<PAGE>
VAN KAMPEN FUNDS
EQUITY GROWTH FUND
ANNUAL REPORT
JUNE 30, 1998
<PAGE>
LETTER TO SHAREHOLDERS
July 24, 1998
Dear Shareholder,
Van Kampen American Capital is consolidating all of the retail mutual funds
that we distribute under the single name of Van Kampen Funds. This move
accompanies the change in our legal name to Van Kampen Funds Inc. Additionally,
as of August 31, your fund will be listed in the daily newspapers by share class
under the heading "Van Kampen Funds."
ECONOMIC REVIEW
The economic crisis in Asia deepened late in the reporting period while
growth continued at a robust pace in the United States and Europe. After last
fall's currency crisis, signs of recovery began to appear in Asia early in 1998
as equity markets rebounded and currency values stabilized. But a steep decline
in the Japanese yen beginning in February undermined investor confidence in the
region and ignited fears of yet another round of currency devaluations. At the
heart of the problem was a sudden worsening of economic conditions in Japan and
the perceived inability of Japanese leaders to rescue the country's ailing
banking system.
Despite the drag from Asia, the U.S. economy continued to expand at a
healthy rate. The nation's inflation-adjusted output of goods and services ran
at 5.4 percent during the first quarter, an annualized rate considered by many
economists to be virtually unsustainable without leading to inflation. As the
reporting period ended, however, there were indications that the Asian financial
crisis was finally having a moderating impact on domestic economic growth. Also,
the Conference Board's index of leading indicators points toward a slowdown in
economic growth for later this year.
In Europe, economic growth accelerated as the region looked forward to
monetary union, set to begin in January 1999. At that time, a common currency
(the euro) will begin to replace the currencies of the 11 participant nations.
The elimination of foreign-exchange risk within these 11 countries and
widespread financial reforms has led to a wave of mergers and acquisitions
across the region.
MARKET REVIEW
The wide variation of returns from global financial markets during the
reporting period reflected the vastly different circumstances in the three major
economic blocks of the United States, Europe, and Asia. In Europe, where
companies have relatively little exposure to Asia, stocks posted impressive
gains. During the 12 months ended in June, the Dow Jones Europe/Africa Index
climbed 30.39 percent in U.S. dollar terms. The rally was broad based, with
markets in Finland, France, Germany, Greece, Ireland, Italy, Portugal, and Spain
each climbing more than 30 percent. European bonds also benefited from stable
monetary policy and low inflation.
Stock prices in the United States continued to move higher during the
period, but the Asian financial crisis had an uneven impact on corporate
profits. The Wilshire 5000 Index consisting of all publicly traded U.S.
companies gained 26.32 percent during the 12 month period. Companies with
1
<PAGE>
heavy exposure to domestic consumers benefited from strength in the American
economy, while commodity-related issues lagged. U.S. bonds benefited from a
global flight to quality and from a growing perception that domestic economic
growth was slowing. The yield on the Treasury's 30-year benchmark bond declined
from 5.92 percent on December 31, 1997 to 5.62 percent by the end of the period.
In Asia, renewed currency concerns caused major declines in nearly all
equity markets. Despite a solid rally in January, the Dow Jones Asia/Pacific
Index (excluding Japan) fell 48.77 percent during the 12 months through June and
by 18.69 percent during the first half of 1998. The worst-performing Asian
market was Indonesia, where the average stock lost nearly two-thirds of its
value amid a deepening recession, political turmoil, and social unrest. For the
12 months through June, the Dow Jones Indonesia Index declined by 87.66 percent
in U.S. dollar terms.
OUTLOOK
We remain optimistic about the prospects for European equity markets, based
on the region's accelerating growth rate and the introduction of a common
currency next year. As interest rates decline, liquidity should increase as more
European investors leave the sanctuary of money-market funds in favor of
equities.
Our outlook for Asia is guarded. As the reporting period ended, the
Japanese government announced a bank bailout package that ignited a rally in
Asian financial markets. While we view the latest reforms in a positive light,
we are concerned that investor reaction to the news may have been overly
euphoric.
In the United States, economic growth is likely to slow in coming months as
the impact of the Asian crisis becomes more evident. With equities already
trading at record-high valuations, we are cautious about the ability of U.S.
stocks to rally significantly from current levels. On a longer-term basis,
however, we believe the environment for domestic equities remain highly
positive.
Several factors are helping to sustain a generally bullish environment for
global bonds. Extreme economic weakness in Asia is exerting downward pressure on
energy, commodity, and goods prices. Also, the strong dollar is containing U.S.
inflation despite a tight labor market and above-trend economic growth.
Additional details about your funds, including investment overviews from
your portfolio management team, are provided in this report. As always, we are
pleased to have the opportunity to serve you and your family through our diverse
menu of quality investments.
Sincerely,
/s/ Don G. Powell /s/ Dennis J. McDonnell
Don G. Powell Dennis J. McDonnell
Chairman President
Van Kampen Investment Advisory Corp. Van Kampen Investment Advisory Corp.
2
<PAGE>
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN EQUITY GROWTH FUND
WE RECENTLY SPOKE WITH THE MANAGEMENT TEAM OF THE VAN KAMPEN EQUITY GROWTH FUND
ABOUT THE KEY EVENTS AND ECONOMIC FORCES THAT SHAPED THE MARKETS DURING THE
PERIOD SINCE THE FUND'S INCEPTION ON MAY 28, 1998. THE TEAM INCLUDES KURT
FEUERMAN, MANAGING DIRECTOR AND PORTFOLIO MANAGER; MARGARET JOHNSON, PRINCIPAL
AND PORTFOLIO MANAGER; AND DENNIS J. MCDONNELL, CHIEF INVESTMENT OFFICER FOR
EQUITY INVESTMENTS. THE FOLLOWING EXCERPT REFLECTS THEIR VIEWS ON THE FUND'S
PERFORMANCE SINCE INCEPTION THROUGH JUNE 30, 1998.
Q HOW DID THE FUND PERFORM DURING THE REPORTING PERIOD?
A The Fund has existed for just about a month, an extremely short time frame.
During that period (May 28, 1998, to June 30, 1998), the Fund generated a total
return of 2.90 percent (Class A shares at net asset value). In comparison, the
Standard & Poor's 500-Stock Index returned 3.68 percent, and the Lipper Growth
Fund Index, which more closely resembles the Fund, returned 4.32 percent.
The S&P 500-Stock Index is a broad-based, unmanaged index that reflects the
general performance of the stock market, and the Lipper Growth Fund Index
reflects the average performance of the 30 largest growth funds. These indices
are statistical composites that do not include any commissions or sales charges
that would be paid by an investor purchasing the securities or investments they
represent.
Q WHICH FACTORS HAD THE GREATEST IMPACT ON THE FUND'S PERFORMANCE?
A In June, some of the Fund's larger positions registered negative
performance. For example, General Motors fell about 7 percent in the month,
Cendant was down about 6 percent; and Loews was down 4 percent.
Q WHICH OF THE FUND'S HOLDINGS PERFORMED WELL DURING THE REPORTING PERIOD?
A Some of our best performers included Clear Channel Communications, which
rose about 13.8 percent in June, and Berkshire Hathaway, which appreciated about
10.8 percent during the month. Clear Channel Communications has been a leader in
consolidating the radio, TV station, and, more recently, the billboard industry
in the United States. We continue to like Clear Channel Communications,
following the company's recent acquisition of More Group in the United Kingdom.
Regarding Berkshire Hathaway, we have recently been buying General Reinsurance
in the wake of the announcement of Berkshire's acquisition of the company. We
believe this acquisition could change the way Berkshire is classified--from a
holding company to a financial services giant.
3
<PAGE>
Q WHAT IS YOUR OUTLOOK FOR STOCKS IN THE SECOND HALF OF 1998?
A Although there is much discussion today about the U.S. equity market's
lofty valuation levels and the risks posed by weakness in Asia, we see ample
opportunities for capital appreciation in individual stocks. The fact that we
have plenty of new, exciting growth ideas for the portfolio is the primary
reason we remain optimistic on the prospects for the market, in general.
As of June 30, one of our largest positions was Continental Airlines, which
we are enthusiastic about for several reasons. Like other airlines, Continental
has recently begun to deploy free cash flow into share repurchases. This is very
accretive to earnings per share (EPS) and should enhance value over time. In
addition to using strong cash flow from operations, we anticipate that the
company will monetize its stake in Amadeus, an international reservation system,
over the next 6 to12 months. This should create cash proceeds of $300 million or
more, in exchange for an asset with no earnings. Management has committed
publicly to using all of those proceeds for share repurchase. At or near current
prices, this would eliminate 6 percent of total shares outstanding.
Kurt Feuerman Margaret Johnson
PORTFOLIO MANAGER PORTFOLIO MANAGER
4
<PAGE>
VAN KAMPEN
EQUITY GROWTH
PORTFOLIO OF INVESTMENTS
June 30, 1998
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS (97.6%)
BASIC MATERIALS (2.1%)
800 Du Pont (El) de Nemours Co. $60
900 Monsanto 50
------------
110
------------
CAPITAL GOODS (17.9%)
1,900 Case Corp. 92
1,200 Cordant Technologies, Inc. 55
(a)2,000 Gulfstream Aerospace Corp. 93
(a)2,600 Knoll, Inc. 77
1,100 Northrop Grumman Corp. 114
900 Pitney Bowes, Inc. 43
600 Textron, Inc. 43
1,000 Tyco International Ltd. 63
2,900 United Technologies Corp. 268
700 Xerox Corp. 71
------------
919
------------
COMMUNICATION SERVICES (2.5%)
800 American Telephone & Telegraph Co. 46
(a)700 Associated Group, Inc. 'B' 28
(a)1,100 Worldcom, Inc. 53
------------
127
------------
CONSUMER CYCLICALS (10.3%)
(a)6,000 Cendant Corp. 125
300 Gannett Co., Inc. 21
1,900 General Motors Corp. 127
(a)300 Harrah's Entertainment, Inc. 7
1,100 Hilton Hotels Corp. 31
800 Home Depot, Inc. 67
1,100 International Game Technology 27
700 ITT Industries, Inc. 26
600 Pulitzer Publishing Co. 54
(a)800 Staples, Inc. 23
700 Young & Rubicam, Inc. 22
------------
530
------------
CONSUMER STAPLES (15.3%)
(a)1,200 Brinker International, Inc. 23
(a)2,600 Clear Channel Communications, Inc. 284
600 Coca-Cola Co. 51
2,000 Coca-Cola Enterprises, Inc. 79
500 Comcast Corp. 'B' 20
500 Cracker Barrel Old Country Store, Inc. 16
2,600 Philip Morris Cos., Inc. 102
500 Quaker Oats, Co. 27
400 Ralston-Ralston Purina Group 47
(a)1,200 SFX Entertainment, Inc. 'A' 55
500 Time Warner, Inc. 43
400 WM. Wrigley Jr. Co. 39
------------
786
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
VALUE
SHARES (000)
- ----------------- ------------------
<S> <C>
ENERGY (0.9%)
700 Diamond Offshore Drilling, Inc. $28
300 Schlumberger Ltd. 20
------------
48
------------
FINANCIAL (26.4%)
1,100 ACE Ltd. 43
1,000 Allstate Corp. 92
1,600 American Express Co. 182
700 BankAmerica Corp. 61
2 Berkshire Hathaway, Inc. 157
800 Chase Manhattan Corp. 60
400 Citicorp 60
500 CMAC Investment Corp. 31
200 General RE Corp. 51
2,900 Loews Corp. 253
300 MBNA Corp. 10
500 Merrill Lynch & Co., Inc. 46
300 Morgan (J.P.) & Co., Inc. 35
600 Nationwide Financial Services, Inc. 'A' 31
100 Progressive Corp. 14
600 Provident Companies, Inc. 21
(a)700 Reinsurance Group of America, Inc. 36
1,200 St. Paul Cos., Inc. 50
1,100 Travelers, Inc. 67
450 Washington Mutual Inc. 19
100 Wells Fargo Co. 37
------------
1,356
------------
HEALTH CARE (1.8%)
300 Eli Lilly Co. 20
300 Merck & Co., Inc. 40
300 Pfizer, Inc. 33
------------
93
------------
TECHNOLOGY (11.6%)
(a)200 ADC Telecom, Inc. 7
500 America Online, Inc. 53
200 Ciena Corp. 14
(a)500 Cisco Systems, Inc. 46
500 Computer Associates International, Inc. 28
(a)400 Dell Computer Corp. 37
(a)800 Ingram Micro, Inc. 35
500 Intel Corp. 37
200 International Business Machines Corp. 23
500 Linear Technology Corp. 30
(a)1,900 Litton Industries, Inc. 112
(a)1,300 Microsoft Corp. 141
400 Motorola, Inc. 21
(a)200 Tellabs, Inc. 14
------------
598
------------
TRANSPORTATION (8.8%)
(a)7,400 Continental Airlines, 'B' 450
------------
TOTAL COMMON STOCKS (COST $4,879) 5,017
------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
<TABLE>
<CAPTION>
FACE
AMOUNT VALUE
(000) (000)
----- -----
<S> <C>
SHORT-TERM INVESTMENT (3.3%)
REPURCHASE AGREEMENT (3.3%)
$172 Chase Securities, Inc., 5.40%, dated 6/30/98,
due 7/1/98, to be repurchased at $172, collateralized
by $135 U.S. Treasury Bonds, 8.125%, due 5/15/21,
valued at $177 (COST $172) $172
------------
TOTAL INVESTMENTS (100.9%) (COST $5,051) 5,189
OTHER ASSETS IN EXCESS OF LIABILITIES (-0.9%) (46)
------------
NET ASSETS (100%) $5,143
------------
------------
</TABLE>
(a) - Non-income producing security
The accompanying notes are an integral part of the financial statements.
7
<PAGE>
VAN KAMPEN FUNDS
STATEMENT OF ASSETS AND LIABILITIES
EQUITY GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 30, 1998
(000)
- -------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments in Securities, at Value $5,189
Receivable for:
Investments Sold 41
Dividends 4
Investment Adviser 8
-------------
Total Assets 5,242
-------------
LIABILITIES:
Payable for:
Investments Purchased 84
Administrative Fees 1
Custody Fees 1
Professional Fees 8
Shareholder Reporting Expenses 1
Transfer Agent Fees 1
Filing and Registration Fees 3
-------------
Total Liabilities 99
-------------
NET ASSETS $5,143
-------------
-------------
NET ASSETS CONSIST OF:
Paid in Capital in Excess of Par $5,000
Accumulated Net Realized Gain 5
Unrealized Appreciation (Depreciation) on
Investments 138
-------------
NET ASSETS $5,143
-------------
-------------
CLASS A SHARES:
Net Assets $2,057
Shares Issued and Outstanding ($.001 par
value) (Authorized 2,625,000,000) 200
Net Asset Value and
Redemption Price Per Share $10.29
-------------
-------------
Maximum Sales Charge 5.75%
Maximum Offering Price Per Share (Net Asset Value
Per Share x 100/ (100 - maximum sales charge)) $10.92
-------------
-------------
CLASS B SHARES:
Net Assets $1,543
Shares Issued and Outstanding ($.001 par
value) (Authorized 2,625,000,000) 150
Net Asset Value and Offering Price Per Share*** $10.28
-------------
-------------
CLASS C SHARES:
Net Assets $1,543
Shares Issued and Outstanding ($.001 par
value) (Authorized 2,625,000,000) 150
Net Asset Value and Offering Price Per Share*** $10.28
-------------
-------------
Investments at Cost $5,051
-------------
-------------
*** Redemption price may be subject to a contingent deferred sales charge.
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE>
VAN KAMPEN FUNDS
STATEMENT OF OPERATIONS
EQUITY GROWTH FUND
<TABLE>
<CAPTION>
MAY 29, 1998*
TO JUNE 30, 1998
(000)
- -------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Dividends $ 4
Interest 5
----------------
Total Income 9
----------------
EXPENSES:
Investment Advisory Fees 4
Less: Fees Waived (4)
----------------
Net Investment Advisory Fees -
Administrative Fees 1
Custodian Fees 1
Professional Fees 8
Shareholder Reports 1
Transfer Agent Fees 1
Distribution Fees
Class A 1
Class B 1
Class C 1
Filing and Registration Fees 2
Expenses Reimbursed by
Adviser (8)
----------------
Net Expenses 9
----------------
Net Investment Income -
----------------
NET REALIZED GAIN ON:
Investments 5
----------------
Net Realized Gain 5
----------------
CHANGE IN UNREALIZED
APPRECIATION/DEPRECIATION ON:
Investments 138
----------------
Change in Unrealized
Appreciation/Depreciation 138
----------------
Net Realized Gain and Change in
Unrealized Appreciation/Depreciation 143
----------------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $143
----------------
----------------
</TABLE>
* Commencement of Operations
The accompanying notes are an integral part of the financial statements.
9
<PAGE>
VAN KAMPEN FUNDS
STATEMENT OF CHANGES IN NET ASSETS
EQUITY GROWTH FUND
<TABLE>
<CAPTION>
MAY 29, 1998*
TO JUNE 30, 1998
(000)
- -------------------------------------------------------------------------------
<S> <C>
INCREASE (DECREASE) IN NET ASSETS
OPERATIONS:
Net Investment Income $-
Net Realized Gain 5
Change in Unrealized Appreciation/Depreciation 138
--------------
Net Increase in Net Assets Resulting from Operations 143
--------------
Total Increase in Net Assets 143
--------------
NET ASSETS -Beginning of Period 5,000
--------------
NET ASSETS -End of Period $5,143
--------------
--------------
</TABLE>
- -------------------------------------------------------------------------------
* Commencement of operations
The accompanying notes are an integral part of the financial statements.
10
<PAGE>
VAN KAMPEN FUNDS
FINANCIAL HIGHLIGHTS
EQUITY GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------ ------------------ ------------------
MAY 29, 1998* MAY 29, 1998* MAY 29, 1998*
SELECTED PER SHARE DATA AND RATIOS TO JUNE 30, 1998 TO JUNE 30, 1998 TO JUNE 30, 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00
------------------ ------------------ ------------------
INCOME FROM INVESTMENT OPERATIONS
Net Realized Gain 0.29 0.28 0.28
------------------ ------------------ ------------------
NET ASSET VALUE, END OF PERIOD $10.29 $10.28 $10.28
------------------ ------------------ ------------------
TOTAL RETURN (1) 2.90% 2.80% 2.80%
------------------ ------------------ ------------------
------------------ ------------------ ------------------
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's) $2,057 $1,543 $1,543
Ratio of Expenses to Average Net Assets 1.50% ** 2.25%** 2.25%**
Ratio of Net Investment Income to Average Net Assets 0.51% ** (0.25)%** (0.25)%**
Portfolio Turnover Rate 19% 19% 19%
- ------------------------------------------------------------------------------------------------------------------------
Effect of Voluntary Expense Limitation During the Period
Per Share Benefit to Net Investment Income $0.02 $0.02 $0.02
Ratios Before Expense Limitation:
Expenses to Average Net Assets 4.06% ** 4.81%** 4.81%**
Net Investment Income to Average Net Assets (2.05)% ** (2.81)%** (2.81)%**
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations
** Annualized
(1) Total return is calculated exclusive of sales charges or deferred sales
charges. Total returns for periods of less than one year are not
annualized.
The accompanying notes are an integral part of the financial statements.
11
<PAGE>
VAN KAMPEN FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
Van Kampen Series Fund, Inc. (formerly Morgan Stanley Funds, Inc.) (the "Fund")
was incorporated under the laws of Maryland on August 14, 1992 and commenced
operations on January 4, 1993. The Fund is registered under the Investment
Company Act of 1940, as amended, as an open-end management investment company
which offers redeemable shares of diversified and non-diversified investment
portfolios.
As of June 30, 1998, the Fund had sixteen separate active investment portfolios:
Van Kampen Aggressive Equity Fund (formerly Morgan Stanley Aggressive Equity
Fund), Van Kampen American Value Fund (formerly Morgan Stanley American Value
Fund), Van Kampen Asian Growth Fund (formerly Morgan Stanley Asian Growth Fund),
Van Kampen Emerging Markets Fund (formerly Morgan Stanley Emerging Markets
Fund), Van Kampen Equity Growth Fund, Van Kampen Global Equity Fund (formerly
Morgan Stanley Global Equity Fund), Van Kampen Global Equity Allocation Fund
(formerly Morgan Stanley Global Equity Allocation Fund), Van Kampen Global Fixed
Income Fund (formerly Morgan Stanley Global Fixed Income Fund), Van Kampen
Government Obligations Money Market Fund (formerly Morgan Stanley Government
Obligations Money Market Fund), Van Kampen High Yield & Total Return Fund
(formerly Morgan Stanley High Yield Fund), Van Kampen International Magnum Fund
(formerly Morgan Stanley International Magnum Fund), Van Kampen Latin American
Fund (formerly Morgan Stanley Latin American Fund), Van Kampen Money Market Fund
(formerly Morgan Stanley Money Market Fund), Van Kampen U.S. Real Estate Fund
(formerly Morgan Stanley U.S. Real Estate Fund), Van Kampen Value Fund (formerly
Morgan Stanley Value Fund), and Van Kampen Worldwide High Income Fund (formerly
Morgan Stanley Worldwide High Income Fund) (referred to herein respectively as
"Aggressive Equity Fund," "American Value Fund," "Asian Growth Fund," "Emerging
Markets Fund," "Equity Growth Fund," "Global Equity Fund," "Global Equity
Allocation Fund", "Global Fixed Income Fund," "Government Obligations Money
Market Fund" "High Yield & Total Return Fund," "International Magnum Fund,"
"Latin American Fund," "Money Market Fund," "U.S. Real Estate Fund," "Value
Fund," "Worldwide High Income Fund," and individually a "Portfolio" and
collectively as the "Portfolios"). The financial statements of the Equity
Growth Fund are presented here separately.
The Fund currently offers three classes of shares, Class A, Class B, and
Class C Shares. Class A shares are sold with a front-end sales charge of up
to 5.75%. For certain purchases of Class A shares, the front-end sales charge
may be waived and a contingent deferred sales charge of 1.00% imposed in the
event of certain redemptions within one year of the purchase. Class B shares
are sold with a contingent deferred sales charge on redemptions made within 5
years of purchase which declines annually from 5% for redemptions made in
year one, down to 1.50% in year five. The contingent deferred sales charge is
based on the lesser of the current market value of the shares redeemed or the
total cost of such shares. Class B shares will automatically convert to Class
A shares after the eighth year following purchase. Class C shares are sold
with a contingent deferred sales charge of 1% for shares that are redeemed
within one year of purchase, based on the lesser of the current market value
of the shares redeemed or the total cost of such shares. All three classes of
shares have identical voting, dividend, liquidation and other rights. The
Fund began offering the current Class B shares on August 1, 1995. Class B
shares held prior to May 1, 1995 were renamed Class C shares.
The Equity Growth Fund commenced operations on May 29, 1998.
A. ACCOUNTING POLICIES: The following significant accounting policies are in
conformity with generally accepted accounting principles for investment
companies. Such policies are consistently followed by the Fund in the
preparation of the financial statements. Generally accepted accounting
principles require management to make estimates and assumptions that affect the
reported amounts and disclosures in the financial statements. Actual results may
differ from those estimates.
1. SECURITY VALUATION: Equity securities listed on a U.S. exchange and equity
securities traded on NASDAQ are valued at the latest quoted sales price on the
valuation date. Securities listed on a foreign exchange are valued at their
closing price. Unlisted securities and listed securities not traded on the
valuation date for which market quotations are readily available are valued at
the average between the current bid and asked prices obtained from reputable
brokers. Bonds and other fixed income securities may be valued according to the
broadest and most representative market. In addition, bonds and other fixed
income securities may be valued on the basis of prices provided by a pricing
service which takes into account institutional size trading in similar groups of
securities. Debt securities purchased with remaining maturities of 60 days or
less are valued at amortized cost, if it approximates market value. All other
securities and assets for which market values are not readily available are
valued at fair value as determined in good faith by the Board of Directors,
although the actual calculations may be done by others.
2. TAXES: It is the portfolio's intention to qualify as a regulated investment
company and distribute all of its taxable income. Accordingly, no provision for
Federal income taxes is required in the financial statements. A portfolio may be
subject to taxes imposed by countries in which it invests. Such taxes are
generally based on income earned or gains realized or repatriated. Taxes are
accrued and applied to net investment income, net realized capital gains and net
unrealized appreciation, as applicable, as the income is earned or capital gains
are recorded.
To the extent that capital loss carryforwards are used to offset any future net
capital gains realized during the carryforward period as provided by U.S.
Federal income tax regulations, no capital gains tax liability will be incurred
by the Portfolio for gains realized and not distributed. To the extent that
capital gains are so offset, such gains will not be distributed to shareholders.
3. REPURCHASE AGREEMENTS: In connection with transactions in repurchase
agreements, a bank as custodian for the Fund takes possession of the underlying
securities, with a market value at least equal to the amount of the repurchase
transaction, including principal
12
<PAGE>
VAN KAMPEN FUNDS
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
and accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to determine the adequacy of the collateral. In the event of default on the
obligation to repurchase, the Fund has the right to liquidate the collateral and
apply the proceeds in satisfaction of the obligation. In the event of default or
bankruptcy by the counterparty to the agreement, realization and/or retention of
the collateral or proceeds may be subject to legal proceedings.
4. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Realized gains and losses on the sale of investment
securities are determined on the specific identified cost basis. Dividend income
is recorded on the ex-dividend date (except for certain foreign dividends which
may be recorded as soon as the Portfolio is informed of such dividends), net of
applicable withholding taxes where recovery of such taxes is not reasonably
assured. Interest income is recognized on the accrual basis except where
collection is in doubt. Discounts and premiums on securities purchased are
amortized according to the effective yield method over their respective lives.
Most expenses of the Fund can be directly attributed to a particular Portfolio.
Expenses which cannot be directly attributed are apportioned among the
Portfolios based upon relative net assets. Income, expenses (other than class
specific expenses) and realized and unrealized gains or losses are allocated to
each class of shares based upon their relative net assets. Distributions from
the Portfolios are recorded on the ex-distribution date.
The amount and the character of income and capital gain distributions to be paid
by the Fund are determined in accordance with Federal income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing book and tax treatment for foreign
currency transactions, net operating losses, foreign taxes on net realized
gains, deductibility of interest expense on short sales and gains on certain
securities of corporations designated as "passive foreign investment
companies."
Permanent book and tax basis differences relating to shareholder distributions
may result in reclassification among undistributed net investment income (loss),
accumulated net realized gain (loss) and paid in capital.
Permanent book and tax basis differences, if any, are not included in ending
undistributed (distributions in excess of) net investment income for the purpose
of presenting net investment income (loss) per share in the Financial
Highlights.
B. ADVISER: Van Kampen Investment Advisory Corp., (the "Adviser") a wholly
owned subsidiary of Van Kampen Funds Inc. (an indirect wholly owned subsidiary
of Morgan Stanley Dean Witter & Co.), Morgan Stanley Asset Management, Inc.
("MSAM" or a "Sub-Adviser") and Miller Anderson & Sherrerd LLP, wholly owned
subsidiaries of Morgan Stanley Dean Witter & Co., provide the Fund with
investment advisory services at a fee paid monthly and calculated at the annual
rates based on average daily net assets as indicated below. The Adviser has
agreed to reduce advisory fees payable to it and to reimburse the Portfolios, if
necessary, if the annual operating expenses, as defined, expressed as a
percentage of average daily net assets, exceed the maximum ratios indicated as
follows:
<TABLE>
<CAPTION>
CLASS B
CLASS A AND CLASS C
MAX. OPERATING MAX. OPERATING
PORTFOLIO ADVISORY FEE EXPENSE RATIO EXPENSE RATIO
- --------- ------------ -------------- --------------
<S> <C> <C> <C>
Equity Growth 0.70% 1.50% 2.25%
</TABLE>
C. ADMINISTRATOR: Van Kampen Investment Advisory Corp. (the "Administrator")
also provides the Fund with administrative services pursuant to an
administrative agreement for a monthly fee which on an annual basis equals 0.25%
of the average daily net assets of the portfolio, plus reimbursement of
out-of-pocket expenses. Under an agreement between the Adviser and The Chase
Manhattan Bank ("Chase"), through its corporate affiliate Chase Global Funds
Services Company ("CGFSC"), Chase provides certain administrative services to
the Fund. Chase is compensated for such services by the Adviser from the fee it
receives from the Fund. Transfer Agency services are provided to the Fund by Van
Kampen Investor Services, Inc., an affiliate of the advisor.
D. DISTRIBUTOR: Van Kampen Funds Inc. the ("Distributor") a wholly owned
subsidiary of Morgan Stanley Dean Witter & Co., serves as the Distributor of the
Fund's shares. The Distributor is entitled to receive from the Portfolio a
distribution fee, which is accrued daily and paid quarterly, of an amount of up
to 0.25% of the Class A shares and up to 1.00%, on an annualized basis, of the
average daily net assets attributable to the Class B and Class C shares of the
Portfolio.
The Distributor may receive a front end sales charge for purchases of Class A
shares. In addition, the Distributor may receive a contingent deferred sales
charge for certain redemptions of Class B and Class C shares of each Portfolio
redeemed within one to five years following such purchase.
E. DIRECTORS' FEES: The Fund provides deferred compensation and retirement
plans for its trustees who are not officers of Van Kampen. Under the deferred
compensation plan, trustees may elect to defer all or a portion of their
compensation to a later date. Benefits under the retirement plan are payable
for a ten-year period and are based upon each trustee's years of service to the
Fund.
F. PURCHASES AND SALES: For the period ended June 30, 1998, the Portfolio made
purchases of $5,481 and sales of $607 of investment securities other than
long-term U.S. Government securities and short-term investments. There were no
purchases or sales of long-term U.S. Government securities.
G. OTHER: At June 30, 1998, cost and unrealized appreciation (depreciation)
for U.S. Federal income tax purposes of the investments of the Portfolio was:
<TABLE>
<CAPTION>
NET
APPRECIATION
COST APPREC. (DEPREC.) (DEPRECIATION)
FUND (000) (000) (000) (000)
- ---- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Equity Growth $5,051 $239 $(101) $138
</TABLE>
At June 30, 1998, Van Kampen Funds Inc. owned all shares of the Fund.
13
<PAGE>
VAN KAMPEN FUNDS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
The Van Kampen Equity Growth Fund
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statement of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of the Van Kampen Equity Growth Fund
("The Fund"), (a portfolio of the Van Kampen Series Fund Inc.) at June 30, 1998,
the results of its operations, the changes in the net assets and the financial
highlights for the period from May 29, 1998 (commencement of operations) to June
30, 1998, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management: our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at June 30,
1998 by correspondence with the custodian and brokers, provides a reasonable
basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
200 E. Randolph St.
Chicago, Illinois 60601
August 11, 1998
14
