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P R O S P E C T U S
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VAN KAMPEN EQUITY GROWTH FUND
A PORTFOLIO OF THE
MORGAN STANLEY FUND, INC.
P.O. BOX 418256, KANSAS CITY, MISSOURI 64141
FOR INFORMATION CALL 1-800-282-4404
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Morgan Stanley Fund, Inc. (the "Company") is an open-end management
investment company, or mutual fund, which consists of twenty-two investment
portfolios. This prospectus (the "Prospectus") describes the Class A, Class B
and Class C shares of one of the Company's portfolios, Van Kampen Equity Growth
Fund (the "Fund"). The Fund is designed to make available to retail investors
the expertise of Van Kampen American Capital Investment Advisory Corp., the
adviser (the "Adviser") and administrator (the "Administrator"), and its
affiliate, Morgan Stanley Asset Management Inc., a sub-adviser ("MSAM" or a
"Sub-Adviser"), to the Fund. Shares are available through Van Kampen American
Capital Distributors, Inc. (the "Distributor") and through investment dealers,
banks and financial services firms that provide distribution, administrative or
shareholder services ("Participating Dealers").
This Prospectus is designed to set forth concisely the information about the
Fund that a prospective investor should know before investing and it should be
retained for future reference. Additional information about the Company is
contained in a "Statement of Additional Information," dated October 28, 1997 as
supplemented on June 8, 1998, which is incorporated herein by reference. The
Company offers other portfolios which are described in other prospectuses. The
Statement of Additional Information and the prospectuses pertaining to the other
portfolios of the Company are available upon request and without charge by
writing or calling the Company at the address and telephone number set forth
above. The Statement of Additional Information and other materials regarding the
Company have been filed with the Securities and Exchange Commission and are
available at the Commission's internet web site (http://www.sec.gov).
THE COMPANY'S SHARES ARE NOT OBLIGATIONS, DEPOSITS OR ACCOUNTS OF, OR
ENDORSED OR GUARANTEED BY, ANY BANK OR DEPOSITORY INSTITUTION, OR ANY OF ITS
AFFILIATES OR CORRESPONDENTS. THE COMPANY'S SHARES ARE NOT FEDERALLY INSURED BY
THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY
OTHER AGENCY. SHARES OF THE COMPANY INVOLVE INVESTMENT RISKS, INCLUDING THE
POSSIBLE LOSS OF PRINCIPAL.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 28, 1997 AS SUPPLEMENTED ON JUNE 8, 1998.
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PROSPECTUS SUMMARY
THE COMPANY
The Company currently consists of twenty-two portfolios which are designed
to offer investors a range of investment choices with Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") providing services as adviser
and administrator and its affiliates, Morgan Stanley Asset Management Inc.
("MSAM" or a "Sub-Adviser") and Miller Andersen & Sherrerd, LLP ("MAS" or a
"Sub-Adviser"), providing services as sub-advisers. Van Kampen American Capital
Distributors, Inc. (the "Distributor") provides services as Distributor.
This Prospectus describes the Class A, Class B and Class C shares of only
one of the Company's portfolios, Van Kampen Equity Growth Fund (the "Fund"). The
investment objective of the Fund is to seek long-term capital appreciation by
investing primarily in growth-oriented equity securities of medium and large
capitalization companies.
RISK FACTORS
The investment policies of the Fund entail certain risks and considerations
of which an investor should be aware. The Fund invests in common stocks, which
are subject to market risks that may cause their prices to fluctuate over time.
Changes in the value of portfolio securities will not necessarily affect cash
income derived from these securities, but will affect the Fund's net asset
value. The Fund may invest in small- to medium-sized corporations, which are
more vulnerable to financial risks and other risks than larger corporations, and
therefore may involve a higher degree of risk and price volatility than
investments in the securities of larger corporations. The Fund may invest in
securities that are neither listed on stock exchanges nor traded
over-the-counter, including private placement securities and restricted
securities. Such securities may be less liquid than publicly traded securities.
The Fund may invest in securities of foreign issuers which are subject to
certain risks not typically associated with domestic securities. See "Additional
Investment Information -- Foreign Investment" for more information. The Fund may
invest in forward foreign currency exchange contracts, and may invest in foreign
currency exchange futures and options. In addition, the Fund may invest in
derivatives, which include options, futures and options on futures and swaps and
the Fund may invest in repurchase agreements, borrow money, lend its portfolio
securities and purchase securities on a when-issued or delayed delivery basis.
The Fund may invest in securities which are convertible upon various terms and
conditions into equity securities, borrow for purposes of leverage, invest in
reverse repurchase agreements and engage in short selling.
The Fund's share price and investment return fluctuate, and a shareholder's
investment when redeemed may be worth more or less than his original cost. Each
of these investment strategies involves specific risks which are described under
"Investment Objectives and Policies" and "Additional Investment Information"
herein and under "Investment Objectives and Policies" in the Statement of
Additional Information.
HOW TO INVEST
The Class A, Class B and Class C shares of the Fund are designed to provide
investors a choice of three ways to pay distribution costs. Class A shares of
the Fund are offered at net asset value plus a maximum initial sales charge of
5.75%, which initial sales charge may be reduced on certain larger purchases or
when combining purchases with the investor's aggregate investments in the
Participating Funds (as defined within the Prospectus). Class B and Class C
shares of the Funds are offered at net asset value. Class B shares are subject
to a contingent deferred sales charge ("CDSC") for redemptions within five years
of purchase and are subject to higher annual distribution-related expenses than
the Class A shares. Class C shares are also subject to a CDSC
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for redemptions within one year of purchase and are subject to higher annual
distribution-related expenses than the Class A shares. See "Purchase of Shares"
for a discussion of reduction or waiver of sales charges, which are available
for certain investors. Share purchases may be made through the Distributor,
through Participating Dealers or by sending payments directly to the Company.
The minimum initial investment is $500 for each class of the Fund, except that
the minimum initial investment amount is reduced for certain categories of
investors. The minimum for subsequent investments is $25, except that there is
no minimum for automatic reinvestment of dividends and distributions. See
"Purchase of Shares."
HOW TO REDEEM
Shares of the Fund may be redeemed at any time at the net asset value per
share price (less any applicable CDSC) of the Fund next determined after receipt
of the redemption request. The redemption price may be more or less than the
purchase. See "Redemption of Shares."
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FUND EXPENSES
The following table illustrates all expenses and fees that a shareholder of
the Fund may incur:
<TABLE>
<CAPTION>
EQUITY
SHAREHOLDER TRANSACTION EXPENSES GROWTH FUND
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<S> <C>
Maximum Sales Load Imposed on
Purchases (as a percentage of
offering price)
Class A..................... 5.75%(1)
Class B..................... None
Class C..................... None
Maximum Deferred Sales Load (as
a percentage of the lesser of
initial purchase price or
current market value)
Class A
For Purchases up to
$999,999................. None
For Purchases of
$1,000,000 or more....... 1.00%(2)
Class B..................... 5.00%(3)
Class C..................... 1.00%(4)
Maximum Sales Load Imposed on
Reinvested Dividends
Class A..................... None
Class B..................... None
Class C..................... None
Redemption Fees
Class A..................... None
Class B..................... None
Class C..................... None
Exchange Fees
Class A..................... None
Class B..................... None
Class C..................... None
</TABLE>
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(1) Percentage shown is the maximum sales load. Certain large purchases may be
subject to a reduced sales load.
(2) Purchases of Class A shares of the Fund which, when combined with the net
asset value of the purchaser's existing investments in Class A shares of the
Participating Funds (as defined under "Purchase of Shares -- Quantity
Discounts"), aggregate to $1 million or more are not subject to an initial
sales load (an "initial sales charge"). A contingent deferred sales charge
("CDSC") of 1.00% will be imposed, however, on shares from any such purchase
that are redeemed within one year following such purchase. Certain other
purchases are not subject to an initial sales charge. See "Purchase of
Shares."
(3) Percentage shown is the maximum CDSC. Purchases of Class B shares of the
Fund are subject to a maximum CDSC of 5.00% which decreases in steps to
0.00% after five years. See "Purchase of Shares."
(4) Purchases of Class C shares of the Fund are subject to a CDSC of 1.00% for
redemptions made within one year of purchase. See "Purchase of Shares."
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<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
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(AS A PERCENTAGE OF AVERAGE DAILY NET EQUITY
ASSETS) GROWTH FUND
-----------
Investment Advisory Fee (after expense
reimbursement and/or fee waiver) (5)
<S> <C>
Class A............................... 0.72%
Class B............................... 0.72%
Class C............................... 0.72%
12b-1 Distribution and Service Fees
Class A (6)........................... 0.25%
Class B (6)........................... 1.00%
Class C (6)........................... 1.00%
Other Expenses (after expense
reimbursement and/or fee waiver) (5)
Class A............................... 0.53%
Class B............................... 0.53%
Class C............................... 0.53%
Total Operating Expenses (after expense
reimbursement and/or fee waiver) (5)
Class A............................... 1.50%
Class B............................... 2.25%
Class C............................... 2.25%
</TABLE>
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(5) The Adviser has agreed to waive a portion of its advisory fees and/or to
reimburse a portion of expenses of the Fund, if necessary, if such fees
would cause the total annual operating expenses of the Fund, as a percentage
of average daily net assets, to exceed the percentages set forth in the
table above. The following table sets forth for the Fund investment advisory
fees and expected total operating expenses absent fee waivers and/or expense
reimbursements. The Adviser in its discretion may terminate voluntary fee
waivers and/or reimbursements at any time. Absent the waiver of fees or
reimbursement of expenses, the amounts in the examples below would be
greater.
<TABLE>
<CAPTION>
EQUITY
GROWTH FUND
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<S> <C>
Investment Advisory Fees
(All Classes)......................... 0.80%
Total Operating Expenses
Class A............................... 1.58%
Class B............................... 2.33%
Class C............................... 2.33%
</TABLE>
For further information on Fund expenses, see "Management of the Company."
(6) Of the 12b-1 distribution and service fees for the Class A shares, 0.25%
represents a shareholder services fee, and for the Class B shares and the
Class C shares, 0.75% represents a distribution fee and 0.25% represents a
shareholder services fee. See "Management of the Company -- Distributor."
Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a fund-level expense by the
Conduct Rules of the National Association of Securities Dealers, Inc.
("NASD").
The purpose of the above table is to assist the investor in understanding
the various expenses that an investor in the Fund will bear directly or
indirectly. The expenses and fees for the Fund are based on advisory agreements,
12b-1 plans and estimates of other expenses because the Fund commenced
investment operations on May 28, 1998.
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The following examples illustrate the expenses that you would pay on a
$1,000 investment, assuming a 5% annual rate of return and redemption at the end
of each time period as indicated, in (i) Class A shares of each Fund, including
the maximum 5.75% initial sales charge, (ii) Class B shares of each Fund, which
have a CDSC, but no initial sales charge and (iii) Class C shares of the Fund,
which have a CDSC, but no initial sales charge.
<TABLE>
<CAPTION>
EQUITY
GROWTH FUND
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<S> <C>
Class A shares
1 Year................................ $ 72(1)
3 Years............................... 102
Class B shares
(Assuming complete redemption at end of
period)
1 Year................................ 73
3 Years............................... 100
(Assuming no redemption)
1 Year................................ 23
3 Years............................... 70
Class C shares
(Assuming complete redemption immediately
prior to the end of period)
1 Year................................ 33
3 Years............................... 70
(Assuming no redemption)
1 Year................................ 23
3 Years............................... 70
</TABLE>
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(1) The example reflects Class A shares sold subject to the maximum 5.75%
initial sales charge. Certain large purchases may be subject to a reduced
initial sales charge. Purchases of Class A shares of the Fund which, when
combined with the net asset value of the purchaser's existing investment in
Class A shares of the Participating Funds, aggregate to $1 million or more
are not subject to an initial sales charge but a CDSC of 1.00% will be
imposed on such shares that are redeemed within one year following such
purchase.
THE FOREGOING EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE SHOWN.
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INVESTMENT OBJECTIVES AND POLICIES
The investment objective of the Fund is described below, together with the
policies the Fund employs in its efforts to achieve its objective. The Fund's
investment objective is a fundamental policy which may not be changed by the
Fund without the approval of a majority of the Fund's outstanding voting
securities. There is no assurance that the Fund will attain its objective. The
investment policies described below are not fundamental policies and may be
changed without shareholder approval. For more information about certain
investment practices of the Fund, see "Additional Investment Information" below
and "Investment Objectives and Policies" in the Statement of Additional
Information.
The Fund's investment objective is to provide long-term capital appreciation
by investing primarily in growth-oriented equity securities of medium and large
capitalization companies. Under normal circumstances, the Fund will invest at
least 65% of the value of its total assets in equity securities. With respect to
the Fund, equity securities include common and preferred stocks, convertible
securities and rights and warrants to purchase common stocks.
The Sub-Adviser employs a flexible and eclectic investment process in
pursuit of the Fund's investment objective. In selecting securities for the
Fund, the Sub-Adviser concentrates on a universe of rapidly growing, high
quality companies and lower, but accelerating, earnings growth situations. The
Sub-Adviser's universe of potential investments generally comprises companies
with market capitalizations of $500 million or more. The Fund is not restricted
to investments in specific market sectors. The Sub-Adviser uses its research
capabilities, analytical resources and judgment to assess economic, industry and
market trends, as well as individual company developments, to select promising
growth investments for the Fund. The Sub-Adviser concentrates on companies with
strong, communicative management and clearly defined strategies for growth. In
addition, the Sub-Adviser rigorously assesses company developments, including
changes in strategic direction, management focus and current and likely future
earnings results. Valuation is important to the Sub-Adviser but is viewed in the
context of prospects for sustainable earnings growth and the potential for
positive earnings surprises vis-a-vis consensus expectations. The Fund is free
to invest in any equity security that, in the Sub-Adviser's judgment, provides
above average potential for capital appreciation.
In selecting investments for the Fund, the Sub-Adviser emphasizes individual
security selection. While the Fund's investments generally will be diversified
among a number of issuers, the Fund may, subject to certain limitations, invest
between 5% and 10% of its total assets in selected issuers as a result of the
Sub-Adviser's investment process. See "Investment Limitations." Investing more
of the Fund's assets in selected issuers may subject the Fund to greater risks
impacting individual securities than a Fund which does not employ such a
practice. The Fund has a long-term investment perspective; however, the
Sub-Adviser may take advantage of short-term opportunities that are consistent
with the Fund's objective by selling recently purchased securities which have
increased in value.
The Fund may invest up to 25% of its total assets at the time of purchase in
securities of foreign companies. The Fund may invest in securities of foreign
issuers directly or in the form of depositary receipts. The Fund may invest in
forward foreign currency exchange contracts, and may invest in foreign currency
exchange futures and options. The Fund may invest in convertible securities of
domestic and, subject to the above restrictions, foreign issuers on occasions
when, due to market conditions, it is more advantageous to purchase such
securities than to purchase common stock. Since the Fund invests in both common
stocks and convertible securities, the risks of
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investing in the general equity markets may be tempered to a degree by the
Fund's investments in convertible securities which are often not as volatile as
common stock. The Fund may invest in derivatives, when-issued and delayed
delivery securities and non-publicly traded securities, including private
placements and restricted securities. The Fund may from time to time and
consistent with applicable legal requirements sell securities short, lend
portfolio securities and engage in reverse repurchase agreements.
For temporary defensive purposes, the Fund may invest a portion or all of
its assets in money market instruments and short- and medium-term debt
securities that the Sub-Adviser believes to be of high quality or hold cash.
For further information about the foregoing and certain additional
investment practices of the Fund, see "Additional Investment Information" below.
ADDITIONAL INVESTMENT INFORMATION
BORROWING AND OTHER FORMS OF LEVERAGE
The Fund may borrow money (i) as a temporary measure for extraordinary or
emergency purposes, and (ii) in connection with reverse repurchase agreements,
provided that (i) and (ii) in combination do not exceed 33 1/3% of the Fund's
total assets (including the amount borrowed) less liabilities (exclusive of
borrowings). The Fund may not purchase additional securities when borrowings
exceed 5% of total assets.
CONVERTIBLE SECURITIES, WARRANTS AND EQUITY-LINKED SECURITIES
The Fund may invest in convertible securities, preferred stock, warrants or
other securities exchangeable under certain circumstances for shares of common
stock. Warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period.
The Fund may invest in equity-linked securities, which are securities that
are convertible into, or the value of which is based upon the value of, equity
securities upon certain terms and conditions. The amount received by an investor
at maturity of such securities is not fixed but is based on the price of the
underlying common stock. Trading prices of the underlying common stock will be
influenced by the issuer's operational results, by complex, interrelated
political, economic, financial or other factors affecting the capital markets,
the stock exchanges on which the underlying common stock is traded and the
market segment of which the issuer is a part. In addition, it is not possible to
predict how equity-linked securities will trade in the secondary market which is
fairly developed and liquid. The market for such securities may be shallow,
however, and high volume trades may be possible only with discounting. In
addition to the foregoing risks, the return on such securities depends on the
creditworthiness of the issuer of the securities, which may be the issuer of the
underlying securities or a third party investment banker or other lender. The
creditworthiness of such third party issuer of equity-linked securities may, and
often does, exceed the creditworthiness of the issuer of the underlying
securities. The advantage of using equity-linked securities over traditional
equity and debt securities is that the former are income producing vehicles that
may provide a higher income than the dividend income on the underlying equity
securities while allowing some participation in the capital appreciation of the
underlying equity securities. Another advantage of using equity-linked
securities is that they may be used for hedging to reduce the risk of investing
in the generally more volatile underlying equity securities.
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DEPOSITARY RECEIPTS
Depositary receipts include ADRs, Global Depositary Receipts ("GDRs"),
European Depositary Receipts ("EDRs") and other depositary receipts, to the
extent that such receipts become available. ADRs are securities, typically
issued by a U.S. financial institution (a "depositary"), that evidence ownership
interests in a security or a pool of securities issued by a foreign issuer (the
"underlying issuer") and deposited with the depositary. The Fund may invest in
ADRs and other depository receipts. ADRs include American Depositary Shares and
New York Shares and may be "sponsored" or "unsponsored." Sponsored ADRs are
established jointly by a depositary and the underlying issuer, whereas
unsponsored ADRs may be established by a depositary without participation by the
underlying issuer. GDRs, EDRs and other types of depositary receipts are
typically issued by foreign depositaries, although they may also be issued by
U.S. depositaries, and evidence ownership interests in a security or pool of
securities issued by either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities. Depositary receipts
are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the United States. For purposes of the Funds' investment policies,
investments in depositary receipts will be deemed to be investments in the
underlying securities.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Fund may enter into forward foreign currency exchange contracts
("forward contracts"). Forward contracts provide for the purchase or sale of an
amount of a specified foreign currency at a future date. Purposes for which such
contracts may be used include protecting against a decline in a foreign currency
against the U.S. Dollar between the trade date and settlement date when the Fund
purchases or sells securities, locking in the U.S. Dollar value of dividends
declared on securities held by the Fund and generally protecting the U.S. Dollar
value of securities held by the Fund against exchange rate fluctuations. While
such forward contracts may limit losses to the Fund as a result of exchange rate
fluctuations, they will also limit any exchange rate gains that might otherwise
have been realized.
FOREIGN INVESTMENT
The Fund may invest in securities of foreign issuers. Investment in
securities of foreign issuers, especially in securities of issuers in emerging
countries, involves somewhat different investment risks from those affecting
securities of U.S. issuers. There may be limited publicly available information
with respect to foreign issuers, and foreign issuers are not generally subject
to uniform accounting, auditing, and financial and other reporting standards and
requirements comparable to those applicable to domestic companies. Therefore,
disclosure of certain material information may not be made and less information
may be available to investors investing in foreign countries than in the United
States. There may also be less government supervision and regulation of foreign
securities exchanges, brokers and listed companies than in the United States.
Many foreign securities markets have substantially less volume than United
States national securities exchanges, and securities of some foreign issuers are
less liquid and subject to greater price volatility than securities of
comparable domestic issuers. Brokerage commissions and other transaction costs
on foreign securities exchanges are generally higher
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than in the United States. Dividends and interest paid by foreign issuers may be
subject to withholding and other foreign taxes, which may decrease the net
return on foreign investments as compared to dividends and interest paid to the
Funds by domestic companies. Additional risks include future adverse political
and economic developments, the possibility that a foreign jurisdiction might
impose or change withholding taxes on income payable with respect to foreign
securities, possible seizure, nationalization or expropriation of the foreign
issuer or foreign deposits, and the possible adoption of foreign governmental
restrictions such as exchange controls. Emerging countries may have less stable
political environment than more developed countries. Also, it may be more
difficult to obtain a judgment in a court outside the United States.
Investments in securities of foreign issuers are frequently denominated in
foreign currencies, and a Fund may temporarily hold uninvested reserves in bank
deposits in foreign currencies. Therefore, the value of the Fund's assets
measured in U.S. Dollars may be affected favorably or unfavorably by changes in
currency exchange rates and exchange control regulations. The Fund will also
incur certain costs in connection with conversions between various currencies.
INVESTMENT COMPANY SECURITIES
The Fund may invest in securities of another open-end or closed-end
investment company, by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations and except as may otherwise be permitted by the Investment
Company Act of 1940, as amended (the "1940 Act"). To the extent the Fund invests
a portion of its assets in investment company securities, those assets will be
subject to the expenses of the purchased investment company as well as to the
expenses of the Fund itself.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend its securities to brokers, dealers, domestic and foreign
banks or other financial institutions for the purpose of increasing its net
investment income. These loans must be secured continuously by cash or
equivalent collateral or by a letter of credit at least equal to the market
value of the securities loaned plus accrued interest. The Fund will not enter
into securities loan transactions exceeding in the aggregate 33 1/3% of the
market value of the Fund's total assets. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral should
the borrower of the portfolio securities fail financially.
MONEY MARKET INSTRUMENTS
The Fund is permitted to invest in money market instruments pending other
investment, prior to settlement of portfolio transactions, for liquidity and for
temporary defensive purposes, although the Fund intends to stay invested in
securities satisfying their primary investment objective to the extent
practical. The money market investments permitted for the Fund include
obligations of the U.S. Government, its agencies and instrumentalities,
obligations of foreign sovereignties, other debt securities, including
high-grade commercial paper, repurchase agreements and bank obligations, such as
bankers' acceptances and certificates of deposit (including Eurodollar
certificates of deposit).
NON-PUBLICLY TRADED SECURITIES, PRIVATE PLACEMENTS AND RESTRICTED SECURITIES
The Fund may invest in securities that are neither listed on a stock
exchange nor traded over the counter. Such unlisted securities may involve a
higher degree of business and financial risk that can result in substantial
losses. As a result of the absence of a public trading market for these
securities, they may be less liquid than publicly traded securities. Although
these securities may be resold in privately negotiated transactions, the
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prices realized from these sales could be less than those originally paid by the
Fund or less than what may be considered the fair value of such securities.
Furthermore, companies whose securities are not publicly traded may not be
subject to the disclosure and other investor protection requirements which might
be applicable if their securities were publicly traded. The Fund may not invest
more than 15% of its net assets in illiquid securities. Securities that are
restricted from sale to the public without registration ("Restricted
Securities") under the Securities Act of 1933, as amended (the "1933 Act"),
which can be offered and sold to qualified institutional buyers under Rule 144A
under the 1933 Act ("144A Securities") may be determined to be liquid under
guidelines adopted by, and subject to the supervision of, the Board of Directors
and therefore not subject to the limitation on illiquid securities. 144A
Securities may become illiquid if qualified institutional buyers are not
interested in acquiring the securities.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with brokers, dealers or banks
that meet the credit guidelines of the Company's Board of Directors. In a
repurchase agreement, the Fund buys a security from a seller that has agreed to
repurchase it at a mutually agreed upon date and price, reflecting the interest
rate effective for the term of the agreement. The term of these agreements is
usually from overnight to one week and never exceeds one year. A repurchase
agreement may be viewed as a fully collateralized loan of money by the Fund to
the seller. The Fund always receives securities as collateral with a market
value at least equal to the purchase price, including accrued interest, and this
value is maintained during the term of the agreement. If the seller defaults and
the collateral value declines, the Fund might incur a loss. If bankruptcy
proceedings are commenced with respect to the seller, the Fund's realization
upon the collateral may be delayed or limited. Repurchase agreements with
durations (or maturities) over seven days in length are considered to be
illiquid securities.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with brokers, dealers,
banks or other financial institutions that meet credit guidelines set by the
Fund's Board of Directors. In a reverse repurchase agreement, the Fund sells a
security and agrees to repurchase it at a mutually agreed upon date and price,
reflecting the interest rate effective for the term of the agreement. It may
also be viewed as the borrowing of money by the Fund. The Fund's investment of
the proceeds of a reverse repurchase agreement is the speculative factor known
as leverage. The Fund will enter into a reverse repurchase agreement only if the
interest income from investment of the proceeds is expected to be greater than
the interest expense of the transaction and the proceeds are invested for a
period no longer than the term of the agreement. The Fund will maintain with the
Custodian a separate account with a segregated portfolio of cash or liquid
assets in an amount at least equal to its purchase obligations under these
agreements (including accrued interest). If interest rates rise during a reverse
repurchase agreement, it may adversely affect the Fund's net asset value. In the
event that the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the buyer or its trustee or receiver may
receive an extension of time to determine whether to enforce the Fund's
repurchase obligation, and the Fund's use of proceeds of the agreement may
effectively be restricted pending such decision.
SHORT SALES
The Fund may from time to time sell securities short without limitation,
although they do not intend to sell securities short on a regular basis. A short
sale is a transaction in which the Fund sells securities it either owns or has
the right to acquire at no added cost (i.e., "against the box") or it does not
own (but has borrowed) in
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anticipation of a decline in the market price of the securities. When the Fund
makes a short sale of borrowed securities, the proceeds it receives from the
sale will be held on behalf of a broker until the Fund replaces the borrowed
securities. To deliver the securities to the buyer, the Fund will need to
arrange through a broker to borrow the securities and, in so doing, the Fund
will become obligated to replace the securities borrowed at their market price
at the time of replacement, whatever that price may be. The Fund may have to pay
a premium to borrow the securities and must pay any dividends or interest
payable on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a short sale will be secured by collateral deposited with the broker that
consists of cash or liquid assets. In addition, the Fund will place in a
segregated account with its Custodian an amount of cash or liquid assets equal
to the difference, if any, between (1) the market value of the securities sold
and (2) any cash or liquid securities deposited as collateral with the broker in
connection with the short sale (not including the proceeds of the short sale).
Possible losses from short sales differ from losses that could be incurred from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed delivery basis.
In such transactions, instruments are bought with payment and delivery taking
place in the future in order to secure what is considered to be an advantageous
yield or price at the time of the transaction. The payment obligation and the
interest rates that will be received are each fixed at the time the Fund enters
into the commitment, and no interest accrues to the Fund until settlement. Thus,
it is possible that the market value at the time of settlement could be higher
or lower than the purchase price if the general level of interest rates has
changed.
ZERO COUPONS; PAY-IN-KIND; DEFERRED PAYMENT SECURITIES
The Fund may invest in zero coupon securities, which are securities that are
sold at a discount to par value and on which interest payments are not made
during the life of the security. Upon maturity, the holder is entitled to
receive the par value of the security. While interest payments are not made on
such securities, holders of such securities are deemed to have received annually
"phantom income." Because the Fund will distribute its "phantom income" to
shareholders, to the extent that shareholders elect to receive dividends in cash
rather than reinvesting such dividends in additional shares, the Fund will have
fewer assets with which to purchase income producing securities. The Fund
accrues income with respect to these securities prior to the receipt of cash
payments. Pay-in-kind securities are securities that have interest payable by
delivery of additional securities. Upon maturity, the holder is entitled to
receive the aggregate par value of the securities. Deferred payment securities
are securities that remain zero coupon securities until a predetermined date, at
which time the stated coupon rate becomes effective and interest becomes payable
at regular intervals. Zero coupon, pay-in-kind and deferred payment securities
may be subject to greater fluctuation in value and lesser liquidity in the event
of adverse market conditions than comparably rated securities paying cash
interest at regular interest payment periods.
DERIVATIVE INSTRUMENTS
The Fund is permitted to invest in various derivative instruments for both
hedging and non-hedging purposes. Derivative instruments include options,
futures and options on futures, structured notes, caps, floors, collars and
swaps. Additionally, the Fund may invest in other derivative instruments that
are developed over time if their use would be consistent with the objectives of
the Fund. The Fund will limit its use of derivative
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instruments to 50% of its total assets measured by the aggregate notional amount
of outstanding derivative instruments, provided that no more than 33 1/3% of its
total assets are invested, for non-hedging purposes, in derivatives other than
futures and options on futures. The Fund's investments in forward foreign
currency contracts and derivatives used for hedging purposes are not subject to
the limits described above.
The Fund may use derivatives instruments under a number of different
circumstances to further their investment objectives. The Fund may use
derivatives when doing so provides more liquidity than the direct purchase of
the securities underlying such derivatives. For example, the Fund may purchase
derivatives to quickly gain exposure to a market in response to changes in the
Fund's investment strategy, or upon the inflow of investable cash or when the
derivative provides greater liquidity than the underlying securities market. The
Fund may also use derivatives when it is restricted from directly owning the
underlying securities due to foreign investment restrictions or other reasons or
when doing so provides a price advantage over purchasing the underlying
securities directly, either because of a pricing differential between the
derivatives and securities markets or because of lower transaction costs
associated with the derivatives transaction. Derivatives may also be used by the
Fund for hedging purposes and in other circumstances when the Fund's portfolio
managers believe it advantageous to do so consistent with the Fund's investment
objective. The Fund will not, however, use derivatives in a manner that creates
leverage, except to the extent that the use of leverage is expressly permitted
by the Fund's investment policies, and then only in a manner consistent with
such policies.
Some of the derivative instruments in which the Fund may invest and the
risks related thereto are described in more detail below.
CAPS, FLOORS AND COLLARS
The Fund may invest in caps, floors and collars, which are instruments
analogous to options. In particular, a cap is the right to receive the excess of
a reference rate over a given rate and is analogous to a put option. A floor is
the right to receive the excess of a given rate over a reference rate and is
analogous to a call option. Finally, a collar is an instrument that combines a
cap and a floor. That is, the buyer of a collar buys a cap and writes a floor,
and the writer of a collar writes a cap and buys a floor. The risks associated
with caps, floors and collars are similar to those associated with options. In
addition, caps, floors and collars are subject to risk of default by the
counterparty because they are privately negotiated instruments.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Fund may purchase and sell futures contracts and options on futures
contracts, including but not limited to securities index futures, foreign
currency exchange futures, interest rate futures and other financial futures.
Futures contracts provide for the sale by one party and purchase by another
party of a specified amount of a specific security, instrument or basket
thereof, at a specific future date and at a specified price. An option on a
futures contract is a legal contract that gives the holder the right to buy or
sell a specified amount of futures contracts at a fixed or determinable price
upon the exercise of the option.
The Fund may sell securities index futures contracts and/or options thereon
in anticipation of or during a market decline to attempt to offset the decrease
in market value of investments in its portfolio, or purchase securities index
futures in order to gain market exposure. Subject to applicable laws, the Fund
may engage in transactions in securities index futures contracts (and options
thereon) which are traded on a recognized securities or futures exchange, or may
purchase or sell such instruments in the over-the-counter market. There
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currently are limited securities index futures and options on such futures in
many countries, particularly emerging countries. The nature of the strategies
adopted by the Sub-Adviser and the extent to which those strategies are used,
may depend on the development of such markets.
The Fund may engage in transactions involving foreign currency exchange
futures contracts. Such contracts involve an obligation to purchase or sell a
specific currency at a specified future date and at a specified price. The Fund
may engage in such transactions to hedge their respective holdings and
commitments against changes in the level of future currency rates or to adjust
their exposure to a particular currency.
The Fund may engage in transactions in interest rate futures transactions.
Interest rate futures contracts involve an obligation to purchase or sell a
specific debt security, instrument or basket thereof at a specified future date
at a specified price. The value of the contract rises and falls inversely with
changes in interest rates. The Fund may engage in such transactions to hedge
their holdings of debt instruments against future changes in interest rates.
Financial futures are futures contracts relating to financial instruments,
such as U.S. Government securities, foreign currencies and certificates of
deposit. Such contracts involve an obligation to purchase or sell a specific
security, instrument or basket thereof at a specified future date at a specified
price. Like interest rate futures contracts, the value of financial futures
contracts rises and falls inversely with changes in interest rates. The Funds
may engage in financial futures contracts for hedging and non-hedging purposes.
Under rules adopted by the Commodity Futures Trading Commission, the Fund
may enter into futures contracts and options thereon for both hedging and
non-hedging purposes, provided that not more than 5% of the Fund's total assets
at the time of entering the transaction are required as margin and option
premiums to secure obligations under such contracts relating to non-hedging
activities.
Gains and losses on futures contracts and options thereon depend on the
Sub-Adviser's ability to predict correctly the direction of securities prices,
interest rates and other economic factors. Other risks associated with the use
of futures and options are (i) imperfect correlation between the change in
market value of investments held by the Fund and the prices of futures and
options relating to investments purchased or sold by the Fund, and (ii) possible
lack of a liquid secondary market for a futures contract and the resulting
inability to close a futures position. The risk that the Fund will be unable to
close out a futures position or options contract will be minimized by entering
into futures contracts or options transactions for which there appears to be a
liquid exchange or secondary market. The risk of loss in trading on futures
contracts in some strategies can be substantial, due both to the low margin
deposits required and the extremely high degree of leverage involved in futures
pricing.
OPTIONS TRANSACTIONS
The Fund may seek to increase their returns or may hedge their portfolio
investments through options transactions with respect to (i) securities,
instruments, indices or baskets thereof in which the Fund may invest and (ii)
foreign currencies. Purchasing a put option gives the Fund the right to sell a
specified security, currency or basket of securities or currencies at the
exercise price until the expiration of the option. Purchasing a call option
gives the Fund the right to purchase a specified security, currency or basket of
securities or currencies at the exercise price until the expiration of the
option.
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The Fund also may write (i.e., sell) put and call options on investments
held in its portfolio, as well as with respect to a foreign currency. The Fund
that has written an option receives a premium, which increases the Fund's return
on the underlying security or instrument in the event the option expires
unexercised or is closed out at a profit. However, by writing a call option, the
Fund will limit its opportunity to profit from an increase in the market value
of the underlying security or instrument above the exercise price of the option
for as long as the Fund's obligation as writer of the option continues. The Fund
may only write options that are "covered." A covered call option means that so
long as the Fund is obligated as the writer of the option, it will earmark or
segregate sufficient liquid assets to cover its obligations under the option or
own (i) the underlying security or instrument subject to the option, (ii)
securities or instruments convertible or exchangeable without the payment of any
consideration into the security or instrument subject to the option, or (iii) a
call option on the same underlying security with a strike price no higher than
the price at which the underlying instrument was sold pursuant to a short option
position.
By writing (or selling) a put option, the Fund incurs an obligation to buy
the security or instrument underlying the option from the purchaser of the put
at the option's exercise price at any time during the option period, at the
purchaser's election. The Fund may also write options that may be exercisable by
the purchaser only on a specific date. The Fund that has written a put option
will earmark or segregate sufficient liquid assets to cover its obligations
under the option or will own a put option on the same underlying security with
an equal or higher strike price.
The Fund may engage in transactions in options which are traded on
recognized exchanges or over-the-counter. There currently are limited options
markets in many countries, particularly emerging countries, and the nature of
the strategies adopted by the Sub-Adviser and the extent to which those
strategies are used will depend on the development of such option markets. The
primary risks associated with the use of options are (i) imperfect correlation
between the change in market value of investments held, purchased or sold by the
Fund and the prices of options relating to such investments; and (ii) possible
lack of a liquid secondary market for an option.
STRUCTURED NOTES
Structured Notes are derivatives on which the amount of principal repayment
and/or interest payments is based upon the movement of one or more factors.
These factors include, but are not limited to, currency exchange rates, interest
rates (such as the prime lending rate and LIBOR) and stock indices such as the
S&P 500 Index. In some cases, the impact of the movements of these factors may
increase or decrease through the use of multipliers or deflators. The Fund may
use structured notes to tailor their investments to the specific risks and
returns the Sub-Adviser wish to accept while avoiding or reducing certain other
risks.
SWAPS -- SWAP CONTRACTS
Swaps and Swap Contracts are derivatives in the form of a contract or other
similar instrument in which two parties agree to exchange the returns generated
by a security, instrument, basket thereof or index for the returns generated by
another security, instrument, basket thereof or index. The payment streams are
calculated by reference to a specific security, instrument, basket thereof or
index and an agreed upon notional amount. The relevant indices include but are
not limited to, currencies, fixed interest rates, prices and total return on
interest rate indices, fixed income indices, stock indices and commodity indices
(as well as amounts derived from arithmetic operations on these indices). For
example, the Fund may agree to swap the return generated by a
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fixed income index for the return generated by a second fixed income index. The
currency swaps in which the Fund may enter will generally involve an agreement
to pay interest streams in one currency based on a specified index in exchange
for receiving interest streams denominated in another currency. Such swaps may
involve initial and final exchanges that correspond to the agreed upon notional
amount.
The Fund will usually enter into swaps on a net basis, i.e., the two return
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two returns. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the Fund)
and any accrued, but unpaid, net amounts owed to a swap counterparty will be
covered by the maintenance of a segregated account consisting of cash or liquid
securities. The Fund will not enter into any swap agreement unless the
counterparty meets the rating requirements set forth in guidelines established
by the Company's Board of Directors.
Interest rate and total rate of return swaps do not involve the delivery of
securities, other underlying assets, or principal. Accordingly, the risk of loss
with respect to interest rate and total rate of return swaps is limited to the
net amount of payments that the Fund is contractually obligated to make. If the
other party to an interest rate or total rate of return swap defaults, the
Fund's risk of loss consists of the net amount of payments that the Fund is
contractually entitled to receive. In contrast, currency swaps may involve the
delivery of the entire principal value of one designated currency in exchange
for the other designated currency. Therefore, the entire principal value of a
currency swap may be subject to the risk that the other party to the swap will
default on its contractual delivery obligations. If there is a default by the
counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swaps market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swaps market has become relatively liquid. Swaps that include caps, floors
and collars are more recent innovations for which standardized documentation has
not yet been fully developed and, accordingly, they are less liquid than
"traditional" swaps.
The use of swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Sub-Adviser is incorrect in their forecasts of
market values, interest rates and currency exchange rates, the investment
performance of the Fund would be less favorable than it would have been if this
investment technique were not used.
INVESTMENT LIMITATIONS
The Fund is a diversified investment company under the 1940 Act, and,
therefore, with respect to 75% of its assets, may not (a) invest more than 5% of
its total assets in the securities of any one issuer, except obligations of the
U.S. Government, its agencies and instrumentalities, or (b) own more than 10% of
the outstanding voting securities of any one issuer. The Fund also intends to
comply with the diversification requirements imposed by the Internal Revenue
Code of 1986, as amended ("the Code"), for qualification as a regulated
investment company.
The Fund also operates under certain investment restrictions that are deemed
fundamental policies and may be changed only with the approval of the holders of
a majority of the Fund's outstanding shares. See "Investment Limitations" in the
Statement of Additional Information. In addition, the Fund operates under
certain non-fundamental investment limitations as described in the Statement of
Additional Information.
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MANAGEMENT OF THE COMPANY
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") is the investment adviser and administrator of the Fund. The
Adviser provides investment advice and portfolio management services pursuant to
an advisory agreement (the "Advisory Agreement") and, subject to the supervision
of the Company's Board of Directors, makes the Fund's investment decisions,
arranges for the execution of portfolio transactions and generally manages the
Funds' investments. The Advisory Agreement also provides that the Adviser may
appoint sub-advisers to perform these portfolio management responsibilities. See
"Investment Sub-Advisers" below. The Adviser is entitled to receive an aggregate
advisory fee computed daily and paid monthly at the annual rate of 0.80%,
applied to the Fund's average net assets.
The Adviser reserves the right in its sole discretion from time to time to
waive all or a portion of its management fee or to reimburse the Fund for all or
a portion of their other expenses.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital,
Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and more
than $60 billion under management or supervision. Van Kampen American Capital's
more than 50 open-end and 38 closed-end funds and more than 2,500 unit
investment trust are professionally distributed by leading financial advisers
nationwide. The Distributor of the Company and the sponsor of the funds
mentioned above is also a wholly-owned subsidiary of Van Kampen American
Capital. The Adviser's principal office is located at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181.
Van Kampen American Capital is an indirect wholly-owned subsidiary of Morgan
Stanley Dean Witter & Co. Morgan Stanley Dean Witter & Co. and various of its
directly or indirectly owned subsidiaries, including Morgan Stanley & Co.
Incorporated, a registered broker-dealer and investment adviser, and Morgan
Stanley International are engaged in a wide range of financial services. Their
principal businesses include securities underwriting, distribution and trading,
merger, acquisition, restructuring and other corporate finance advisory
activities; merchant banking, stock brokerage and research services; asset
management; trading of futures, options, foreign exchange, commodities and swaps
(involving foreign exchange, commodities, indices and interest rates); real
estate advice, financing and investing; and global custody, securities clearance
services and securities lending; and credit services.
INVESTMENT SUB-ADVISER. Morgan Stanley Asset Management Inc. ("MSAM," or
the "Sub-Adviser") is the investment sub-adviser of the Fund. The Sub-Adviser
provides investment advice and portfolio management services pursuant to an
investment sub-advisory agreement and, subject to the supervision of the Adviser
and the Company's Board of Directors, make the Fund's investment decisions,
arrange for the execution of portfolio transactions and generally manage the
Fund's investments.
The Sub-Adviser is entitled to receive sub-advisory fees computed daily and
paid monthly. If the average daily net assets of the Fund during the monthly
period are less than or equal to $500 million, the Adviser shall pay MSAM
one-half of the total investment advisory fee payable to the Adviser by the Fund
(after application of any fee waivers in effect) for such monthly period. If the
Fund's average daily net assets for the monthly period are greater than $500
million, the Adviser shall pay MSAM a fee for such monthly period equal to the
greater of (a) one-half of what the total investment advisory fee payable to the
Adviser by the Fund (after application of any
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fee waivers in effect) for such monthly period would have been had the Fund's
average daily net assets during such period been equal to $500 million, or (b)
forty-five percent of the total investment advisory fee payable to the Adviser
by the Fund (after application of any fee waivers in effect) for such monthly
period.
MSAM, with principal offices at 1221 Avenue of the Americas, New York, NY
10020, conducts a worldwide portfolio management business. It provides a broad
range of portfolio management services to customers in the United States and
abroad. At August 31, 1997, MSAM had approximately $80.9 billion in assets under
management as an investment adviser or as a named fiduciary or fiduciary
adviser. MAS is a Pennsylvania limited liability partnership founded in 1969
with its principal offices at One Tower Bridge, West Conshohocken, Pennsylvania
19428. MAS provides investment services to employee benefit plans, endowment
funds, foundations and other institutional investors and has served as an
investment adviser to several open-end investment companies since 1984. At
August 31, 1997, MAS had approximately $57.6 billion in assets under management.
PORTFOLIO MANAGERS. Kurt A. Feuerman and Margaret K. Johnson share primary
responsibility for managing the Fund's assets. Kurt Feuerman is a Managing
Director of MSAM. Prior to joining MSAM in July 1993, he spent over three years
in Morgan Stanley & Co. Incorporated's ("Morgan Stanley") research department
where he was responsible for restaurant, gaming and emerging growth stocks.
Before joining Morgan Stanley, Mr. Feuerman was a Managing Director at Drexel
Burnham Lambert, where he had been an equity analyst since 1984. Mr. Feuerman
earned a B.A. degree from McGill University, an M.A. from Syracuse University,
and an M.B.A. from Columbia University. Margaret Johnson is a Principal of MSAM
and a Portfolio Manager in the Institutional Equity Group. She joined MSAM in
1984 and worked as an Analyst in the Marketing and Fiduciary Advisor areas. Ms.
Johnson became an Equity Analyst in 1986 and a Portfolio Manager in 1989. She
holds a B.A. degree from Yale College and is a Chartered Financial Analyst.
ADMINISTRATOR. The Administrator provides the Company with administrative
services pursuant to an administration agreement (the "Administration
Agreement"). The services provided under the Administration Agreement are
subject to the supervision of the officers and Board of Directors of the Company
and include day-to-day administration of matters related to the corporate
existence of the Company, maintenance of its records, preparation of reports,
supervision of the Company's arrangements with its custodian and assistance in
the preparation of the Company's registration statements under federal and state
laws. The Administration Agreement also provides that the Administrator through
its agents will provide the Company dividend disbursing and transfer agent
services. For its services under the Administration Agreement, the Company pays
the Administrator a monthly fee which on an annual basis equals 0.25% of the
average daily net assets of the Fund.
Under sub-administration agreements between the Administrator and The Chase
Manhattan Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a
corporate affiliate of Chase, provides certain administrative services to the
Company. The Administrator supervises and monitors such administrative services
provided by CGFSC. The services provided under the sub-administration agreement
are subject to the supervision of the Board of Directors of the Company. The
Board of Directors of the Company has approved the provision of services
described above pursuant to the sub-administration agreement as being in the
best interests of the Company. CGFSC's business address is 73 Tremont Street,
Boston, Massachusetts 02108-3913. For additional information on the
Administration Agreement, see "Management of the Company" in the Statement of
Additional Information.
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DIRECTORS AND OFFICERS. Pursuant to the Company's Articles of
Incorporation, the Board of Directors decides upon matters of general policy and
reviews the actions of the Adviser, Sub-Adviser, Administrator and the Company's
Distributor. The Officers of the Company conduct and supervise its daily
business operations.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor") serves as the distributor of the shares of the Company. Under its
distribution agreement (the "Distribution Agreement") with the Company, the
Distributor sells shares of the Company upon the terms and at the current
offering price described in this Prospectus. The Distributor is not obligated to
sell any specific number of shares of the Company.
The Company currently offers Class A shares, Class B shares and Class C
shares of the Fund. The Company may in the future offer one or more classes of
shares for the Fund that may have sales charges or other distribution charges or
a combination thereof different from those of the classes currently offered.
The Board of Directors of the Company has approved and adopted the
Distribution Agreement for the Company and a Plan for each class of the Funds
pursuant to Rule 12b-1 under the 1940 Act (each a "Plan" and together, the
"Plans"). Under each Plan, the Distributor is entitled to receive from the Fund
a distribution fee, which is accrued daily and paid quarterly, at a maximum rate
of 0.75% of the Class B shares and Class C shares of each Fund, on an annualized
basis of the average daily net assets of such classes. The actual amount of such
compensation is agreed upon by the Company's Board of Directors and by the
Distributor. With respect to Class B shares, the Distributor expects to utilize
substantially all of its fee to reimburse itself for commissions paid to
investment dealers, banks or financial services firms that provide distribution
services ("Participating Dealer"). With respect to Class C shares, the
Distributor expects to reallocate substantially all of its fee to such
Participating Dealers. The Distributor may, in its discretion, voluntarily waive
from time to time all or any portion of its distribution fee and the Distributor
is free to make additional payments out of its own assets to promote the sale of
Fund shares. Class A shares, Class B shares and Class C shares are subject to a
service fee at an annual rate of 0.25% on an annualized basis of the average
daily net assets of such class of shares of the Fund. In addition to such
payments, the Adviser may use its advisory fee or other resources to pay
expenses associated with activities which might be construed to be financing the
sale of the Fund's shares including payments to third parties that provide
assistance in the distribution effort (in addition to selling shares and
providing shareholder services).
The Plans obligate the Fund to accrue and pay to the Distributor the fee
agreed to under its Distribution Agreement. The Plans do not obligate the Fund
to reimburse the Distributor for the actual expenses the Distributor may incur
in fulfilling its obligations under the Plan. Thus, under each Plan, even if the
Distributor's actual expenses exceed the fee payable to it thereunder at any
given time, the Fund will not be obligated to pay more than that fee. If the
Distributor's actual expenses are less than the fee it receives, the Distributor
will retain the full amount of the fee.
Each Plan for a class of Company shares, under the terms of Rule 12b-1, will
remain in effect only if approved at least annually by the Company's Board of
Directors, including those directors who are not "interested persons" of the
Company as that term is defined in the 1940 Act and who have no direct or
indirect
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financial interest in the operation of a Plan or in any agreements related
thereto ("12b-1 Directors"). Each Plan may be terminated at any time by a vote
of a majority of the 12b-1 Directors or by a vote of a majority of the
outstanding voting securities of the applicable class of the Fund. The fee set
forth above will be paid by the appropriate class to the Distributor unless and
until a Plan is terminated or not renewed. The Company intends to operate each
Plan in accordance with its terms and the NASD Conduct Rules concerning sales
charges.
PAYMENTS TO FINANCIAL INSTITUTIONS. The Adviser or its affiliates may
compensate certain financial institutions for the continued investment of their
customers' assets in the Funds pursuant to the advice of such financial
institutions. These payments will be made directly by the Adviser or its
affiliates from their assets, and will not be made from the assets of the
Company or by the assessment of a sales charge on shares. Such financial
institutions may also perform certain shareholder or recordkeeping services that
would otherwise be performed by ACCESS. The Adviser may elect to enter into a
contract to pay the financial institutions for such services.
EXPENSES. The Fund is responsible for payment of certain other fees and
expenses (including professional fees, custodial fees and printing and mailing
costs) specified in the Administration and Distribution Agreements.
PURCHASE OF SHARES
GENERAL
The Company offers three classes of shares to the public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the NASD who are acting as securities dealers ("dealers") and
NASD members or eligible non-NASD members who are acting as brokers or agents
for investors ("brokers"). The term "dealers" and "brokers" are sometimes
referred to herein as "Participating Dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. The $500
minimum may be waived by the Distributor for plans involving periodic
investments. Shares of the Company may be sold in foreign countries where
permissible. The Company and the Distributor reserve the right to refuse any
order for the purchase of shares. The Company also reserves the right to suspend
the sale of the Company's shares in response to conditions in the securities
markets or for other reasons.
Shares of the Company may be purchased on any business day through
Participating Dealers. Shares may also be purchased by completing the
application accompanying this Prospectus and forwarding the application, through
the Participating Dealer, to the shareholder service agent, ACCESS Investor
Services, Inc. ("ACCESS"), a wholly-owned subsidiary of Van Kampen American
Capital, Inc. When purchasing shares of the Company, investors must specify
whether the purchase is for Class A shares, Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus an
initial or contingent deferred sales charge depending on the class of shares
chosen by the investor, as shown in the tables herein. See "Valuation of Shares"
for a further description of net asset value computations.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the classes of
shares may differ from one another, reflecting the daily expense accruals of the
higher distribution fees applicable with respect to the Class B shares and Class
C shares and the differential in the dividends paid on
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the classes of shares. The price paid for shares purchased is based on the next
calculation of net asset value (plus sales charges, where applicable) after an
order is received by a Participating Dealer provided such order is transmitted
to the Distributor prior to the Distributor's close of business on such day.
Orders received by Participating Dealers after the close of the New York Stock
Exchange (the "NYSE") are priced based on the net asset value calculated after
the next day's close provided they are received by the Distributor prior to the
Distributor's close of business on such day. It is the responsibility of
Participating Dealers to transmit orders received by them to the Distributor so
they will be received prior to such time.
Each class of shares represents an interest in the same portfolio of
investments, has the same rights and is identical in all respects, except that
(i) Class B shares and Class C shares bear the expenses of the deferred sales
arrangement and any expenses (including higher distribution fees) resulting from
such sales arrangement, (ii) generally, each class has exclusive voting rights
with respect to approvals of the Rule 12b-1 distribution plan to which its
distribution fee or service fee is paid, (iii) certain shares are subject to a
conversion feature, (iv) each class has different exchange privileges and (v)
each class has different shareholder service options available. The net income
attributable to Class B shares and Class C shares and the dividends payable on
Class B shares and Class C shares will be reduced by the amount of the higher
distribution fees associated with such class of shares. Sales personnel of
Participating Dealers distributing the Company's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A shares, Class B shares or Class C shares.
In deciding which class of shares to purchase, investors should take into
consideration their investment goals, present and anticipated purchase amounts,
time horizons and temperments. Investors should consider whether, during the
anticipated life of their investment in the Fund, the accumulated distribution
fees and contingent deferred sales charges on Class B shares prior to conversion
or Class C shares would be less than the initial sales charge on Class A shares
purchased at the same time, and to what extent such differential would be offset
by the higher dividends per share on Class A shares. To assist investors in
making this determination, the table under the caption "Fund Expenses" sets
forth examples of the charges applicable to each class of shares. In this
regard, Class A shares may be more beneficial to the investor who qualifies for
reduced initial sales charges or purchases shares at net asset value, as
described herein under "Purchase of Shares -- Class A Shares." For these
reasons, it is presently the policy of the Distributor not to accept any order
of $500,000 or more for Class B shares or any order of $1 million or more for
Class C shares as it ordinarily would be more beneficial for such an investor to
purchase Class A shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for most
accounts under $1 million, investors in Class A shares do not have all their
funds invested initially and, therefore, initially own fewer shares. Other
investors might determine that it is more advantageous to purchase either Class
B shares or Class C shares and have all their funds invested initially, although
remaining subject to a contigent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
21
<PAGE>
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. Class B shares may be appropriate for investors who wish to avoid a
front-end sales charge, put 100% of their investment dollars to work
immediately, and/or have a longer-term investment horizon. Class C shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, have a shorter-term investment
horizon and/or desire a short contigent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Investors should understand that the purpose and function of the CDSC
and ongoing distribution fee with respect to Class B shares and Class C shares
are the same as those of the initial sales charge with respect to Class A
shares. See "Distribution Plans."
The Distributor may from time to time implement programs under which a
Participating Dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
Participating Dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the Participating Dealer at
the public offering price during such programs. Other programs provide, among
other things and subject to certain conditions, for certain favorable
distribution arrangements for shares of the Company. 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 Company. Fees may include payment
for travel expenses, including lodging, incurred in connection with trips taken
by invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances, additional compensation or promotional incentives may
be offered to Participating Dealers that have sold or may sell significant
amount of shares during specified periods of time. 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. All of the foregoing payments are made by the Distributor out of its own
assets. These programs will not change the price an investor will pay for shares
or the amount that a Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth herein.
22
<PAGE>
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
DEALERS
AS % OF AS % OF NET (AS % OF
SIZE OF INVESTMENT OFFERING PRICE AMOUNT 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 initial sales charge is payable at the time of purchase on investments of
$1 million or more, although for such investments the Fund imposes a
contingent deferred sales charge of 1.00% in the event of certain redemptions
within one year of the purchase. A commission will be paid to brokers, dealers
or financial intermediaries who initiate and are responsible for purchases of
$1 million or more as follows: 1.00 % on sales to $2 million, plus 0.80% on
the next $1 million, plus 0.50% on the excess over $3 million. See "Purchase
of Shares -- Purchase of Class B Shares" and "-- Purchase of Class C Shares"
for additional information with respect to contingent deferred sales charges.
In addition to the reallowances from the applicable public offering price
described herein, the Distributor may, from time to time, pay or allow
additional reallowances or promotional incentives, in the form of cash or other
compensation, to Participating Dealers that sell shares of the Company.
Participating Dealers which are reallowed all or substantially all of the sales
charges may be deemed to be underwriters for purposes of the 1933 Act.
The Distributor may also pay financial institutions (which may include
banks) and other industry professionals that provide services to facilitate
transactions in shares of the Company for their clients a transaction fee up to
the level of the reallowance allowable to Participating Dealers described
herein. Such financial institutions, other industry professionals and
Participating Dealers are hereinafter referred to as "Service Organizations."
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Company. State
securities laws regarding registration of banks and other financial institutions
may differ from the interpretations of federal law expressed herein and banks
and other financial institutions may be required to register as dealers pursuant
to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their Participating Dealers must notify the Company whenever a
quantity discount is applicable to purchases. Upon such notification, an
investor will receive the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their Participating Dealer or the
Distributor.
23
<PAGE>
A person eligible for a reduced sales charge includes an individual, their
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
estate or single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
The phrase "Participating Funds," as used herein, refers to certain open-end
investment companies advised by the Adviser or Van Kampen American Capital Asset
Management Inc. and distributed by the Distributor as determined from time to
time by the Company's Board of Directors.
VOLUME DISCOUNTS. The size of investment shown in the preceding sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds which have been previously purchased and are
still owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an
investor to obtain a reduced sales charge by aggregating the investments over a
13-month period to determine the sales charge as outlined in the preceding
table. The size of investment shown in the preceding table also 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 receive
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchased amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales
charges in connection with unit investment trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Company or the Distributor. The Company reserves the right
to modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAMS. The Company permits
unitholders of unit investment trusts to reinvest distributions from such trusts
in Class A shares of the Company at net asset value 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 Company and the Distributor. The total sales charge for all other
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the Participating Dealer, if any, through
24
<PAGE>
which such participation in the qualifying program was initiated 0.50% of the
offering price as a dealer concession or agency commission. Persons desiring
more information with respect to this program, including the applicable terms
and conditions thereof, should contact their Participating 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 ACCESS with appropriate
backup data for each participating investor in a computerized format fully
compatible with ACCESS' processing system.
As further requirements for obtaining these special benefits, the Company
also requires that all dividends and other distributions by a Fund be reinvested
in additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Company will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Company reserves the right to
modify or terminate this program at any time.
NAV PURCHASE OPTIONS. Class A shares of the Fund may be purchased without
an initial sales charge, 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/directors of funds advised by the
Adviser or Van Kampen American Capital Asset Management, Inc. and such
persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan
Stanley Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and registered representatives of
financial institutions that have a selling group agreement with the
Distributor and their spouses and children under 21 years of age when
purchasing for any accounts they beneficially own, or, in the case of any
such financial institution, when purchasing for retirement plans for such
institution's employees.
(4) Registered investments advisers, trust companies and bank trust
departments investing on their own behalf or on behalf of their clients
provided that the aggregate amount invested in a Fund alone, or in any
combination of shares of the Fund and shares of other Participating Funds as
described herein under "Purchase of Shares -- Class A Shares -- Volume
Discounts," during the 13-month period commencing with the first investment
pursuant hereto equals at least $1 million. The Distributor may pay
Participating Dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement
plans of organizations with retirement plan assets of $3 million or more and
which invest in multiple fund families through national wirehouse alliance
programs. The Distributor may pay commissions of up to 1.00% for such
purchases.
(6) Accounts as to which a broker, dealer or financial intermediary
charges an account management fee ("wrap accounts"), provided the broker,
dealer or financial intermediary has a separate agreement with the
Distributor.
25
<PAGE>
(7) Trusts created under pension, profit sharing or other employee
benefit plans qualified under Section 401(a) of the Code, or custodial
accounts held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of the
Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided that (1) the
initial amount invested in the Participating Funds is at least $500,000 or
(2) such shares are purchased by an employer sponsored plan with more than
100 eligible employees. Section 403(b) and similar accounts for which Van
Kampen American Capital Trust Company ("VKAC Trust") 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. A commission will be paid to dealers who initiate and are responsible
for such purchases within a rolling twelve month period as follows: 1.00% on
sales up 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.
(8) 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 other 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 participant's account in connection with this privilege will
be subject to a contingent deferred sales charge of one percent 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
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 ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS 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 with respect to such shares. Authorized dealers will be
paid a service fee as described herein under "Distribution Plans" on purchases
made as described in (3) through (8) above.
The Company may terminate, or amend the terms of, offering shares of the
Fund at net asset value to the foregoing groups at any time.
26
<PAGE>
PURCHASE OF CLASS B SHARES
Class B shares of the Fund may be purchased at net asset value without an
initial sales charge. However, a CDSC will be imposed on certain Class B shares
redeemed within five years of purchase. The charge is assessed on an amount
equal to the lesser of the then-current market value of the Class B shares
redeemed or the total cost of such shares. Accordingly, the CDSC will not be
applied to dollar amounts representing an increase in the net asset values above
the initial purchase price of the shares being redeemed. In addition, no charge
is assessed on redemptions of Class B shares derived from reinvestment of
dividends or capital gains distributions.
In determining whether the CDSC is applicable to a redemption, the
calculation is made in the manner that results in the lowest possible rate.
Therefore, it is assumed that the redemption is first of any Class B shares in
the shareholder's account that represent reinvested dividends and/or
distributions, and/or of Class B shares held longer than five years after
purchase, and next of Class B shares held the longest during the initial
five-year period after purchase. The amount of the CDSC, if any, will vary
depending on the number of years from the time of purchase of Class B shares
until the redemption of such shares (the "holding period"). The following table
sets forth the rates of the CDSC.
CONTINGENT DEFERRED SALES CHARGE
<TABLE>
<CAPTION>
SALES CHARGE AS
PERCENTAGE OF
THE
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO
PAYMENT WAS MADE CHARGE
- ------------------------------ ----------------
<S> <C>
First......................... 5.00%
Second........................ 4.00%
Third......................... 3.00%
Fourth........................ 2.50%
Fifth......................... 1.50%
Thereafter.................... None*
</TABLE>
- --------------
* As described more fully below, Class B shares automatically convert to Class A
shares after the eighth year following purchase.
Proceeds from any CDSC are paid to the Distributor and are used by the
Distributor to defray its expenses related to providing distribution-related
services to the Company in connection with the sale of the Class B shares. The
Distributor will make payments to the Participating Dealers that handle the
purchases of such shares at a rate not in excess of 4.00% of the purchase price
of such shares at the time of purchase and expects to pay to Participating
Dealers a portion of its distribution fee under the Rule 12b-1 Plan as described
under "Management of the Company -- Distributor" above. Additionally, the
Distributor may pay additional promotional incentives in the form of cash or
other compensation to authorized dealers that sell Class B shares of the Fund.
The combination of the CDSC and the distribution fee facilitates the ability of
the Company to sell the Class B shares without a sales charge being deducted at
the time of purchase.
AUTOMATIC CONVERSION TO CLASS A SHARES. After the eighth year following
purchase, Class B shares will automatically convert to Class A shares and will
no longer be subject to the higher distribution fees. Such conversion will be on
the basis of the relative net asset values of the two classes, without the
imposition of any sales load, fee or other charge. Under current tax law, the
conversion is not a taxable event to the shareholder.
27
<PAGE>
PURCHASE OF CLASS C SHARES
Class C shares of the Fund may be purchased at the net asset value per share
and such shares are subject to a CDSC at the rate of 1.00% of the lesser of the
current market value of the shares redeemed or the total cost of such shares for
shares that are redeemed within one year of purchase. The Distributor will make
payments to the Participating Dealers that handle the purchases of such shares
at the rate of 1.00% of the purchase price of such shares at the time of
purchase and expects to pay to Participating Dealers most of its distribution
fee, with respect to such shares, under the Rule 12b-1 Plan for such class of
shares, as described under "Management of the Company -- Distributor" above. In
determining whether a CDSC is payable, and, if so, the amount of the fee or
charge, it is assumed that shares not subject to such fee or charge are the
first redeemed.
WAIVER OF CDSC
The CDSC will be waived on the redemption of Class B or Class C shares (i)
following the death or initial determination of disability (as defined in the
Code) of a shareholder; (ii) certain distributions from an IRA or other
retirement plan; (iii) to the extent that shares redeemed have been withdrawn
from a Systematic Withdrawal Plan, up to a maximum amount of 12% per year from a
shareholder account based on the value of the account at the time the Withdrawal
Plan is established; or (iv) in circumstances under which no commission or
transaction fee is paid to authorized dealers at the time of purchase of such
shares. A shareholder, or their representative, must notify the Transfer Agent
prior to the time of redemption if such circumstances exist and the shareholder
is eligible for this waiver. The shareholder is responsible for providing
sufficient documentation to the Transfer Agent to verify the existence of such
circumstances. For information on the imposition and waiver of the CDSC, contact
Investor Services at 1-800-282-4404.
AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS
No initial sales charge or CDSC will be payable on the shares of the Fund or
classes thereof purchased through the automatic reinvestment of dividends and
distributions on shares of the Fund.
REINSTATEMENT PRIVILEGE OF EACH CLASS
A shareholder who has redeemed Class A shares of a Participating Fund may
reinvest up to the full amount received at net asset value at the time of the
reinvestment in Class A shares of the Funds without payment of a sales charge. A
shareholder who has redeemed Class B shares of a Participating Fund and paid a
CDSC upon such redemption may reinvest up to the full amount received upon
redemption in Class A shares of a Fund at net asset value with no initial sales
charge. A Class C shareholder who has redeemed shares of a Participating Fund
may reinstate any portion or all of the net proceeds of such redemption in Class
C shares of a Fund with credit given for any CDSC paid upon such redemption. The
reinstatement privilege as to any specific Class A, Class B or Class C shares
must be exercised within 180 days of the redemption. The Transfer Agent must
receive from the shareholder or the shareholder's Participating Dealer both a
written request for reinstatement and a check or wire which does not exceed the
redemption proceeds. The written request must state that the reinvestment is
made pursuant to this reinstatement privilege. If a loss is realized on the
redemption of Class A shares, the reinvestment may be subject to the "wash sale"
rules if made within 30 days of the redemption, resulting in a postponement of
the recognition of such loss for federal income tax purposes. The reinstatement
privilege may be terminated or modified at any time. Reinstatement at net asset
value is also offered to participants in those eligible retirement plans held or
administered by Van Kampen American Capital Trust Company for repayment of
principal (and interest) on their borrowings on such plan. See the Statement of
Additional Information for further discussion of waiver provisions.
28
<PAGE>
SHAREHOLDER SERVICES
The Company 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. Unless otherwise described below, each of these
services may be modified or terminated by the Company at any time.
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. ACCESS acts as transfer agent for the Company and
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Except as described herein, after each
share transaction in an account, the shareholder receives a statement showing
the activity in the account. Each shareholder will receive statements at least
quarterly from ACCESS showing any reinvestments of dividends and capital gains
distributions and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gains distributions and systematic purchases or redemptions. Additions to an
investment account may be made at any time by purchasing shares through
authorized brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Company will not issue share
certificates. However, upon written or telephone request to the Company, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of the Company. A shareholder will be required to surrender
such certificates upon redemption or transfer thereof. In addition, if such
certificates are lost the shareholder must write to Morgan Stanley Fund, Inc.
c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an
"affidavit of loss" and to obtain a Surety Bond in a form acceptable to ACCESS.
On the date the letter is received, ACCESS will calculate a fee for replacing
the lost certificate equal to no more than 2.00% of the net asset value of the
issued shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Dividends and Distributions."
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanied by this
Prospectus or by calling (800) 282-4404 or (800) 772-8889 for the hearing
impaired, elect to have all dividends and other distributions paid on a class of
shares of the Company invested in shares of the same class of any Participating
Fund, so long as a pre-existing account for such class of shares exists for such
shareholder. Both accounts must also be of the same type, either non-
29
<PAGE>
retirement or retirement. Any two non-retirement accounts can be used. If the
accounts are retirement accounts, they must both be for the same class and of
the same type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Keogh) and for
the benefit of the same individual.
If the 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 portfolio at its net asset value as of the payable date of the
distribution only if shares of such selected portfolio have been registered for
sale in the investor's state and are currently available for sale.
RETIREMENT PLANS. Eligible investors may establish IRAs; SEP; and pension
and profit sharing plans; 401(k) plans; or Section 403(b)(7) plans in the case
of employees of public school systems and certain non-profit organizations.
Documents and forms containing detailed information regarding these plans are
available from the Distributor. VKAC Trust serves as custodian under the IRA,
403(b)(7) and Keogh plans. Details regarding fees are available from the
Distributor.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the
same class of another Participating Fund based on the net asset values of each
Fund on the date of exchange, subject to certain limitations. Before effecting
an exchange, shareholders in the Company should obtain and read a current
prospectus of the Participating Funds into which the exchange is to be made.
Shareholders may only exchange into such other Participating Funds as are
legally available for sale in their state and are currently available for sale.
To be eligible for exchange, shares of the Fund generally must have been
registered in the shareholder's name for at least 30 days prior to an exchange.
Shares of the Fund registered in a shareholder's name for less than 30 days may
only be exchanged upon receipt of prior approval of the Adviser. Under normal
circumstances, it is the policy of the Adviser not to approve such requests.
Class A shares of a Participating Fund that generally impose an initial
sales charge are not subject to any sales charge upon exchange into another
Participating Fund. Class A shares of Participating Fund that do not impose an
initial sales charge will be subject to the applicable sales charge of the
Participating Fund being obtained in the exchange.
No sales charge is imposed upon the exchange of a Class B share or a Class C
share. The CDSC schedule, conversion schedule and holding period applicable to a
Class B share or a Class C share acquired through the exchange privilege is
determined by reference to the Participating Fund from which such share
originally was purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but 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 ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanied by this Prospectus. See
"Redemption of Shares -- Telephone Transaction Procedures" for more information.
The exchange will take place at the relative net asset values of the shares next
determined after receipt of such request with adjustment for any
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additional sales charge. Any shares exchanged begin earning dividends on the
next business day after the exchange is affected. If the exchanging shareholder
does not have an account in the portfolio whose shares are being acquired, a new
account will be established with the same registration, dividend and capital
gains options (except dividend diversification options) and broker, dealer or
financial intermediary 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 dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. The Company reserves the right to reject any order to acquire
its shares through exchange. In addition, the Company may restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment. If an account has multiple owners, ACCESS may
rely on the instructions of any one owner.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $5,000 or more at the offering price next computed after receipt of
instructions may establish a quarterly, semi-annual or annual withdrawal plan.
Investors whose shares in a single account total $10,000 or more at the offering
price next computed after receipt of instructions may establish a monthly,
quarterly, semi-annual or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the principal,
if necessary. Each withdrawal constitutes a redemption of shares on which
taxable gain or loss will be recognized. The plan holder may arrange for
monthly, quarterly, semi-annual, or annual checks in any amount not less than
$25.
The CDSC on Class B and Class C shares is waived for withdrawals under the
Systematic Withdrawal Plan of a maximum of 1% per month, 3% per quarter, 6%
semiannually or 12% annually, of a shareholder's investment in, and any
dividends or distributions on, shares of the Fund at the time the Systematic
Withdrawal Plan commences. Under this CDSC waiver policy, amounts withdrawn each
period will be paid by redeeming first shares not subject to a CDSC because the
shares were purchased by the reinvestment of dividends or capital gains
distributions, the CDSC period has elapsed or some other waiver of the CDSC
applies. If shares subject to the CDSC must be redeemed, shares held for the
longest period of time will be redeemed first and continuing with shares held
the next longest period of time until shares held the shortest period of time
are redeemed.
Under the plan, sufficient shares of the Company are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Company reserves the right to amend or terminate the systematic
withdrawal program on 30 days' notice to its shareholders.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can
use ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of ACH. In addition, the shareholder must fill out the appropriate
section of the account application. The shareholder must also include a voided
check or deposit slip from the bank account into which redemptions are to be
deposited together with the completed application. Once ACCESS has received the
application and the voided check or deposit slip, such
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<PAGE>
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 to ACCESS or by
calling 1-800-282-4404. A shareholder's bank may charge a fee for ACH transfers.
TRANSFER OF REGISTRATION. You may transfer the registration of any of your
Company shares to another person by writing to the Company c/o ACCESS, P.O. Box
418256, Kansas City, Missouri 64141-9256. As in the case of redemptions, the
written request must be received in "good order" before any transfer can be
made. Shares held in broker street name may be transferred only by contacting
your Participating Dealer.
REDEMPTION OF SHARES
Shareholders may redeem for cash some or all of their shares without charge
by the Company (other than any applicable CDSC) at any time by sending a written
request in proper form directly to the Company c/o ACCESS, P.O. Box 418256,
Kansas City, Missouri 64141-9256, by placing the redemption request through a
Participating Dealer or by calling the Company. See "Purchase of Shares" for a
discussion of applicable CDSC levels.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent
directly to ACCESS, the redemption request should indicate the number of shares
or dollars to be redeemed, the class designation of such shares, the account
number and be signed exactly as the shares are registered. Signatures must
conform exactly to the account registration. If the proceeds of the redemption
would 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. If certificates are held for the shares
being redeemed, such certificates must be endorsed for transfer or accompanied
by an endorsed stock power and sent with the redemption request. In the event
the redemption is requested by a corporation, partnership, trust, fiduciary,
executor or administrator, additional documents may be necessary. The redemption
price is the net asset value per share next determined after the request is
received by ACCESS in proper form. Payment for shares redeemed will ordinarily
be made by check mailed within seven business days after acceptance by ACCESS of
the request and any other necessary documents in proper order.
DEALER REDEMPTION REQUESTS. Shareholders may redeem shares through their
securities dealer, who will submit the request to the Distributor. Orders
received from dealers must be at least $500 unless transmitted via the FUNDSERV
network. The redemption price for such shares is the net asset value next
calculated after an order is received (less any applicable CDSC) by a 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 dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Any change in the redemption price due to failure of the
Distributor to receive a redemption request prior to such time must be settled
between the shareholder and dealer. Shareholders must submit a written
redemption request in proper form (as described above under "Written Redemption
Requests") to the dealer within three business days after calling the dealer
with the redemption request. Payment for shares redeemed will ordinarily be made
by check mailed within three business days to the dealer.
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<PAGE>
TELEPHONE REDEMPTION REQUESTS. The Company permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application accompanying this Prospectus or call the Company at (800) 282-4404
or (800) 772-8889 for the hearing impaired, to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. See
"Telephone Transaction Procedures" for more information. Telephone redemptions
may not be available if the shareholder cannot reach ACCESS by telephone,
whether because all telephone lines are busy or for any other reason, in such
case, a shareholder would have to use the Company's other redemption procedures
previously described. Requests received by ACCESS prior to 4:00 p.m., Eastern
Time, on a regular business day will be processed at the net asset value per
share determined that day. These privileges are available for all accounts other
than retirement accounts. The telephone redemption privilege is not available
for shares represented by certificates. If an account has multiple owners,
ACCESS may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address or bank account of record has been changed within 30 days prior to a
telephone redemption request. The Company reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Company will waive the CDSC on redemptions
following the disability of holders of Class B shares and Class C shares. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Company does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B shares and Class C shares.
In cases of disability, the CDSCs on Class B shares and Class C shares will
be waived where the disabled person is either an individual shareholder or owns
the shares as a joint tenant with right of survivorship or is the beneficial
owner of a custodial or fiduciary account, and where the redemption is made
within one year of the initial determination of disability. This waiver of the
CDSC on Class B shares and Class C shares applies to a total or partial
redemption, but only to redemptions of shares held at the time of the initial
determination of disability.
GENERAL REDEMPTION INFORMATION. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check or
wiring redemption proceeds until it confirms that the purchase check has
cleared, usually a period of up to 15 days. In addition, the redemption payment
may be delayed or the right of redemption suspended by the Fund pursuant to
rules of the SEC.
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<PAGE>
The Company may redeem any shareholder account with a net asset value on the
date of the notice of redemption less than the minimum investment as specified
by the Directors. At least 60 days' advance written notice of any such
involuntary redemption is required and the shareholder is given an opportunity
to purchase the required value of additional shares at the next determined net
asset value without sales charge. Any involuntary redemption may only occur if
the shareholder account is less than the minimum investment due to shareholder
redemptions.
A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule. IRA redemption requests should be sent to the IRA
custodian to be forwarded to ACCESS. Where VKAC Trust serves as IRA custodian,
special IRA, 403(b)(7), or Keogh redemption forms must be obtained from and be
forwarded to Van Kampen American Capital Trust Company, P.O. Box 944, Houston,
Texas 77001-0944. Contact the custodian for information. Reinstatement
privileges (as otherwise described under "Purchase of Shares -- Reinstatement
Privilege of Each Class" above) also extend to participants in eligible
retirement plans held or administered by VKAC Trust who repay the principal and
interest on their borrowings from such plans.
FOR SHARES HELD IN BROKER STREET NAME, YOU CANNOT REQUEST REDEMPTION BY
TELEPHONE OR BY MAIL; SUCH SHARES MAY BE REDEEMED ONLY BY CONTACTING YOUR
PARTICIPATING DEALER.
TELEPHONE TRANSACTION PROCEDURES. Van Kampen American Capital, Inc. and its
subsidiaries, including ACCESS (collectively, "VKAC") and the Company 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, a
shareholder agrees that neither VKAC nor the Company will be liable for
following instructions which it reasonably believes to be genuine. VKAC and the
Company may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed.
VALUATION OF SHARES
Net asset value is calculated separately for each class of the Fund. The net
asset value per share of each class of shares of the Fund is determined by
dividing the total fair market value of the investments and other assets
attributable to such class of shares, less all liabilities attributable to such
class of shares, by the total number of outstanding shares of such class of
shares. Net asset value per share of the Fund is determined as of the regular
close of the NYSE (currently 4:00 p.m., Eastern Time) on each day that the NYSE
is open for business. Securities listed on a securities exchange for which
market quotations are available are valued at their closing price. If no closing
price is available, such securities will be valued at the last quoted sale price
on the day the valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily traded. Unlisted
securities and listed securities not traded on the valuation date for which
market quotations are readily available are valued at the average of the mean
between the current bid and asked prices obtained from reputable brokers.
Bonds and other fixed income securities are valued according to the broadest
and most representative market, which will ordinarily be the over-the-counter
market. Net asset value includes interest on fixed income securities, which is
accrued daily. In addition, bonds and other fixed income securities may be
valued on the basis of prices provided by a pricing service when such prices are
believed to reflect the fair market value of such
34
<PAGE>
securities. The prices provided by a pricing service are determined without
regard to bid or last sale prices but take into account institutional size
trading in similar groups of securities and any developments related to the
specific securities. Securities not priced in this manner are valued at the most
recent quoted bid price, or, when stock exchange valuations are used, at the
latest quoted sale price on the day of valuation. If there is no such reported
sale, the latest quoted bid price will be used. Debt securities purchased with
remaining maturities of 60 days or less are valued at amortized cost, if it
approximates market value. In the event that amortized cost does not approximate
market value, market prices as determined above will be used. The "amortized
cost" method of valuation does not take into account unrealized gains or losses.
This method involves valuing an instrument at its cost and thereafter assuming a
constant amortization to maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market value of the instrument.
While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument.
The value of other assets and securities for which no quotations are readily
available (including illiquid and unlisted foreign securities) and those
securities for which it is inappropriate to determine prices in accordance with
the above procedures are determined in good faith at fair value using methods
determined by the Board of Directors. For purposes of calculating net asset
value per share, all assets and liabilities initially expressed in foreign
currencies will be converted into U.S. Dollars at the mean of the bid price and
asked price of such currencies against the U.S. Dollar as quoted by a major
bank.
PORTFOLIO TRANSACTIONS
The Adviser and the Sub-Adviser select the brokers or dealers that will
execute the purchases and sales of investment securities for the Fund. The
Adviser and the Sub-Adviser may, consistent with NASD rules, place portfolio
orders with qualified broker-dealers who recommend the Fund to their clients or
who act as agents in the purchase of shares of the Fund for their clients.
Subject to the overriding objective of obtaining the best execution of
orders, the Adviser and the Sub-Adviser may allocate a portion of the Company's
portfolio brokerage transactions to Morgan Stanley & Co. Incorporated ("Morgan
Stanley") and affiliates of the Adviser and the Sub-Adviser or broker affiliates
of Morgan Stanley under procedures adopted by the Board of Directors. For such
portfolio transactions, the commissions, fees or other remuneration received by
Morgan Stanley or such affiliates must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers for comparable
transactions involving similar securities being purchased or sold during a
comparable period of time.
Although the objectives of the Fund is not to invest for short-term trading,
the Fund will seek to take advantage of trading opportunities as they arise to
the extent they are consistent with the Fund's objectives. Accordingly,
investment securities may be sold from time to time without regard to the length
of time they have been held. The Fund anticipates that its annual portfolio
turnover rate will not exceed 100% under normal circumstances but market
conditions could result in portfolio activity at a greater or lesser rate than
anticipated. High portfolio turnover involves correspondingly greater
transaction costs which will be borne directly by a Fund. In addition, high
portfolio turnover may result in more capital gains which would be taxable to
the shareholders of the Fund.
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<PAGE>
PERFORMANCE INFORMATION
The Company may from time to time advertise total return of the Fund. THESE
FIGURES WILL BE BASED ON HISTORICAL EARNINGS AND ARE NOT INTENDED TO INDICATE
FUTURE PERFORMANCE. The "total return" shows what an investment in a Fund would
have earned over a specified period of time (such as one, three, five or ten
years) assuming that all distributions and dividends by the Fund were reinvested
on the reinvestment dates during the period. Total return does not take into
account any federal or state income taxes consequences to shareholders subject
to tax. The Company may also include comparative performance information in
advertising or marketing the Fund's shares. Such performance information may
include data from Lipper Analytical Services, Inc. and Morgan Stanley Capital
International.
PERFORMANCE OF INVESTMENT SUB-ADVISERS
MSAM manages a portfolio of Morgan Stanley Institutional Fund, Inc. ("MSIF")
which served as a model for the Fund. The Equity Growth portfolio of MSIF (the
"MSIF Portfolio") has substantially the same investment objective, policies and
strategies as the Fund. In addition, the Adviser and the Sub-Adviser intend the
Fund to be managed by the same personnel and to continue to have closely similar
investment strategies, techniques and characteristics as the corresponding MSIF
Portfolio. Past investment performance of the MSIF Portfolio, as shown in the
tables below, may be relevant to your consideration of investment in the Fund.
The investment performance of the MSIF Portfolio is not necessarily indicative
of future performance of the Fund. Also, the operating expenses of the Fund will
be different from, and may be higher than, the operating expenses of the MSIF
Portfolio. The investment performance of the MSIF Portfolio is provided merely
to indicate the experience of the Sub-Adviser in managing a similar investment
portfolio.
The data set forth below under the heading "Return With Sales Charge" is
adjusted to reflect the Fund's projected operating expenses and (i) with respect
to the Class A shares, to take into account a maximum 5.75% initial sales charge
applicable to purchases of Class A shares of the Fund, (ii) with respect to
Class B shares, to take into account the applicable CDSC that is imposed if
Class B shares of the Fund are redeemed within the year of their purchase
indicated and (iii) with respect to the Class C shares, to take into account a
1.00% CDSC that is imposed if Class C shares of the Fund are redeemed within one
year of their purchase. The data set forth below under the heading "Return
Without Sales Charge" is adjusted to reflect the Fund's projected operating
expenses and not adjusted to take into account such sales charges.
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<PAGE>
TOTAL RETURN FOR THE MSIF PORTFOLIO'S CLASS A SHARES
(A SEPARATE MUTUAL FUND FROM THE EQUITY GROWTH FUND)
FOR THE PERIOD ENDED MARCH 31, 1998
(ADJUSTED TO REFLECT PROJECTED OPERATING EXPENSES AND, WHERE INDICATED, THE
SALES CHARGES OF THE FUND)
<TABLE>
<CAPTION>
RETURN WITH SINCE
SALES CHARGE 1 YEAR 3 YEARS 5 YEARS INCEPTION(1)
- ------------------------------------------------------ --------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Class A............................................... 41.49% 35.31% 24.02% 19.74%
Class B............................................... 44.37% 37.07% 25.06% 20.50%
Class C............................................... 48.37% 37.60% 25.18% 20.50%
<CAPTION>
RETURN WITHOUT
SALES CHARGE
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Class A............................................... 50.12% 38.00% 25.50% 20.76%
Class B............................................... 49.37% 37.60% 25.18% 20.50%
Class C............................................... 49.37% 37.60% 25.18% 20.50%
</TABLE>
- --------------
(1) Commenced Operations on April 2, 1991.
The past performance of the MSIF Portfolio is no guarantee of the future
performance of the Equity Growth Fund.
DIVIDENDS AND DISTRIBUTIONS
Shareholders will automatically be credited with all dividends and
distributions in additional shares at net asset value, without payment of any
sales charge of the Fund, except that, upon written notice to the Company or by
checking off the appropriate box in the account application form, a shareholder
may elect to receive dividends and/or distributions in cash.
The Fund expects to distribute substantially all of its net investment
income in the form of annual dividends. The Fund expects to distribute net
realized gains, if any, annually. Confirmations of the purchase of shares of the
Fund through the automatic reinvestment of income dividends and capital gains
distributions will be provided, pursuant to Rule 10b-10(b) under the Securities
Exchange Act of 1934, as amended, on the next quarterly client statement
following such purchase of shares. Consequently, confirmations of such purchases
will not be provided at the time of completion of such purchases, as might
otherwise be required by Rule 10b-10.
Any undistributed net investment income and undistributed realized gains
increase the Fund's net assets for the purpose of calculating net asset value
per share. Therefore, on the "ex-dividend" or "ex-distribution" date, the net
asset value per share excludes the dividend or distribution (i.e., is reduced by
the per share amount of the dividend or distribution). Dividends and
distributions paid shortly after the purchase of shares by an investor, although
in effect a return of capital, are taxable to shareholders subject to tax.
Expenses of the Company allocated to a particular class of shares of the
Fund will be borne on a pro rata basis by each outstanding share of that class.
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TAXES
TAX STATUS OF THE FUND
The following summary of certain federal income tax consequences is based on
current tax laws and regulations, which may be changed by legislative, judicial
or administrative action, possibly with retroactive effect. See also the tax
sections in the Statement of Additional Information.
No attempt has been made to present a detailed explanation of the federal,
state or local income tax treatment of the Funds or their shareholders.
Accordingly, shareholders are urged to consult their tax advisors regarding
specific questions as to federal, state and local income taxes.
The Fund and other portfolios of the Company are generally treated as
separate entities for federal income tax purposes, and thus the provisions of
the Internal Revenue Code of 1986, as amended (the "Code"), generally will be
applied to each portfolio separately, rather than to the Company as a whole. Net
long-term, mid-term and short-term capital gains, net income and operating
expenses therefore will be determined separately for each portfolio.
The Fund intends to qualify for the special tax treatment afforded
"regulated investment companies" ("RICs") under Subchapter M of the Code so that
each will be relieved of federal income tax on that part of its net investment
income and net capital gain (the excess of net long-term capital gain over net
short-term capital loss less any available capital loss carryforward) which is
distributed to its shareholders.
TAX STATUS OF DISTRIBUTIONS AND DISPOSITIONS
The Fund intends to distribute substantially all of its net investment
income (including, for this purpose, net short-term capital gain) to its
shareholders. Dividends paid by the Fund from its net investment income will be
taxable to the shareholders of the Fund as ordinary income, whether received in
cash or in additional shares, if the shareholder is subject to tax. Dividends
paid by the Fund attributable to dividends received from shares of domestic
corporations may qualify for the dividends-received deduction for corporations.
Distributions of net capital gains ("capital gain dividends") are taxable to
shareholders subject to tax as long-term capital gains, regardless of how long
the shareholder has held the Fund's shares. Capital gain distributions are not
eligible for the corporate dividends-received deduction. The Fund will make
annual reports to shareholders of the federal income tax status of all
distributions. For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see the discussion below regarding the
Taxpayer Relief Act of 1997.
The Fund intends to make sufficient distributions or deemed distributions of
its ordinary income and net capital gains prior to the end of each calendar year
to qualify as an RIC under the Code and to avoid liability for federal income
and excise taxes.
Dividends and other distributions declared in December by the Fund payable
as of a record date in such month and paid at any time during January of the
following year are treated as having been paid by the Fund and received by the
shareholders on December 31 of the year declared.
The sale, exchange or redemption of shares may result in taxable gain or
loss to the selling, exchanging or redeeming shareholder, depending upon whether
the fair market value of the redemption proceeds exceeds or is less than the
shareholder's adjusted basis in the redeemed, exchanged or sold shares. If
capital gain dividends
38
<PAGE>
have been made with respect to shares that are sold at a loss after being held
for six months or less, then the loss is treated as a long-term capital loss to
the extent of the capital gain dividends. Shareholders may also be subject to
state and local taxes on distributions from the Funds.
Under the Taxpayer Relief Act of 1997 (the "1997 Tax Act"), the maximum tax
rates applicable to net capital gains recognized by individuals and other
non-corporate taxpayers are (i) the same as ordinary income rates for capital
assets held for one year or less, (ii) 28% for capital assets held for more than
one year but not more than 18 months and (iii) 20% for capital assets held for
more than 18 months. The 1997 Tax Act did not affect the maximum net capital
gains tax rate for corporations, which remains at 35%. The new tax rates for
capital gains under the 1997 Tax Act described above apply to distributions of
capital gains dividends by the Fund (if, as expected, the Fund designates
capital gain dividends as 28% rate gain distributions or 20% rate gain
distributions, in accordance with its holding period for the securities sold
that generated such capital gain dividends) as well as to sales and exchanges of
shares in the Fund. With respect to capital losses recognized on dispositions of
shares held six months or less where such losses are treated as long-term
capital losses to the extent of prior capital gain dividends received on such
shares (see discussion above regarding gains or losses recognized on the sale or
exchange of shares), it is unclear how such capital losses offset the capital
gains referred to above. Shareholders should consult their own tax advisers as
to the application of the new capital gains rates to their particular
circumstances.
THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED HEREIN FOR GENERAL
INFORMATION ONLY. PROSPECTIVE INVESTORS AND SHAREHOLDERS SHOULD CONSULT THEIR
OWN TAX ADVISERS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM OF AN INVESTMENT
IN THE FUND.
GENERAL INFORMATION
DESCRIPTION OF COMMON STOCK
The Company was organized as a Maryland corporation on August 14, 1992. The
Amended Articles of Incorporation currently permit the Company to issue 27.375
billion shares of common stock, par value $.001 per share. Pursuant to the
Company's By-Laws, the Board of Directors may increase the number of shares the
Company is authorized to issue without the approval of the shareholders of the
Company. The Board of Directors has the power to designate one or more classes
of shares of common stock and to classify and reclassify any unissued shares
with respect to such classes.
The shares of the Fund, when issued, will be fully paid, nonassessable,
fully transferable and redeemable at the option of the holder. Except as
described herein, the shares have no preference as to conversion, exchange,
dividends, retirement or other features and have no preemptive rights. The
shares of the Fund have non-cumulative voting rights, which means that the
holders of more than 50% of the shares voting for the election of Directors can
elect 100% of the Directors if they choose to do so. Under Maryland law, the
Company is not required to hold an annual meeting of its shareholders unless
required to do so under the 1940 Act. Any person or organization owning 25% or
more of the outstanding shares of the Fund may be presumed to "control" (as that
term is defined in the 1940 Act) the Fund. As of May 29, 1998, Van Kampen
American Capital owned 100% of the outstanding voting shares of the Fund.
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<PAGE>
REPORTS TO SHAREHOLDERS
The Company will send to its shareholders annual and semi-annual reports;
the financial statements appearing in annual reports are audited by independent
accountants.
In addition, the Company or ACCESS will send to each shareholder having an
account directly with the Company a quarterly statement showing transactions in
the account, the total number of shares owned, and any dividends or
distributions paid. In addition, when a transaction occurs in a shareholder's
account, the Company or ACCESS will send the shareholder a confirmation
statement showing the same information.
CUSTODIAN
Domestic securities and cash are held by Chase, which is not an affiliate of
the Adviser, the Sub-Adviser or the Distributor. Morgan Stanley Trust Company,
Brooklyn, New York ("Morgan Stanley Trust"), acts as the Company's custodian for
foreign assets held outside the United States and employs subcustodians who were
approved by the Directors of the Company in accordance with regulations of the
SEC for the purpose of providing custodial services for such assets. Morgan
Stanley Trust may also hold certain domestic assets for the Company. Morgan
Stanley Trust is an affiliate of the Adviser, the Sub-Adviser and the
Distributor. For more information on the custodians, see "General Information --
Custody Arrangements" in the Statement of Additional Information.
DIVIDEND DISBURSING AND TRANSFER AGENT
ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256, acts as dividend
disbursing and transfer agent for the Company.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, NY 10036,
serves as independent accountants for the Company and audits its annual
financial statements.
40
<PAGE>
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NO DEALER, SALES REPRESENTATIVE 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 MADE BY THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE DISTRIBUTOR. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER BY THE COMPANY OR THE DISTRIBUTOR TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION IN SUCH JURISDICTION.
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TABLE OF CONTENTS
PAGE
----
Prospectus Summary.......................................... 2
Fund Expenses............................................... 4
Investment Objectives and Policies.......................... 7
Additional Investment Information........................... 8
Investment Limitations...................................... 16
Management of the Company................................... 17
Purchase of Shares.......................................... 20
Shareholder Services........................................ 29
Redemption of Shares........................................ 32
Valuation of Shares......................................... 34
Portfolio Transactions...................................... 35
Performance Information..................................... 36
Dividends and Distributions................................. 37
Taxes....................................................... 38
General Information......................................... 39
VAN KAMPEN
EQUITY GROWTH FUND
A PORTFOLIO OF
MORGAN STANLEY
FUND, INC.
---------------
PROSPECTUS
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INVESTMENT ADVISER
VAN KAMPEN
AMERICAN
CAPITAL INVESTMENT
ADVISORY CORP.
INVESTMENT SUB-ADVISER
MORGAN STANLEY ASSET MANAGEMENT INC.
DISTRIBUTOR
VAN KAMPEN AMERICAN
CAPITAL DISTRIBUTORS, INC.
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