<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 22, 1998
1933 ACT REGISTRATION NO. 333-47517
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
<TABLE>
<S> <C>
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933 [X]
PRE-EFFECTIVE AMENDMENT NO. 1 [X]
POST-EFFECTIVE AMENDMENT NO. ____ [ ]
</TABLE>
---------------------
VAN KAMPEN
REAL ESTATE SECURITIES FUND
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
ONE PARKVIEW PLAZA, OAKBROOK TERRACE, ILLINOIS 60181
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (630) 684-6000
---------------------
<TABLE>
<S> <C>
RONALD A. NYBERG, ESQ. COPIES TO:
EXECUTIVE VICE PRESIDENT, WAYNE W. WHALEN, ESQ.
GENERAL COUNSEL AND SECRETARY THOMAS A. HALE, ESQ.
VAN KAMPEN INVESTMENTS, INC. SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
ONE PARKVIEW PLAZA 333 WEST WACKER
OAKBROOK TERRACE, ILLINOIS 60181 CHICAGO, ILLINOIS 60606
(Name and Address of Agent for Service)
</TABLE>
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
TITLE OF SECURITIES BEING REGISTERED: COMMON SHARES OF BENEFICIAL INTEREST,
PAR VALUE $0.01 PER SHARE. NO FILING FEE IS DUE HEREWITH BECAUSE OF RELIANCE ON
SECTION 24(F) OF THE INVESTMENT COMPANY ACT OF 1940.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement is organized as follows:
-- Cross Reference Sheet with respect to Van Kampen Real Estate Securities
Fund
-- Questions and Answers to Shareholders of Van Kampen U.S. Real Estate
Fund
-- Notice of Special Meeting of Shareholders of Van Kampen U.S. Real Estate
Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen U.S. Real Estate Fund into Van Kampen Real Estate Securities Fund
-- Prospectus of Van Kampen Real Estate Securities Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen U.S. Real Estate Fund into Van Kampen Real
Estate Securities Fund
-- Part C Information
-- Exhibits
<PAGE> 3
VAN KAMPEN REAL ESTATE SECURITIES FUND
CROSS-REFERENCE SHEET PURSUANT TO RULE 481(A) OF REGULATION C
UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
FORM N-14
ITEM NO. PROSPECTUS/PROXY STATEMENT CAPTION*
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<S> <C> <C>
PART A INFORMATION REQUIRED IN THE PROSPECTUS/PROXY STATEMENT
Item 1. Beginning of Registration Statement and Outside Front
Cover Page of Prospectus/Proxy Statement........... Outside front cover page of
Prospectus/Proxy Statement
Item 2. Beginning and Outside Back Cover Page of
Prospectus/Proxy Statement......................... Outside back cover page of
Prospectus/Proxy Statement
Item 3. Fee Table, Synopsis Information and Risk Factors..... Summary; Risk Factors
Item 4. Information about the Transaction.................... Summary; The Proposed Reorganization
Item 5. Information about the Registrant..................... Outside front cover page of
Prospectus/Proxy Statement;
Summary; The Proposed
Reorganization; Other Information;
Exhibit A; Prospectus and
Statement of Additional
Information of the Van Kampen Real
Estate Securities Fund
Item 6. Information about the Company Being Acquired......... Outside front cover page of
Prospectus/Proxy Statement;
Summary; Exhibit A; Prospectus and
Statement of Additional
Information of the Van Kampen U.S.
Real Estate Fund
Item 7. Voting Information................................... Other Information; Voting
Information and Requirements
Item 8. Interest of Certain Persons and Experts.............. Summary; The Proposed Reorganization
Item 9. Additional Information Required for Reoffering by
Persons Deemed to be Underwriters.................. Not applicable
PART B INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
Item 10. Cover Page........................................... Cover Page
Item 11. Table of Contents.................................... Table of Contents
Item 12. Additional Information about the Registrant.......... Additional Information about the Van
Kampen Real Estate Securities
Fund; Incorporation of Documents
by Reference
Item 13. Additional Information about the Company Being
Acquired........................................... Additional Information about the Van
Kampen U.S. Real Estate Fund;
Incorporation of Documents by
Reference
Item 14. Financial Statements................................. Financial Statements; Incorporation
of Documents by Reference
PART C OTHER INFORMATION
Items 15-17. Information required to be included in Part C is set forth under the appropriate item, so
numbered, in Part C of this Registration Statement.
</TABLE>
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* References are to captions within the part of the registration statement to
which the particular item relates except as otherwise indicated.
<PAGE> 4
OCTOBER 1998
IMPORTANT NOTICE
TO VAN KAMPEN
U.S. REAL ESTATE
FUND SHAREHOLDERS
QUESTIONS &
ANSWERS
Although we recommend that you read the complete Prospectus/Proxy Statement,
for your convenience, we have provided a brief overview of the issues to be
voted on.
Q WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to vote on a reorganization (the "Reorganization") of Van
Kampen U.S. Real Estate Fund, formerly known as Morgan Stanley U.S. Real Estate
Fund (the "U.S. Real Estate Fund"), into Van Kampen Real Estate Securities Fund,
formerly known as Van Kampen American Capital Real Estate Securities Fund (the
"VK Real Estate Securities Fund"), a fund that pursues a similar investment
objective.
Q WHY IS THE REORGANIZATION BEING RECOMMENDED?
A After several transactions in 1996 and 1997, Van Kampen Investments Inc. ("Van
Kampen") became an indirect wholly-owned subsidiary of Morgan Stanley Dean
Witter & Co. Van Kampen through its subsidiaries acts as the adviser,
distributor and shareholder servicing agent of the Van Kampen sponsored family
of retail funds. Van Kampen also assumed similar roles for the Morgan
Stanley-sponsored family of retail funds. The purpose of the proposed
Reorganization is to permit the shareholders of the U.S. Real Estate Fund to
(i) achieve certain economies of scale from the VK Real Estate Securities
Fund's larger net asset size and the potentially lower operating expenses
associated therewith, (ii) eliminate the duplication of services and expenses
that currently exists as a result of the separate operations of the funds and
(iii) obtain potentially greater portfolio diversity and potentially lower
portfolio transaction costs.
Q HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders of the U.S. Real Estate Fund approve the Reorganization,
the assets and liabilities of the U.S. Real Estate Fund will be combined with
those of the VK Real Estate Securities Fund, and you will become a shareholder
of the VK Real Estate Securities Fund. You will receive shares of the VK Real
Estate Securities Fund equal in value at the time of issuance to your shares of
the U.S. Real Estate Fund.
<PAGE> 5
Q WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATION?
A You will pay no sales loads or commissions in connection with the
Reorganization. If the Reorganization is completed, the costs associated with
the proposed Reorganization, including the costs associated with the shareholder
meeting, generally will be borne by the VK Real Estate Securities Fund. As more
fully discussed in the combined Prospectus/Proxy Statement, the holding period
with respect to the contingent deferred sales charge applicable to Class B
shares or Class C shares of the VK Real Estate Securities Fund acquired in the
Reorganization will be measured from the earlier of the time (i) the holder
purchased such Class B shares or Class C shares from the U.S. Real Estate Fund
or (ii) the holder purchased Class B shares or Class C shares of any other Van
Kampen Fund and subsequently exchanged them for shares of the U.S. Real Estate
Fund.
Q HOW DO ADVISORY AND OTHER OPERATING FEES PAID BY THE U.S. REAL ESTATE FUND
COMPARE TO THOSE PAYABLE BY THE VK REAL ESTATE SECURITIES FUND?
A The VK Real Estate Securities Fund is advised by Van Kampen Asset Management
Inc. ("Asset Management"), a subsidiary of Van Kampen. The U.S. Real Estate Fund
is advised by Van Kampen Investment Advisory Corp. ("Advisory Corp."), also a
subsidiary of Van Kampen. Each of the U.S. Real Estate Fund and VK Real Estate
Securities Fund is subadvised by Morgan Stanley Asset Management Inc. ("MSAM" or
the "Subadviser"), an indirect, wholly owned subsidiary of Morgan Stanley Dean
Witter & Co. Management of the funds anticipates that, as a result of the
Reorganization, shareholders of the U.S. Real Estate Fund would be subject to
lower gross total operating expenses as a percentage of net assets. The
contractual advisory fees payable by the U.S. Real Estate Fund are the same as
the contractual advisory fees payable by the VK Real Estate Securities Fund. The
advisory fees and other expenses of the U.S. Real Estate Fund currently are less
than those of the VK Real Estate Securities Fund but only because voluntary fee
waivers and expense reimbursements from Advisory Corp. There can be no assurance
that such waivers or reimbursements will continue for the U.S. Real Estate Fund
if the Reorganization is not completed. Furthermore, if the Reorganization is
completed, it is anticipated that Asset Management would waive advisory fees
and/or reimburse other expenses for the surviving VK Real Estate Securities Fund
as necessary so that net operating expenses (after waiver and reimbursement) are
not higher than the current net operating expenses (after waiver and
reimbursement) being paid by the U.S. Real Estate Fund.
Q WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE VK REAL ESTATE SECURITIES
FUND? WHAT HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A If the Reorganization is approved, your interest in shares of the U.S. Real
Estate Fund automatically will be converted into shares of the VK Real Estate
Securities Fund, and we will send you written confirmation that this change has
taken place. You will receive the same class of shares of the VK Real Estate
Securities Fund equal in value to your class of shares of the U.S. Real Estate
<PAGE> 6
Fund. No certificates for VK Real Estate Securities Fund shares will be issued
in connection with the Reorganization, although such certificates will be
available upon request. If you currently hold certificates representing your
shares of the U.S. Real Estate Fund, it is not necessary to return such
certificates; however, shareholders may want to present such certificates to
receive certificates of the VK Real Estate Securities Fund (to simplify proof of
and to preserve the tax basis of separate lots of shares).
Q WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended.
If the Reorganization so qualifies, in general, a shareholder of the U.S. Real
Estate Fund will recognize no gain or loss upon the receipt solely of the shares
of the VK Real Estate Securities Fund in connection with the Reorganization.
Additionally, the U.S. Real Estate Fund would not recognize any gain or loss as
a result of the transfer of all of its assets and liabilities solely in exchange
for the shares of the VK Real Estate Securities Fund or as a result of its
liquidation.
Q WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE U.S. REAL ESTATE FUND BEFORE THE
REORGANIZATION TAKES PLACE?
A If you choose to redeem or exchange your shares of the U.S. Real Estate Fund
before the Reorganization takes place, the redemption or exchange will be
treated as a normal redemption or exchange of shares and generally will be a
taxable transaction.
Q WHERE DO I CALL FOR FURTHER INFORMATION?
A Please call Investor Services at 1-800-341-2911 (Telecommunications Device for
the Deaf users may call 1-800-772-8889) weekdays from 7:00 a.m. to 7:00 p.m.
Central time.
<PAGE> 7
ABOUT THE PROXY
Please vote on each issue using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
APPROVAL OF REORGANIZATION --
mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
PROXY
VAN KAMPEN U.S. REAL ESTATE FUND
SPECIAL MEETING OF SHAREHOLDERS
SAMPLE
1. FOR [ ] AGAINST [ ] ABSTAIN [ ] THE PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION XXXXXXXX.
<PAGE> 8
VAN KAMPEN U.S. REAL ESTATE FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
NOTICE OF SPECIAL MEETING
, 1998
A Special Meeting of shareholders of Van Kampen U.S. Real Estate Fund,
formerly known as the Morgan Stanley U.S. Real Estate Fund (the "U.S. Real
Estate Fund"), will be held at the offices of Van Kampen Investments Inc., One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, on , , 1998
at 1:30 p.m. (the "Special Meeting"), for the following purposes:
(1) To approve an Agreement and Plan of Reorganization pursuant to which the
U.S. Real Estate Fund would (i) transfer all of its assets to the Van Kampen
Real Estate Securities Fund, formerly known as the Van Kampen American Capital
Real Estate Securities Fund (the "VK Real Estate Securities Fund"), in
exchange solely for Class A, B and C shares of beneficial interest of the VK
Real Estate Securities Fund and the VK Real Estate Securities Fund's
assumption of the liabilities of the U.S. Real Estate Fund, (ii) distribute
such shares of the VK Real Estate Securities Fund to the holders of shares of
the U.S. Real Estate Fund and (iii) be dissolved.
(2) To transact such other business as may properly come before the Special
Meeting.
Shareholders of record as of the close of business on , 1998 are
entitled to vote at the Special Meeting or any adjournment thereof.
For the Board of Directors,
Ronald A. Nyberg
Secretary
October , 1998
---------------------
PLEASE VOTE PROMPTLY BY SIGNING AND
RETURNING THE ENCLOSED PROXY.
---------------------
<PAGE> 9
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This Prospectus/Proxy Statement shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any jurisdiction in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such jurisdiction.
SUBJECT TO COMPLETION -- DATED September 22, 1998
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN U.S. REAL ESTATE FUND
This Prospectus/Proxy Statement is being furnished to shareholders of Van
Kampen U.S. Real Estate Fund, formerly known as Morgan Stanley U.S. Real Estate
Fund (the "U.S. Real Estate Fund"), and relates to the special meeting of
shareholders of the U.S. Real Estate Fund to be held at the offices of Van
Kampen Investments Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181 on
, 1998 at 1:30 p.m. and at any and all adjournments thereof (the
"Special Meeting"). Shareholders of record as of the close of business on
October , 1998 are entitled to vote at the Special Meeting or any adjournment
thereof. The purpose of the Special Meeting is to approve or disapprove the
proposed reorganization of the U.S. Real Estate Fund (the "Reorganization") into
the Van Kampen Real Estate Securities Fund, formerly known as Van Kampen
American Capital Real Estate Securities Fund (the "VK Real Estate Securities
Fund"). The Reorganization would result in shareholders of the U.S. Real Estate
Fund in effect exchanging their Class A, B and C shares of the U.S. Real Estate
Fund for corresponding Class A, B and C shares of the VK Real Estate Securities
Fund. The purpose of the Reorganization is to permit the shareholders of the
U.S. Real Estate Fund to (i) achieve certain economies of scale from the VK Real
Estate Securities Fund's larger net asset size and the potentially lower
operating expenses associated therewith, (ii) eliminate the duplication of
services and expenses that currently exist as a result of the separate
operations of the funds and (iii) obtain greater portfolio diversity and
potentially lower portfolio transaction costs.
The VK Real Estate Securities Fund is an open-end management investment
company organized as a Delaware business trust. The U.S. Real Estate Fund is a
series of the Van Kampen Series Fund, Inc., an open-end management investment
company organized as a Maryland corporation (the "Series Fund"). The primary
investment objective of the VK Real Estate Securities Fund is to seek long-term
growth of capital, with the secondary investment objective of providing current
income. The investment objective of the U.S. Real Estate Fund is similar to, but
not identical with, the investment objectives of the VK Real Estate Securities
Fund. The investment objective of the U.S. Real Estate Fund is to provide
above-average current income and long-term capital appreciation. There can be no
assurance that either fund will achieve its investment objectives. The address,
principal executive office and telephone number of the VK Real Estate Securities
Fund and the U.S. Real Estate Fund is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, (630) 684-6000 or (800) 421-5666. The enclosed proxy and this
Prospectus/Proxy Statement are first being sent to U.S. Real Estate Fund
shareholders on or about October , 1998.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS, NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
---------------------
<PAGE> 10
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the U.S. Real Estate Fund should know before voting on the
Reorganization (in effect, investing in Class A, B or C shares of the VK Real
Estate Securities Fund) and constitutes an offering of Class A, B and C shares
of beneficial interest, par value $0.01 per share, of the VK Real Estate
Securities Fund only. Please read it carefully and retain it for future
reference. A Statement of Additional Information dated October -- , 1998,
relating to this Prospectus/Proxy Statement (the "Reorganization SAI") has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. A Prospectus (the "VK Fund Prospectus") and
Statement of Additional Information containing additional information about the
VK Real Estate Securities Fund, each dated April 30, 1998 (and as currently
supplemented), have been filed with the SEC and are incorporated herein by
reference. A copy of the VK Fund Prospectus accompanies this Prospectus/Proxy
Statement. A Prospectus (the "Series Fund Prospectus") and Statement of
Additional Information containing additional information about the U.S. Real
Estate Fund, each dated September -- , 1998, have been filed with the SEC and
are incorporated herein by reference. Copies of the foregoing may be obtained
without charge by calling or writing the VK Real Estate Securities Fund or the
U.S. Real Estate Fund at the telephone number or address shown above. If you
wish to request the Reorganization SAI, please ask for the "Reorganization SAI."
IN ADDITION, EACH OF THE VK REAL ESTATE SECURITIES FUND AND THE U.S. REAL ESTATE
FUND WILL FURNISH, WITHOUT CHARGE, A COPY OF ITS MOST RECENT ANNUAL REPORT AND
SUBSEQUENT SEMI-ANNUAL REPORT, IF ANY, TO A SHAREHOLDER UPON REQUEST. ANY SUCH
REQUEST SHOULD BE DIRECTED TO VAN KAMPEN INVESTOR SERVICES INC. BY CALLING (800)
421-5666 OR BY WRITING THE RESPECTIVE FUND AT THE ADDRESS SHOWN ABOVE.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
The VK Real Estate Securities Fund and the Series Fund, on behalf of the U.S.
Real Estate Fund, are subject to the informational requirements of the
Securities Exchange Act of 1934, as amended, and the Investment Company Act of
1940, as amended (the "1940 Act"), and in accordance therewith file reports and
other information with the SEC. Such reports, other information and proxy
statements filed by the VK Real Estate Securities Fund and the Series Fund on
behalf of the U.S. Real Estate Fund can be inspected and copied at the public
reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its Regional Office at 500 West Madison Street,
Chicago, Illinois. Copies of such material can also be obtained from the SEC's
Public Reference Branch, Office of Consumer Affairs and Information Services,
Washington, D.C. 20549, at prescribed rates. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, other information and proxy
statements filed by the VK Real Estate Securities Fund and by the Series Fund on
behalf of the U.S. Real Estate Fund. Such information is filed electronically
with the SEC through the SEC's Electronic Data Gathering, Analysis and Retrieval
system (EDGAR).
The date of this Prospectus/Proxy Statement is October -- , 1998.
2
<PAGE> 11
THE PROPOSED REORGANIZATION
A. SUMMARY
The following is a summary of, and is qualified by reference to, the more
complete information contained in this Prospectus/Proxy Statement and the
information attached hereto or incorporated herein by reference. As discussed
more fully below and elsewhere in this Prospectus/Proxy Statement, the Board of
Directors of the Series Fund (the "Board of Directors") believes the proposed
Reorganization (as defined herein) is in the best interests of shareholders of
the U.S. Real Estate Fund. As a result of the Reorganization, shareholders of
the U.S. Real Estate Fund would acquire an interest in the VK Real Estate
Securities Fund.
Shareholders should read the entire Prospectus/Proxy Statement carefully
together with (i) the Series Fund Prospectus incorporated herein by reference
and (ii) the VK Fund Prospectus incorporated herein by reference and
accompanying this Prospectus/Proxy Statement. This Prospectus/Proxy Statement
constitutes an offering of Class A, B and C shares of the VK Real Estate
Securities Fund only.
THE REORGANIZATION
This Prospectus/Proxy Statement is being furnished to shareholders of the U.S.
Real Estate Fund in connection with the proposed combination of the U.S. Real
Estate Fund with and into the VK Real Estate Securities Fund pursuant to the
terms and conditions of the Agreement and Plan of Reorganization between the
Series Fund on behalf of the U.S. Real Estate Fund and the VK Real Estate
Securities Fund (the "Agreement"). The Agreement provides that the U.S. Real
Estate Fund would (i) transfer all of its assets to the VK Real Estate
Securities Fund in exchange solely for Class A, B and C shares of beneficial
interest of the VK Real Estate Securities Fund and the VK Real Estate Securities
Fund's assumption of the liabilities of the U.S. Real Estate Fund, (ii) dissolve
pursuant to a plan of liquidation and dissolution to be adopted by the Board of
Directors promptly following the Closing (as defined herein) and (iii) as part
of such dissolution, distribute to each shareholder of the U.S. Real Estate Fund
shares of the respective class of shares of the VK Real Estate Securities Fund
equal in value to their existing shares of the U.S. Real Estate Fund
(collectively, the "Reorganization").
The Board of Directors has determined that the Reorganization is in the best
interests of shareholders of each class of shares of the U.S. Real Estate Fund
and that the interests of such shareholders will not be diluted as a result of
the Reorganization. Similarly, the Board of Trustees of the VK Real Estate
Securities Fund (the "Board of Trustees") has determined that the Reorganization
is in the best interests of the VK Real Estate Securities Fund and that the
interests of each class of shares of existing shareholders of the VK Real Estate
Securities Fund will not be diluted as a result of the Reorganization. The Board
of Directors and Board
3
<PAGE> 12
of Trustees unanimously approved the Reorganization and the Agreement on October
23, 1997.
The VK Real Estate Securities Fund, as the primary beneficiary of the
Reorganization, generally will bear the costs of soliciting approval of the
Reorganization in the event the Reorganization is consummated. These costs
include expenses paid by the U.S. Real Estate Fund except that the investment
adviser of the U.S. Real Estate Fund, in its capacity as the investment adviser
of the U.S. Real Estate Fund, will reimburse the U.S. Real Estate Fund for any
remaining unamortized organizational expenses at the time of Closing. If the
Reorganization is not completed, Van Kampen Investments Inc. ("Van Kampen") will
bear all of the costs associated with the Reorganization. See "THE PROPOSED
REORGANIZATION -- Expenses" below.
The Board of Directors is asking shareholders of the U.S. Real Estate Fund to
approve the Reorganization at the Special Meeting to be held on , 1998.
If shareholders of the U.S. Real Estate Fund approve the Reorganization, it is
expected that the Closing will be after the close of business on ,
1998, but it may be at a different time as described herein.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" THE REORGANIZATION.
APPROVAL OF THE REORGANIZATION REQUIRES THE FAVORABLE VOTE OF THE HOLDERS OF A
[MAJORITY] OF THE OUTSTANDING SHARES ENTITLED TO VOTE. SEE "VOTING INFORMATION
AND REQUIREMENTS" BELOW.
REASONS FOR THE PROPOSED REORGANIZATION
After several transactions in 1996 and 1997, Van Kampen became an indirect
wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. Van Kampen through
its subsidiaries acts as the adviser, distributor and shareholder servicing
agent of the Van Kampen-sponsored family of retail funds. Van Kampen also
assumed similar roles for the Morgan Stanley-sponsored family of retail funds.
The Board of Directors believes that the proposed Reorganization would be in the
best interests of the shareholders of the U.S. Real Estate Fund because it would
permit the shareholders of the U.S. Real Estate Fund to (i) achieve certain
economics of scale from the VK Real Estate Securities Fund's larger net asset
size and the potentially lower operating expenses associated therewith, (ii)
eliminate the duplication of services and expenses that currently exists as a
result of the separate operations of the funds, and (iii) obtain greater
portfolio diversity and potentially lower portfolio transaction costs.
In determining whether to recommend approval of the Reorganization to
shareholders of the U.S. Real Estate Fund, the Board of Directors considered a
number of factors, including, but not limited to: (i) the capabilities and
resources of the funds' advisers, the funds' subadviser and other service
providers in the areas of marketing, investment and shareholder services; (ii)
the expenses and advisory fees applicable to the U.S. Real Estate Fund and the
VK Real Estate Securities Fund
4
<PAGE> 13
before the Reorganization and the estimated expense ratios of the VK Real Estate
Securities Fund after the Reorganization; (iii) the comparative investment
performance of the U.S. Real Estate Fund and the VK Real Estate Securities Fund;
(iv) the terms and conditions of the Agreement and whether the Reorganization
would result in dilution of U.S. Real Estate Fund or VK Real Estate Securities
Fund shareholder interests; (v) the advantages of eliminating duplication of
effort in marketing funds having similar investment objectives in addition to
the economies of scale potentially realized through the combination of the two
funds; (vi) the compatibility of the funds' investment objectives; (vii) the
compatibility of the funds' service features available to shareholders,
including the retention of applicable holding periods and exchange privileges;
(viii) the costs estimated to be incurred by the respective funds as a result of
the Reorganization; (ix) the future growth prospects of the U.S. Real Estate
Fund; and (x) the anticipated tax consequences of the Reorganization.
In this regard, the Board of Directors reviewed information provided by Van
Kampen Investment Advisory Corp. ("Advisory Corp."), the investment adviser of
the U.S. Real Estate Fund, Van Kampen Asset Management Inc. ("Asset
Management"), the investment adviser of the VK Real Estate Securities Fund, and
Van Kampen, the parent corporation of Advisory Corp. and Asset Management,
relating to the anticipated impact to the shareholders of the U.S. Real Estate
Fund and the VK Real Estate Securities Fund as a result of the Reorganization.
The Board considered the probability that the elimination of duplicative
operations and the increase in asset levels of the combined fund after the
Reorganization would result in the following potential benefits for shareholders
of the U.S. Real Estate Fund, although there can, of course, be no assurances in
this regard:
(1) Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the net assets of the U.S. Real Estate Fund with the assets of
the VK Real Estate Securities Fund should lead to reduced total operating
expenses for shareholders of the U.S. Real Estate Fund, on a per share
basis, by allowing fixed and relatively fixed costs, such as accounting,
legal and printing expenses, to be spread over a larger asset base. The
contractual advisory fees payable by the U.S. Real Estate Fund are the
same as the contractual advisory fees payable by the VK Real Estate
Securities Fund. The advisory fees and other expenses of the U.S. Real
Estate Fund are currently less than those of the VK Real Estate Securities
Fund but only because of such voluntary fee waivers and expense
reimbursements from Advisory Corp. There can be no assurance that such
waivers or reimbursements will continue for the U.S. Real Estate Fund if
the Reorganization is not completed. Management anticipates that the
Reorganization also should lead to certain economies affecting the total
operating expenses of the VK Real Estate Securities Fund compared to its
current total operating expenses and, if the Reorganization is completed,
it is anticipated that Asset
5
<PAGE> 14
Management would waive advisory fees and/or reimburse expenses for the
surviving VK Real Estate Securities Fund as necessary so that net
operating expenses (after waiver and reimbursement) remain the same or
less than the current net operating expenses (after waiver and
reimbursement) of the U.S. Real Estate Fund.
(2) Elimination of Separate Operations. Consolidating the U.S. Real Estate
Fund and the VK Real Estate Securities Fund should eliminate the
duplication of services and expenses that currently exists as a result of
their separate operations. Consolidating the separate operations of the
U.S. Real Estate Fund with those of the VK Real Estate Securities Fund
should promote more efficient operations on a more cost-effective basis.
(3) Benefits to the Portfolio Management Process. The larger net asset size
of the VK Real Estate Securities Fund generally permits it to purchase
larger individual portfolio investments that may result in reduced
transaction costs or more favorable pricing and provide the opportunity
for greater portfolio diversity.
Based upon these and other factors, the Board of Directors unanimously
determined that the Reorganization is in the best interests of the shareholders
of the U.S. Real Estate Fund.
COMPARISON OF THE VK REAL ESTATE SECURITIES FUND AND THE U.S. REAL ESTATE FUND
GENERAL. The VK Real Estate Securities Fund and the U.S. Real Estate Fund have
similar investment objectives and similar investment policies and practices.
Both funds seek long-term growth of capital and current income and both funds
invest primarily in securities of companies engaged in the real estate industry,
with emphasis on investment in real estate investment trusts ("REITs") in trying
to achieve the investment objectives. Each of the VK Real Estate Securities Fund
and U.S. Real Estate Fund uses Morgan Stanley Asset Management Inc. as
subadviser ("MSAM" or the "Subadviser"). The primary differences between the
funds are as follows: (i) the VK Real Estate Securities Fund places somewhat
less emphasis on achieving current income and has less emphasis on investing in
income-producing securities than the U.S. Real Estate Fund (although the U.S.
Real Estate Fund limits investment in debt securities to 35% of its total assets
while the VK Real Estate Securities Fund has no similar limit on investing in
debt securities); (ii) the VK Real Estate Securities Fund is a diversified fund
whereas the U.S. Real Estate Fund is a non-diversified fund which means that,
although the U.S. Real Estate Fund can invest more of its assets in fewer
issuers, the U.S. Real Estate Fund also bears increased risks associated with
such practice compared to a more diversified portfolio and (iii) the VK Real
Estate Securities Fund allows for broader investment in foreign securities while
the U.S. Real Estate Fund focuses primarily on investments in U.S. issuers or
non-U.S. issuers engaged in the U.S. real estate
6
<PAGE> 15
industry. See further information comparing the funds below and under the
heading "Risk Factors".
INVESTMENT OBJECTIVES AND POLICIES. The primary investment objective of the VK
Real Estate Securities Fund is to provide long-term growth of capital. A
secondary objective of the VK Real Estate Securities Fund is to provide current
income. The VK Real Estate Securities Fund seeks to achieve its investment
objectives by investing principally in a portfolio of securities of companies
operating in the real estate industry. The investment objective of the U.S. Real
Estate Fund is to provide above-average current income and long-term capital
appreciation by investing primarily in equity securities of companies in the
U.S. real estate industry, including REITs. The primary difference between the
two investment objectives is that the objective of the U.S. Real Estate Fund
places somewhat greater emphasis on current income than does the VK Real Estate
Securities Fund.
Both funds use similar definitions of companies in the "real estate industry"
to generally include any company that derives at least 50% of its assets (marked
to market), gross income or net profits from the ownership, construction,
management or sale of residential, commercial or industrial real estate. Real
estate industry companies may include among others: equity real estate
investment trusts, which pool investors' funds for investment primarily in
commercial real estate properties; mortgage real estate investment trusts, which
invest pooled funds in real estate related loans; brokers or real estate
developers; and companies with substantial real estate holdings, such as paper
and lumber producers and hotel and entertainment companies. Under normal market
conditions, the VK Real Estate Securities Fund invests at least 65% of its total
assets in a diversified portfolio of securities of companies operating in the
real estate industry ("Real Estate Securities"). Such securities include equity
securities (common stocks, preferred stocks and convertible securities) and debt
securities. The VK Real Estate Securities Fund may invest up to 25% of its total
assets in securities of foreign issuers, some or all of which may be Real Estate
Securities and may invest in American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs") or other securities representing underlying shares
of foreign issuers. In connection with investing in securities of foreign
issuers, the VK Real Estate Securities Fund allows for investments in forward
foreign currency exchange contracts. Under normal market conditions, the U.S.
Real Estate Fund invests at least 65% of its total assets in income producing
equity securities (which include common stock, preferred stock, convertible
securities, rights and warrants to purchase common stocks and publicly traded
limited partnership interests in master limited partnerships) of U.S. and
non-U.S. companies principally engaged in the U.S. real estate industry. The
U.S. Real Estate Fund seeks to invest in equity securities of companies that
provide a dividend yield that exceeds the composite dividend yield of securities
comprising the Standard & Poor's Composite Index of 500 Stocks. The U.S. Real
Estate Fund may invest in securities of foreign issuers provided such issuers
are principally engaged in the U.S.
7
<PAGE> 16
real estate industry. The U.S. Real Estate Fund may invest in ADRs, EDRs and
other depositary receipts and in forward foreign currency exchange contracts.
Under normal market conditions, the U.S. Real Estate Fund may invest up to 35%
of its total assets in debt securities. Each fund's investments in debt
securities must be rated, at the time of investment, at least Baa by Moody's
Investor Services Inc. ("Moody's"), BBB by Standard & Poor's Rating Group
("S&P"), comparably rated by another nationally recognized statistical rating
organization or, if unrated, determined by the respective fund's investment
adviser to be of comparable quality. Each fund may engage in portfolio
management strategies and techniques involving options, futures contracts and
options on futures contracts. Each fund may enter into repurchase agreements.
Each fund may purchase or sell securities on a when-issued or delayed delivery
basis. For temporary defensive purposes, each fund may invest up to 100% of its
total assets in short-term investments, including obligations issued or
guaranteed by the U.S. Government, commercial paper, bankers' acceptances,
certificates of deposit, repurchase agreements collateralized by these
securities, and other short-term evidences of indebtedness and, with respect to
the U.S. Real Estate Fund only, medium-term debt instruments.
Each fund may invest a limited portion of its net assets in restricted
securities and illiquid securities; the VK Real Estate Securities Fund limit on
restricted and illiquid securities is 15% of such Fund's net assets whereas the
U.S. Real Estate Fund limit on illiquid securities is 15% of such Fund's net
assets and the U.S. Real Estate Fund limit on restricted securities is 10% of
such Fund's net assets. Each fund allows for a limited amount of borrowing; the
VK Real Estate Securities Fund limit is 33 1/3% of such Fund's total assets for
temporary borrowing to facilitate payment of redemption requests whereas the
U.S. Real Estate Fund limit is 10% of such Fund's total assets for emergency or
extraordinary purposes. Unlike the VK Real Estate Fund, the U.S. Real Estate
Fund may invest in zero coupon debt securities, payment in kind securities,
deferred payment securities, and certain other derivative transactions such as
structured notes, caps and floors and allows for lending of its portfolio
securities up to 33 1/3% of the U.S. Real Estate Fund's total assets.
INVESTMENT ADVISER AND SUB-ADVISER. The VK Real Estate Securities Fund is
advised by Asset Management, which is a wholly-owned subsidiary of Van Kampen.
The U.S. Real Estate Fund is advised by Advisory Corp., which also is a
wholly-owned subsidiary of Van Kampen. Van Kampen is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and more than $65
billion under management or supervision. Van Kampen's more than 50 open-end and
39 closed-end funds and more than 2,500 unit investment trusts are
professionally distributed by leading financial advisers nationwide. Van Kampen
is an indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co.
("MSDW"). The
8
<PAGE> 17
principal offices of Asset Management and Advisory Corp. are located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181.
MSAM currently is the investment subadviser of the VK Real Estate Securities
Fund and U.S. Real Estate Fund. MSAM is an indirect wholly-owned subsidiary of
MSDW. 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.
The Funds currently have the same portfolio managers, Russell C. Platt and
Theodore R. Bigman of MSAM. Messrs. Platt and Bigman have served as portfolio
managers of the U.S. Real Estate Fund since its inception. After Van Kampen
became an indirect wholly-owned subsidiary of MSDW, Messrs. Platt and Bigman
became dual employees of Asset Management and MSAM and were appointed portfolio
managers of the VK Real Estate Securities Fund effective January 1, 1997.
Effective October 1, 1998, the Board of Trustees of the VK Real Estate
Securities Fund appointed MSAM as the investment subadviser of the VK Real
Estate Securities Fund. The addition of MSAM as Subadviser does not impact the
VK Real Estate Securities Fund's portfolio management team or the day to day
management of the Fund and does not result in any increase in the Fund's
expenses. It did eliminate the need for Messrs. Platt and Bigman to remain as
dual employees of Asset Management and MSAM. Asset Management pays MSAM an
investment subadvisory fee pursuant to the subadvisory agreement described
below.
MSDW 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; credit services; trading of futures, options,
foreign exchange, commodities and swaps (involving foreign exchange,
commodities, indices and interest rates); real estate advice, financing and
investing; securities clearance services and securities lending.
ADVISORY AND OTHER FEES. The contractual advisory fees of the VK Real Estate
Securities Fund and the U.S. Real Estate Fund are the same. Each fund is
obligated to pay its respective adviser a monthly fee based on its average daily
net asset value at the annual rate of 1.00%. While the VK Real Estate Securities
Fund currently pays Asset Management at such rate, the U.S. Real Estate Fund
currently pays Advisory Corp. at an annual rate of 0.48% due to a voluntary fee
waiver by Advisory Corp. Each of Asset Management and Advisory Corp. retains the
right from time to time to charge all or a portion of its management fee or to
reimburse the respective fund for all or a portion of its other expenses. For a
complete description of the VK Real Estate Securities Fund's advisory services,
see the
9
<PAGE> 18
sections of the VK Fund Prospectus and Statement of Additional Information
entitled "Investment Advisory Services" and "Investment Advisory and Other
Services -- Investment Advisory Agreement", respectively. For a complete
description of the U.S. Real Estate Fund's advisory services, see the sections
of the Series Fund Prospectus and Statement of Additional Information entitled
"Management of the Company -- Investment Adviser" and "Management of the Company
- --Investment Advisory and Administrative Agreements", respectively.
Subadvisory fees are paid to MSAM on behalf of the U.S. Real Estate Fund by
Advisory Corp and on behalf of the Real Estate Securities Fund by Asset
Management. The subadvisory fees of the U.S. Real Estate Fund are as follows: if
the average daily net assets during the monthly period are less than or equal to
$500 million, then Advisory Corp. shall pay MSAM one-half of the total
investment advisory fee payable to Advisory Corp. by such Fund (after
application of any fee waivers in effect) for such monthly period; and if such
Fund's average daily net assets for the monthly period are greater than $500
million, then Advisory Corp. 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 Advisory Corp. by such Fund (after application of any 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 Advisory Corp. by the Fund (after
application of any fee waivers in effect) for such monthly period. The
subadvisory fees of the Real Estate Securities Fund 50% of the compensation
received by Asset Management.
The total operating expenses of the VK Real Estate Securities Fund for the 6
month period ended June 30, 1998 (on an annualized basis) were 1.58%, 2.34% and
2.34% of the average daily net assets attributable to Class A, B and C shares,
respectively. No fee waivers or expense reimbursements were in effect with
respect to the VK Real Estate Securities Fund during such period.
The total operating expenses (after fee waiver) of the U.S. Real Estate Fund
for the 12 month period ended June 30, 1998 were 1.55%, 2.30% and 2.30% of
average daily net assets attributable to Class A, B and C shares, respectively.
In the absence of fee waiver, total operating expenses of the U.S. Real Estate
Fund would have been 2.09%, 2.84% and 2.83% of the average daily net assets
attributable to Class A, B and C shares, respectively, for that same period.
The advisory fees and other operating expenses of the U.S. Real Estate Fund
are currently less than that of the VK Real Estate Securities Fund but only
because of voluntary fee waivers from Advisory Corp. There can be no assurance
that such waivers will continue for the U.S. Real Estate Fund if the
Reorganization is not completed. Furthermore, if the Reorganization is
completed, it is anticipated that Asset Management would waive advisory fees
and/or reimburse other expenses for the surviving VK Real Estate Securities Fund
as necessary so that net operating expenses (after waiver and reimbursement) are
not higher than the current net
10
<PAGE> 19
operating expenses (after waiver and reimbursement) being paid by the U.S. Real
Estate Fund.
Both the VK Real Estate Securities Fund and the U.S. Real Estate Fund have
adopted substantially identical distribution plans (the "Distribution Plans")
pursuant to Rule 12b-1 under the 1940 Act and have adopted substantially
identical service agreements or plans (the "Service Plans"). Both the VK Real
Estate Securities Fund and the U.S. Real Estate Fund can pay up to 0.75% of
their respective average daily net assets attributable to Class B and C shares
for reimbursement of certain distribution-related expenses. In addition, both
the VK Real Estate Securities Fund and the U.S. Real Estate Fund can pay up to
0.25% of the respective average daily net assets attributable to Class A, B and
C shares for the provision of ongoing services to shareholders. The distributor
of both the U.S. Real Estate Fund's shares and the VK Real Estate Securities
Fund's shares is Van Kampen Funds Inc. (the "Distributor"), a subsidiary of Van
Kampen. For a complete description of these arrangements with respect to the VK
Real Estate Securities Fund, see the section of the VK Fund Prospectus entitled
"The Distribution and Service Plans." For a complete description of these
arrangements with respect to the U.S. Real Estate Fund, see the section of the
Series Fund Prospectus entitled "Management of the Company -- Distributor."
11
<PAGE> 20
EXPENSE COMPARISON TABLE
The table below sets forth (i) the estimated annual fees and expenses paid by
the VK Real Estate Securities Fund for the six months ended June 30, 1998 (on an
annualized basis) and the U.S. Real Estate Fund for the fiscal year ended June
30, 1998 and (ii) pro forma expenses for the combined fund.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
----------------------------------------- -----------------------------------------
VK REAL ESTATE U.S. REAL VK REAL ESTATE U.S. REAL
SECURITIES FUND ESTATE FUND PRO FORMA SECURITIES FUND ESTATE FUND PRO FORMA
--------------- ----------- --------- --------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchase of a Share (as a
percentage of Offering Price).... 4.75%(1) 5.75% 4.75%(1) None None None
Maximum Deferred Sales Charge (as
a percentage of the lower of the
original purchase price or
redemption proceeds)............. None None None 4.00%(2) 5.00%(2) 4.00%(2)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees................... 1.00% 0.46%(4) 0.91%(5) 1.00% 0.46%(4) 0.91%(5)
Rule 12b-1 Fees................... 0.25% 0.25% 0.25% 1.00%(6) 1.00%(6) 1.00%
Other Expenses.................... 0.43% 0.84% 0.39% 0.44% 0.84% 0.39%
----- ----- ----- ----- ----- -----
Total Fund Operating Expenses..... 1.68% 1.55%(4) 1.55%(5) 2.44% 2.30%(4) 2.30%(5)
----- ----- ----- ----- ----- -----
Expense Example of Total Operating
Expenses Assuming Redemption at
the End of the Period(7)
One Year......................... $ 64 $ 72 $ 63 $ 65 $ 73 $ 63
Three Years...................... 98 104 94 106 102 102
Five Years....................... 134 137 128 145 138 138
Ten Years........................ 237 231 223 259 245 245
Expense Example of Total Operating
Expenses Assuming No Redemption
at the End of the Period(7)
One Year......................... $ 64 $ 72 $ 63 $ 25 $ 23 $ 23
Three Years...................... 98 104 94 76 72 72
Five Years....................... 134 137 128 130 123 123
Ten Years........................ 237 231 223 259 245 245
<CAPTION>
CLASS C SHARES
-----------------------------------------
VK REAL ESTATE U.S. REAL
SECURITIES FUND ESTATE FUND PRO FORMA
--------------- ----------- ---------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load Imposed on
Purchase of a Share (as a
percentage of Offering Price).... None None None
Maximum Deferred Sales Charge (as
a percentage of the lower of the
original purchase price or
redemption proceeds)............. 1.00%(3) 1.00%(3) 1.00%(3)
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net
assets)
Management Fees................... 1.00% 0.46%(4) 0.91%(5)
Rule 12b-1 Fees................... 1.00%(6) 1.00%(6) 1.00%
Other Expenses.................... 0.44% 0.84% 0.39%
----- ----- -----
Total Fund Operating Expenses..... 2.44% 2.30%(4) 2.30%(5)
----- ----- -----
Expense Example of Total Operating
Expenses Assuming Redemption at
the End of the Period(7)
One Year......................... $ 35 $ 33 $ 33
Three Years...................... 76 72 72
Five Years....................... 130 123 123
Ten Years........................ 278 264 264
Expense Example of Total Operating
Expenses Assuming No Redemption
at the End of the Period(7)
One Year......................... $ 25 $ 23 $ 23
Three Years...................... 76 72 72
Five Years....................... 130 123 123
Ten Years........................ 278 264 264
</TABLE>
(See notes on the following page)
12
<PAGE> 21
Notes to Expense Comparison Table
(1) Class A shares of the VK Real Estate Securities Fund received pursuant to
the Reorganization will not be subject to a sales charge upon purchase.
(2) Class B Shares of the VK Real Estate Securities Fund are subject to a
contingent deferred sales charge equal to 4.00% of the lesser of the then
current net asset value or the original purchase price on Class B Shares
redeemed during the first or second year after purchase, which charge is
reduced to zero after a five year period as follows: Year 1 -- 4.00%; Year
2 -- 4.00%; Year 3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; and Year
6 -- 0.00%. Class B Shares of the U.S. Real Estate Fund are subject to a
contingent deferred sales charge equal to 5.00% of the lesser of the then
current net asset value on the original purchase price on Class B Shares
redeemed during the first year after purchase, which charge is reduced to
zero after a five year period as follows: Year 1 -- 5.00%; Year 2 -- 4.00%;
Year 3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; and Year 6 -- 0.00%.
(3) Class C shares of the VK Real Estate Securities Fund and U.S. Real Estate
Fund are subject to a contingent deferred sales charge equal to 1.00% of
the lesser of the then current net asset value or the original purchase
price on Class C shares redeemed during the first year after purchase,
which charge is reduced to zero thereafter.
(4) After fee waiver. Absent such waiver, "Management Fees" for the U.S. Real
Estate Fund would have been 1.00% with respect to Class A, B and C shares
and "Total Fund Operating Expenses" for the U.S. Real Estate Fund would
have been 2.09%, 2.84% and 2.83% with respect to Class A, B and C shares,
respectively.
(5) Asset Management has agreed to waive a portion of its advisory fees and/or
to reimburse a portion of expenses if the Reorganization is completed so
that total operating expenses do not exceed the current net operating
expenses of the U.S. Real Estate Fund prior to the Reorganization. Asset
Management in its discretion may terminate voluntary fee waivers and/or
reimbursements at any time. Absent such waiver/reimbursement, pro forma
"Management Fees" would be 1.00% with respect to Class A, B and C shares,
and pro forma "Total Fund Operating Expense" would be 1.64%, 2.39% and
2.39%, with respect to Class A, B and C shares, respectively.
(6) Individual long-term shareholders may pay more than the economic equivalent
of the maximum front-end sales charge permitted by NASD Rules.
(7) Expenses examples reflect what an investor would pay on a $1,000
investment, assuming a 5% annual return with either redemption or no
redemption at the end of each time period as noted in the above table. The
Pro Forma column reflects expenses estimated to be paid on new shares
purchased from the combined fund subsequent to the Reorganization. THE
EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
13
<PAGE> 22
DISTRIBUTION, PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES. Both the
VK Real Estate Securities Fund and the U.S. Real Estate Fund offer three classes
of shares. The Class A shares of the VK Real Estate Securities Fund and the U.S.
Real Estate Fund are subject to an initial sales charge of up to 4.75% and
5.75%, respectively. The initial sales charge applicable to Class A shares of
the VK Real Estate Securities Fund will be waived for Class A shares acquired in
the Reorganization. Any subsequent purchases of Class A shares of the VK Real
Estate Securities Fund after the Reorganization will be subject to an initial
sales charge of up to 4.75%, excluding Class A shares purchased through the
dividend reinvestment plan. Purchases of Class A shares of the VK Real Estate
Securities Fund or the U.S. Real Estate Fund in amounts of $1,000,000 or more
are not subject to an initial sales charge, but a contingent deferred sales
charge of 1.00% may be imposed on certain redemptions made within the first year
after purchase.
The Class B shares of the VK Real Estate Securities Fund and the U.S. Real
Estate Fund do not incur a sales charge when they are purchased, but generally
are subject to a contingent deferred sales charge of 4.00% and 5.00%,
respectively, if redeemed within the first year after purchase, which charge is
reduced to zero after a five year period. The deferred sales charge schedule
differs between the funds only in year one and is the same in years two through
five.
The Class C shares of both the VK Real Estate Securities Fund and the U.S.
Real Estate Fund do not incur a sales charge when purchased, but generally are
subject to a contingent deferred sales charge of 1.00% if redeemed within the
first year after purchase.
No contingent deferred sales charge will be imposed on Class B shares or Class
C shares of the U.S. Real Estate Fund in connection with the Reorganization. The
holding period and conversion schedule for Class B shares or Class C shares of
the VK Real Estate Securities Fund received in connection with the
Reorganization will be measured from the earlier time (i) the holder purchased
such shares from the U.S. Real Estate Fund or (ii) the holder purchased such
shares from any other Fund advised by Advisory Corp. or Asset Management and
distributed by the Distributor and subsequently exchanged them for shares of the
U.S. Real Estate Fund.
Shares of the VK Real Estate Securities Fund or the U.S. Real Estate Fund may
be purchased by check, by electronic transfer, by bank wire and by exchange from
certain other funds advised by Advisory Corp. or Asset Management and
distributed by the Distributor. For a complete description regarding purchase of
shares and exchange of shares of the VK Real Estate Securities Fund, see the
sections of the VK Fund Prospectus entitled "Purchase of Shares" and
"Shareholder Services--Exchange Privilege." For a complete description regarding
purchase of shares and exchange of shares of the U.S. Real Estate Fund, see the
sections of the
14
<PAGE> 23
Series Fund Prospectus entitled "Purchase of Shares" and "Shareholder Services--
Exchange Privilege".
Shares of the VK Real Estate Securities Fund and the U.S. Real Estate Fund
properly presented for redemption may be redeemed or exchanged at the next
determined net asset value per share (subject to any applicable deferred sales
charge). Shares of either the VK Real Estate Securities Fund or the U.S. Real
Estate Fund may be redeemed or exchanged by mail or by special redemption
privileges (telephone exchange, telephone redemption, by check or electronic
transfer). If a shareholder of either fund attempts to redeem shares within a
short time after they have been purchased by check, the respective fund may
delay payment of the redemption proceeds until such fund can verify that payment
for the purchase of the shares has been (or will be) received, usually a period
of up to 15 days.
No further purchases of the shares of the U.S. Real Estate Fund may be made
after the date on which the shareholders of the U.S. Real Estate Fund approve
the Reorganization, and the stock transfer books of the U.S. Real Estate Fund
will be permanently closed as of the date of Closing. Only redemption requests
and transfer instructions received in proper form by the close of business on
the day prior to the date of Closing will be fulfilled by the U.S. Real Estate
Fund. Redemption requests or transfer instructions received by the U.S. Real
Estate Fund after that date will be treated by the U.S. Real Estate Fund as
requests for the redemption or instructions for transfer of the shares of the VK
Real Estate Securities Fund credited to the accounts of the shareholders of the
U.S. Real Estate Fund. Redemption requests or transfer instructions received by
the U.S. Real Estate Fund after the close of business on the day prior to the
date of Closing will be forwarded to the VK Real Estate Securities Fund. For a
complete description of the redemption arrangements for the VK Real Estate
Securities Fund, see the section of the VK Fund Prospectus entitled "Redemption
of Shares," and, for the U.S. Real Estate Fund, see the section of the Series
Fund Prospectus entitled "Redemption of Shares."
15
<PAGE> 24
CAPITALIZATION. The following table sets forth the capitalization of the VK
Real Estate Securities Fund and the U.S. Real Estate Fund as of June 30, 1998,
and the pro forma capitalization of the combined fund as if the Reorganization
had occurred on that date. These numbers may differ at the time of Closing.
CAPITALIZATION TABLE AS OF JUNE 30, 1998
<TABLE>
<CAPTION>
VK REAL
ESTATE
SECURITIES U.S. REAL
FUND ESTATE FUND PRO FORMA(1)
---------- ----------- ------------
<S> <C> <C> <C>
NET ASSETS (IN THOUSANDS)
Class A shares............... $ 51,860 $ 16,873 $ 68,685
Class B shares............... 76,872 15,197 91,998
Class C shares............... 18,651 4,187 22,821
---------- ----------- ----------
Total................. $ 147,383 $ 36,257 $ 183,504
========== =========== ==========
NET ASSET VALUE PER SHARE
Class A shares............... $ 12.71 $ 15.61 $ 12.70
Class B shares............... 12.70 15.54 12.69
Class C shares............... 12.69 15.55 12.68
SHARES OUTSTANDING (IN
THOUSANDS)
Class A shares............... 4,080 1,081 5,409
Class B shares............... 6,052 978 7,250
Class C shares............... 1,469 269 1,799
---------- ----------- ----------
Total................. 11,601 2,328 14,458
========== =========== ==========
SHARES AUTHORIZED
Class A shares............... Unlimited 375,000,000 Unlimited
Class B shares............... Unlimited 375,000,000 Unlimited
Class C shares............... Unlimited 375,000,000 Unlimited
</TABLE>
- ---------------
(1) The pro forma net assets and net asset value per share reflect the payment
of the reorganization expenses of approximately $136,000 by the VK Real
Estate Securities Fund. The pro forma shares outstanding reflect the
issuance of approximately 1,329,000 Class A shares, 1,198,000 Class B shares
and 330,000 Class C shares by the VK Real Estate Securities Fund in exchange
for the assets and liabilities of the U.S. Real Estate Fund.
PERFORMANCE INFORMATION. The average annual total returns for VK Real Estate
Securities Fund for the one-year and three-year periods ended June 30, 1998 and
for the period beginning June 9, 1994 (the date Class A shares of the VK Real
Estate Securities Fund were first offered for sale to the public) through June
30, 1998 were 2.87%, 18.89% and 14.54% with respect to its Class A shares; for
the one-year and three-year periods ended June 30, 1998 and for the period
beginning June 9, 1994 (the date Class B shares of the VK Real Estate Securities
Fund were first offered for sale to the public) through June 30, 1998 were
3.46%, 19.22%, and 14.65% with respect to its Class B shares; and for the
one-year and three-year
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periods ended June 30, 1998 and for the period beginning June 9, 1994 (the date
Class C shares of the VK Real Estate Securities Fund were first offered to the
public) through June 30, 1998 were 6.27%, 19.89% and 15.10% with respect to its
Class C shares.
The average annual total returns for the U.S. Real Estate Fund for the
one-year period ended June 30, 1998, and for the period beginning May 1, 1996
(the date Class A shares of the U.S. Real Estate Fund were first offered for
sale to the public) through June 30, 1998 were 2.04% and 18.66% with respect to
its Class A shares; for the one-year period ended June 30, 1998 and for the
period beginning May 1, 1996 (the date Class B shares of the U.S. Real Estate
Fund were first offered for sale to the public) through June 30, 1998 were 2.48%
and 19.75% with respect to its Class B shares; and for the one-year period ended
June 30, 1998 and for the period beginning May 1, 1996 (the date Class C shares
of the U.S. Real Estate Fund were first offered for sale to the public) through
June 30, 1998 were 6.24% and 20.87% with respect to its Class C shares.
The foregoing total returns include the effect of the maximum sales charge
applicable to sales of shares of both the VK Real Estate Securities Fund and the
U.S. Real Estate Fund. The foregoing total returns also assume reinvestment of
all dividends and distributions.
The VK Real Estate Securities Fund paid income distributions totaling $0.190
per Class A share for the year, representing an annualized distribution rate of
2.85% based upon the June 30, 1998 maximum offering price. The U.S. Real Estate
Fund paid income distributions totaling $0.330 per Class A share for the year,
representing an annualized distribution rate of 4.03% based upon the June 30,
1998 maximum offering price. During the year, the U.S. Real Estate Fund had fee
waivers and expense reimbursements in place and in the absence of such waivers
and reimbursements, the U.S. Real Estate Fund's income available for
distribution would have been reduced. As a result, the distribution rate would
have been reduced as well. The estimated Class A share distribution rate
assuming no fee waiver or reimbursement of expenses for the U.S. Real Estate
Fund is 3.55%.
The total returns, yields and distribution rates are not necessarily
indicative of future results. The performance of an investment company is the
result of conditions in the securities markets, portfolio management and
operating expenses. Although information such as that shown above is useful in
reviewing a fund's performance and in providing some basis for comparison with
other investment alternatives, it should not be used for comparison with other
investments using different reinvestment assumptions or time periods. In the
absence of fee waivers and expense reimbursements, the total returns, yields and
distribution rates would have been reduced.
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Management's discussion of the VK Real Estate Securities Fund's and U.S. Real
Estate Fund's performance as of the end of each fund's last fiscal year are
attached hereto as Exhibit A.
OTHER SERVICE PROVIDERS. The transfer agent for each fund is Van Kampen
Investor Services Inc., a wholly-owned subsidiary of Van Kampen. The independent
accountants for each fund is PricewaterhouseCoopers LLP. The U.S. Real Estate
Fund obtains certain administrative services from Chase Global Funds Services
Company, a corporate affiliate of The Chase Manhattan Bank ("Chase"). The VK
Real Estate Securities Fund obtains certain accounting and legal services from
Advisory Corp. and Van Kampen, respectively. The custodians for the U.S. Real
Estate Fund are Chase for domestic securities and cash and Morgan Stanley Trust
Company, an affiliate of the Adviser, for foreign assets. The custodian for the
VK Real Estate Securities Fund is State Street Bank and Trust Company.
GOVERNING LAW. The U.S. Real Estate Fund is a series of the Van Kampen Series
Fund, Inc. ("Series Fund") an open-end management investment company organized
as a Maryland corporation. The VK Real Estate Securities Fund is an open-end
management investment company organized as a Delaware business trust. While
Maryland corporate law contains many provisions specifically applicable to
management investment companies and Delaware business trust law is specifically
drafted to accommodate some of the unique corporate governance needs of
management investment companies, certain statutory differences do exist and the
funds' organization documents contain certain differences summarized below. Each
fund is subject to federal securities laws, including the 1940 Act and the rules
and regulations promulgated by SEC thereunder, and applicable state securities
laws.
Consistent with Delaware law, the VK Real Estate Securities Fund has
authorized the issuance of an unlimited number of shares. Consistent with
Maryland law, the Series Fund has authorized a specific number of shares
available for the U.S. Real Estate Fund, however, the Series Fund organizational
documents provide directors with the authority to increase or decrease the
authorized number of shares, from time to time, as they consider necessary. Both
the VK Real Estate Securities Fund and the Series Fund allow the
trustees/directors to create one or more separate investment portfolios and to
establish a separate series of shares for each portfolio and to further
subdivide the shares of a series into one or more classes.
In general, the rights associated with common shares of beneficial interest of
the VK Real Estate Securities Fund are similar to the rights associated with
shares of common stock of the Series Fund. An area of potential difference is
that, although shareholders of a Delaware business trust generally are not
personally liable for obligations of the trust under Delaware law (the Delaware
business trust law provides that shareholders of a Delaware business trust
should be entitled to the same limitation of liability as shareholders of
private, for profit corporations), similar statutory or other authority limiting
business trust shareholder liability does
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not apply in many other states, and a shareholder subject to proceedings in
courts in other states, which may not apply Delaware law, may be subject to
liability. To guard against this risk, the VK Real Estate Securities Fund
organizational documents (i) contain an express disclaimer of shareholder
liability for acts or obligations of the trust and require notice of such
disclaimer in each agreement, obligation or instrument entered into by the trust
and (ii) provide for shareholder indemnification out of the series or fund
property if any shareholder is held personally liable for the obligations of the
trust. Management of the VK Real Estate Securities Fund believes the risk of
liability to a VK Real Estate Securities Fund shareholder beyond his or her
investment is remote.
Shareholders of a Maryland corporation currently have no personal liability
for the corporation's acts or obligations, except that a shareholder may be
liable to the extent that: (1) the dividends a shareholder receives exceed the
amount which properly could have been paid under Maryland law, (2) the
consideration paid to a shareholder by the Maryland corporation for stock was
paid in violation of Maryland law or (3) a shareholder otherwise receives any
distribution, payment or release which exceeds the amount which a shareholder
could properly receive under Maryland law.
Neither fund is required, and neither fund anticipates, holdings annual
meetings of its shareholders. Both funds do have certain mechanics whereby
shareholders can call a special meeting of the respective fund. Shareholders
generally have the right to approve investment advisory agreements, elect
trustees/directors, change fundamental investment policies, ratify the selection
of independent auditors and vote on other matters required by law or deemed
desirable by trustees/directors.
The business of each of the VK Real Estate Securities Fund and the U.S. Real
Estate Fund is supervised by the same nine trustees. The responsibilities,
powers and fiduciary duties of trustees under Delaware law are substantially the
same as those for directors under Maryland law. For the VK Real Estate
Securities Fund and the Series Fund, trustee/director vacancies may be filled by
approval of a majority of the trustees/directors then in office subject to
provisions of the 1940 Act. Trustees/Directors terms are until the later of the
election of such person's successor or resignation or removal. Each of the funds
has substantially the same mandatory retirement age provisions for
trustees/directors. Trustees of the VK Real Estate Securities Fund may be
removed with or without cause by vote of two-third's of the shares then
outstanding or by vote of two-third's of the number of trustees prior to such
removal. Trustees of the Series Fund may be removed with or without cause by
vote of a majority of the shares present or in person at a meeting.
The foregoing is only a summary of certain differences between the VK Real
Estate Securities Fund under Delaware law and the U.S. Real Estate Fund under
Maryland law. It is not intended to be a complete list of differences and
shareholders should refer to the provisions of each fund's applicable
organizational docu-
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ments for a more thorough comparison. Such documents are filed as part of each
fund's registration statements with the SEC and shareholders may obtain copies
of such documents as described on page 2 of this prospectus/proxy statement.
B. RISK FACTORS
SIMILARITY OF RISKS
The investment objectives of the VK Real Estate Securities Fund and the U.S.
Real Estate Fund are similar. The investment policies of the VK Real Estate
Securities Fund and the U.S. Real Estate Fund are similar insofar as they each
invest, under normal market conditions, at least 65% of the respective fund's
total assets in securities of companies principally engaged in the real estate
industry. Each of the VK Real Estate Securities Fund and the U.S. Real Estate
Fund also engages in certain common investment practices such as the purchase
and sale of securities on a "when issued" and "delayed delivery" basis, the
ability to borrow up to a certain percentage of its net assets in order to pay
for redemptions, to utilize options, futures and options on futures, to engage
in repurchase agreements and to invest up to a certain percentage of its assets
in restricted securities and illiquid securities. To the extent that the
investment objectives and investment policies and practices of the VK Real
Estate Securities Fund and the U.S. Real Estate Fund are similar, the risks
associated with an investment in the funds are similar.
Investment in either of the VK Real Estate Securities Fund or the U.S. Real
Estate Fund may not be appropriate for all investors. Neither fund is intended
to be a complete investment program, and investors should consider their
long-term investment goals and financial needs when making an investment
decision with respect to the funds. An investment in either fund is intended to
be a long-term investment and should not be used as a trading vehicle.
CONCENTRATION. Although the funds do not invest directly in real estate,
investments in the funds generally will be subject to the risks associated with
real estate because of their policy of concentration in the securities of
companies in the real estate industry. These risks include, among others:
declines in the value of real estate; risks related to general and local
economic conditions; overbuilding and increased competition; increases in
property taxes and operating expenses; changes in zoning laws; casualty or
condemnation losses; variations in rental income: changes in neighborhood
values; the appeal of properties to tenants and changes in interest rates. The
value of securities of companies which service the real estate industry also
will be affected by such risks. If the funds have rental income or income from
the disposition of real property acquired as a result of a default on securities
the funds own, the receipt of such income may adversely affect their ability to
retain their tax status as regulated investment companies.
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Real estate investment trusts are dependent upon management skill, may not be
diversified and are subject to the risks of financing projects. Such real estate
investment trusts are also subject to heavy cash flow dependency, defaults by
borrowers, self-liquidation and the possibility of failing to qualify for
tax-free pass-through of income under the Internal Revenue Code of 1986, as
amended (the "Code"), and to maintain exemption from the Investment Company Act
of 1940, as amended (the "1940 Act"). Real estate investment trusts are not
taxed on income distributed to shareholders provided they comply with several
requirements of the Code. The funds indirectly bear their proportionate share of
any expenses paid by the real estate investment trusts in which they invest.
Because the funds concentrate their investments in securities of real estate
companies the funds may be more susceptible than investment companies without
such a policy to any single economic, political or regulatory occurrence
affecting the real estate industry.
DIFFERENCES IN RISKS
The VK Real Estate Securities Fund and the U.S. Real Estate Fund engage in
some dissimilar investment practices. To the extent that the investment
practices of the funds differ, the risks associated with an investment in the VK
Real Estate Securities Fund are different from the risks associated with an
investment in the U.S. Real Estate Fund. An investment in the VK Real Estate
Securities Fund may not be appropriate for all U.S. Real Estate Fund
shareholders. For a complete description of the risks of an investment in the VK
Real Estate Securities Fund, see the sections in the VK Fund Prospectus entitled
"Investment Objective and Policies," "Risk Factors" and "Investment Practices."
For a complete description of the risks of an investment in the U.S. Real Estate
Fund, see the sections in the Series Fund Prospectus entitled "Investment
Objectives and Policies," "Additional Investment Information" and "Investment
Limitations."
DIVERSIFICATION. The U.S. Real Estate Fund is a non-diversified investment
company. The VK Real Estate Securities Fund is a diversified investment company.
A non-diversified investment company such as the U.S. Real Estate Fund may
invest a greater proportion of its assets in the securities of a smaller number
of issuers and as a result, may be subject to greater risks involving a single
corporate, economic, political or regulatory occurrence than a diversified
investment company such as the VK Real Estate Securities Fund. A diversified
investment company such as the VK Real Estate Securities Fund, however, is less
likely to benefit from a single corporate economic, political or regulatory
event that beneficially affect issuers in which it invests because it generally
invests a smaller percentage of its assets in each issuer in which it invests.
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C. THE PROPOSED REORGANIZATION
The material features of the Agreement are summarized below. This summary does
not purport to be complete and is subject in all respects to the provisions of,
and is qualified in its entirety by reference to, the Agreement attached as
Appendix A to the Reorganization SAI, a copy of which may be obtained without
charge by calling the VK Real Estate Securities Fund or the U.S. Real Estate
Fund at (800) 421-5666 and asking for the "Reorganization SAI".
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the VK Real Estate Securities Fund would acquire
all of the assets and the liabilities of the U.S. Real Estate Fund portfolio of
the Series Fund on the date of the Closing in consideration for Class A, B and C
shares of the VK Real Estate Securities Fund.
Subject to the U.S. Real Estate Fund's shareholders approving of the
Reorganization, the closing (the "Closing") will occur within 15 business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the Special Meeting or such later date as soon as
practicable thereafter as the VK Real Estate Securities Fund and the U.S. Real
Estate Fund may mutually agree.
On the date of Closing, the U.S. Real Estate Fund will transfer to the VK Real
Estate Securities Fund all of the assets and liabilities of the U.S. Real Estate
Fund. The VK Real Estate Fund will in turn transfer to the U.S. Real Estate Fund
a number of its Class A, B and C shares equal in value to the value of the net
assets of the U.S. Real Estate Fund transferred to the VK Real Estate Securities
Fund as of the date of Closing, as determined in accordance with the valuation
method described in the VK Real Estate Securities Fund's then current
prospectus. In order to minimize any potential for undesirable federal income
and excise tax consequences in connection with the Reorganization, the VK Real
Estate Securities Fund and the U.S. Real Estate Fund may distribute on or before
the Closing all or substantially all of their respective undistributed net
investment income (including net capital gains) as of such date.
The U.S. Real Estate Fund expects to distribute the Class A, B and C shares of
the VK Real Estate Securities Fund to the shareholders of the U.S. Real Estate
Fund promptly after the Closing and then dissolve pursuant to a plan of
dissolution adopted by the Board.
The VK Real Estate Securities Fund and the U.S. Real Estate Fund have made
certain standard representations and warranties to each other regarding their
capitalization, status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
1. the approval of the Reorganization by the U.S. Real Estate Fund's
shareholders;
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2. the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
3. the receipt of all necessary approvals, registrations and exemptions
under federal and state laws;
4. the truth in all material respects as of the Closing of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
5. the effectiveness under applicable law of the registration statement of
the VK Real Estate Securities Fund of which this Prospectus/Proxy
Statement forms a part and the absence of any stop orders under the
Securities Act of 1933, as amended, pertaining thereto; and
6. the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the U.S.
Real Estate Fund, provided that no such amendment after such approval shall be
made if it would have a material adverse affect on the interests of U.S. Real
Estate Fund shareholders. The Agreement also may be terminated by the
non-breaching party if there has been a material misrepresentation, material
breach of any representation or warranty, material breach of contract or failure
of any condition to Closing.
The Board recommends that you vote to approve the Reorganization, as it
believes the Reorganization is in the best interests of the U.S. Real Estate
Fund's shareholders and that the interests of the U.S. Real Estate Fund's
existing shareholders will not be diluted as a result of consummation of the
proposed Reorganization.
DESCRIPTION OF SECURITIES TO BE ISSUED
SHARES OF BENEFICIAL INTEREST. Beneficial interests in the VK Real Estate
Securities Fund being offered hereby are represented by transferable Class A, B
and C shares, par value $0.01 per share.
VOTING RIGHTS OF SHAREHOLDERS. Holders of shares of the VK Real Estate
Securities Fund are entitled to one vote per share on matters as to which they
are entitled to vote.
The VK Real Estate Securities Fund is an open-end management investment
company registered with the SEC under the 1940 Act. The U.S. Real Estate Fund
operates as a series of the Series Fund, also an open-end management investment
company registered with the SEC under the 1940 Act. Therefore, in addition to
the
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specific voting rights described above, shareholders of the VK Real Estate
Securities Fund, as well as shareholders of the U.S. Real Estate Fund, are
entitled, under current law, to vote with respect to certain other matters,
including changes in fundamental investment policies and restrictions and the
ratification of the selection of independent auditors. Moreover, under the 1940
Act, shareholders owning not less than 10% of the outstanding shares of the U.S.
Real Estate Fund or VK Real Estate Securities Fund may request that the
respective board of trustees/directors call a shareholders' meeting for the
purpose of voting upon the removal of trustee(s).
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the VK Real Estate Securities Fund will
establish an account for each U.S. Real Estate Fund shareholder containing the
appropriate number of shares of the VK Real Estate Securities Fund. The
shareholder services and shareholder programs of the VK Real Estate Securities
Fund and the U.S. Real Estate Fund are substantially identical. Shareholders of
the U.S. Real Estate Fund who are accumulating U.S. Real Estate Fund shares
under the dividend reinvestment plan, or who are receiving payment under the
systematic withdrawal plan with respect to U.S. Real Estate Fund shares, will
retain the same rights and privileges after the Reorganization in connection
with the VK Real Estate Securities Fund Class A, B or C shares received in the
Reorganization through substantially identical plans maintained by the VK Real
Estate Securities Fund. Van Kampen Trust Company will continue to serve as
custodian for the assets of U.S. Real Estate Fund shareholders held in IRA
accounts after the Reorganization. Such IRA investors will be sent appropriate
documentation to confirm Van Kampen Trust Company's custodianship.
It will not be necessary for shareholders of the U.S. Real Estate Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the U.S. Real Estate Fund, such certificates will become null and void.
However, U.S. Real Estate Fund shareholders holding such certificates may want
to present such certificates to receive certificates of the VK Real Estate
Securities Fund (to simplify substantiation of and to preserve the tax basis of
separate lots of shares).
FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the material federal income tax
consequences of the Reorganization to shareholders of the U.S. Real Estate Fund
and shareholders of the VK Real Estate Securities Fund. The discussion set forth
below is for general information only and may not apply to a holder subject to
special treatment under the Internal Revenue Code of 1986, as amended (the
"Code"), such as a holder that is a bank, an insurance company, a dealer in
securities, a tax-exempt organization or that acquired its Class A, B and C
shares of the U.S. Real
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<PAGE> 33
Estate Fund pursuant to the exercise of employee stock options or otherwise as
compensation. It is based upon the Code, legislative history, Treasury
regulations, judicial authorities, published positions of the Internal Revenue
Service (the "Service") and other relevant authorities, all as in effect on the
date hereof and all of which are subject to change or different interpretations
(possibly on a retroactive basis). This summary is limited to shareholders who
hold their U.S. Real Estate Fund shares as capital assets. No advance rulings
have been or will be sought from the Service regarding any matter discussed in
this Prospectus/Proxy Statement. Accordingly, no assurances can be given that
the Service could not successfully challenge the intended federal income tax
treatment described below. Shareholders should consult their own tax advisers to
determine the specific federal income tax consequences of all transactions
relating to the Reorganization, as well as the effects of state, local and
foreign tax laws and possible changes to the tax laws.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Code. It is a condition to closing that the
VK Real Estate Securities Fund receives an opinion from Skadden, Arps, Slate,
Meagher & Flom (Illinois) ("Skadden Arps") substantially to the effect that for
federal income tax purposes:
1. The acquisition by the VK Real Estate Securities Fund of the assets of
the U.S. Real Estate Fund in exchange solely for Class A, B and C shares
of the VK Real Estate Securities Fund and the assumption by the VK Real
Estate Securities Fund of the liabilities of the U.S. Real Estate Fund
will qualify as a tax-free reorganization within the meaning of Section
368(a)(1) of the Code.
2. No gain or loss will be recognized by the U.S. Real Estate Fund or the VK
Real Estate Securities Fund upon the transfer to the VK Real Estate
Securities Fund of the assets of the U.S. Real Estate Securities Fund in
exchange solely for the Class A, B and C shares of the VK Real Estate
Securities Fund and the assumption by the VK Real Estate Securities Fund
of the liabilities of the U.S. Real Estate Fund.
3. The VK Real Estate Securities Fund's basis in the U.S. Real Estate Fund
assets received in the Reorganization will, in each instance, equal the
basis of such assets in the hands of the U.S. Real Estate Fund
immediately prior to the transfer, and the VK Real Estate Securities
Fund's holding period of such assets will, in each instance, include the
period during which the assets were held by the U.S. Real Estate Fund.
4. No gain or loss will be recognized by the shareholders of the U.S. Real
Estate Fund upon the exchange of their shares of the U.S. Real Estate
Fund for the Class A, B or C shares of the VK Real Estate Securities
Fund.
5. The aggregate tax basis in the Class A, B and C shares of the VK Real
Estate Securities Fund received by the shareholders of the U.S. Real
Estate
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Fund will be the same as the aggregate tax basis of the shares of the
U.S. Real Estate Fund surrendered in exchange therefor. See "Continuation
of Shareholder Accounts and Plans; Share Certificates" above.
6. The holding period of the Class A, B and C shares of the VK Real Estate
Securities Fund received by the shareholders of the U.S. Real Estate Fund
will include the holding period of the shares of the U.S. Real Estate
Fund surrendered in exchange therefor if such surrendered shares of the
U.S. Real Estate Fund are held as capital assets by such shareholder.
In rendering its opinion, Skadden Arps may rely upon certain representations
of the management of the VK Real Estate Securities Fund and the U.S. Real Estate
Fund and assume that the Reorganization will be consummated as described in the
Agreement and that redemptions of shares of the U.S. Real Estate Fund occurring
prior to the Closing will consist solely of redemptions in the ordinary course
of business.
The VK Real Estate Securities Fund intends to be taxed under the rules
applicable to regulated investment companies as defined in Section 851 of the
Code, which are the same rules currently applicable to the U.S. Real Estate Fund
and its shareholders.
EXPENSES
The expenses of the Reorganization, including expenses incurred by the U.S.
Real Estate Fund, generally will be borne by the VK Real Estate Securities Fund
in the event the Reorganization is completed. Management believes that
shareholders of the VK Real Estate Fund will be the primary beneficiaries of
benefits from the Reorganization due to anticipated decreases in its operating
expenses. See the "Expense Comparison Table" above. Management of the U.S. Real
Estate Fund and the VK Real Estate Securities Fund estimates total
Reorganization costs of approximately $136,000. In addition, as part of the
Reorganization, the U.S. Real Estate Fund will write-off the remaining
unamortized organizational expenses of approximately $11,000, which will be
reimbursed by Advisory Corp., in its capacity as the investment adviser of the
U.S. Real Estate Fund. In the event the Reorganization is not completed, Van
Kampen will bear the costs associated with the Reorganization. The Board of
Trustees and the Board of Directors have reviewed and approved the foregoing
arrangements with respect to expenses and other charges relating to the
Reorganization.
As noted above, shareholders of the U.S. Real Estate Fund may redeem their
shares or exchange their shares for shares of certain other funds distributed by
the Distributor at any time prior to the closing of the Reorganization. See
"Distribution, Purchase, Valuation, Redemption and Exchange of Shares" above.
Redemptions and exchanges of shares generally are taxable transactions, unless
your account is
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<PAGE> 35
not subject to taxation, such as an individual retirement account or other tax-
qualified retirement plan. Shareholders should consult with their own tax
advisers regarding potential transactions.
RATIFICATION OF INVESTMENT OBJECTIVE, INVESTMENT POLICIES AND INVESTMENT
RESTRICTIONS OF THE VK REAL ESTATE SECURITIES FUND
Approval of the Reorganization will constitute the ratification by U.S. Real
Estate Fund shareholders of the investment objective, investment policies and
investment restrictions, distribution plan and advisory agreement of the VK Real
Estate Securities Fund. Approval of the Reorganization will constitute approval
of amendments to any of the fundamental investment restrictions of the U.S. Real
Estate Fund that might otherwise be interpreted as impeding the Reorganization,
but solely for the purpose of and to the extent necessary for, consummation of
the Reorganization.
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C shares of the VK Real Estate
Securities Fund will be passed on by Skadden Arps, 333 West Wacker Drive,
Chicago, Illinois 60606, which serves as counsel to the VK Real Estate
Securities Fund and the U.S. Real Estate Fund. Wayne W. Whalen, a partner of
Skadden Arps, is a Trustee of the VK Real Estate Securities Fund and a Director
of the U.S. Real Estate Fund.
D. RECOMMENDATION OF THE BOARD
The Board of Directors has unanimously approved the Agreement and has
determined that participation in the Reorganization is in the best interests of
shareholders of each class of shares of the U.S. Real Estate Fund. THE BOARD OF
DIRECTORS RECOMMENDS VOTING "FOR" THE PROPOSED REORGANIZATION.
OTHER INFORMATION
A. SHAREHOLDERS OF THE VK REAL ESTATE SECURITIES FUND AND THE U.S. REAL ESTATE
FUND
At the close of business on October , 1998, there were Class A
shares, Class B shares and Class C shares, respectively, of
the VK Real Estate Securities Fund. As of such date, the trustees and officers
of the VK Real Estate Securities Fund as a group own less than 1% of the shares
of the VK Real Estate Securities Fund. As of such date, no person was known by
the VK Real Estate Securities Fund to own beneficially or of record as much as
5% of
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the Class A, B or C shares or Class B shares of the VK Real Estate Securities
Fund except as follows: [TO COME]
At the close of business on October , 1998, the record date with respect to
the Special Meeting, there were Class A shares, Class B shares
and Class C shares, respectively, of the U.S. Real Estate Fund. As of
such date, the trustees and officers of the U.S. Real Estate Fund as a group own
less than 1% of the outstanding shares of the U.S. Real Estate Fund. As of such
date, no person was known by the U.S. Real Estate Fund to own beneficially or of
record as much as 5% of the Class A, B or C shares of the U.S. Real Estate Fund
except as follows: [TO COME]
B. SHAREHOLDER PROPOSALS
As a general matter, the VK Real Estate Securities Fund does not intend to
hold future regular annual or special meetings of its shareholders unless
required by the 1940 Act. In the event the Reorganization is not consummated,
the VK Real Estate Securities Fund does not intend to hold future regular annual
or special meetings of its shareholders unless required by the 1940 Act. Any
shareholder who wishes to submit proposals for consideration at a meeting of
shareholders of the VK Real Estate Securities Fund or the U.S. Real Estate Fund
should send such proposal to the respective fund at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. To be considered for presentation at a shareholders'
meeting, rules promulgated by the SEC require that, among other things, a
shareholder's proposal must be received at the offices of the fund a reasonable
time before a solicitation is made. Timely submission of a proposal does not
necessarily mean that such proposal will be included.
VOTING INFORMATION AND REQUIREMENTS
Holders of shares of the U.S. Real Estate Fund are entitled to one vote per
share on matters as to which they are entitled to vote. The U.S. Real Estate
Fund does not utilize cumulative voting.
Each valid proxy given by a shareholder of the U.S. Real Estate Fund will be
voted by the persons named in the proxy in accordance with the instructions
marked thereon and as the persons named in the proxy may determine on such other
business as may come before the Special Meeting on which shareholders are
entitled to vote. If no designation is made, the proxy will be voted by the
persons named in the proxy as recommended by the Board "FOR" approval of the
Reorganization. Abstentions and broker non-votes do not count as votes "FOR" a
proposal and are treated as votes "AGAINST". A [majority] of the outstanding
shares entitled to vote on a proposal must be present in person or by proxy to
have a quorum to conduct business at the Special Meeting. Abstentions and broker
non-votes will be deemed present for quorum purposes.
28
<PAGE> 37
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the U.S. Real Estate Fund a written notice of revocation,
by delivering a duly executed proxy bearing a later date, or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
It is not anticipated that any action will be asked of the shareholders of the
U.S. Real Estate Fund other than as indicated above, but if other matters are
properly brought before the Special Meeting, it is intended that the persons
named in the proxy will vote in accordance with their judgment.
APPROVAL OF THE REORGANIZATION WILL REQUIRE THE FAVORABLE VOTE OF THE HOLDERS
OF A [MAJORITY] OF THE OUTSTANDING SHARES OF THE U.S. REAL ESTATE FUND ENTITLED
TO VOTE.
In the event that sufficient votes in favor of a proposal are not received by
the scheduled time of the Special Meeting, the persons named in the proxy may
propose and vote in favor of one or more adjournments of the Special Meeting to
permit further solicitation of proxies. If sufficient shares were present to
constitute a quorum, but insufficient votes had been cast in favor of a proposal
to approve it, proxies would be voted in favor of adjournment only if the Board
determined that adjournment and additional solicitation was reasonable and in
the best interest of the shareholders of the U.S. Real Estate Fund, taking into
account the nature of the proposal, the percentage of the votes actually cast,
the percentage of negative votes, the nature of any further solicitation that
might be made and the information provided to shareholders about the reasons for
additional solicitation. Any such adjournment will require the affirmative vote
of the holders of a majority of the outstanding shares voted at the session of
the Special Meeting to be adjourned.
Proxies of shareholders of the U.S. Real Estate Fund are solicited by the
Board. In order to obtain the necessary quorum at the Special Meeting,
additional solicitation may be made by mail, telephone, telegraph or personal
interview by representatives of Advisory Corp., Asset Management, Van Kampen, or
by dealers or their representatives. In addition, such solicitation servicing
may also be provided by First Data Investor Services Group, a solicitation firm
located in Boston, Massachusetts, at a cost estimated to be approximately
$4,500, plus reasonable expenses.
October , 1998
PLEASE SIGN AND RETURN YOUR PROXY PROMPTLY.
YOUR VOTE IS IMPORTANT AND YOUR PARTICIPATION
IN THE AFFAIRS OF YOUR FUND DOES MAKE A DIFFERENCE.
29
<PAGE> 38
EXHIBIT A
MANAGEMENT'S DISCUSSION OF
VK REAL ESTATE SECURITIES FUND AND U.S. REAL ESTATE FUND PERFORMANCE
Management's Discussion of the VK Real Estate Securities Fund's Performance as
of the Annual Report dated December 31, 1997.
LETTER TO SHAREHOLDERS
February 1, 1998
Dear Shareholder,
The new year ushers in what promises to be an exciting and challenging time
for investors. The Taxpayer Relief Act of 1997 signed into law by President
Clinton in August creates many new opportunities for you and your family to take
a more active role in achieving your long-term financial goals.
Most Americans will benefit from the bill's $95 billion in tax cuts over five
years. The so-called Kiddie Credit gives parents $400 in immediate tax relief
for every child under age 17, and families will find it easier to save for their
children's college expenses through the new Education IRA. The bill also cuts
capital gains tax rates for the first time in over a decade and loosens
restrictions on tax-deductible IRA contributions. Perhaps the most exciting
feature of all is the new Roth IRA, which allows investment earnings to grow tax
free, not just tax deferred.
This year more than ever, it could be important for you to talk with your
financial adviser about how to make the tax code work to your advantage. At Van
Kampen American Capital, we have prepared a variety of publications to help you
understand your choices under the new tax legislation. And with the help of your
adviser, we'll help you locate the many benefits hidden among the changing tax
landscape.
ECONOMIC OVERVIEW
These continue to be the best of times for the U.S. economy. Growth is strong,
consumers are optimistic, unemployment is low, the budget is headed for surplus,
and our nation's currency is rising around the world.
Despite the strength in the economy, there is no indication of troublesome
inflation. In fact, the producer price index fell by 1.2 percent during the
year, the largest annual decline in wholesale prices since 1986. Inflation at
the consumer level was also virtually nonexistent, with the consumer price index
rising by only
A-1
<PAGE> 39
1.7 percent during 1997. A strong dollar and significant productivity gains
helped offset inflationary pressures caused by rising wages.
After increasing short-term interest rates by 0.25 percent in March, the
Federal Reserve Board left monetary policy unchanged for the remainder of the
year. In addition to signs that the economy was slowing modestly from its
breakneck pace of early 1997, Fed policy-makers were concerned about the impact
that higher U.S. interest rates might have on the struggling economies of
Southeast Asia. Generally, higher U.S. interest rates cause the dollar to rise
relative to other currencies. With nearly all Asian currencies already down
significantly, a hike in U.S. rates would force monetary authorities in Asia to
choose between letting their currencies decline further or matching the rate
increase, thereby slowing their already-sluggish economies.
MARKET OVERVIEW
Bolstered by solid economic growth and low inflation, stock prices continued
their advance during the reporting period. Over the 12 months through December,
the Wilshire 5000 Index, which measures the performance of all publicly traded
U.S. companies, gained 29.17 percent. And with its 22.64 percent advance in
1997, the Dow Jones Industrial Average completed its third consecutive year of
20 percent-plus gains for the first time in the history of the index.
But while U.S. stocks kept rising, volatility also picked up. During the
spring, stronger-than-expected economic growth and a subsequent hike in
short-term interest rates caused stock prices to fall by 10 percent. Later in
the year, investors were unnerved by the spreading economic crisis in Asia.
Between early August and late October, the DJIA fell by 16 percent before
rebounding sharply to close the reporting period near record-high territory.
Within the equity market, large stocks continued to outperform their small-cap
cousins. For the year, the Russell 1000 Index of large-cap companies returned
30.49 percent, compared to 20.52 percent for the Russell 2000 Index of small
stocks. A wave of consolidations helped make Financial Services the
top-performing industry group. The Dow Jones Financial Index soared 48.44
percent during 1997.
OUTLOOK
We expect that the recent upheavals in Southeast Asia will have a mixed impact
on the U.S. economy and financial markets. Sales of American goods overseas are
likely to decline in coming months, and competition from relatively inexpensive
imports could pinch profit margins. However, lower currency values in Asia will
likely result in less inflation in the U.S. and a greater likelihood of stable
or falling interest rates. Such a scenario usually benefits stock prices, and we
believe that a
A-2
<PAGE> 40
portfolio of high-quality domestic stocks should continue to perform well. We
also anticipate that stock selection will play a larger role in generating
investment performance due to the uneven impact of the Asian crisis on
individual companies.
As we noted earlier, the Taxpayer Relief Act of 1997 provides attractive new
vehicles through which investors can save for a variety of goals, including
higher education and retirement. We encourage you to work with your financial
adviser to consider how the tax changes can work to your benefit.
Additional details about your Fund, including a question-and-answer section
with your portfolio management team, are provided in this report. As always, we
are pleased to have the opportunity to serve you and your family through our
diverse menu of quality investments.
Sincerely,
Don G. Powell
Chairman
Van Kampen American Capital
Asset Management, Inc.
Dennis J. McDonnell
President
Van Kampen American Capital
Asset Management, Inc.
PERFORMANCE RESULTS FOR THE PERIOD ENDED DECEMBER 31, 1997
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
A SHARES B SHARES C SHARES
-------- -------- --------
<S> <C> <C> <C>
Total Returns
One year total return based on
NAV(1)............................ 20.66% 19.76% 19.78%
One-year total return(2)............ 14.91% 15.76% 18.78%
Life-of-Fund average annual total
return(2)*........................ 18.43% 18.71% 19.22%
Commencement Date................... 06/09/94 06/09/94 06/09/94
</TABLE>
- ---------------
(1) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge (4.75% for A shares) or
contingent deferred sales charge for early withdrawal (4% for B shares and
1% for C shares).
(2)Standardized total return. Assumes reinvestment of all distributions for the
period and includes payment of the maximum sales charge (A shares) or
contingent deferred sales charge for early withdrawal (B and C shares).
* Total return is calculated from June 30, 1994 (the date the Fund's investment
strategy was implemented) through the end of the period.
See the Prior Performance section of the current prospectus. Past performance
does not guarantee future results. Investment return and net asset value will
fluctuate with market conditions. This performance was achieved during generally
A-3
<PAGE> 41
rising stock prices. Fund shares, when redeemed, may be worth more or less than
their original cost.
Investing in REITs involves unique risks in addition to those risks associated
with investing in the real estate industry in general. Equity REITs may be
affected by changes in the value of the underlying property owned by the REITs,
while mortgage REITs may be affected by the quality of any credit extended.
REITs are dependent upon management skills, are not diversified and are subject
to the risks of financing projects. REITs are subject to heavy cash flow
dependency, default by borrowers, self-liquidation and the possibilities of
failing to qualify for tax-exempt status under the Internal Revenue Code of
1986, as amended. REITs, especially mortgage REITs, are also subject to some
interest rate risk (e.g., as interest rates rise, the value of REITs may
decline).
Market forecasts provided in this report may not necessarily come to pass.
A-4
<PAGE> 42
PUTTING YOUR FUND'S PERFORMANCE IN PERSPECTIVE
As you evaluate your progress toward achieving your financial goals, it is
important to track your investment portfolio's performance at regular intervals.
A good starting point is a comparison of your investment holdings to an
applicable benchmark, such as a broad-based market index. Such a comparison can:
- Illustrate the general market environment in which your investments
are being managed
- Reflect the impact of favorable market trends or difficult market
conditions
- Help you evaluate the extent to which your Fund's management team has
responded to the opportunities and challenges presented to them over
the period measured
For these reasons, you may find it helpful to review the chart below, which
compares your Fund's performance to that of the Standard & Poor's 500-Stock
Index and the NAREIT Equity REIT Index over time. These indices are unmanaged
statistical composites, and do not reflect any commissions or fees which would
be incurred by an investor purchasing the securities they represent. Similarly,
their performance does not reflect any sales charges or other costs which would
be applicable to an actively managed portfolio, such as that of the Fund.
A-5
<PAGE> 43
GROWTH OF A HYPOTHETICAL $10,000 INVESTMENT
Van Kampen American Capital Real Estate Securities Fund vs. Standard & Poor's
500-Stock Index and the NAREIT Equity REIT Index (June 30, 1994 through December
31, 1997)
[Line Graph]
The above chart reflects the performance of Class A shares of the Fund. The
performance of Class A shares will differ from that of other share classes of
the Fund because of the difference in sales charges and/or expenses paid by
shareholders investing in the different share classes. The Fund's performance
assumes reinvestment of all distributions and includes payment of the maximum
sales charge (4.75% for A shares).
While past performance is not indicative of future performance, the above
information provides a broader vantage point from which to evaluate the
discussion of the Fund's performance found in the following pages.
A-6
<PAGE> 44
GLOSSARY OF TERMS
DOW JONES INDUSTRIAL AVERAGE:
The oldest and most widely recognized stock market average, which reflects the
performance of 30 actively traded stocks of well-established, blue chip
performance.
FEDERAL RESERVE BOARD (FED):
A seven-member group that oversees the operations of the Federal Reserve
System, the central bank system of the United States. Currently led by Chairman
Alan Greenspan, the Fed meets eight times a year to establish monetary policy
and monitor the country's economic pulse.
GROWTH INVESTING:
An investing strategy that seeks to identify stocks that tend to offer
greater-than-average earnings growth. Growth stocks typically trade at higher
prices than value stocks, due to their expected earnings growth.
NET ASSET VALUE (NAV):
The value of a mutual fund share, calculated by deducting a fund's liabilities
from its total assets and dividing this amount by the number of shares
outstanding. The NAV does not include any initial or contingent deferred sales
charge.
P/E RATIO:
The price-to-earnings ratio shows the "multiple" of earnings at which a stock
is selling. It is calculated by dividing a stock's current price by its current
earnings per share. A high multiple means that investors are optimistic about
future growth and have bid up the stock's price.
REAL ESTATE INVESTMENT TRUSTS (REITS):
Publicly traded companies that own, develop, and operate apartment complexes,
hotels, office buildings, and other commercial properties.
STANDARD AND POOR'S 500-STOCK INDEX:
An index of the 500 largest, most actively traded stocks on the New York Stock
Exchange. It provides a guide to the overall health of the U.S. stock market.
The S&P 500 is a much broader index than the Dow Jones Industrial Average and
reflects the stock market more accurately.
A-7
<PAGE> 45
VALUATION:
The estimated or determined worth of a stock, based on its price relative to
its earnings.
VALUE INVESTING:
A strategy that seeks to identify stocks that are sound investments but are
temporarily out of favor in the marketplace, due to concerns about short-term
performance. As a result, they trade at prices below the value that investors
believe they are actually worth.
A-8
<PAGE> 46
PORTFOLIO MANAGEMENT REVIEW
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
We recently spoke with the management team of the Van Kampen American Capital
Real Estate Securities Fund about the key events and economic forces that shaped
the markets during the most recent fiscal year. The team is led by portfolio
managers Russell C. Platt and Theodore R. Bigman. The following excerpts reflect
their views on the Fund's performance during the 12-month period ended December
31, 1997.
Q
WHAT WERE THE MARKET CONDITIONS IN WHICH THE FUND OPERATED DURING THE
PAST 12 MONTHS?
A
A strong U.S. economy and a cooperative bond market in the past year were
beneficial to the real estate industry, which continues on the path of
recovery that began in 1993. While the total return for the period was not as
great as the one generated a year earlier, it was solid and more in line with
the type of returns that we believe investors can expect at this point in the
real estate cycle. Real estate investments generally tracked the Standard &
Poor's 500-Stock Index, but displayed defensive characteristics during the more
volatile periods in the broader market, particularly in the latter part of the
year.
The past 12 months were characterized by numerous mergers and acquisitions in
the real estate market. An impressive total of 15 public transactions occurred,
most notably Equity Office Properties' surprising merger with rival Beacon
Office Properties, and Starwood Lodging's successful bid for ITT Corp. Public
mergers in 1997 totaled $26.7 billion, representing a significant increase from
the year before, in which six public REIT mergers accounted for only $5.0
billion. Companies were able to finance these transactions through an active
issuance market, with an estimated $39 billion in debt and equity capital raised
by the end of the year.
Q
HOW DID YOU POSITION THE PORTFOLIO DURING THE REPORTING PERIOD?
A
We continued to support the thesis that efficient markets will, over
time, drive values in the public and private markets into equilibrium; in
that environment, understanding asset value is critical. As a result, our
security-selection process is based on finding those stocks that we believe
offer the best value relative to their underlying net property assets. While
real estate cycles in the physical property market can last for long periods of
time, valuations in the public markets can fluctuate quite rapidly. This caused
us to over-and underweight property sectors throughout the year despite
conditions in the physical market. Our investment style led us to overweight
positions in the office and high-end hotel sectors, which contributed handsomely
to the Fund's returns for the year. In addition, our value
A-9
<PAGE> 47
style of investing allowed the Fund to perform particularly well during times of
greatest market volatility.
Q
WHAT WAS THE FUND'S PERFORMANCE OVER THE REPORTING PERIOD?
A
The Fund achieved a total return of 20.66 percent (Class A shares at net
asset value) for the 12-month period ended December 31, 1997. This
performance compares favorably to the total return of the NAREIT (National
Association of Real Estate Investment Trusts) Equity REIT Index of 10.98 percent
over the same period. The NAREIT Index is an unmanaged index that reflects the
performance of a broad range of equity REITs of all property types. By
comparison, the Standard & Poor's 500-Stock Index registered a total return of
33.31 percent in the 12 months ended December 31, 1997. The S&P 500-Stock Index
is a broad-based, unmanaged index that reflects the general performance of the
stock market. Keep in mind that these indices are unmanaged statistical
composites that do not reflect any commissions, fees, or sales charges that
would be incurred by an investor purchasing the securities they represent.
Please refer to the chart on page three for additional Fund performance results.
Q
WHAT FACTORS OR SECTORS CONTRIBUTED TO THE FUND'S SUCCESS OVER ITS FISCAL
YEAR?
A
With respect to the overall portfolio, our value style of investing was
beneficial during the period. Recall that the NAREIT Equity REIT Index
registered a total return of 35.5 percent in 1996, of which 19.0 percent
occurred in the fourth quarter (with a 12.2 percent return in the final month
alone). Given that level of performance, many growth and "momentum" companies
sold at significant premiums to underlying real estate values, and thus
experienced a retracement of stock prices in the first six months of this year.
Our value focus allowed us to avoid a number of companies in which the
retrenchment was often significant.
Our sector weightings and stock selection within sectors also contributed to the
Fund's total return in the first half of the year. After last year's outstanding
performance, office and hotel property sectors continued to show above-average
performance during the past six months, and our overweighted positions in these
sectors positively contributed to the total return. Limited new supply in both
sectors has allowed for better returns. We were somewhat surprised by the
above-average performance in the retail sector in the first half of the year,
and our holdings in regional malls added significantly to returns. Our stock
selection in the manufactured-home sector and the industrial sector also
contributed to the Fund's success. For additional Fund portfolio highlights,
please refer to page eight.
A-10
<PAGE> 48
Q
WHAT IS YOUR OUTLOOK FOR THE REAL ESTATE MARKET AND FOR THE FUND?
A
As we continue to advance in this current real estate recovery cycle, we
see more property sectors approaching equilibrium, or a balanced
supply-and-demand equation. We are also beginning to see greater amounts
of development in many property sectors due to the fact that rental rates have
recovered greatly. In many cases, the new development is justified. We do not
yet feel that we are at a level of development that will bring about the demise
of this cycle; nonetheless, it is incumbent upon us to be alert and increasingly
careful in our company analysis and stock selection. For example, in calculating
the net asset value for some of the Southeastern multi-family companies, we have
computed a greater vacancy rate, because certain markets in this region have
excess supply. In addition, we are attempting to focus our investments in
companies that have a Northeastern or West Coast focus when possible; these are
markets in which is it very difficult to develop, so we believe the
supply-and-demand balance will remain in check.
In conclusion, we believe that, as the real estate cycle ages, understanding the
underlying real estate value of these securities will become increasingly
important. In this environment, we feel strongly that our value style of
investing will prevail.
<TABLE>
<S> <C>
/s/ RUSSEL C. PLATT /s/ THEODORE R. BIGMAN
Russel C. Platt Theodore R. Bigman
Portfolio Manager Portfolio Manager
</TABLE>
A-11
<PAGE> 49
PORTFOLIO HIGHLIGHTS
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
TOP TEN HOLDINGS AS A PERCENTAGE OF LONG TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, 1997 DECEMBER 31, 1997
<S> <C> <C> <C>
Taubman Centers, Inc. ....... 5.5% ................... 1.9%
Chateau Properties, Inc. .... 4.8% ................... 5.5%
Arden Realty Group, Inc. .... 4.7% ................... 2.3%
Nationwide Health Properties,
Inc. ...................... 4.7% ................... 4.8%
Bay Apartment Communities,
Inc. ...................... 4.3% ................... 3.5%
Host Marriott Corp. ......... 4.2% ................... 2.1%
Essex Property Trust,
Inc. ...................... 4.0% ................... 4.0%
Pacific Gulf Properties,
Inc. ...................... 3.8% ................... 2.6%
Capstar Hotel Co. ........... 3.7% ................... N/A
Brandywine Realty Trust ..... 3.6% ................... 3.7%
</TABLE>
N/A=Not Applicable
TOP FIVE PORTFOLIO SECTORS AS A PERCENTAGE OF LONG-TERM INVESTMENTS
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF JUNE 30, 1997
<S> <C> <C> <C>
Office/Industrial.......... 28.9% Office/Industrial.......... 25.2%
Apartments................. 19.5% Apartments................. 19.6%
Hotel & Lodging............ 11.3% Hotel & Lodging............ 13.9%
Shopping Malls............. 10.7% Shopping Malls............. 11.1%
Shopping Centers........... 7.4% Healthcare Facilities...... 10.4%
</TABLE>
A-12
<PAGE> 50
Management's Discussion of the U.S. Real Estate Fund's Performance as of the
Annual Report dated June 30, 1998.
LETTER TO SHAREHOLDERS
VAN KAMPEN
U.S. REAL ESTATE FUND
INVESTMENT OVERVIEW
(UNAUDITED)
COMPOSITION OF NET ASSETS (AT JUNE 30, 1998)
<TABLE>
<S> <C> <C> <C> <C>
DIVERSIFIED 7.5
LAND 0.5
LODGING/RESORTS 8.5
OFFICE/INDUSTRIAL 37.8
RESIDENTIAL 19.5
RETAIL 17.4
SELF STORAGE 4.3
SHORT-TERM INVEST-
MENT 1.5
OTHER 3.0
</TABLE>
A-13
<PAGE> 51
<TABLE>
<CAPTION>
TOTAL RETURNS**
----------------------------------------
AVERAGE ANNUAL
ONE YEAR SINCE INCEPTION
------------------ ------------------
WITH WITHOUT WITH WITHOUT
SALES SALES SALES SALES
CHARGE* CHARGE CHARGE* CHARGE
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Shares 2.04% 8.27% 18.66% 21.93%
- ------------------------------------------------------------------------------
Class B Shares 2.48% 7.23% 19.75% 20.86%
- ------------------------------------------------------------------------------
Class C Shares 6.24% 7.20% 20.87% 20.87%
- ------------------------------------------------------------------------------
NAREIT Equity Index N/A 8.05% N/A 20.69%
- ------------------------------------------------------------------------------
</TABLE>
* The returns above are calculated using the applicable sales charge for Class
A shares and the applicable deferred sales charge for Class B and Class C
shares.
** Total returns for the Fund reflect expenses waived and reimbursed, if
applicable, by the Adviser. Without such waivers and reimbursements, total
returns would be lower.
The NAREIT Equity Index is an unmanaged market weighted index of tax qualified
REITs listed on the New York Stock Exchange, American Stock Exchange and the
NASDAQ National Market System, including dividends.
A-14
<PAGE> 52
COMPARISON OF CHANGE IN VALUE OF A $10,000 INVESTMENT
<TABLE>
<CAPTION>
MEASUREMENT
PERIOD
(FISCAL U.S. REAL U.S. REAL U.S. REAL
YEAR ESTATE FUND - ESTATE FUND - ESTATE FUND - NAREIT
COVERED) CLASS A CLASS B CLASS C EQUITY INDEX
<S> <C> <C> <C> <C>
5/1/96 9500 10000 10000 10000
6/30/96 9965 9954 10372 10289
6/30/97 13528 13669 14067 12854
6/30/98 14496 15086 15088 13133
</TABLE>
TOP FIVE HOLDINGS
<TABLE>
<CAPTION>
PERCENT OF
ISSUER INDUSTRY NET ASSETS
- -----------------------------------------------------------------------------
<S> <C> <C>
Arden Realty Group, Inc. Office/Industrial 5.1%
- -----------------------------------------------------------------------------
Chateau Communities, Inc. REIT Residential 5.0%
- -----------------------------------------------------------------------------
CarrAmerica Realty Corp. REIT Office/Industrial 4.9%
- -----------------------------------------------------------------------------
Starwood Lodging Trust REIT Lodging/Resorts 4.6%
- -----------------------------------------------------------------------------
Brookfield Properties Corp. Office 4.4%
- -----------------------------------------------------------------------------
</TABLE>
TOP FIVE SECTORS
<TABLE>
<CAPTION>
PERCENT
OF
VALUE NET
SECTOR (000) ASSETS
- ---------------------------------------------------------------------------
<S> <C> <C>
Office/Industrial $13,718 37.8%
- ---------------------------------------------------------------------------
Residential 7,061 19.5%
- ---------------------------------------------------------------------------
Retail 6,319 17.4%
- ---------------------------------------------------------------------------
Lodging/Resorts 3,071 8.5%
- ---------------------------------------------------------------------------
Diversified 2,716 7.5%
- ---------------------------------------------------------------------------
</TABLE>
In accordance with SEC regulations, Fund performance since inception as shown at
left assumes that: the maximum sales charge was deducted from the initial
investment of $10,000 in Class A shares; the maximum deferred sales charge was
deducted from the value of the investment of $10,000 in Class B and Class C
shares; all recurring fees (including management fees) were deducted; and all
dividends and distributions were reinvested.
Past performance is not predictive of future performance.
A-15
<PAGE> 53
The investment objective of the Van Kampen U.S. Real Estate Fund, formerly the
Morgan Stanley U.S. Real Estate Fund, is to provide above-average current income
and long-term capital appreciation by investing primarily in equity securities
of companies in the U.S. real estate industry, including real estate investment
trusts.
For the year ended June 30, 1998, the Fund had a total return of 8.27 percent
for the Class A shares at net asset value (NAV), as compared to 8.05 percent for
the National Association of Real Estate Investment Trusts (NAREIT) Equity Index.
Following a difficult first quarter, the second quarter provided very little
improvement for REIT investors. The NAREIT Equity Index declined 4.59 percent
for the quarter, and was down 5.03 percent at the end of the reporting period.
This represents the first time that the REIT market provided a negative total
return on a quarterly basis since the first quarter of 1995. As is the pattern
in the REIT market, the second half of the year provides the majority of the
performance; this was true in the second half of 1997, with third and fourth
quarter returns of 11.8 percent and 1.8 percent, respectively.
In the first quarter, the key reason for the difficulties in REIT prices
appeared to be technical -- the continued strength in the U.S. equity market led
many non-dedicated real estate investors to move funds to the broad market from
the REIT sector. In the second quarter, however, the continuation of price
weakness led to a greater focus on real estate fundamentals. As the U.S. real
estate cycle continues to age, the level of new construction has begun to raise
concerns among real estate industry participants. Specifically, markets are
being gauged for a view as to when supply will surpass demand. Since the public
market tends to look to the future, we can expect multiples to contract in
anticipation of a deterioration in fundamentals.
After three years of strong performance, the sector is faced with competing
rallying cries of both REIT bulls and bears. One group of analysts finds value
in the sector by demonstrating the large disparity between the relative average
multiple of the S&P 500 versus REITs. These analysts cite REITs for providing
defensive characteristics and portfolio diversification. The bears point to the
cyclical nature of the real estate asset class and argue that multiples have
begun to contract in anticipation of a slowdown in the rate of return in U.S.
commercial real estate and an eventual downturn in capital values. Other
favorite criticisms advanced by the bears include the notion that the REIT
sector's reliance on raising equity capital to grow creates a supply-demand
imbalance for REIT shares, thus keeping a ceiling on share prices. This opinion
reflects the idea that non-dedicated investors will continue to avoid the
sector; in addition, it is not clear how much demand will be provided by
value-oriented investors or those investors searching for defensive vehicles.
A-16
<PAGE> 54
As we have discussed, the multifamily and industrial markets have already
achieved equilibrium, with limited pockets of current supply problems. Despite a
rapidly accelerating pace of new office development, the potential for
widespread occupancy pressures from this sector does not appear on the horizon
until 1999 or 2000. New development is confined primarily to sunbelt suburban
locations and is only lightly scattered in a number of central business
districts. In the hotel sector, although recent concerns were focused on the
limited service segment of the market, the cautionary yellow flag is now being
waved for each of the categories. The reason that potential oversupply in the
hotel sector creates greater concern than in other sectors is that the typical
lease in a hotel is only one night, creating the potential for a rapid
deterioration of the operating environment. In light of the strong economy,
retail sales have been buoyant, leading to strong results for retailers and
greater demand to open new stores. We expect new development to meet this
demand.
It is not surprising that the equity offering calendar has become very light,
and that the few deals that were completed in the quarter were priced at far
lower levels than were desired by issuers. This is in contrast to 1997, which
featured a record level of new equity issuance. Given current valuations, we
expect that a number of the IPOs that have been filed will be postponed until
the market recovers. In addition, a number of companies that made large
acquisitions and that expected to complete equity follow-on offerings need to
carefully study alternative options. Clearly, if current pricing levels persist,
the rapid pace of equity securitization will slow as companies become reluctant
or unable to raise equity capital to finance their growth. This should apply to
acquisitions financed by cash as well as to the trend of trading property for
shares with institutional investors and private companies. Finally, we expect
that the merger environment may heat up, given that some companies are trading
at or below valuation levels that approximate their private real estate value.
The current market also may require a change of focus by the majority of the
REIT analyst community. The recent focus has been on setting targets for a
company's annual acquisitions pace and utilizing these targets to establish
estimates of funds from operations (FFO) per share. Since this analysis is
highly dependent on projecting future equity issuance and the corresponding
price for that issuance, current FFO estimates have become suspect. Our style of
focusing on NAV per share does not face this issue. However, to the extent that
we have attributed some portion of the NAV to "development value," we must
analyze the feasibility of a REIT completing its identified projects. We have
spent considerable time discussing the attitude of management toward enhancing
shareholder value by focusing on internal growth, development and redevelopment
of assets, stock buybacks, and the sale of non-strategic assets.
A-17
<PAGE> 55
The REIT market has come under pressure by selling from non-dedicated
investors. These investors were heavily concentrated in larger-capitalization
companies, particularly those focusing in the office and hotel sectors (which
were the two best-performing sectors over the last three years). We have
continued to shape the portfolio with companies that we feel offer attractive
fundamental valuations relative to their underlying real estate value. As a
result, we added a number of large-cap companies that have faced the greatest
price compression. From a top-down perspective, we significantly added to the
office sector as a result of price declines. Previously, we attempted to
overweight the office sector due to favorable fundamentals, but lofty prices
caused us to temper that overweighting. High prices in the office sector were
the result of external growth expectations, which are in the process of being
downgraded. Despite price pressure in the hotel sector, we modestly decreased
our exposure due to the concerns discussed above. In order to pay for additions
to the office sector, we decreased our exposure to both multifamily and health
care. These two sectors were modestly valued and did not suffer the same
declines in share price.
IMPORTANT FUND UPDATE
On October 23, 1997, the Trustees of the Fund approved its reorganization into
the Van Kampen Real Estate Securities Fund. Upon shareholder approval, the
reorganization of the Fund is expected to take place prior to December 31, 1998.
More information about the reorganization will be forwarded to you in a proxy
statement in the near future.
Your Fund and the Van Kampen Real Estate Securities Fund have substantially
similar investment objectives, policies and practices, and are managed by the
same portfolio management team. The Van Kampen Fund's investment objective is to
provide shareholders with long-term growth of capital, with current income as a
secondary objective.
Russell Platt
Portfolio Manager
Theodore R. Bigman
Portfolio Manager
A-18
<PAGE> 56
FUND SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 421-5666.
DEALERS--FOR INFORMATION
WITH RESPECT TO THE
REORGANIZATION CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889.
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 421-5684.
VAN KAMPEN
REAL ESTATE SECURITIES FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser of the VK Real Estate Securities Fund
VAN KAMPEN
ASSET MANAGEMENT INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor of the VK Real Estate Securities Fund
VAN KAMPEN FUNDS INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent of the VK Real Estate Fund
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian of the VK Real Estate Securities Fund
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Legal Counsel of the VK Real Estate Securities Fund
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants of the VK Real Estate Securities Fund
PRICEWATERHOUSECOOPERS LLP
200 East Randolph
Chicago, IL 60601
<PAGE> 57
PROSPECTUS/PROXY STATEMENT
VAN KAMPEN REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN U.S. REAL ESTATE FUND
OCTOBER , 1998
------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
PROPOSAL 1: THE PROPOSED REORGANIZATION............................. 3
A. SUMMARY..................................................... 3
The Reorganization........................................ 3
Reasons for the Proposed Reorganization................... 4
Comparison of the VK Real Estate Securities Fund and the
U.S. Real Estate Fund................................... 6
B. RISK FACTORS................................................ 20
Similarity of Risks....................................... 20
Differences in Risks...................................... 21
C. THE PROPOSED REORGANIZATION................................. 22
Terms of the Agreement.................................... 22
Description of Securities to be Issued.................... 23
Continuation of Shareholder Accounts and Plans; Share
Certificates.............................................. 24
Federal Income Tax Consequences........................... 24
Expenses.................................................. 26
Ratification of Investment Objective, Investment Policies
and Investment Restrictions of the VK Real Estate
Securities Fund......................................... 27
Legal Matters............................................. 27
D. RECOMMENDATION OF THE BOARD................................. 27
OTHER INFORMATION................................................... 27
A. SHAREHOLDERS OF THE VK REAL ESTATE SECURITIES FUND AND THE
U.S. REAL ESTATE FUND..................................... 27
B. SHAREHOLDER PROPOSALS....................................... 28
VOTING INFORMATION AND REQUIREMENTS................................. 28
EXHIBIT A: MANAGEMENT'S DISCUSSION OF VK REAL ESTATE SECURITIES FUND
AND U.S. REAL ESTATE FUND PERFORMANCE............................. A-1
</TABLE>
[VAN KAMPEN FUNDS LOGO]
<PAGE> 58
-----------------------------------------------------------------------------
Real Estate
-----------------------------------------------------------------------------
<PAGE> 59
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is a
diversified, open-end investment company, commonly known as a mutual fund. The
Fund's primary investment objective is to seek long-term growth of capital.
Current income is a secondary investment objective. The Fund seeks to achieve
its investment objectives by investing principally in securities of companies
operating in the real estate industry ("Real Estate Securities"). A "real estate
industry" company is a company that derives at least 50% of its assets
(marked-to-market), gross income or net profits from the ownership,
construction, management or sale of residential, commercial or industrial real
estate. Under normal market conditions, at least 65% of the Fund's total assets
will be invested in Real Estate Securities, primarily equity securities of real
estate investment trusts. There is no assurance that the Fund will achieve its
investment objectives.
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. (the "Adviser"). This Prospectus sets forth certain information
that a prospective investor should know before investing in the Fund. Please
read it carefully and retain it for future reference. The address of the Fund is
One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone number
is (800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE REGULATORS NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated April 30, 1998, containing
additional information about the Fund is hereby incorporated by reference in its
entirety into this Prospectus. A copy of the Statement of Additional Information
may be obtained without charge by calling (800) 421-5666 or for
Telecommunications Device for the Deaf at (800) 421-2833. The Statement of
Additional Information has been filed with the Securities and Exchange
Commission ("SEC") and is available along with other related materials at the
SEC's internet web site (http://www.sec.gov).
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED APRIL 30, 1998.
<PAGE> 60
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 3
Shareholder Transaction Expenses............................ 6
Annual Fund Operating Expenses and Example.................. 7
Financial Highlights........................................ 9
The Fund.................................................... 11
Investment Objectives and Policies.......................... 11
Risk Factors................................................ 15
Investment Practices........................................ 16
Investment Advisory Services................................ 21
Alternative Sales Arrangements.............................. 22
Purchase of Shares.......................................... 25
Shareholder Services........................................ 35
Redemption of Shares........................................ 39
Distribution and Service Plans.............................. 43
Distributions from the Fund................................. 45
Tax Status.................................................. 45
Fund Performance............................................ 50
Description of Shares of the Fund........................... 52
Additional Information...................................... 53
Appendix -- Description of Bond Ratings..................... 54
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY
IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 61
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Real Estate Securities Fund (the "Fund")
is a diversified, open-end management investment company organized as a Delaware
business trust.
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").
INVESTMENT OBJECTIVES. The primary investment objective of the Fund is to seek
long-term growth of capital. Current income is a secondary investment objective.
There is no assurance that the Fund will achieve its investment objectives. See
"Investment Objectives and Policies."
INVESTMENT POLICY AND RISKS. The Fund seeks to achieve its investment objectives
by investing principally in a portfolio of securities of companies operating in
the real estate industry ("Real Estate Securities"). Real Estate Securities
include equity securities, including common stocks and convertible securities,
as well as non-convertible preferred stocks and debt securities of real estate
industry companies. A "real estate industry" company is a company that derives
at least 50% of its assets (marked-to-market), gross income or net profits from
the ownership, construction, management or sale of residential, commercial or
industrial real estate. Under normal market conditions, at least 65% of the
Fund's total assets will be invested in Real Estate Securities, primarily equity
securities of real estate investment trusts. The Fund's investments in debt
securities will be rated, at the time of investment, at least Baa by Moody's
Investors Service, Inc. ("Moody's"), BBB by Standard & Poor's Ratings Group
("S&P"), or comparably rated by another nationally recognized statistical rating
organization or, if unrated, determined by Van Kampen American Capital Asset
Management, Inc. to be of comparable quality. Under normal market conditions,
the Fund may invest up to 35% of its total assets in equity and debt securities
of companies outside the real estate industry, U.S. Government securities, cash
and money market instruments. There can be no assurance that the Fund will
achieve its investment objectives.
Because of the Fund's policy of concentrating its investments in Real Estate
Securities, the Fund may be more susceptible than an investment company without
such a policy to any single economic, political or regulatory occurrence
affecting the real estate industry. The Fund will be affected by general changes
in interest rates, which will result in increases or decreases in the market
value of the debt securities (and, to a lesser degree, equity securities) held
by the Fund. The market value of debt securities tends to have an inverse
relationship to the movement of interest
3
<PAGE> 62
rates. For additional information regarding the risks connected with investment
in Real Estate Securities, see "Risk Factors."
The Fund may invest up to 25% of its total assets in securities issued by
foreign issuers, some or all of which may also be Real Estate Securities.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers, including
fluctuations in foreign exchange rates, political and economic developments, and
the possible imposition of exchange controls or other foreign governmental laws
or restrictions. See "Investment Objectives and Policies -- Foreign Securities."
The Fund may purchase or sell debt securities on a forward commitment basis.
See "Investment Practices -- Forward Commitments." The Fund may use portfolio
management techniques and strategies involving options, futures contracts and
options on futures. The utilization of options, futures contracts and options on
futures contracts may involve risks different from those associated with direct
investments in underlying securities. See "Investment Practices -- Using
Options, Futures Contracts and Related Options."
INVESTMENT RESULTS. The investment results of the Fund are shown in the table of
"Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
public, each with its own sales charge structure: Class A shares, Class B shares
and Class C shares. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class of shares that best
suits their circumstances and objectives. Each class of shares represents an
interest in the same portfolio of investments of the Fund. See "Alternative
Sales Arrangements." For information on redeeming shares see "Redemption of
Shares."
Class A Shares. Class A shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price (4.99% of the net
amount invested), reduced on investments of $100,000 or more. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge ("CDSC") of 1.00% may be imposed on
redemptions made within one year of purchase. Class A shares are subject to an
annual service fee of up to 0.25% of the Fund's average daily net assets
attributable to such class of shares. See "Purchase of Shares -- Class A Shares"
and "Distribution and Service Plans."
Class B Shares. Class B shares are offered at net asset value per share and
are subject to a maximum CDSC of 4.00% on redemptions made within the first or
second year after purchase and declining thereafter to 0.00% after the fifth
year. See "Redemption of Shares." Class B shares are subject to a combined
annual distribution fee and service fee of up to 1.00% of the Fund's average
daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class B Shares"
4
<PAGE> 63
and "Distribution and Service Plans." Class B shares convert automatically to
Class A shares eight years after the end of the calendar month in which the
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. Class C shares are offered at net asset value per share and
are subject to a CDSC of 1.00% on redemptions made within one year of purchase.
See "Redemption of Shares." Class C shares are subject to a combined annual
distribution fee and service fee of up to 1.00% of the Fund's average daily net
assets attributable to such class of shares. See "Purchase of Shares -- Class C
Shares" and "Distribution and Service Plans."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the Fund's investment adviser.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor")
distributes the Fund's shares.
DISTRIBUTIONS FROM THE FUND. Dividends from net investment income (which
includes net short-term capital gains, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses) are
distributed quarterly. Net capital gains, if any, are distributed at least
annually. Such distributions are automatically reinvested in shares of the Fund
at net asset value per share (without a sales charge) unless payment in cash is
requested. See "Distributions from the Fund."
The foregoing is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 64
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)............... 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering
price)........................ None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or Year
redemption proceeds).......... None(2) Year 1--4.00% 1--1.00%
Year 2--4.00% After--None
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)........... None None None
Exchange fee.................... None None None
</TABLE>
- ------------------------------------------------------------------------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a CDSC of 1.00% may be imposed on redemptions made
within one year of the purchase. See "Purchase of Shares -- Class A Shares."
6
<PAGE> 65
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------- -------- --------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)......................... 1.00% 1.00% 1.00%
12b-1 Fees (as a percentage of average daily
net assets)(1)............................ 0.25% 1.00%(2) 1.00%(2)
Other Expenses (as a percentage of average
daily net assets)......................... 0.52% 0.52% 0.52%
Total Fund Operating Expenses (as a
percentage of average daily net assets)... 1.77% 2.52% 2.52%
</TABLE>
- ------------------------------------------------------------------------------
(1) Class A shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
shares and Class C shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Distribution and Service Plans."
(2) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted as a Fund-level expense by NASD
Rules.
7
<PAGE> 66
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
-------- ---- ----- ----- -----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an operating
expense ratio of 1.77% for Class A shares,
2.52% for Class B shares and 2.52% for Class
C shares, (ii) a 5.00% annual return and
(iii) redemption at the end of each time
period:
Class A.................................... $65 $101 $139 $246
Class B.................................... $66 $108 $149 $267*
Class C.................................... $36 $ 78 $134 $286
You would pay the following expenses on the
same $1,000 investment assuming no redemption
at the end of each time period:
Class A.................................... $65 $101 $139 $246
Class B.................................... $26 $ 78 $134 $267*
Class C.................................... $26 $ 78 $134 $286
- -----------------------------------------------------------------------------
</TABLE>
* Based on conversion to Class A shares after eight years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required by the SEC to utilize a 5.00% annual
return assumption. The ten year amount with respect to Class B shares of the
Fund reflects the lower aggregate 12b-1 and service fees applicable to such
shares after conversion to Class A shares. Class B shares acquired through the
exchange privilege are subject to the CDSC schedule relating to the Class B
shares of the fund from which the purchase of Class B shares was originally
made. Accordingly, future expenses as projected could be higher than those
determined in the above table if the investor's Class B shares were exchanged
from a fund with a higher CDSC. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services," "Redemption of Shares" and "Distribution and Service Plans."
8
<PAGE> 67
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (Selected data for a share of beneficial interest
outstanding throughout each of the periods indicated)
- --------------------------------------------------------------------------------
The following financial highlights have been audited by Price Waterhouse LLP,
independent accountants, whose report thereon was unqualified. The most recent
annual report (which contains the financial highlights for the last four fiscal
periods) is included in the Statement of Additional Information and may be
obtained by shareholders without charge by calling the telephone number on the
cover of this Prospectus. This information should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
-------------------------------------------------
JUNE 9, 1994
(COMMENCEMENT OF
INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO
----------------------------- DECEMBER 31,
1997 1996 1995(A) 1994(A)
------- ------- ------- ----------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.................... $13.008 $ 10.00 $ 9.27 $9.43
------- ------- ------ -----
Net Investment Income...................................... .364 .351 .27 .23
Net Realized and Unrealized Gain/Loss...................... 2.220 3.514 .85 (.18)
------- ------- ------ -----
Total from Investment Operations............................ 2.584 3.865 1.12 .05
------- ------- ------ -----
Less:
Distributions from and in Excess of Net Investment
Income................................................... .380 .380 .2456 .153
Return of Capital Distribution............................. -0- -0- .1444 .057
Distributions from Net Realized Gain....................... 1.402 .477 -0- -0-
------- ------- ------ -----
Total Distributions......................................... 1.782 .857 .39 .21
------- ------- ------ -----
Net Asset Value, End of the Period.......................... $13.810 $13.008 $10.00 $9.27
======= ======= ====== =====
Total Return(b)............................................. 20.66% 39.82% 12.39% .24%(c)
Net Assets at End of the Period (In millions)............... $ 51.3 $ 23.3 $ 8.5 $ 4.6
Ratio of Expenses to Average Net Assets**................... 1.77% 2.60% 2.67% 1.26%
Ratio of Net Investment Income to Average Net Assets**...... 2.77% 3.21% 2.92% 4.28%
Portfolio Turnover.......................................... 159% 97% 94% 28%*
Average Commission Paid Per Equity Share Traded(d).......... $ .0594 $ .0486 -- --
*Non-Annualized
**If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to Average Net Assets..................... N/A 2.61% 3.16% 3.03%
Ratio of Net Investment Income to Average Net Assets........ N/A 3.19% 2.44% 2.52%
</TABLE>
(Table and footnotes continued on following page)
9
<PAGE> 68
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B SHARES CLASS C SHARES
------------------------------------------------ ------------------------------------------------
JUNE 9, 1994 JUNE 9, 1994
(COMMENCEMENT OF (COMMENCEMENT OF
INVESTMENT INVESTMENT
YEAR ENDED DECEMBER 31, OPERATIONS) TO YEAR ENDED DECEMBER 31, OPERATIONS) TO
----------------------------- DECEMBER 31, ----------------------------- DECEMBER 31,
1997 1996 1995(A) 1994(A) 1997 1996 1995(A) 1994(A)
------- ------- ------- ---------------- ------- ------- ------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of the Period.............. $13.008 $ 10.00 $ 9.28 $9.43 $12.999 $ 9.99 $ 9.28 $9.43
------- ------- ------ ----- ------- ------- ------ -----
Net Investment Income...... .272 .266 .19 .20 .271 .266 .20 .22
Net Realized and Unrealized
Gain/Loss................ 2.206 3.519 .843 (1.76) 2.206 3.520 .823 (.178)
------- ------- ------ ----- ------- ------- ------ -----
Total from Investment
Operations................. 2.478 3.785 1.033 .024 2.477 3.786 1.023 .042
------- ------- ------ ----- ------- ------- ------ -----
Less:
Distributions from and in
Excess of Net Investment
Income................... .284 .300 .197 .1268 .284 .300 .197 .1399
Return of Capital
Distribution............. -0- -0- .116 .0472 -0- -0- .116 .0521
Distributions from Net
Realized Gain............ 1.402 .477 -0- -0- 1.402 .477 -0- -0-
------- ------- ------ ----- ------- ------- ------ -----
Total Distributions......... 1.686 .777 .313 .174 1.686 .777 .313 .192
------- ------- ------ ----- ------- ------- ------ -----
Net Asset Value, End of the
Period..................... $13.800 $13.008 $10.00 $9.28 $13.790 $12.999 $ 9.99 $9.28
======= ======= ====== ===== ======= ======= ====== =====
Total Return(b)............. 19.76% 38.82% 11.37% (.04%)(c) 19.78% 38.86% 11.26% .15%(c)
Net Assets at End of the
Period (In millions)....... $ 73.2 $ 26.5 $ 12.0 $ 9.1 $ 17.4 $ 7.7 $ 3.1 $ 1.3
Ratio of Expenses to Average
Net Assets**............... 2.52% 3.37% 3.50% 1.84% 2.52% 3.38% 3.54% 1.62%
Ratio of Net Investment
Income to Average Net
Assets**................... 2.03% 2.39% 2.07% 3.81% 2.00% 2.39% 2.11% 3.92%
Portfolio Turnover.......... 159% 97% 94% 28%* 159% 97% 94% 28%*
Average Commission Paid Per
Equity Share Traded(d)..... $ .0594 $ .0486 -- -- $ .0594 $ .0486 -- --
*Non-Annualized
**If certain expenses had not been assumed by the Adviser, total return would have been lower and the ratios would have been as
follows:
Ratio of Expenses to Average
Net Assets................. N/A 3.39% 3.99% 3.60% N/A 3.40% 4.03% 3.38%
Ratio of Net Investment
Income to Average Net
Assets..................... N/A 2.37% 1.58% 2.05% N/A 2.38% 1.62% 2.15%
</TABLE>
- ------------
N/A = Not applicable.
(a)Based on average shares outstanding.
(b)Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c)Total Return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(d)Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal years prior to 1996.
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THE FUND
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The Fund is a diversified, open-end management investment company, commonly
known as a mutual fund. A mutual fund provides, for those who have similar
investment goals, a practical and convenient way to invest in a diversified
portfolio of securities by combining their resources in an effort to achieve
such goals.
Van Kampen American Capital Asset Management, Inc. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser or its
affiliates also act as investment adviser to other mutual funds distributed by
Van Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
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INVESTMENT OBJECTIVES AND POLICIES
- ------------------------------------------------------------------------------
GENERAL. The Fund's primary investment objective is to seek to provide
shareholders with long-term growth of capital. Current income is a secondary
objective. The Fund seeks to achieve its investment objectives by investing
principally in a diversified portfolio of Real Estate Securities, which include
equity securities, including common stocks and convertible securities, as well
as non-convertible preferred stocks and debt securities of real estate industry
companies. A "real estate industry" company is a company that derives at least
50% of its assets (marked to market), gross income or net profits from the
ownership, construction, management or sale of residential, commercial or
industrial real estate. Real estate industry companies may include among others:
equity real estate investment trusts, which pool investors' funds for investment
primarily in commercial real estate properties; mortgage real estate investment
trusts, which invest pooled funds in real estate related loans; brokers or real
estate developers; and companies with substantial real estate holdings, such as
paper and lumber producers and hotel and entertainment companies. Under normal
market conditions, at least 65% of the Fund's total assets will be invested in
Real Estate Securities, primarily equity securities of real estate investment
trusts. The Fund's investments in debt securities will be rated, at the time of
investment, at least Baa by Moody's, BBB by S&P, comparably rated by another
nationally recognized statistical rating organization or, if unrated, determined
by the Adviser to be of comparable quality. Ratings at the time of purchase
determine which securities may be acquired, and a subsequent reduction in
ratings does not require the Fund to dispose of a security. Securities rated Baa
by Moody's or BBB by S&P are considered to be medium grade obligations which
possess speculative characteristics so that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher rated securities. The
ratings assigned by
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the ratings agencies represent their opinions of the quality of the debt
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized, however, that ratings are general and are
not absolute standards of quality. The Fund may invest more than 25% of its
total assets in the real estate industry.
Under normal market conditions, the Fund may invest up to 35% of its total
assets in equity and debt securities of companies outside the real estate
industry, U.S. Government securities, cash and money market instruments.
The Fund may invest up to 25% of its assets in securities issued by foreign
issuers. See "Investment Objectives and Policies -- Foreign Securities." The
Fund may engage in portfolio management strategies and techniques involving
options, futures contracts and options on futures contracts. Options, futures
contracts and related options are described in "Investment Practices -- Using
Options, Futures Contracts and Related Options" and the Statement of Additional
Information.
For temporary defensive purposes, the Fund may invest up to 100% of its total
assets in short-term investments as described below. The Fund will assume a
temporary defensive posture only when economic and other factors affect the real
estate industry market to such an extent that the Adviser believes there are
extraordinary risks in being invested primarily in Real Estate Securities.
There can be no assurance that the Fund will achieve its investment
objectives.
The investment objectives and policies, the percentage limitations, and the
kinds of securities in which the Fund may invest generally are not fundamental
policies and may be changed by the Trustees. Certain limitations as described
under "Investment Practices -- Investment Restrictions" are fundamental and can
be changed only by action of the shareholders. If there is a change in the
objectives of the Fund, shareholders should consider whether the Fund remains an
appropriate investment in light of their then current financial position and
needs.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
SHORT-TERM INVESTMENTS. The Fund may invest in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, commercial
paper, bankers' acceptances, certificates of deposit, repurchase agreements
collateralized by these securities, and other short-term evidences of
indebtedness. The Fund will only purchase commercial paper if it is rated
Prime-1 or Prime-2 by Moody's, A-1 or A-2 by S&P, comparably rated by another
nationally recognized statistical rating organization or, if unrated, determined
by the Adviser to be of comparable quality.
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<PAGE> 71
Such temporary investments may be made either for liquidity purposes, to meet
shareholder redemption requirements or as a temporary defensive measure.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in securities
issued by foreign issuers of developed countries of similar quality as the
securities described above as determined by the Adviser. Some of such securities
may also be Real Estate Securities. Investments in securities of foreign
entities and securities denominated in foreign currencies involve risks not
typically involved in domestic investment, including fluctuations in foreign
exchange rates, future foreign political and economic developments, and the
possible imposition of exchange controls or other foreign or United States
governmental laws or restrictions applicable to such investments. Since the Fund
may invest in securities denominated or quoted in currencies other than the
United States dollar, changes in foreign currency exchange rates may affect the
value of investments in the portfolio and the accrued income and unrealized
appreciation or depreciation of investments. Changes in foreign currency
exchange rates relative to the U.S. dollar will affect the U.S. dollar value of
the Fund's assets denominated in that currency and the Fund's yield on such
assets.
The Fund also may purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. ADRs are
publicly traded on exchanges or over-the-counter in the United States and are
issued through "sponsored" or "unsponsored" arrangements. In a sponsored ADR
arrangement, the foreign issuer assumes the obligation to pay some or all of the
depositary's transaction fees, whereas under an unsponsored arrangement, the
foreign issuer assumes no obligation and the depositary's transaction fees are
paid by the ADR holders. In addition, less information is available in the
United States about an unsponsored ADR than about a sponsored ADR and the
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored ADR. The Fund may invest in ADRs through both
sponsored and unsponsored arrangements. For further information on ADRs and
EDRs, investors should refer to the Statement of Additional Information.
With respect to certain foreign countries, there is the possibility of
expropriation of assets, confiscatory taxation, political or social instability
or diplomatic developments which could affect investment in those countries.
There may be less publicly available information about a foreign security than
about a United States security, and foreign entities may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to those of United States entities. In addition, certain foreign
investments made by the Fund may be subject to foreign withholding taxes, which
would reduce the Fund's total return on such investments and the amounts
available for distributions by the Fund to its shareholders. See "Tax Status."
Foreign financial markets, while growing in volume, generally have
13
<PAGE> 72
less trading volume than United States markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable domestic companies. The foreign markets also have different clearance
and settlement procedures and in certain markets there have been times when
settlements have been unable to keep pace with the volume of securities
transactions making it difficult to conduct such transactions. Delays in
settlement could have an adverse affect on the Fund's ability to purchase and
sell portfolio securities in a timely fashion. Costs associated with
transactions in foreign securities, including custodial costs and foreign
brokerage commissions, are generally higher than costs associated with
transactions in United States securities. In addition, the Fund will incur costs
in connection with conversions between various currencies. There is generally
less government supervision and regulation of exchanges, financial institutions
and issuers in foreign countries than there is in the United States.
FOREIGN CURRENCY TRANSACTIONS. The value of the Fund's portfolio securities
that are traded in foreign markets may be affected by changes in currency
exchange rates and exchange control regulations. In addition, the Fund will
incur costs in connection with conversions between various currencies. The
Fund's foreign currency exchange transactions generally will be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund purchases
and sells foreign currency on a spot basis in connection with the settlement of
transactions in securities traded in such foreign currency. The Fund does not
purchase and sell foreign currencies as an investment.
The Fund also may enter into contracts with banks or other foreign currency
brokers and dealers to purchase or sell foreign currencies at a future date
("forward contracts") and purchase and sell foreign currency futures contracts
to hedge against changes in foreign currency exchange rates. A foreign currency
forward contract is a negotiated agreement between the contracting parties to
exchange a specified amount of currency at a specified future time at a
specified rate. The rate can be higher or lower than the spot rate between the
currencies that are the subject of the contract.
The Fund may attempt to hedge against changes in the value of the United
States dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency futures contract for
such amount. Such hedging strategies may be employed before the Fund purchases a
foreign security traded in the hedged currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment for such security is made or received. Hedging against a
change in the value of a foreign currency in the foregoing manner does not
eliminate fluctuations in the price of portfolio securities or prevent losses if
the prices of such securities decline.
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<PAGE> 73
Furthermore, such hedging transactions reduce or preclude the opportunity for
gain if the value of the hedged currency should move in the direction opposite
to the hedged position. The Fund will not speculate in foreign currency forward
or futures contracts or through the purchase and sale of foreign currencies.
- ------------------------------------------------------------------------------
RISK FACTORS
- ------------------------------------------------------------------------------
Although the Fund does not invest directly in real estate, an investment in
the Fund generally will be subject to the risks associated with real estate
because of its policy of concentration in the securities of companies in the
real estate industry. These risks include, among others: declines in the value
of real estate; risks related to general and local economic conditions;
overbuilding and increased competition; increases in property taxes and
operating expenses; changes in zoning laws; casualty or condemnation losses;
variations in rental income; changes in neighborhood values; the appeal of
properties to tenants and changes in interest rates. The value of securities of
companies which service the real estate industry also will be affected by such
risks. If the Fund has rental income or income from the disposition of real
property acquired as a result of a default on securities the Fund owns, the
receipt of such income may adversely affect its ability to retain its tax status
as a regulated investment company.
Equity real estate investment trusts may be affected by changes in the value
of the underlying property owned by the trusts, while mortgage real estate
investment trusts may be affected by the quality of credit extended. Equity and
mortgage real estate investment trusts are dependent upon management skill, may
not be diversified and are subject to the risks of financing projects. Such real
estate investment trusts are also subject to heavy cash flow dependency,
defaults by borrowers, self-liquidation and the possibility of failing to
qualify for tax-free pass-through of income under the Internal Revenue Code of
1986, as amended (the "Code") and to maintain exemption from the Investment
Company Act of 1940, as amended (the "1940 Act"). Changes in interest rates also
may affect the value of the debt securities in the Fund's portfolio. Real estate
investment trusts are not taxed on income distributed to shareholders provided
they comply with several requirements of the Code. The Fund indirectly will bear
its proportionate share of any expenses paid by the real estate investment
trusts in which it invests.
Because of the Fund's policy of concentrating its investments in Real Estate
Securities, the Fund may be more susceptible than an investment company without
such a policy to any single economic, political or regulatory occurrence
affecting the real estate industry.
Like other mutual funds, financial and business organizations and individuals
around the world, the Fund could be adversely affected if the computer systems
used by the Fund's Adviser and other service providers do not properly process
and
15
<PAGE> 74
calculate date-related information and data from and after January 1, 2000. This
is commonly known as the "Year 2000 Problem". The Adviser is taking steps that
it believes are reasonably designed to address the Year 2000 Problem with
respect to computer systems that it uses and to obtain reasonable assurances
that comparable steps are being taken by the Fund's other major service
providers. At this time, there can be no assurance that these steps will be
sufficient to avoid any adverse impact to the Fund. In addition, the Year 2000
Problem may adversely affect the issuers of securities in which the Fund may
invest which, in turn, may adversely affect the net asset value of the Fund.
Additional information about the Fund's investment practices and the risks
associated with such practices are contained in "Investment Objectives and
Policies" and "Investment Practices" herein and in the Statement of Additional
Information.
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INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
banks or broker-dealers in order to earn a return on temporarily available cash.
A repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a debt security and the seller agrees to
repurchase the obligation at a future time and set price, thereby determining
the yield during the holding period. Repurchase agreements involve certain risks
in the event of default by the other party. The Fund will not invest more than
15% of its net assets in repurchase agreements that do not mature within seven
days and in any other illiquid securities. In the event of a bankruptcy or other
default of a seller of a repurchase agreement, the Fund could experience delays
in liquidating the underlying securities and the Fund would incur losses
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period and (c)
expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund that would not be available to the Fund if it invested
separately. The manner in which the joint account is managed is subject to
conditions set forth in an SEC exemptive order
16
<PAGE> 75
authorizing this practice, which conditions are designed to ensure the fair
administration of the joint account and to protect the amounts in that account.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible
for the placement of orders for the purchase and sale of portfolio securities
for the Fund and the negotiation of brokerage commissions on such transactions.
Brokerage firms are selected on the basis of their professional capability for
the type of transaction and the value and quality of execution services rendered
on a continuing basis. The debt securities in the Fund's portfolio generally are
traded in the over-the-counter market through dealers. A dealer is a securities
firm or bank which makes a market for securities by opening a position at one
price and closing the position at a slightly more favorable price. The
difference between the prices is known as a spread. Foreign currency and forward
currency exchange contracts are traded in a similar fashion in a dealer market
maintained primarily by large commercial banks. The Fund will pay brokerage
commissions in connection with transactions in exchange-traded options, futures
contracts and related options. Spreads or commissions for transactions executed
in foreign markets often are higher than in the United States. The Adviser may
place portfolio transactions, to the extent permitted by law, with brokerage
firms which are affiliated with the Fund, the Adviser or the Distributor and
with firms participating in the distribution of shares of the Fund if it
reasonably believes that the quality of the execution and the commission are
comparable to that available from other qualified brokerage firms. The Adviser
is authorized to pay higher commissions to brokerage firms that provide it with
investment and research information than to firms which do not provide such
services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided. The information received may be used
by the Adviser in managing the assets of other advisory accounts as well as in
the management of the assets of the Fund.
PORTFOLIO TURNOVER. The Fund may purchase and sell securities without regard
to the length of time the security will be or has been held. The annual
portfolio turnover rate may exceed 100%, which is higher than that of many other
investment companies. A 100% turnover rate would occur, for example, if all the
securities held by the Fund were replaced in a period of one year. High
portfolio turnover involves correspondingly greater brokerage commissions and
other transaction costs, which are borne directly by the Fund. High portfolio
turnover also may result in realization of short-term capital gains if
securities are held for one year or less which may be subject to applicable
income taxes. See "Tax Status."
RESTRICTED SECURITIES. The Fund generally may invest up to 15% of its net
assets in restricted securities and other illiquid assets. As used herein,
restricted securities are those that have been sold in the United States without
registration under the Securities Act of 1933, as amended ("1933 Act") and are
thus subject to restrictions on resale. Excluded from the limitation, however,
are any restricted
17
<PAGE> 76
securities which are eligible for resale pursuant to Rule 144A under the 1933
Act and which have been determined to be liquid by the Trustees or by the
Adviser pursuant to Trustee-approved guidelines. The determination of liquidity
is based on the volume of reported trading in the institutional secondary market
for each security. Since it is not possible to predict with assurance how the
markets for restricted securities sold and offered under Rule 144A will develop,
the Trustees will carefully monitor the Fund's investment in these securities
focusing on such factors, among others, as valuation, liquidity and availability
of information. This investment practice could have the effect of increasing the
level of illiquidity in the Fund to the extent that qualified institutional
buyers become for a time uninterested in purchasing these restricted securities.
These difficulties and delays could result in the Fund's inability to realize a
favorable price upon disposition of restricted securities, and in some cases
might make disposition of such securities at the time desired by the Fund
impossible. Since market quotations are not readily available for restricted
securities, such securities will be valued by a method that the Fund's Trustees
believe accurately reflects fair value. Also excluded from this limitation on
restricted securities are securities purchased by the Fund of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief from the
provisions of the 1940 Act.
USING OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS. The Fund expects to
utilize options, futures contracts and related options thereon in several
different ways, depending upon the status of the Fund's portfolio and the
Adviser's expectations concerning the securities markets.
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions or other parties ("Counterparty") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than over-the-counter currency options) that are subject to a buy-back
provision permitting the Fund to require to the Counterparty to sell the option
back to the Fund at a formula price within seven days. The staff of the SEC
currently takes the position that, in general, OTC Options on securities other
than U.S. Government securities purchased by the Fund, and portfolio securities
covering OTC Options sold by the Fund, are illiquid securities subject to the
Fund's limitation on illiquid securities described below. The Fund may not
purchase or sell futures contracts or related options for which the aggregate
initial margin and premiums exceed 5% of the fair market value of the Fund's
assets.
Potential Risks of Options, Futures Contracts and Related Options. In certain
cases, the options and futures markets provide investment or risk management
opportunities that are not available from direct investments in securities. In
18
<PAGE> 77
addition, some strategies can be performed with greater ease and at lower cost
by utilizing the options and futures markets rather than purchasing or selling
portfolio securities. However, the purchase and sale of options, futures
contracts and related options involve risks different from those associated with
direct investments in the underlying securities. While utilization of options,
futures contracts and similar instruments may be advantageous to the Fund, if
the Adviser is not successful in employing such instruments in managing the
Fund's investments, the Fund's performance will be worse than if the Fund did
not make such investments. In addition, the Fund will pay commissions and other
costs in connection with such investments, which may increase the Fund's
expenses and reduce its return.
In order to prevent leverage in connection with the purchase of futures
contracts or call options thereon by the Fund, an amount of cash, cash
equivalents or liquid securities equal to the market value of the obligation
under the futures contract or option (less any related margin deposits) will be
maintained in a segregated account with the Custodian. The Fund may not invest
more than 15% of its net assets in illiquid securities, including certain OTC
Options deemed illiquid and repurchase agreements which have a maturity of
longer than seven days. A more complete discussion of the potential risks
involved in transactions in options, futures contracts and related options is
contained in the Statement of Additional Information.
FORWARD COMMITMENTS. The Fund may purchase or sell debt securities on a
"when-issued" or "delayed delivery" basis ("Forward Commitments"). These
transactions occur when securities are purchased or sold by the Fund with
payment and delivery taking place in the future, frequently a month or more
after such transaction. This price is fixed on the date of the commitment, and
the seller continues to accrue interest on the securities covered by the Forward
Commitment until delivery and payment take place. At the time of settlement, the
market value of the securities may be more or less than the purchase or sale
price.
The Fund may settle a Forward Commitment by either taking delivery of the
securities or reselling or repurchasing a Forward Commitment on or before the
settlement date in which event the Fund may reinvest the proceeds in another
Forward Commitment. The Fund's use of Forward Commitments may increase its
overall investment exposure and thus its potential for gain or loss. When
engaging in Forward Commitments, the Fund relies on the other party to complete
the transaction. Should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure.
The Fund maintains a segregated account (which is marked to market daily) of
cash, liquid securities or the security covered by the Forward Commitment (in
the case of a Forward Commitment sale) with the Fund's Custodian in an aggregate
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<PAGE> 78
amount equal to the amount of its commitment as long as the obligation to
purchase or sell continues.
INVESTMENT RESTRICTIONS. The Fund has adopted certain fundamental investment
restrictions which may not be changed without approval by a vote of a majority
of the outstanding voting shares of the Fund (as defined in the 1940 Act). The
percentage limitations need only be met at the time the investment is made or
other relevant action taken. These restrictions provide, among other things,
that the Fund may not:
1. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of its
net assets, or pledge more than 10% of its net assets in connection with
permissible borrowings or purchase additional securities when money
borrowed exceeds 5% of its net assets. Margin deposits or payments in
connection with the writing of options, or in connection with the purchase
or sale of forward contracts, futures, foreign currency futures and
related options, are not deemed to be a pledge or other encumbrance.
2. With respect to 75% of its total assets, invest more than 5% of its assets
in the securities of any one issuer (except the U.S. Government, its
agencies and instrumentalities) or purchase more than 10% of the
outstanding voting securities of any one issuer, except that the Fund may
purchase securities of other investment companies to the extent permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, and (iii) an exemption or other relief from the provisions
of the 1940 Act.
3. Lend money or securities except by the purchase of a portion of an issue
of bonds, debentures or other obligations of types commonly distributed to
institutional investors publicly or privately (in the latter case the
investment will be subject to the stated limits on investments in
"restricted securities"), and except by the purchase of securities subject
to repurchase agreements.
4. Concentrate its investment in any one industry, except that the Fund will
invest more than 25% of its total assets in the real estate industry and
except that the Fund may purchase securities of other investment companies
to the extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, and (iii) an exemption or other relief from
the provisions of the 1940 Act.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund.
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<PAGE> 79
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. 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 trusts are professionally distributed by leading financial advisers
nationwide. Van Kampen American Capital Distributors, Inc., the distributor of
the Fund and the sponsor of the funds mentioned above, is also a wholly-owned
subsidiary of Van Kampen American Capital. Van Kampen American Capital is an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
Adviser's principal office is located at One Parkview Plaza, Oakbrook Terrace,
Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates); real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed on average daily net assets of the Fund at the annual rate of 1.00% of
the Fund's average daily net assets. This fee is higher than that charged by
most other mutual funds but the Board believes it is justified by the special
nature of the Fund and it is not necessarily higher than the fees charged by
certain mutual funds with investment objectives and policies similar to those of
the Fund. Under the Advisory Agreement, the Fund also reimburses the Adviser for
the cost of the Fund's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value. Operating
expenses paid by the Fund include service fees, distribution fees, custodian
fees, legal and accounting fees, the costs of reports and proxies to
shareholders, trustees' fees (other than those who are affiliated persons, as
defined in the 1940 Act, of the Adviser, Distributor, ACCESS,
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<PAGE> 80
Van Kampen American Capital or Morgan Stanley Dean Witter & Co.), and all other
business expenses not specifically assumed by the Adviser. Advisory (management)
fee and total operating expense ratios are shown under the caption "Annual Fund
Operating Expenses and Example" herein.
From time to time the Adviser or Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them to the extent
of, or bearing expenses in excess of, such limitations as they may establish.
The Adviser may utilize at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp. ("Advisory Corp.").
PERSONAL INVESTMENT POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors, trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. Russell C. Platt and Theodore R. Bigman have been
primarily responsible for the day-to-day management of the Fund's investment
portfolio since January 1, 1997. Mr. Platt became Executive Vice President of
the Adviser on December 31, 1996. Since 1994, Mr. Platt has also been a
Principal, and as of December 1, 1996, a Managing Director of Morgan Stanley
Asset Management Inc. ("MSAM") where he has primary responsibility for managing
the real estate securities investment business for MSAM and serves as a member
of the Investment Committee of The Morgan Stanley Real Estate Fund ("MSREF").
From 1991 to 1993, Mr. Platt was head of Morgan Stanley Realty's Transaction
Development Group. Mr. Bigman became Senior Vice President of the Adviser on
December 31, 1996. Since 1995, Mr. Bigman has also been a Vice President, and as
of December 1, 1996, a Principal of MSAM where, together with Mr. Platt, he is
responsible for MSAM's real estate securities research. Prior to joining MSAM,
he was a Director at CS First Boston, where he worked for eight years in the
Real Estate Group.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares of the Fund that is most beneficial given the amount of the
purchase and the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price (4.99% of the net
amount invested), reduced on investments of $100,000 or more. Investments of
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<PAGE> 81
$1 million or more are not subject to any sales charge at the time of purchase,
but a CDSC of 1.00% may be imposed on redemptions made within one year of the
purchase. Class A shares are subject to an ongoing service fee at an annual rate
of up to 0.25% of the Fund's aggregate average daily net assets attributable to
the Class A shares. Certain purchases of Class A shares qualify for reduced
initial sales charges. See "Purchase of Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within five years of purchase. Class B
shares are subject to an ongoing service fee at an annual rate of up to 0.25% of
the Fund's aggregate average daily net assets attributable to the Class B shares
and an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. Class B shares convert
automatically to Class A shares eight years after the end of the calendar month
in which the shareholder's order to purchase was accepted. See "Purchase of
Shares -- Class B Shares."
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares."
CONVERSION FEATURE. Class B shares purchased on or after June 1, 1996, and any
dividend reinvestment plan shares received thereon, will automatically convert
to Class A shares eight years after the end of the calendar month in which the
shares were purchased. Class B shares purchased before June 1, 1996, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares six years after the end of the calendar month in which the shares
were purchased. Class C shares purchased before January 1, 1997, and any
dividend reinvestment plan shares received thereon, automatically convert to
Class A shares ten years after the end of the calendar month in which such
shares were purchased. Such conversion will be on the basis of the relative net
asset values per share, without the imposition of any sales load, fee or other
charge. The conversion schedule applicable to a share acquired through the
exchange privilege is determined by reference to the Participating Fund (defined
below) from which such share was originally purchased.
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<PAGE> 82
The conversion of such shares to Class A shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or distributions constituting
"preferential dividends" under the Code and (ii) the conversion of shares does
not constitute a taxable event under federal income tax law. The conversion may
be suspended if such an opinion is no longer available and such shares might
continue to be subject to the higher aggregate fees applicable to such shares
for an indefinite period.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the higher aggregate fees and CDSC on Class B shares and Class C shares would be
less than the initial sales charge on Class A shares purchased at the same time,
and to what extent such differential would be offset by the higher dividends per
share on Class A shares. To assist investors in making this determination, the
table under the caption "Annual Fund Operating Expenses and Example" sets forth
examples of the charges applicable to each class of shares. In this regard,
Class A shares may be more beneficial to the investor who qualifies for reduced
initial sales charges or purchases shares at net asset value. It is presently
the policy of the Distributor not to accept any order of $500,000 or more for
Class B shares or any order of $1 million or more for Class C shares as it
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 amounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a CDSC. Ongoing distribution fees on Class B shares and
Class C shares may be offset to the extent of the additional funds originally
invested and any return realized on those funds. However, there can be no
assurance as to the return, if any, which will be realized on such additional
funds. For investments held for ten years or more, the relative value upon
liquidation of the three classes tends to favor Class A shares or Class B shares
rather than Class C shares.
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges or have a longer-term investment horizon.
Class B shares may be appropriate for investors who wish to avoid a front-end
sales charge, put
24
<PAGE> 83
100% of their investment dollars to work immediately or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon or desire a short CDSC
schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any CDSC
incurred upon redemption within five years or one year, respectively, of
purchase. Sales personnel of broker-dealers distributing the Fund's shares and
other persons entitled to receive compensation for selling such shares may
receive differing compensation for selling such shares. INVESTORS SHOULD
UNDERSTAND THAT THE PURPOSE AND FUNCTION OF THE CDSC AND ONGOING DISTRIBUTION
FEE WITH RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE
OF THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution
and Service Plans."
GENERAL. Dividends paid by the Fund with respect to Class A shares, Class B
shares and Class C shares will be calculated in the same manner at the same time
on the same day except that the higher distribution fees and transfer agency
costs relating to Class B shares or Class C shares will be borne by the
respective class. See "Distributions From the Fund." Shares of the Fund may be
exchanged, subject to certain limitations, for shares of the same class of
certain other mutual funds advised by the Adviser and its affiliates and
distributed by the Distributor. See "Shareholder Services -- Exchange
Privilege."
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares also are offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The terms "dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Initial investments must be at least $500 for each class of shares, and
subsequent investments must be at least $25 for each class of shares. Both
minimums may be waived by the Distributor for plans involving periodic
investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The
25
<PAGE> 84
Fund also reserves the right to suspend the sale of the Fund's shares in
response to conditions in the securities markets or for other reasons.
Shares of the Fund may be purchased on any business day through authorized
dealers. Shares also may be purchased by completing the application accompanying
this Prospectus and forwarding the application, through the authorized dealer,
to the shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"), a
wholly-owned subsidiary of Van Kampen American Capital. When purchasing shares
of the Fund, investors must specify whether the purchase is for Class A shares,
Class B shares or Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or deferred sales charge depending on the class of shares chosen by
the investor, as shown in the tables herein. Net asset value per share for each
class is computed as of the close of trading on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) each day the Exchange is open.
Net asset value per share for each class is determined by dividing the value of
the Fund's securities, cash and other assets (including accrued interest)
attributable to such class less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding. Such computation is made by using prices as of the close of trading
on the Exchange and (i) valuing securities listed or traded on a national
securities exchange at the last reported sale price, (ii) valuing
over-the-counter securities for which the last sale price is available from the
National Association of Securities Dealers Automated Quotations ("NASDAQ") at
that price, (iii) unlisted securities and listed securities for which the last
sale price is not available are valued at the last reported bid price, (iv)
options and futures contracts are valued at the last sale price or if no sales
are reported, at the mean between the bid and asked prices, and (v) valuing any
securities for which market quotations are not readily available and any other
assets at fair value as determined in good faith by the Adviser in accordance
with procedures approved by the Trustees of the Fund. Short-term investments
with a maturity of 60 days or less when purchased are valued at amortized cost,
which approximates market value. Short-term investments with a maturity of more
than 60 days when purchased are valued based on market quotations until the
number of days remaining until maturity becomes less than 61 days. From such
time until maturity, the investments are valued at amortized cost using the
value of the investment on the 61st day.
Generally, the net asset values per share of the Class A shares, Class B
shares and Class C shares are expected to be substantially the same. Under
certain circumstances, however, the per share net asset values of the Class A
shares, Class B shares and Class C shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable with respect to the Class B shares and Class C
shares and the differential in the
26
<PAGE> 85
dividends paid on the classes of shares. The price paid for shares purchased is
based on the next calculation of net asset value (plus sales charges where
applicable) after an order is received by an authorized dealer provided such
order is transmitted to the Distributor prior to the Distributor's close of
business on such day. Orders received by authorized dealers after the close of
the Exchange are priced based on the next close provided they are received by
the Distributor prior to the Distributor's close of business on such day. It is
the responsibility of authorized dealers to transmit orders received by them to
the Distributor so they will be received prior to such time. Orders of less than
$500 are mailed by the authorized dealer and processed at the offering price
next calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights except that (i) Class B shares
and Class C shares bear the expenses of the deferred sales arrangement and any
expenses (including the higher distribution fee and transfer agency costs)
resulting from such sales arrangement, (ii) generally, each class has exclusive
voting rights with respect to approvals of the Rule 12b-1 distribution plan
pursuant to which its distribution fee or service fee is paid, (iii) each class
of shares has different exchange privileges, (iv) certain classes of shares are
subject to a conversion feature and (v) certain classes of shares have different
shareholder service options available. The net income attributable to Class B
shares and Class C shares and the dividends payable on Class B shares and Class
C shares will be reduced by the amount of the distribution fee and other
expenses associated with such shares. Sales personnel of authorized dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling Class A shares, Class B shares or Class C shares.
The Distributor may from time to time implement programs under which an
authorized dealer's sales force may be eligible to win nominal awards for
certain sales efforts or under which the Distributor will reallow to any
authorized dealer that sponsors sales contests or recognition programs
conforming to criteria established by the Distributor, or participates in sales
programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the authorized 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 Fund. Also, the Distributor in its discretion may
from time to time, pursuant to objective criteria established by the
Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. In some instances additional compensation or promotional
27
<PAGE> 86
incentives may be offered to brokers, dealers or financial intermediaries that
have sold or may sell significant amounts of shares during specified periods of
time. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that the Fund will receive from such sale.
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 below.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
REALLOWED TO
AS % OF DEALERS
SIZE OF AS % OF NET AMOUNT (AS % OF
INVESTMENT OFFERING PRICE INVESTED OFFERING PRICE)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Less than $100,000................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000.... 3.75% 3.90% 3.25%
$250,000 but less than $500,000.... 2.75% 2.83% 2.25%
$500,000 but less than
$1,000,000....................... 2.00% 2.04% 1.75%
$1,000,000 or more*................ * * *
- ----------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a CDSC of
1.00% on redemptions made within one year of the purchase. A commission will
be paid to authorized dealers who initiate and are responsible for purchases
of $1 million or more as follows: 1.00% on sales to $2 million, plus 0.80%
on the next $1 million and 0.50% on the excess over $3 million.
In addition to the reallowances from the applicable public offering price
described 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 authorized dealers that sell shares of the Fund. Authorized
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 Fund for their clients a transaction fee up to the
level of the reallowance allowable to authorized dealers described herein. Such
financial institutions, other industry professionals and authorized dealers are
hereinafter referred to
28
<PAGE> 87
as "Service Organizations." Banks are currently prohibited from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Fund. State securities
laws regarding registration of banks and other financial institutions may differ
from the interpretation of federal law expressed herein and banks and other
financial institutions may be required to register as dealers pursuant to
certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors or their authorized dealers must notify the Fund at the time of the
purchase order whenever a quantity discount is applicable to purchases. Upon
such notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their authorized
dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or
her spouse and children under 21 years of age and any corporation, partnership
or sole proprietorship which is 100% owned, either alone or in combination, by
any of the foregoing; a trustee or other fiduciary purchasing for a single trust
or for a single fiduciary account, or a "company" as defined in Section 2(a)(8)
of the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by the Adviser or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
Volume Discounts. The size of investment shown in the preceding sales charge
table applies to the total dollar amount being invested by any person in shares
of the Fund, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
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 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 sales charge
table. The size of investment shown in the preceding sales charge table also
includes
29
<PAGE> 88
purchases of shares of the Participating Funds over a 13-month period based on
the total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
If the goal is not achieved within the period, the investor must pay the
difference between the sales charges applicable to the purchases made and the
sales charges previously paid. The initial purchase must be for an amount equal
to at least 5% of the minimum total purchase amount of the level selected. If
trades not initially made under a Letter of Intent subsequently qualify for a
lower sales charge through the 90-day back-dating provisions, an adjustment will
be made at the expiration of the Letter of Intent to give effect to the lower
charge. Such adjustments in sales charge will be used to purchase additional
shares for the shareholder at the applicable discount category. Additional
information is contained in the application 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 Fund or the Distributor. The Fund reserves the right to modify or
terminate these arrangements at any time.
Unit Investment Trust Reinvestment Programs. The Fund permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
shares of the Fund at net asset value, and with no minimum initial or subsequent
investment requirement if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all other investments made
from unit trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
if any, through which such participation in the qualifying program was initiated
0.50% of the offering price as a dealer concession or agency commission. Persons
desiring more information with respect to this program, including the applicable
terms and conditions thereof, should contact their authorized dealer or the
Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS' processing system.
30
<PAGE> 89
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund by:
(1) Current or retired trustees or directors of funds advised by the Adviser
or Advisory Corp. and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley
Group Inc. and any of its subsidiaries, employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser, and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age when purchasing for any accounts they beneficially own, or,
in the case of any such financial institution, when purchasing for
retirement plans for such institution's employees, provided that such
purchases are otherwise permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers
through which purchases are made an amount up to 0.50% of the amount
invested over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans
which invest in multiple fund families through broker-dealer retirement
plan alliance programs that have entered into agreements with the
Distributor and which are subject to certain minimum size and operational
requirements. Trustees and other fiduciaries should refer to the Statement
of Additional Information for further detail with respect to such alliance
programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the
31
<PAGE> 90
Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans qualified under Section 401(a) of the Code, or custodial accounts
held by a bank created pursuant to Section 403(b) of the Code and
sponsored by non-profit organizations defined under Section 501(c)(3) of
the Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code. Such
plans will qualify for purchases at net asset value provided, for plans
initially establishing accounts with the Distributor in the Participating
Funds after February 1, 1997, that (1) the initial amount invested in the
Participating Funds is at least $500,000 or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have
received proposals from the Distributor prior to February 1, 1997 based on
net asset value purchase privileges previously in effect will be qualified
to purchase shares of the Participating Funds at net asset value for
accounts established on or before May 1, 1997. Section 403(b) and similar
accounts for which Van Kampen American Capital Trust Company served as
custodian will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. Prior to February 1, 1997, a commission will be paid to
authorized dealers who initiate and are responsible for such purchases
within a rolling twelve-month period as follows: 1.00% on sales to $5
million, plus 0.50% on the next $5 million and 0.25% on the excess over
$10 million. For purchases on February 1, 1997 and thereafter, a
commission will be paid as follows: 1.00% on sales to $2 million, plus
0.80% on the next $1 million, plus 0.50% on the next $47 million, plus
0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group". For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified
group does not include one whose
32
<PAGE> 91
sole organizational nexus, for example, is that its participants are
credit card holders of the same institution, policy holders of an
insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each
group's participants account in connection with this privilege will be
subject to a CDSC of 1.00% in the event of redemption within one year of
purchase, and a commission will be paid to authorized dealers who initiate
and are responsible for such sales to each individual as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the
excess over $3 million.
The term "families" includes a person's spouse, children under 21 years of age
and grandchildren, parents, and a person's spouse's parents.
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 to purchase shares pursuant to this provision or for
placing a redemption order with respect to such shares. Authorized dealers will
be paid a service fee as described herein under "Distribution and Service Plans"
on purchases made as described in (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
CLASS B SHARES
Class B shares are offered at net asset value. Class B shares which are
redeemed within five years of purchase are subject to a CDSC at the rates set
forth in the following table charged as a percentage of the dollar amount
subject thereto. The charge is assessed on an amount equal to the lesser of the
then current market value or the cost of the shares being redeemed. Accordingly,
no sales charge is imposed on increases in net asset value above the initial
purchase price. In addition, no charge is assessed on shares derived from
reinvestment of dividends or capital gains distributions. It is presently the
policy of the Distributor not to accept any order for Class B shares in an
amount of $500,000 or more because it ordinarily will be more advantageous for
an investor making such an investment to purchase Class A shares.
33
<PAGE> 92
The amount of the CDSC, if any, varies depending on the number of years from
the time of payment for the purchase of Class B shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month are aggregated and deemed to have been made on the last day of
the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE
AS A PERCENTAGE OF
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- -------------------------------------------------------------------------------
<S> <C>
First.....................................................................4.00%
Second....................................................................4.00%
Third.....................................................................3.00%
Fourth....................................................................2.50%
Fifth.....................................................................1.50%
Sixth and after............................................................None
</TABLE>
- ------------------------------------------------------------------------------
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC, second of shares held for over five years and
third of shares held longest during the five year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired 10
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), 10 shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of 4.00% (the applicable rate in the second year after purchase).
A commission or transaction fee of 4.00% of the purchase amount will be paid
to authorized dealers at the time of purchase. Additionally, the Distributor
may, from time to time, pay additional promotional incentives in the form of
cash or other compensation to authorized dealers that sell Class B shares of the
Fund.
CLASS C SHARES
Class C shares are offered at net asset value. Class C shares which are
redeemed within the first year of purchase are subject to a CDSC of 1.00%. The
charge is assessed on an amount equal to the lesser of the then current market
value or the cost of the shares being redeemed. Accordingly, no sales charge is
imposed on increases in net asset value above the initial purchase price. In
addition, no charge is assessed on shares derived from reinvestment of dividends
or capital gains distributions. It is presently the policy of the Distributor
not to accept any order in
34
<PAGE> 93
an amount of $1 million or more for Class C shares because it ordinarily will be
more advantageous for an investor making such an investment to buy Class A
shares.
In determining whether a CDSC is applicable to a redemption, it is assumed
that the redemption is first of any shares in the shareholder's Fund account
that are not subject to a CDSC and second of shares held for more than one year.
A commission or transaction fee of up to 1.00% of the purchase amount will
generally be paid to authorized dealers at the time of purchase. Authorized
dealers also will be paid ongoing commissions and transaction fees of up to
0.75% of the average daily net assets of the Fund's Class C shares generally
annually commencing in the second year after purchase. Additionally, the
Distributor may, from time to time, pay additional promotional incentives in the
form of cash or other compensation to authorized dealers that sell Class C
shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The CDSC is waived on redemptions of Class B shares and Class C shares (i)
following the death or disability (as defined in the Code) of a shareholder;
(ii) in connection with required minimum distributions from an IRA or other
retirement plan; (iii) pursuant to the Fund's systematic withdrawal plan but
limited to 12% annually of the initial value of the account; (iv) in
circumstances under which no commission or transaction fee is paid to authorized
dealers at the time of purchase of such shares; and (v) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The CDSC is also waived on redemptions of Class C shares
as it relates to the reinvestment of redemption proceeds in shares of the same
class of the Fund within 180 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of such services.
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. Each shareholder has an investment account
under which the investor's shares of the Fund are held by ACCESS. Except as
described in this Prospectus, after each share transaction in an account, the
shareholder receives a statement showing the activity in the account. Each
shareholder who has an account in any of the Participating Funds will receive
35
<PAGE> 94
statements 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 dealers or by mailing a check directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and 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 certificates equal to no more
than 2.00% of the net asset value of the issued shares, and bill the party to
whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
341-2911 ((800) 421-2833 for the hearing impaired) or in writing to 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.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to debit a bank account on a regular
basis to invest predetermined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
RETIREMENT PLANS. Eligible investors may establish individual retirement
accounts ("IRAs"); SEP; 401(k) plans; Section 403(b)(7) plans in the case of
employees of public school systems and certain non-profit organizations; or
other pension or profit sharing plans. Documents and forms containing detailed
information regarding these plans are available from the Distributor. Van Kampen
American Capital Trust Company serves as custodian under the IRA, 403(b)(7) and
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
36
<PAGE> 95
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 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 ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application accompanying this
Prospectus or by calling (800) 341-2911 or ((800) 421-2833 for the hearing
impaired), elect to have all dividends and other distributions paid on a class
of shares of the Fund invested into shares of the same class of any
Participating Fund so long as the investor has a pre-existing account for such
class of shares of the other fund. Both accounts must be of the same class and
of the same type, either non-retirement or retirement. If the accounts are
retirement accounts, they must both be for the same class and of the same type
of retirement plan (e.g., IRA, 403(b)(7), 401(k), Keogh) and for the benefit of
the same individual. If a qualified, pre-existing account does not exist, the
shareholder must establish a new account subject to minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value as of
the payable date of the distribution.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the
same class of any Participating Fund based on the next computed net asset values
of each Fund after requesting the exchange without any sales charge, subject to
certain limitations. Shares of the Fund may be exchanged for shares of any
Participating Fund only if shares of that Participating Fund are available for
sale; however, during periods of suspension of sales, shares of a Participating
Fund may be available for sale only to existing shareholders of the
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such Fund.
To be eligible for exchange, shares of the Fund must have been registered in
the shareholder's name for at least 30 days. Shares of the Fund registered in a
shareholder's name for less than 30 days may be exchanged only upon receipt of
prior approval of the Adviser. It is the policy of the Adviser, under normal
circumstances, not to approve such request.
When Class B shares and Class C shares are exchanged among Participating
Funds, the holding period for purposes of computing the CDSC is based upon the
37
<PAGE> 96
date of the initial purchase of such shares from a Participating Fund. If such
Class B or Class C shares are redeemed and not exchanged for shares of another
Participating Fund, such Class B or Class C shares are subject to the CDSC
schedule imposed by the Participating Fund from which such shares were
originally purchased.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written
request to 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 accompanying this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Fund employ procedures considered by them to be reasonable to
confirm that instructions communicated by telephone are genuine. Such procedures
include requiring certain personal identification information prior to acting
upon telephone instructions, tape recording telephone communications, and
providing written confirmation of instructions communicated by telephone. If
reasonable procedures are employed, neither VKAC nor the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine.
VKAC and the Fund may be liable for any losses due to unauthorized or fraudulent
instructions if reasonable procedures are not followed. If the exchanging
shareholder does not have an account in the fund whose shares are being
acquired, a new account will be established with the same registration, dividend
and capital gain options (except dividend diversification) and authorized dealer
of record as the account from which shares are exchanged, unless otherwise
specified by the shareholder. In order to establish a systematic withdrawal plan
for the new account or reinvest dividends from the new account into another
fund, however, an exchanging shareholder must file a specific written request.
The Fund reserves the right to reject any order to acquire its shares through
exchange. In addition, the Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. Any investor whose shares in a single account total $5,000 or
more at the
38
<PAGE> 97
offering price next computed after receipt of instructions may establish a
quarterly, semi-annual or annual withdrawal plan. This plan provides for the
orderly use of the entire account, not only the income but also the capital, if
necessary. Each withdrawal constitutes a redemption of shares on which any
capital gain or loss will be recognized. The planholder may arrange for monthly,
quarterly, semi-annual or annual checks in any amount not less than $25. Such a
systematic withdrawal plan may also be maintained by an investor purchasing
shares for a retirement plan established on a form made available by the Fund.
See "Shareholder Services -- Retirement Plans."
Class B shareholders and Class C shareholders who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a CDSC. Initial account balance means the amount of the
shareholder's investment at the time the election to participate in the plan is
made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any gain or loss realized by the shareholder upon the redemption of
shares is a taxable event. The Fund reserves the right to amend or terminate the
systematic withdrawal program on 30 days' notice to its shareholders.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at www.vkac.com
for further instruction. VKAC and the Fund employ procedures considered by them
to be reasonable to confirm that instructions communicated through the internet
are genuine. Such procedures include requiring use of a personal identification
number prior to acting upon internet instructions and providing written
confirmation of instructions communicated through the internet. If reasonable
procedures are employed neither VKAC nor the Fund will be liable for following
instructions through the internet which it reasonably believes to be genuine. If
an account has multiple owners, ACCESS may rely on the instructions of any one
owner.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
39
<PAGE> 98
Shareholders may also place redemption requests through an authorized dealer.
Orders received from authorized dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by an authorized dealer
provided such order is transmitted to the Distributor prior to the Distributor's
close of business on such day. It is the responsibility of authorized dealers to
transmit redemption requests received by them to the Distributor so they will be
received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B shares
and Class C shares are subject to a CDSC. In addition, a CDSC of 1.00% may be
imposed on certain redemptions of Class A shares made within one year of
purchase for investments of $1 million or more. The CDSC incurred upon
redemption is paid to the Distributor in reimbursement for distribution-related
expenses. A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange; registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 120 days must
accompany the redemption request. IRA redemption requests should be sent to the
IRA custodian to be forwarded to ACCESS. Where Van Kampen American Capital Trust
Company serves as IRA custodian, special IRA, 403(b)(7), or Keogh distribution
forms must be obtained from and be forwarded to Van Kampen American Capital
Trust Company, P. O. Box 944, Houston, Texas 77001-0944. Contact the custodian
for information.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received.
40
<PAGE> 99
Payment for shares redeemed will be made by check mailed within seven days after
acceptance by ACCESS of the request and any other necessary documents in proper
order. Such payment may be postponed or the right of redemption suspended as
provided by the rules of the SEC. If the shares to be redeemed have been
recently purchased by check, ACCESS may delay mailing a redemption check until
it confirms the purchase check has cleared, which may take up to 15 days. A
taxable gain or loss will be recognized by the shareholder upon redemption of
shares.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to a
bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application
accompanying this Prospectus or call the Fund at (800) 341-2911 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach 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 Fund's
regular redemption procedure previously described. Requests received by ACCESS
prior to 4:00 p.m., New York time, on a regular business day will be processed
at the net asset value per share determined that day. These privileges are
available for all accounts other than retirement accounts. The telephone
redemption privilege is not available for shares represented by certificates. If
an account has multiple owners, 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 and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. This service is also not available with respect to shares held in
an individual
41
<PAGE> 100
retirement account (IRA) for which Van Kampen American Capital Trust Company
acts as custodian. The Fund reserves the right at any time to terminate, limit
or otherwise modify this redemption privilege.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum initial investment as specified in this Prospectus. At least 60 days
advance written notice of any such involuntary redemption will be given, and the
shareholder will be given an opportunity to purchase the required value of
additional shares at the next determined net asset value without sales charge.
Any involuntary redemption may only occur if the shareholder account is less
than the minimum initial investment due to shareholder redemptions.
REDEMPTION UPON DEATH OR DISABILITY. The Fund will waive the CDSC on
redemptions following the death or disability of a Class B shareholder or Class
C shareholder. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
CDSC on Class B shares and Class C shares.
In cases of death or disability, the CDSC on Class B shares and Class C shares
will be waived where the decedent or disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the death or initial determination of
disability. This waiver of the CDSC on Class B shares and Class C shares applies
to a total or partial redemption, but only to redemptions of shares held at the
time of the death or initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A shareholder or Class B shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A shares of the Fund. A Class C shareholder who has
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class C shares of the Fund with credit given for any CDSC
paid upon such redemption. Such reinstatement is made at the net asset value
(without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 180 days after the date of the redemption. Reinstatement at
net asset value is also offered to participants in those eligible retirement
plans held or administered by Van Kampen
42
<PAGE> 101
American Capital Trust Company for repayment of principal, and interest, on
their borrowings on such plans.
- ------------------------------------------------------------------------------
DISTRIBUTION AND SERVICE PLANS
- ------------------------------------------------------------------------------
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers or financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution-related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C shares up to 0.75% of the Fund's average daily
net assets attributable to Class C shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial
43
<PAGE> 102
intermediaries or the amount of the Distributor's actual distribution-related
expense attributable to the Class C shares. In addition, the Fund may spend up
to 0.25% per year of the Fund's average daily net assets attributable to the
Class C shares pursuant to the Service Plan in connection with the ongoing
provision of services to holders of such shares by the Distributor and by
brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to Class B shares or Class C
shares for any given year may exceed the amounts payable to the Distributor with
respect to such class of shares under the Distribution Plan, the Service Plan
and payments received pursuant to the CDSC. In such event, with respect to any
such class of shares, any unreimbursed expenses will be carried forward and paid
by the Fund (up to the amount of the actual expenses incurred) in future years
so long as such Distribution Plan is in effect. Except as mandated by applicable
law, the Fund does not impose any limit with respect to the number of years into
the future that such unreimbursed expenses may be carried forward (on a Fund
level basis). Because such expenses are accounted on a Fund level basis, in
periods of extreme net asset value fluctuation such amounts with respect to a
particular Class B share or Class C share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
December 31, 1997, there were $2,203,968 and $119,214 of unreimbursed
distribution-related expenses with respect to Class B shares and Class C shares,
respectively, representing 3.01% and 0.68% of the Fund's net assets attributable
to Class B shares and Class C shares, respectively. If the Distribution Plan was
terminated or not continued, the Fund would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through CDSCs.
The Distributor will not use the proceeds from the CDSC applicable to a
particular class of shares to defray distribution-related expenses attributable
to any other class of shares. Various federal and state laws prohibit national
banks and some state-chartered commercial banks from underwriting or dealing in
the Fund's shares. In addition, state securities laws on this issue may differ
from the interpretations of federal law, and banks and financial institutions
may be required to register as dealers pursuant to state law. In the unlikely
event that a court were to find that these laws prevent such banks from
providing such services described above, the
44
<PAGE> 103
Fund would seek alternate providers and expects that shareholders would not
experience any disadvantage.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive two kinds of return from the Fund: dividends and
capital gains distributions.
DIVIDENDS. Dividends from net investment income (including but not limited to
dividends received by the Fund from in its investments in stocks and interest
earned from other investments) are the Fund's main source of income.
Substantially all of this income, less expenses, is distributed quarterly as
dividends to shareholders. Dividends automatically are applied to purchase
additional shares of the Fund at the next determined net asset value. See
"Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B shares and Class C shares may be lower than
the per share dividends on Class A shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAINS. The Fund may realize capital gains or losses when it sells
securities, depending on whether the sales prices for the securities are higher
or lower than their purchase prices. The Fund at least annually distributes to
shareholders its net capital gains, which are the excess of the Fund's net
long-term capital gains, if any, on the sale of securities during the year over
its net short-term capital losses on the sale of securities, including capital
losses carried forward from prior years in accordance with tax laws. As in the
case of dividends, capital gains distributions are automatically reinvested in
additional shares of the Fund at net asset value unless the shareholder elects
otherwise. See "Shareholder Services -- Reinvestment Plan."
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXATION OF THE FUND. The Fund has elected and qualified and
intends to continue to qualify each year and to elect to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source of its income and
diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its net investment income (including tax-exempt interest, taxable
income and net short-term capital gain, but not net capital gains, which are the
excess of net long-term capital gains over net short-term capital losses), it
will not be required to pay
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<PAGE> 104
federal income taxes on any income distributed to shareholders. The Fund intends
to distribute at least the minimum amount of net investment income necessary to
satisfy the 90% distribution requirement. The Fund will not be subject to
federal income tax on any net capital gains distributed to shareholders.
In order to avoid a 4% excise tax, the Fund will be required to distribute, by
December 31 of each year, at least 98% of its ordinary income (not including
tax-exempt income) for such year and at least 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31 of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, the Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. To qualify again as a
regulated investment company in a subsequent year, the Fund may be required to
pay an interest charge on 50% of its earnings and profits attributable to
non-regulated investment company years and would be required to distribute such
earnings and profits to shareholders (less any interest charge). In addition, if
the Fund failed to qualify as a regulated investment company for its first
taxable year or, if immediately after qualifying as a regulated investment
company for any taxable year, it failed to qualify for a period greater than one
taxable year, the Fund would be required to recognize any net built-in gains
(the excess of aggregate gains, including items of income, over aggregate losses
that would have been realized if it had been liquidated) in order to qualify as
a regulated investment company in a subsequent year.
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of the gains or losses realized by the Fund. These provisions may also
require the Fund to recognize income or gain without receiving cash with which
to make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. The Fund will monitor its transactions and may make certain tax elections
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For
46
<PAGE> 105
example, with respect to securities issued at a discount, the Fund will be
required to accrue as income each year a portion of the discount and to
distribute such income each year in order to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and to avoid income and excise taxes, the Fund may have
to dispose of securities that it would otherwise have continued to hold.
The Fund may invest in the stock of "passive foreign investment companies"
("PFICs"). A PFIC is a foreign corporation that, in general, meets either of the
following tests: (1) at least 75% of its gross income is passive or (2) an
average of at least 50% of its assets produce, or are held for the production of
passive income. Under certain circumstances, a regulated investment company that
holds stock of a PFIC will be subject to federal income tax (i) on a portion of
any "excess distribution" received on the stock or (ii) on any gain from a sale
or disposition of the stock (collectively "PFIC income"), plus interest thereon,
even if the regulated investment company distributes the PFIC income as a
taxable dividend to its stockholders. The balance of the PFIC income will be
included in the regulated investment company's investment company taxable income
and, accordingly, will not be taxable to it to the extent that income is
distributed to its shareholders. If the Fund invests in a PFIC and elects to
treat the PFIC as a "qualified electing fund," then in lieu of the foregoing tax
and interest obligation, the Fund would be required to include in income each
year its pro rata share of the qualified electing fund's annual ordinary
earnings and net capital gain, which most likely would have to be distributed by
the Fund to satisfy the distribution requirement for avoiding income and excise
taxes. In many instances it may be very difficult to make this election due to
certain requirements imposed with respect to the election.
As an alternative to making the above-described election to treat the PFIC as
a qualified electing fund, the Fund may make an election to annually
mark-to-market certain publicly traded PFIC stock (a "PFIC Mark-to-Market
Election"). "Marking-to-market," in this context, means recognizing as ordinary
income or loss each year an amount equal to the difference between the Fund's
adjusted tax basis in such PFIC stock and its fair market value. Losses will be
allowed only to the extent of net mark-to-market gain previously included by the
Fund pursuant to the election for prior taxable years. The Fund may be required
to include in its taxable income for the first taxable year in which it makes a
PFIC Mark-to-Market Election an amount equal to the interest charge that would
otherwise accrue with respect to distributions on, or dispositions of, the PFIC
stock. This amount would not be deductible from the Fund's taxable income. The
PFIC Mark-to-Market Election applies to the taxable year for which made and to
all subsequent taxable years, unless the PFIC stock ceases to be publicly traded
or the Internal Revenue Service consents to revocation of the election. By
making the PFIC Mark-to-Market Election, the Fund could ameliorate the adverse
tax consequences arising
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<PAGE> 106
from its ownership of PFIC stock, but in any particular year may be required to
recognize income in excess of the distributions it receives from the PFIC and
proceeds from the dispositions of PFIC stock.
DISTRIBUTIONS. Distributions of the Fund's net investment income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains ("capital gain dividends"), if any, are taxable
to shareholders as long-term capital gains regardless of the length of time
shares of the Fund have been held by such shareholders. Distributions in excess
of the Fund's earnings and profits will first reduce the adjusted tax basis of a
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the tax rates applicable to capital gains
(including capital gain dividends), see "Capital Gains Rates Under the 1997 Tax
Act" below. Tax-exempt shareholders not subject to federal income tax on their
income generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares issued
by the Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal the
fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Some portion of
the distributions from the Fund will be eligible for the dividends received
deduction for corporations if the Fund receives qualifying dividends during the
year and if certain other requirements of the Code are satisfied.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31 prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding and other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders.
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<PAGE> 107
Tax conventions between certain countries and the United States may reduce or
eliminate such taxes.
Under Code Section 988, foreign currency gains or losses from certain forward
contracts not traded in the interbank market as well as certain other gains or
losses attributable to currency exchange rate fluctuations are typically treated
as ordinary income or loss. Such income or loss may increase or decrease (or
possibly eliminate) the Fund's income available for distribution. If, under the
rules governing the tax treatment of foreign currency gains and losses, the
Fund's income available for distribution is decreased or eliminated, all or a
portion of the dividends declared by the Fund may be treated for federal income
tax purposes as a return of capital or, in some circumstances, as capital gain.
Generally, a shareholder's tax basis in Fund shares will be reduced to the
extent that an amount distributed to such shareholder is treated as a return of
capital.
The Fund is required, in certain circumstances, to withhold 31% of dividends
and certain other payments, including redemptions, paid to shareholders who do
not furnish to the Fund their correct taxpayer identification number (in the
case of individuals, their social security number) and certain required
certifications or who are otherwise subject to backup withholding.
SALE OF SHARES. The sale of shares (including transfers in connection with a
redemption or repurchase of shares) will be a taxable transaction for federal
income tax purposes. Selling shareholders will generally recognize gain or loss
in an amount equal to the difference between their adjusted tax basis in the
shares and the amount received. If such shares are held as a capital asset, the
gain or loss will be a capital gain or loss and will be long-term if such shares
have been held for more than one year. For a summary of the tax rates applicable
to capital gains, see "Capital Gains Rates Under the 1997 Tax Act" below. Any
loss recognized upon a taxable disposition of shares held for six months or less
will be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
CAPITAL GAINS RATES UNDER THE 1997 TAX ACT. Under the Taxpayer Relief Act of
1997 (the "1997 Tax Act"), the maximum tax rate applicable to net capital gains
recognized by individuals and other non-corporate taxpayers is (i) the same as
the maximum ordinary income tax rate for capital assets held for one year or
less, (ii) 28% for capital assets held for more than one year but not more than
18 months and (iii) 20% for capital assets held for more than 18 months. The
maximum net capital gains tax rate for corporations remains at 35%. The tax
rates for capital gains described above will apply to distributions of capital
gain dividends by the Fund (if,
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<PAGE> 108
as expected, the Fund designates capital gain dividends as 28% rate gain
distributions or 20% rate gain distributions, in accordance with its holding
periods for the securities sold that generated such capital gain dividends) as
well as to sales and exchanges of shares in the Fund. With respect to capital
losses recognized on dispositions of shares held six months or less where such
losses are treated as long-term capital losses to the extent of prior capital
gain distributions received on such shares (see "Sale of Shares" above), 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.
GENERAL. The federal, state and local income tax discussion set forth above
is for general information only. Prospective investors should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one year, five year and ten year periods or for the life of the
Fund. Other total return quotations, aggregate or average, over other time
periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable CDSC has been paid.
The Fund's total return will vary depending on market conditions, the securities
comprising the Fund's portfolio, the Fund's operating expenses and unrealized
net capital gains or losses during the period. Total return is based on
historical earnings and asset value fluctuations and is not intended to indicate
future performance. No adjustments are made to reflect any income taxes payable
by shareholders on dividends and distributions paid by the Fund.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
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<PAGE> 109
Total return is calculated separately for Class A shares, Class B shares and
Class C shares. Class A shares' total return figures include the maximum sales
charge of 4.75%; Class B shares' and Class C shares' total return figures
include any applicable CDSC. Because of the differences in sales charges and
distribution fees, the total returns for each of the classes will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield which is a measure of the
income actually earned by the Fund's investments, and from total return which is
a measure of the income actually earned by the Fund's investments plus the
effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the rankings or ratings prepared by Lipper Analytical Services, Inc., CDA,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds, with the Consumer Price Index, the Dow Jones
Industrial Average Index, NAREIT Equity REIT Index, Lehman Brothers REIT Index,
Salomon Brothers High Grade Bond Index, Standard & Poor's indices, NASDAQ
Composite Index, other appropriate indices of investment securities, or with
investment or savings vehicles. The performance information may also include
evaluations of the Fund published by nationally recognized ranking services and
by nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The Fund will include performance data for each
class of shares of the Fund in any advertisement or information including
performance data of the Fund.
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<PAGE> 110
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by standard performance information required by the SEC as described
above.
The Fund's Annual Report and Semi-Annual Report contain additional performance
information. A copy of the Annual Report or Semi-Annual Report may be obtained,
without charge, by calling or writing the Fund at the telephone number and
address printed on the cover of this prospectus.
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DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in Maryland on April 14, 1994. The Fund
was reorganized as a business trust under the laws of the State of Delaware as
of August 19, 1995 and adopted its current name at that time.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, par value $0.01 per share, divided into classes.
The Fund currently offers three classes of shares, designated Class A shares,
Class B shares and Class C shares. Other classes may be established from time to
time in accordance with provisions of the Fund's Declaration of Trust.
Each class of shares represents an interest in the same assets of the Fund and
generally are identical in all respects except that each class bears certain
distribution expenses and has exclusive voting rights with respect to its
distribution fee. Except as described herein, there are no conversion,
preemptive or other subscription rights. In the event of liquidation, each of
the shares of the Fund is entitled to its portion of all of the Fund's net
assets after all debt and expenses of the Fund have been paid. Since Class B
shares and Class C shares pay higher distribution fees and transfer agency
costs, the liquidation proceeds to Class B shareholders and Class C shareholders
are likely to be lower than to other shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
1940 Act. More detailed information concerning the Fund is set forth in the
Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to his or her private property for the satisfaction of any
obligation or liability of the Fund but the assets of the Fund only shall be
liable.
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ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the 1933 Act. Copies of the Registration Statement may be obtained
at a reasonable charge from the SEC or may be examined, without charge, at the
office of the SEC in Washington, D.C.
The fiscal year end of the Fund is December 31. The Fund sends to its
shareholders at least semi-annually reports showing the Fund's portfolio and
other information. An Annual Report, containing financial statements audited by
the Fund's independent accountants, is sent to shareholders each year. After the
end of each year, shareholders will receive federal income tax information
regarding dividends and capital gains distributions.
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APPENDIX--DESCRIPTION OF BOND RATINGS
- ------------------------------------------------------------------------------
MOODY'S INVESTORS SERVICE, INC.
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during other good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked shortcomings.
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<PAGE> 113
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Nonrated: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as
a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published
in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa 1,
A 1, Baa 1, Ba 1 and B 1.
STANDARD & POOR'S RATINGS GROUP
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the higher rated issues only in a small degree.
A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
BB, B, CCC, CC, C: Debt rated BB, B, CCC, CC and C is regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. BB indicates the
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<PAGE> 114
lowest degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse conditions.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
NR: Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that Standard & Poor's does not rate a
particular type of obligation as a matter of policy.
PREFERRED STOCK RATINGS
Both Moody's and Standard & Poor's use the same designations for corporate
bonds as they do for preferred stock, except in the case of Moody's preferred
stock ratings, the initial letter rating is not capitalized. While the
descriptions are tailored for preferred stocks, the relative quality
distinctions are comparable to those described above for corporate bonds.
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EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--(800) 341-2911
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 421-2833
FOR AUTOMATED TELEPHONE
SERVICES
DIAL (800) 847-2424
VAN KAMPEN AMERICAN CAPITAL
REAL ESTATE SECURITIES FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Distributor
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Attn: Van Kampen American Capital Real Estate Securities Fund
Custodian
STATE STREET BANK AND
TRUST COMPANY
225 West Franklin Street
P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Real Estate Securities Fund
Legal Counsel
SKADDEN, ARPS, SLATE
MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Accountants
PRICE WATERHOUSE LLP
200 East Randolph Drive
Chicago, IL 60601
<PAGE> 116
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REAL ESTATE
SECURITIES FUND
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P R O S P E C T U S
APRIL 30, 1998
- ------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 117
SUPPLEMENT DATED JULY 14, 1998 TO THE
PROSPECTUS DATED SEPTEMBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998 AND MARCH 9, 1998
VKAC GLOBAL GOVERNMENT SECURITIES FUND
PROSPECTUS DATED SEPTEMBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
MARCH 9, 1998
VKAC RESERVE FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998 AND MARCH 9, 1998
VKAC SHORT-TERM GLOBAL INCOME FUND
VKAC STRATEGIC INCOME FUND
VKAC UTILITY FUND
VKAC PROSPECTOR FUND
MORGAN STANLEY EMERGING MARKETS DEBT FUND
MORGAN STANLEY GLOBAL FIXED INCOME FUND
MORGAN STANLEY HIGH YIELD FUND
MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
MORGAN STANLEY GROWTH AND INCOME FUND
MORGAN STANLEY EUROPEAN EQUITY FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998, MARCH 9, 1998 AND MARCH 13, 1998
VKAC HIGH YIELD FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998, MARCH 9, 1998 AND MARCH 25, 1998
VKAC AGGRESSIVE GROWTH FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998, MARCH 9, 1998 AND APRIL 21, 1998
MORGAN STANLEY AGGRESSIVE EQUITY FUND
MORGAN STANLEY AMERICAN VALUE FUND
MORGAN STANLEY MID CAP GROWTH FUND
MORGAN STANLEY U.S. REAL ESTATE FUND
MORGAN STANLEY VALUE FUND
MORGAN STANLEY ASIAN GROWTH FUND
MORGAN STANLEY EMERGING MARKETS FUND
MORGAN STANLEY GLOBAL EQUITY FUND
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
MORGAN STANLEY JAPANESE EQUITY FUND
MORGAN STANLEY LATIN AMERICAN FUND
<PAGE> 118
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998, MARCH 9, 1998, APRIL 23, 1998 AND MAY 12, 1998
VKAC GREAT AMERICAN COMPANIES FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998, MARCH 9, 1998 AND MAY 12, 1998
VKAC GROWTH FUND
VKAC PACE FUND
PROSPECTUS DATED OCTOBER 28, 1997, AS PREVIOUSLY SUPPLEMENTED ON
MARCH 9, 1998
VKAC TAX FREE MONEY FUND
PROSPECTUS DATED DECEMBER 29, 1997, AS PREVIOUSLY SUPPLEMENTED ON
JANUARY 2, 1998 AND MARCH 9, 1998
VKAC CORPORATE BOND FUND
VKAC EMERGING GROWTH FUND
VKAC HIGH INCOME CORPORATE BOND FUND
PROSPECTUS DATED JANUARY 28, 1998, AS PREVIOUSLY SUPPLEMENTED ON
MARCH 9, 1998
VKAC U.S. GOVERNMENT TRUST FOR INCOME
PROSPECTUS DATED FEBRUARY 17, 1998
VKAC SMALL CAPITALIZATION FUND
PROSPECTUS DATED MARCH 30, 1998
VKAC GROWTH AND INCOME FUND
VKAC HIGH YIELD MUNICIPAL FUND
PROSPECTUS DATED APRIL 27, 1998
VKAC FOREIGN SECURITIES FUND
PROSPECTUS DATED APRIL 30, 1998
VKAC U.S. GOVERNMENT FUND
VKAC INSURED TAX FREE INCOME FUND
VKAC CALIFORNIA INSURED TAX FREE FUND
VKAC TAX FREE HIGH INCOME FUND
VKAC MUNICIPAL INCOME FUND
VKAC INTERMEDIATE TERM MUNICIPAL INCOME FUND
VKAC FLORIDA INSURED TAX FREE INCOME FUND
VKAC NEW YORK TAX FREE INCOME FUND
VKAC PENNSYLVANIA TAX FREE INCOME FUND
VKAC COMSTOCK FUND
VKAC EQUITY INCOME FUND
VKAC GLOBAL MANAGED ASSETS FUND
VKAC GOVERNMENT SECURITIES FUND
VKAC HARBOR FUND
VKAC LIFE INVESTMENT TRUST
<PAGE> 119
VKAC LIMITED MATURITY GOVERNMENT FUND
VKAC REAL ESTATE SECURITIES FUND
PROSPECTUS DATED APRIL 30, 1998, AS PREVIOUSLY SUPPLEMENTED ON
MAY 12, 1998
VKAC ENTERPRISE FUND
VKAC LIFE INVESTMENT TRUST
The Board of Trustees or the Board of Directors, as the case may be (the
"Board"), of each of the funds listed above (the "Funds") recently approved
changing the name of each Fund. The Funds' name changes coincide with recent
name changes affecting the Funds' investment advisers, distributor and
shareholder service/transfer agent as well as the name of the parent corporation
for such entities. As shown below, each of these Van Kampen-related service
providers is truncating or changing its name to coordinate and simplify the
mutual fund operations under the Van Kampen brand name. Likewise, the Board
approved similarly changing the names of the existing Van Kampen American
Capital retail open-end funds and the existing Morgan Stanley retail open-end
funds which are serviced by these Van Kampen-related service providers also to
emphasize the Van Kampen brand name and better coordinate the Van Kampen family
of funds. For Funds organized as business trusts (or series of business trusts)
or corporations (or series of corporations), the Board authorized name changes
to the respective business trust names or corporation names in addition to
changing the Funds' names.
Effective July 14, 1998, all references in the attached prospectus to the
names of Van Kampen-related service providers (and their parent) and the Fund
name and, where applicable, the business trust or corporate name of which the
Fund is a series, will refer to the new names shown in the schedule below.
<TABLE>
<CAPTION>
CURRENT SERVICE PROVIDER NAME NEW SERVICE PROVIDER NAME
----------------------------- -------------------------
<S> <C>
Van Kampen American Capital, Inc. Van Kampen Investments Inc.
Van Kampen American Capital Asset Management, Inc. Van Kampen Asset Management Inc.
Van Kampen American Capital Investment Advisory Corp. Van Kampen Investment Advisory Corp.
Van Kampen American Capital Distributors, Inc. Van Kampen Funds Inc.
ACCESS Investor Services, Inc. Van Kampen Investor Services Inc.
CURRENT NAME NEW NAME
- ------------------------------------------------------------ ------------------------------------------------------------
Van Kampen American Capital U.S. Government Trust Van Kampen U.S. Government Trust
Van Kampen American Capital U.S. Government Fund Van Kampen U.S. Government Fund
Van Kampen American Capital Tax Free Trust Van Kampen Tax Free Trust
Van Kampen American Capital Insured Tax Free Income Fund Van Kampen Insured Tax Free Income Fund
Van Kampen American Capital Tax Free High Income Fund Van Kampen Tax Free High Income Fund
Van Kampen American Capital California Insured Tax Free Van Kampen California Insured Tax Free Fund
Fund
Van Kampen American Capital Municipal Income Fund Van Kampen Municipal Income Fund
Van Kampen American Capital Intermediate Term Municipal Van Kampen Intermediate Term Municipal Income Fund
Income Fund
Van Kampen American Capital Florida Insured Tax Free Income Van Kampen Florida Insured Tax Free Income Fund
Fund
Van Kampen American Capital New York Tax Free Income Fund Van Kampen New York Tax Free Income Fund
Van Kampen American Capital Trust Van Kampen Trust
Van Kampen American Capital High Yield Fund Van Kampen High Yield Fund
Van Kampen American Capital Short-Term Global Income Fund Van Kampen Short-Term Global Income Fund
Van Kampen American Capital Strategic Income Fund Van Kampen Strategic Income Fund
Van Kampen American Capital Equity Trust Van Kampen Equity Trust
Van Kampen American Capital Utility Fund Van Kampen Utility Fund
Van Kampen American Capital Great American Companies Fund Van Kampen Great American Companies Fund
Van Kampen American Capital Growth Fund Van Kampen Growth Fund
Van Kampen American Capital Prospector Fund Van Kampen Prospector Fund
Van Kampen American Capital Aggressive Growth Fund Van Kampen Aggressive Growth Fund
Van Kampen American Capital Pennsylvania Tax Free Income Van Kampen Pennsylvania Tax Free Income
Fund Fund
Van Kampen American Capital Tax Free Money Fund Van Kampen Tax Free Money Fund
Van Kampen American Capital Foreign Securities Fund Van Kampen Foreign Securities Fund
Van Kampen American Capital Comstock Fund Van Kampen Comstock Fund
Van Kampen American Capital Corporate Bond Fund Van Kampen Corporate Bond Fund
</TABLE>
<PAGE> 120
<TABLE>
<CAPTION>
CURRENT NAME NEW NAME
------------ --------
<S> <C>
Van Kampen American Capital Emerging Growth Fund Van Kampen Emerging Growth Fund
Van Kampen American Capital Enterprise Fund Van Kampen Enterprise Fund
Van Kampen American Capital Equity Income Fund Van Kampen Equity Income Fund
Van Kampen American Capital Global Managed Assets Fund Van Kampen Global Managed Assets Fund
Van Kampen American Capital Government Securities Fund Van Kampen Government Securities Fund
Van Kampen American Capital Growth and Income Fund Van Kampen Growth and Income Fund
Van Kampen American Capital Harbor Fund Van Kampen Harbor Fund
Van Kampen American Capital High Income Corporate Bond Fund Van Kampen High Income Corporate Bond Fund
Van Kampen American Capital Life Investment Trust Van Kampen Life Investment Trust
Van Kampen American Capital Limited Maturity Government Fund Van Kampen Limited Maturity Government Fund
Van Kampen American Capital Pace Fund Van Kampen Pace Fund
Van Kampen American Capital Real Estate Securities Fund Van Kampen Real Estate Securities Fund
Van Kampen American Capital Reserve Fund Van Kampen Reserve Fund
Van Kampen American Capital Small Capitalization Fund Van Kampen Small Capitalization Fund
Van Kampen American Capital Tax-Exempt Trust Van Kampen Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Fund Van Kampen High Yield Municipal Fund
Van Kampen American Capital U.S. Government Trust for Income Van Kampen U.S. Government Trust for Income
Van Kampen American Capital World Portfolio Series Trust Van Kampen World Portfolio Series Trust
Van Kampen American Capital Global Government Securities Van Kampen Global Government Securities Fund
Fund
Morgan Stanley Fund, Inc. Van Kampen Series Fund, Inc.
Morgan Stanley Aggressive Equity Fund Van Kampen Aggressive Equity Fund
Morgan Stanley American Value Fund Van Kampen American Value Fund
Morgan Stanley Asian Growth Fund Van Kampen Asian Growth Fund
Morgan Stanley Emerging Markets Fund Van Kampen Emerging Markets Fund
Morgan Stanley Emerging Markets Debt Fund Van Kampen Emerging Markets Debt Fund
Morgan Stanley European Equity Fund Van Kampen European Equity Fund
Morgan Stanley Global Equity Fund Van Kampen Global Equity Fund
Morgan Stanley Global Equity Allocation Fund Van Kampen Global Equity Allocation Fund
Morgan Stanley Global Fixed Income Fund Van Kampen Global Fixed Income Fund
Morgan Stanley Growth and Income Fund Van Kampen Growth and Income Fund II
Morgan Stanley High Yield Fund Van Kampen High Yield & Total Return Fund
Morgan Stanley International Magnum Fund Van Kampen International Magnum Fund
Morgan Stanley Japanese Equity Fund Van Kampen Japanese Equity Fund
Morgan Stanley Latin American Fund Van Kampen Latin American Fund
Morgan Stanley Mid Cap Growth Fund Van Kampen Mid Cap Growth Fund
Morgan Stanley U.S. Real Estate Fund U.S. Real Estate Fund
Morgan Stanley Value Fund Van Kampen Value Fund
Morgan Stanley Worldwide High Income Fund Van Kampen Worldwide High Income Fund
</TABLE>
<PAGE> 121
VAN KAMPEN REAL ESTATE SECURITIES FUND
SUPPLEMENT DATED AUGUST 28, 1998 TO THE PROSPECTUS DATED APRIL 30, 1998,
AS PREVIOUSLY SUPPLEMENTED ON JULY 14, 1998.
The prospectus, as previously supplemented, is being further amended and
supplemented to reflect the Board of Trustees appointment of Morgan Stanley
Asset Management Inc. ("MSAM") as Subadviser to the Fund effective October 1,
1998. The addition of MSAM will not impact the Fund's portfolio management team
or the day to day management of the Fund and will not result in any increase of
the Fund's expenses. The Prospectus is amended and supplemented as follows:
The section of the Prospectus captioned "Prospectus Summary" is hereby
amended with the following:
INVESTMENT ADVISERS. Van Kampen Asset Management Inc. (the "Adviser") is
the Fund's investment adviser. Morgan Stanley Asset Management Inc. (the
"Subadviser") provides sub-advisory services to the Adviser.
The first and second paragraphs of the section of the Prospectus captioned
"INVESTMENT ADVISORY SERVICES" is hereby supplemented with the following:
ADVISORY AGREEMENTS. The Fund retains the Adviser to manage the investment
of its assets and to place orders for the purchase and sale of its portfolio
securities. The Adviser has entered into a sub-advisory agreement (the
"Sub-advisory Agreement") with the Subadviser to assist it in performing its
investment advisory functions. Under an investment advisory agreement between
the Adviser and the Fund (the "Advisory Agreement"), the Fund pays the Adviser a
monthly fee computed on average daily net assets of the Fund at the annual rate
of 1.00% of the Fund's average daily net assets. This fee is higher than that
charged by most other mutual funds but the Fund's Trustees believe it is
justified by the special international nature of the Fund and its asset
allocation features and it is not necessarily higher than the fees charged by
certain mutual funds with an investment objective and investment policies
similar to those of the Fund. Under the Advisory Agreement, the Fund also
reimburses the Adviser for the cost of the Fund's accounting services, which
include maintaining its financial books and records and calculating its daily
net asset value. Operating expenses paid by the Fund include shareholder service
agency fees, service fees, distribution fees, custodian fees, legal and
accounting fees, the costs of reports and proxies to shareholders, trustees'
fees (other than those who are affiliated persons as defined in the 1940 Act of
the Adviser, Distributor, Investor Services, Van Kampen or Morgan Stanley Dean
Witter & Co.), and all other business expenses not specifically assumed by the
Adviser. Advisory (management) fees and total operating expense ratios are shown
under the caption "Annual Fund Operating Expenses and Example" herein. Pursuant
to the Sub-advisory Agreement, the Subadvisory receives on an annual basis 50%
of the compensation received by the Adviser.
From time to time as the Adviser, the Subadviser or the Distributor may
deem appropriate, they may voluntarily undertake to reduce the Fund's expenses
by reducing the fees payable to them to the extent of, or bearing expenses in
excess of, such limitations as they may be established.
The section of the Prospectus captioned "INVESTMENT ADVISORY SERVICES"
hereby is supplemented by adding the following:
THE SUBADVISER. The Subadviser is a wholly-owned subsidiary of Morgan
Stanley Group, Inc. and is an affiliate of the Adviser. The Subadviser provides
portfolio management and named fiduciary services to various closed-end and
open-end investment companies, taxable and nontaxable institutions,
international equities and fixed income securities. At June 30, 1998, the
Subadviser had, together with its affiliated investment management companies,
assets under management (including assets under fiduciary advisory control)
totaling approximately $167 billion. The Subadviser is a leader in the real
estate capital markets with 25 years of real estate financing experience. The
Subadviser has dedicated over 200 employees worldwide to real estate securities
research and market analysis and manages over $4 billion in private real estate
investment partnerships. The Subadviser also draws upon the research
capabilities of Morgan Stanley Group Inc. and its other affiliates as well as
the research and investment ideas of other companies whose brokerage services
the Subadviser utilizes. The address of the Subadviser is 1221 Avenue of the
Americas, New York, New York 10020.
REAL SPT 898
<PAGE> 122
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR
AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES
HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE
SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR
TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION DOES NOT CONSTITUTE A
PROSPECTUS.
SUBJECT TO COMPLETION -- DATED SEPTEMBER 22, 1998
VAN KAMPEN REAL ESTATE SECURITIES FUND
ONE PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181
(800) 421-5666
---------------------
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN REAL ESTATE SECURITIES FUND
RELATING TO THE ACQUISITION OF ASSETS AND LIABILITIES OF
VAN KAMPEN U.S. REAL ESTATE FUND
DATED OCTOBER , 1998
---------------------
This Statement of Additional Information provides information about the Van
Kampen Real Estate Securities Fund, formerly known as Van Kampen American
Capital Real Estate Securities Fund (the "VK Real Estate Securities Fund"), an
open-end management investment company organized as a Delaware business trust,
in addition to information contained in the Prospectus/Proxy Statement of the VK
Real Estate Securities Fund, dated October , 1998, which also serves as the
proxy statement of the Van Kampen U.S. Real Estate Fund, formerly known as
Morgan Stanley U.S. Real Estate Fund (the "U.S. Real Estate Fund"), a series of
the Van Kampen Series Fund, Inc., an open-end management investment company
organized as a Maryland corporation ("Series Fund"), in connection with the
issuance of Class A, B and C shares of the VK Real Estate Securities Fund to
shareholders of the U.S. Real Estate Fund. This Statement of Additional
Information is not a prospectus. It should be read in conjunction with the
Prospectus/Proxy Statement, into which it has been incorporated by reference and
which may be obtained by contacting the VK Real Estate Securities Fund located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181 (telephone no. (630)
684-6000 or (800) 421-5666).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Proposed Reorganization of the U.S. Real Estate Fund........ 2
Additional Information About the VK Real Estate Securities
Fund...................................................... 2
Additional Information About the U.S. Real Estate Fund...... 2
Financial Statements........................................ 2
</TABLE>
The VK Real Estate Securities Fund will provide, without charge, upon the
written or oral request of any person to whom this Statement of Additional
Information is delivered, a copy of any and all documents that have been
incorporated by reference in the registration statement of which this Statement
of Additional Information is a part.
1
<PAGE> 123
PROPOSED REORGANIZATION OF THE U.S. REAL ESTATE FUND
The shareholders of the U.S. Real Estate Fund are being asked to approve an
acquisition of all the assets of the U.S. Real Estate Fund solely in exchange
for Class A, B and C shares of the VK Real Estate Securities Fund and the VK
Real Estate Securities Fund's assumption of the liabilities of the U.S. Real
Estate Fund (the "Reorganization") pursuant to an Agreement and Plan of
Reorganization by and between the VK Real Estate Securities Fund and the Series
Fund, on behalf of the U.S. Real Estate Fund (the "Agreement"). A copy of the
form of the Agreement is attached hereto as Appendix A.
ADDITIONAL INFORMATION ABOUT THE VK REAL ESTATE SECURITIES FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the VK Real Estate Securities Fund, dated April 30,
1998, as supplemented, attached as Appendix B to this Statement of Additional
Information.
ADDITIONAL INFORMATION ABOUT THE U.S. REAL ESTATE FUND
Incorporated herein by reference in its entirety is the Statement of
Additional Information of the Series Fund, dated September --, 1998, attached as
Appendix C to this Statement of Additional Information.
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited financial statements of the VK Real Estate Securities Fund for the
fiscal year ended December 31, 1997 as included in Appendix B, (ii) the
unaudited financial statements of the VK Real Estate Securities Fund for the
semi-annual period ended June 30, 1998, as included in Appendix D hereto, (iii)
the audited financial statements of the U.S. Real Estate Fund for fiscal year
ended June 30, 1998 as included in Appendix C hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix E hereto are unaudited pro forma financial statements
of the VK Real Estate Securities Fund giving effect to the Reorganization which
include: (i) Pro Forma Condensed Statement of Assets and Liabilities at June 30,
1998, (ii) Pro Forma Condensed Statement of Operations for the six months ended
June 30, 1998 and (iii) Pro Forma Portfolio of Investments at June 30, 1998.
2
<PAGE> 124
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
<PAGE> 125
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 19 , by and between Van Kampen Real Estate Securities Fund (the
"VK Real Estate Securities Fund"), a Delaware business trust formed under the
laws of the State of Delaware, and Van Kampen U.S. Real Estate Fund (the
"U.S. Real Estate Fund"), a series of Van Kampen Series Fund, Inc., a Maryland
corporation formed under the laws of the State of Maryland (the "Van Kampen
Series Fund").
WITNESSETH:
WHEREAS, the Board of Trustees of the VK Real Estate Securities Fund and
the Board of Directors of the Van Kampen Series Fund, on behalf of the U.S. Real
Estate Fund have determined that entering into this Agreement for the VK Real
Estate Securities Fund to acquire the assets and liabilities of the U.S. Real
Estate Fund is in the best interests of the shareholders of each respective
fund; and
WHEREAS, the parties intend that this transaction qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein. and
intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the U.S. Real Estate Fund will convey,
transfer and deliver to the VK Real Estate Securities Fund at the closing,
provided for in Section 2 hereof, all of the existing assets of the U.S. Real
Estate Fund (including accrued interest to the Closing Date) acceptable to the
VK Real Estate Securities Fund as more fully set forth on Schedule I hereto, and
as amended from time to time prior to the Closing Date (as defined below), free
and clear of all liens, encumbrances and claims whatsoever (the assets so
transferred collectively being referred to as the "Assets").
B. CONSIDERATION. In consideration thereof, the VK Real Estate Securities
Fund agrees that on the Closing Date the VK Real Estate Securities Fund will
(1) deliver to the U.S. Real Estate Fund, full and fractional Class A, Class B
and Class C Shares of common stock, par value $0.001 per share, of the VK Real
Estate Securities Fund having net asset values per share in an amount equal to
the aggregate dollar value of the Assets net of any liabilities of the U.S. Real
Estate Fund described in Section 3E hereof (the "Liabilities" determined
pursuant to Section 3A of this Agreement (collectively, the "VK Real Estate
Securities Fund Shares") and (ii) assume all of
1
<PAGE> 126
the U.S. Real Estate Fund's Liabilities. The calculation of full and
fractional Class A, Class B and Class C Shares of the VK Real Estate Securities
Fund to be exchanged shall be carried out to no less than two (2) decimal
places. All VK Real Estate Securities Fund Shares delivered to the U.S. Real
Estate Fund in exchange for such Assets shall be delivered at net asset value
without sales load, commission or other transactional fee being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of receipt of all necessary regulatory approvals and the final
adjournment of the meeting of shareholders of the U.S. Real Estate Fund at which
this Agreement will be considered and approved or such later date as soon as
practicable thereafter, as the parties may mutually agree (the "Closing Date").
On the Closing Date, the VK Real Estate Securities Fund shall deliver to the
U.S. Real Estate Fund the VK Real Estate Securities Fund Shares in the amount
determined pursuant to Section 1B hereof and the U.S. Real Estate Fund
thereafter shall, in order to effect the distribution of such shares to the
U.S. Real Estate Fund shareholders, instruct the VK Real Estate Securities Fund
to register the pro rata interest in the VK Real Estate Securities Fund Shares
(in full and fractional shares) of each of the holders of record of shares of
the U.S. Real Estate Fund in accordance with their holdings of either Class A,
Class B or Class C shares and shall provide as part of such instruction a
complete and updated list of such holders (including addresses and taxpayer
identification numbers), and the VK Real Estate Fund agrees promptly to comply
with said instruction. The VK Real Estate Securities Fund shall have no
obligation to inquire as to the validity, propriety or correctness of
such instruction, but shall assume that such instruction is valid, proper and
correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the U.S. Real
Estate Fund to be transferred and assumed, respectively, by the VK Real Estate
Fund shall be computed as of the Closing Date, in the manner set forth in the
most recent Prospectus and Statement of Additional Information of the VK Real
Estate Fund (collectively, the "VK Real Estate Securities Fund Prospectus"),
copies of which have been delivered to the U.S. Real Estate Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company, 225 Franklin Street Post Office Box 1713, Boston,
Massachusetts 02105-1713, as custodian for the VK Real Estate Securities Fund
(the "Custodian") for the benefit of the VK Real Estate Securities Fund, duly
endorsed in proper form for transfer in such condition as to constitute a good
delivery thereof, free and clear of all liens, encumbrances and claims
whatsoever, in accordance with the custom of brokers, and
2
<PAGE> 127
shall be accompanied by all necessary state stock transfer stamps, the cost of
which shall be borne by the Van Kampen Investment Advisory Corp. (the "U.S.
Real Estate Adviser").
C. FAILURE TO DELIVER SECURITIES. If the U.S. Real Estate Fund is
unable to make delivery pursuant to Section 3B hereof to the Custodian of any of
the U.S. Real Estate Fund's securities for the reason that any of such
securities purchased by the VK Real Estate Securities Fund have not yet been
delivered to it by the MS Real Estate Fund's broker or brokers, then, in lieu
of such delivery, the U.S. Real Estate Fund shall deliver to the Custodian, with
respect to said securities, executed copies of an agreement of assignment and
due bills executed on behalf of said broker or brokers, together with such other
documents as may be required by the VK Real Estate Securities Fund or
Custodian, including brokers' confirmation slips.
D. SHAREHOLDER ACCOUNTS. The VK Real Estate Securities Fund, in order
to assist the U.S. Real Estate Fund in the distribution of the VK Real Estate
Securities Fund Shares to the U.S. Real Estate Fund shareholders after delivery
of the VK Real Estate Securities Fund Shares to the U.S. Real Estate Fund, will
establish pursuant to the request of the U.S. Real Estate Fund an open account
with the VK Real Estate Securities Fund for each shareholder of the U.S. Real
Estate Fund and, upon request by the MS Real Estate Fund, shall transfer to
such account the exact number of full and fractional Class A, Class B and Class
C shares of the VK Real Estate Securities Fund then held by the U.S. Real
Estate Fund specified in the instruction provided pursuant to Section 2 hereof.
The VK Real Estate Securities Fund is not required to issue certificates
representing VK Real Estate Securities Fund Shares unless requested to do so
by a shareholder. Upon liquidation or dissolution of the U.S. Real Estate
Fund, certificates representing shares of common stock of the U.S. Real Estate
Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of U.S. Real
Estate Fund's liabilities, debts, obligations, and duties of whatever kind or
nature, whether absolute, accrued, contingent, or otherwise, whether or not
arising in the ordinary course of business, whether or not determinable at the
Closing Date, and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein
are consummated, the VK Real Estate Securities Fund agrees to pay for the
reasonable outside expenses for the transactions contemplated herein; that are
solely and directly related to the reorganization within the meaning of Rev.
Rule 73-54, 1973-1 C.B. 187; including, but not by way of limitation, the
preparation of the VK Real Estate Fund's Registration Statement on Form N-14
(the "Registration Statement") and the solicitation of the U.S. Real Estate
Fund shareholder proxies; the MS Real Estate Fund counsel's reasonable
attorney's fees, which fees shall be payable pursuant to receipt of an
itemized statement; and the cost of rendering the tax opinion, more fully
referenced in Section 7F below. Subject to the foregoing, U.S. Real Estate Fund
and VK Real Estate Securities Fund will each pay its own expenses, if any,
incurred in connection with the transactions contemplated herein. In
addition, Van Kampen Asset Management Inc. will [waive/reduce] the amount of
the advisory fee that it is owed by U.S. Real Estate Fund to Van Kampen Asset
Management Inc. by approximately $35,000 which will represent the remaining
unamortized cost of terminating the VKAC Global Equity Fund trustee retirement
plan. The U.S. Real Estate Fund shareholders will pay their own expenses, if
any, incurred in connection with the transactions contemplated herein. In the
event that the transactions contemplated herein are not consummated for any
reason, then all reasonable outside expenses incurred to the date of
termination of this Agreement shall be borne by Van Kampen Investments Inc.
3
<PAGE> 128
G. DISSOLUTION. As soon as practicable after the Closing Date but in
no event later than one year after the Closing Date, the U.S. Real Estate
Fund shall voluntarily dissolve and completely liquidate by taking, in
accordance with the Maryland general corporate law and Federal securities laws,
all steps as shall be necessary and proper to effect a complete liquidation and
dissolution of the U.S. Real Estate Fund. Immediately after the Closing Date,
the share transfer books relating to the U.S. Real Estate Fund shall be
closed and no transfer of shares shall thereafter be made on such books.
4. U.S. REAL ESTATE FUND'S REPRESENTATIONS AND WARRANTIES.
The U.S. Real Estate Fund hereby represents and warrants to the VK Real Estate
Securities Fund, which representations and warranties are true and correct on
the date hereof, and agrees with the VK Real Estate Securities Fund that:
A. ORGANIZATION. The Van Kampen Series Fund is a Maryland corporation
duly formed and in good standing under the laws of the State of Maryland and is
duly authorized to transact business in the State of Maryland. The U.S. Real
Estate Fund is a separate series of the Van Kampen Series Fund duly designated
in accordance with the applicable provisions of the Van Kampen Series Fund's
Articles of Incorporation. The U.S. Real Estate Fund is qualified to do
business in all jurisdictions in which it is required to be so qualified, except
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the U.S. Real Estate Fund. The U.S. Real Estate Fund
has all material federal, state and local authorizations necessary to own all of
the properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the U.S. Real Estate Fund.
B. REGISTRATION. The Van Kampen Series Fund is registered under the
Investment Company Act of 1940, as amended (the "1940 Act"), as an open-end,
management investment company and such registration has not been revoked or
rescinded. The U.S. Real Estate Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder with respect
to its activities. All of the outstanding shares of beneficial interest of the
MS Real Estate Fund have been duly authorized and are validly issued, fully paid
and nonassessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the U.S. Real Estate Fund audited as
of and for the year ended June 30, 1997, true and complete copies of which have
been heretofore furnished to the VK Real Estate Securities Fund, fairly
represent the financial condition and the results
4
<PAGE> 129
of operations of the U.S. Real Estate Fund as of and for their
respective dates and periods in conformity with generally accepted accounting
principles applied on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The U.S. Real Estate Fund shall furnish to
the VK Real Estate Fund (i) an unaudited statement of assets and liabilities and
the portfolio of investments and the related statements of operations and
changes in net assets of the U.S. Real Estate Fund for the period ended
December 31, 1997; and (ii) within five (5) business days after the Closing
Date, an unaudited statement of assets and liabilities and the portfolio of
investments and the related statements of operations and changes in net assets
as of and for the interim period ending on the Closing Date; such financial
statements will represent fairly the financial position and portfolio of
investments and the results of the U.S. Real Estate Fund's operations as of,
and for the period ending on, the dates of such statements in conformity with
generally accepted accounting principles applied on a consistent basis during
the periods involved and the results of its operations and changes in financial
position for the period then ended; and such financial statements shall be
certified by the Treasurer of the U.S. Real Estate Fund as complying with the
requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will
be, no contingent Liabilities of the U.S. Real Estate Fund not disclosed in
the financial statements delivered pursuant to Sections 4C and 4D which would
materially affect the U.S. Real Estate Fund's financial condition, and there
are no legal, administrative, or other proceedings pending or, to its knowledge,
threatened against the U.S. Real Estate Fund which would, if adversely
determined, materially affect the U.S. Real Estate Fund's financial
condition. All Liabilities were incurred by the U.S. Real Estate Fund in the
ordinary course of its business.
F. MATERIAL AGREEMENTS. The U.S. Real Estate Fund is in compliance
with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the U.S. Real Estate Fund's Prospectus and Statement of
Additional Information, there are no material agreements outstanding relating to
the U.S. Real Estate Fund to which the U.S. Real Estate Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case
no later then 30 calendar days after the Closing Date, PricewaterhouseCoopers
LLP, accountants for the U.S. Real Estate Fund, shall furnish the VK Real
Estate Fund with a statement of the earnings and profits of the U.S. Real
Estate Fund within the meaning of the Code as of the Closing Date.
H. RESTRICTED SECURITIES. None of the securities comprising the assets
of the U.S. Real Estate Fund at the date hereof are, or on the Closing Date
or any subsequent delivery date will be, "restricted securities" under the
Securities Act of 1933, (the "Securities Act") or the rules and regulations of
the
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Securities and Exchange Commission (the "SEC") thereunder, or will be securities
for which market quotations are not readily available for purposes of Section
2(a)(41) under the 1940 Act.
I. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other material tax returns and reports of the U.S. Real Estate
Fund required by law to have been filed by such dates shall have been filed, and
all Federal and other taxes shown thereon shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of the
MS Real Estate Fund's knowledge no such return is currently under audit and no
assessment has been asserted with respect to any such return.
J. CORPORATE AUTHORITY. The Van Kampen Series Fund and the U.S.
Real Estate Fund have the necessary power to enter into this Agreement and to
consummate the transactions contemplated herein. The execution, delivery and
performance of this Agreement and the consummation of the transactions
contemplated herein have been duly authorized by the U.S. Real Estate Fund's
Board of Directors, and, except for obtaining approval of the holders of the
shares of the U.S. Real Estate Fund, no other corporate acts or proceedings
by the U.S. Real Estate Fund are necessary to authorize this Agreement and
the transactions contemplated herein. This Agreement has been duly executed and
delivered by the U.S. Real Estate Fund and constitutes the legal, valid and
binding obligation of U.S. Real Estate Fund enforceable in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium or similar law
affecting creditors' rights generally, or by general principals of equity
(regardless of whether enforcement is sought in a proceeding at equity or law).
K. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the U.S. Real Estate Fund does not and will not
(i) violate any provision of the Morgan Stanley Fund's Articles of
Incorporation, (ii) violate any statute, law, judgment, writ, decree, order,
regulation or rule of any court or governmental authority applicable to the U.S.
Real Estate Fund, (iii) result in a violation or breach of, or constitute a
default under any material contract, indenture, mortgage, loan agreement, note,
lease or other instrument or obligation to which the U.S. Real Estate Fund is
subject, or (iv) result in the creation or imposition or any lien, charge or
encumbrance upon any property or assets of the U.S. Real Estate Fund. Except as
set forth in Schedule 2 to this Agreement, (1) no consent, approval,
authorization, order or filing with or notice to any court or governmental
authority or agency is required for the consummation by the U.S. Real Estate
Fund of the transactions contemplated by this Agreement and (ii) no consent of
or notice to any third party or entity is required for the consummation by the
MS Real Estate Fund of the transactions contemplated by this Agreement.
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L. ABSENCE OF CHANGES. From the date of this Agreement through the
Closing Date, there shall not have been:
(1) any change in the business, results of operations, assets, or
financial condition or the manner of conducting the business of the U.S. Real
Estate Fund, other than changes in the ordinary course of its business, or any
pending or threatened litigation, which has had or may have a material adverse
effect on such business, results of operations, assets or financial condition;
(2) issued any option to purchase or other right to acquire shares of
the U.S. Real Estate Fund granted by the U.S. Real Estate Fund to any
person other than subscriptions to purchase shares at net asset value in
accordance with terms in the Prospectus for the U.S. Real Estate Fund;
(3) any entering into, amendment or termination of any contract or
agreement by U.S. Real Estate Fund, except as otherwise contemplated by this
Agreement,
(4) any indebtedness incurred, other than in the ordinary course of
business, by the U.S. Real Estate Fund for borrowed money or any commitment
to borrow money entered into by the U.S. Real Estate Fund;
(5) any amendment of the Van Kampen Series Fund's Articles of
Incorporation; or
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with respect
to covered options) upon any asset of the U.S. Real Estate Fund other than a
lien for taxes not yet due and payable.
M. TITLE. On the Closing Date, the U.S. Real Estate Fund will have
good and marketable title to the Assets, free and clear of all liens, mortgages,
pledges, encumbrances, charges, claims and equities whatsoever, other than a
lien for taxes not yet due and payable, and full right, power and authority to
sell, assign, transfer and deliver such Assets; upon delivery of such Assets,
the VK Real Estate Fund will receive good and marketable title to such Assets,
free and clear of all liens, mortgages, pledges, encumbrances, charges, claims
and equities other than a lien for taxes not yet due and payable.
N. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform as it relates to the Van Kampen Series
Fund and U.S. Real Estate Fund, in all material respects, to the applicable
requirements of the applicable Federal
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and state securities laws and the rules and regulations of the SEC thereunder,
and do not and will not include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, except that no representations or warranties in this
Section 4N apply to statements or omissions made in reliance upon and in
conformity with written information concerning the VK Real Estate Securities
Fund furnished to the U.S. Real Estate Fund by the VK Real Estate Securities
Fund.
O. TAX QUALIFICATION. The U.S. Real Estate Fund has qualified as a
regulated investment company within the meaning of Section 851 of the Code for
each of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
P. FAIR MARKET VALUE. The fair market value on a going concern basis
of the Assets will equal or exceed the Liabilities to be assumed by the VK Real
Estate Securities Fund and those to which the Assets are subject.
Q. U.S. REAL ESTATE FUND LIABILITIES. Except as otherwise provided
for herein, the U.S. Real Estate Fund shall use reasonable efforts,
consistent with its ordinary operating procedures, to repay in full any
indebtedness for borrowed money and have discharged or reserved against all of
the U.S. Real Estate Fund's known debts, liabilities and obligations
including expenses, costs and charges whether absolute or contingent, accrued or
unaccrued.
5. THE VK REAL ESTATE SECURITIES FUND'S REPRESENTATIONS AND WARRANTIES.
The VK Real Estate Fund hereby represents and warrants to the U.S. Real
Estate Fund, which representations and warranties are true and correct on the
date hereof, and agrees with the U.S. Real Estate Fund that:
A. ORGANIZATION. The VK Real Estate Securities Fund is a Delaware
Business Trust duly formed and in good standing under the laws of the State of
Delaware and is duly authorized to transact business in the State of Delaware.
The VK Real Estate Securities Fund is qualified to do business in all
jurisdictions in which they are required to be so qualified, except
jurisdictions in which the failure to so qualify would not have a material
adverse effect on the VK Real Estate Securities Fund. The VK Real Estate
Securities Fund has all material federal, state and local authorizations
necessary to own all of the properties and assets and to carry on its business
and the business thereof as now being conducted, except authorizations which the
failure to so obtain would not have a material adverse effect on the VK Real
Estate Securities Fund.
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B. REGISTRATION. The VK Real Estate Fund is registered under the 1940
Act as an open-end, management investment company and such registration has not
been revoked or rescinded. The VK Real Estate Securities Fund is in compliance
in all material respects with the 1940 Act and the rules and regulations
thereunder. All of the outstanding shares of beneficial interest, par value
$0.01 par value, of the VK Real Estate Securities Fund have been duty authorized
and are validly issued, fully paid and non-assessable and not subject to
pre-emptive dissenters rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and
liabilities and the portfolio of investments and the related statements of
operations and changes in net assets of the VK Real Estate Securities Fund
audited as of and for the year ended December 31, 1997, true and complete copies
of which have been heretofore furnished to the U.S. Real Estate Fund, fairly
represent the financial condition and the results of operations of the VK Real
Estate Securities Fund as of and for their respective dates and periods in
conformity with generally accepted accounting principles applied on a consistent
basis during the periods involved.
D. FINANCIAL STATEMENTS. The VK Real Estate Securities Fund shall
furnish to the U.S. Real Estate Fund within five (5) business days after the
Closing Date, an unaudited statement of assets and liabilities and the portfolio
of investments and the related statements of operations and changes in net
assets as of and for the interim period ending on the Closing Date; such
financial statements will represent fairly the financial position and portfolio
of investments and the results of its operations as of, and for the period
ending on, the dates of such statements in conformity with generally accepted
accounting principles applied on a consistent basis during the period involved
and the results of its operations and changes in financial position for the
periods then ended; and such financial statements shall be certified by the
Treasurer of the VK Real Estate Securities Fund as complying with the
requirements hereof.
E. CONTINGENT LIABILITIES. There are no contingent liabilities of the
VK Real Estate Fund not disclosed in the financial statements delivered pursuant
to Sections 5C and 5D which would materially affect the VK Real Estate
Securities Fund's financial condition, and there are no legal, administrative,
or other proceedings pending or, to its knowledge, threatened against the VK
Real Estate Securities Fund which would, if adversely determined, materially
affect the VK Real Estate Securities Fund's financial condition.
F. MATERIAL AGREEMENTS. The VK Real Estate Securities Fund Is in
compliance with all material agreements, rules, laws, statutes, regulations and
administrative orders affecting its operations or its assets; and except as
referred to in the VK Real Estate Securities Fund Prospectus and Statement of
Additional Information there are no material agreements outstanding to which the
VK Real Estate Securities Fund is a party.
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G. TAX RETURNS. At the date hereof and on the Closing Date, all
Federal and other material tax returns and reports of the VK Real Estate
Securities Fund required by law to have been filed by such dates shall have been
filed, and all Federal and other taxes shall have been paid so far as due, or
provision shall have been made for the payment thereof, and to the best of the
VK Real Estate Securities Fund's knowledge no such return is currently under
audit and no assessment has been asserted with respect to any such return.
H. CORPORATE AUTHORITY. The VK Real Estate Securities Fund has the
necessary power to enter into this Agreement and to consummate the transactions
contemplated herein. The execution, delivery and performance of this Agreement
and the consummation of the transactions contemplated herein have been duly
authorized by the VK Real Estate Securities Fund's Board of Trustees, no other
corporate acts or proceedings by the VK Real Estate Securities Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the VK Real Estate
Securities Fund and constitutes a valid and binding obligation of the VK Real
Estate Securities Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar law affecting creditors' rights generally,
or by general principals of equity (regardless of whether enforcement is sought
in a proceeding at equity or law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the VK Real Estate Securities Fund does not and
will not (i) result in a material violation of any provision of the Declaration
of Trust of the VK Real Estate Securities Fund, (ii) violate any statute, law,
judgment, writ, decree, order, regulation or rule of any court or governmental
authority applicable to the VK Real Estate Securities Fund or (iii) result in a
material violation or breach of, or constitute a default under, any material
contract, indenture, mortgage, loan agreement, note, lease or other instrument
or obligation to which the VK Real Estate Securities Fund is subject, or (iv)
result in the creation or imposition or any lien, charge or encumbrance upon any
property or assets of the VK Real Estate Fund. Except as set forth in Schedule 3
to this Agreement, (i) no consent, approval, authorization, order or filing with
notice to any court or governmental authority or agency is required for the
consummation by the VK Real Estate Securities Fund of the transactions
contemplated by this Agreement and (ii) no consent of or notice to any third
party or entity is required for the consummation by the VK Real Estate
Securities Fund of the transactions contemplated by this Agreement
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the VK Real
Estate Securities Fund which would materially affect its financial condition.
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K. SHARES OF THE VK REAL ESTATE SECURITIES FUND: REGISTRATION. The
VK Real Estate Securities Fund Shares to be issued pursuant to Section 1 hereof
will be duly registered under the Securities Act and all applicable state
securities laws.
L. SHARES OF THE VK REAL ESTATE SECURITIES FUND: AUTHORIZATION. The
shares of beneficial interest of the VK Real Estate Securities Fund to be issued
pursuant to Section 1 hereof have been duly authorized and, when issued in
accordance with this Agreement, will be validly issued and fully paid and
non-assessable by the Trust and conform in all material respects to the
description thereof contained in the VK Real Estate Securities Fund's Prospectus
furnished to the U.S. Real Estate Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date,
there shall not have been any change in the business, results of operations,
assets or financial condition or the manner of conducting the business of the VK
Real Estate Securities Fund, other than changes in the ordinary course of its
business, which has had a material adverse effect on such business, results of
operations, assets or financial condition.
N. REGISTRATION STATEMENT The Registration Statement and the
Prospectus/Proxy Statement contained therein as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform, as it relates to the VK Real Estate
Fund, in all material respects, to the applicable requirements of the applicable
Federal securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 5N
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Van Kampen Series Fund or the U.S. Real
Estate Fund furnished to the VK Real Estate Securities Fund.
O. TAX QUALIFICATION. The VK Real Estate Securities Fund has qualified
as a regulated investment company within the meaning of Section 851 of the Code
for each of its taxable years; and has satisfied the distribution requirements
imposed by Section 852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until
the Closing Date the U.S. Real Estate Fund and VK Real Estate Securities Fund
each agrees that (except as expressly contemplated or permitted by this
Agreement):
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A. OTHER ACTIONS. The U.S. Real Estate Fund and VK Real Estate
Securities Fund shall operate only in the ordinary course of business consistent
with prior practice. No party shall take any action that would, or reasonably
would be expected to, result in any of its representations and warranties set
forth in this Agreement being or becoming untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The U.S. Real Estate Fund and VK Real
Estate Securities Fund shall file all reports required to be filed by the U.S.
Real Estate Fund and VK Real Estate Fund with the SEC between the date of this
Agreement and the Closing Date and shall deliver to the other party copies of
all such reports promptly after the same are filed. Except where prohibited by
applicable statutes and regulations, each party shall promptly provide the other
(or its counsel) with copies of all other filings made by such party with any
state, local or federal government agency or entity in connection with this
Agreement or the transactions contemplated hereby. Each of the U.S. Real Estate
Fund and the VK Real Estate Securities Fund shall use all reasonable efforts to
obtain all consents, approvals and authorizations required in connection with
the consummation of the transactions contemplated by this Agreement and to make
all necessary filings with the Secretary of State of the State of Delaware and
the Secretary of the State of the State of Maryland.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the U.S. Real Estate Fund or VK
Real Estate Securities Fund, as the case may be, required by the Securities Act
or the Exchange Act and the rules and regulations thereunder, as the case may
be, to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The U.S. Real Estate Fund shall promptly prepare
and file with the SEC the Prospectus/Proxy Statement and the VK Real Estate
Securities Fund shall promptly prepare and file with the SEC the Registration
Statement, in which the Prospectus/Proxy Statement will be included as a
prospectus. In connection with the Registration Statement, insofar as it relates
to the MS Real Estate Fund and its affiliated persons, the VK Real Estate
Securities Fund shall only include such information as is approved by the U.S.
Real Estate Fund for use in the Registration Statement. The VK Real Estate Fund
shall not amend or supplement any such information regarding the VK Real Estate
Securities Fund and such affiliates without the prior written consent of the
U.S. Real Estate Fund which consent shall not unreasonably withheld or delayed.
The VK Real Estate Securities Fund shall promptly notify and provide the U.S.
Real Estate Fund with copies of all amendments or supplements filed with respect
to the Registration Statement. The VK Real Estate Securities Fund shall use all
reasonable efforts to have the Registration Statement declared effective under
the Securities Act as promptly as practicable after such filing. The VK Real
Estate Securities Fund shall also take any action (other than qualifying to do
business in any jurisdiction in which it is now not so qualified) required to be
taken under any applicable state securities laws in
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connection with the issuance of the VK Real Estate Securities Fund's shares of
beneficial interest in the transactions contemplated by this Agreement and the
U.S. Real Fund shall furnish all information concerning the U.S. Real Estate
Fund and the holders of the U.S. Real Estate Fund's shares of common stock as
may be reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date,
the U.S. Real Estate Fund shall make available to the VK Real Estate Fund a copy
of each report, schedule, registration statement and other document (the
"Documents") filed or received by it during such period pursuant to the
requirements of Federal or state securities laws or Federal or state banking
laws (other than Documents which such party is not permitted to disclose under
applicable law). During the period prior to the Closing Date, the VK Real Estate
Securities Fund shall make available to the U.S. Real Estate Fund each Document
pertaining to the transactions contemplated hereby filed or received by it
during such period pursuant to Federal or state securities laws or Federal or
state banking laws (other than Documents which such party is not permitted to
disclose under applicable law).
E. SHAREHOLDERS MEETING. The U.S. Real Estate Fund shall call a
meeting of the U.S. Real Estate Fund shareholders to be held as promptly as
practicable for the purpose of voting upon the approval of this Agreement and
the transactions contemplated herein, and shall furnish a copy of the
Prospectus/Proxy Statement and form of proxy to each shareholder of the U.S.
Real Estate Fund as of the record date for such meeting of shareholders. The
Board shall recommend to the U.S. Real Estate Fund shareholders approval of
this Agreement and the transactions contemplated herein, subject to fiduciary
obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The U.S. Real Estate Fund and VK Real
Estate Securities Fund covenant and agree to coordinate the respective
portfolios of the U.S. Real Estate Fund and VK Real Estate Securities Fund from
the date of the Agreement up to and including the Closing Date in order that at
Closing, when the Assets are added to the VK Real Estate Securities Fund's
portfolio, the resulting portfolio will meet the VK Real Estate Securities
Fund's investment objective, policies and restrictions, as set forth in the VK
Real Estate Securities Fund's Prospectus, a copy of which has been delivered to
the U.S. Real Estate Fund.
G. DISTRIBUTION OF THE SHARES. At Closing the U.S. Real Estate Fund
covenants that it shall cause to be distributed the VK Real Estate Securities
Fund Shares in the proper; pro rata amount for the benefit of U.S. Real Estate
Fund's shareholders and such that the U.S. Real Estate Fund shall not continue
to hold amounts of said shares so as to cause a violation of Section 12(d)(1) of
the 1940 Act. The U.S. Real Estate Fund covenants further that, pursuant to
Section 3G, it shall liquidate and dissolve as promptly as practicable after the
Closing Date. The U.S. Real Estate Fund covenants to use all reasonable efforts
to
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cooperate with the VK Real Estate Securities Fund and the VK Real Estate
Securities Fund's transfer agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other
party prior to the date hereof, each of the U.S. Real Estate Fund and the VK
Real Estate Securities Fund represents that no agent broker, investment banker,
financial advisor or other firm or person is or will be entitled to any broker's
or finder's fee or any other commission or similar fee in connection with any of
he transactions contemplated by this Agreement, and each party shall hold the
other harmless from and against any and all claims, liabilities or obligations
with respect to any such fees, commissions or expenses asserted by any person to
be due or payable in connection with any of the transactions contemplated by
this Agreement on the basis of any act or statement alleged to have been made by
such first party or its affiliate.
I. ADDITIONAL AGREEMENT. In case at any time after the Closing Date
any further action is necessary or desirable in order to carry out the purposes
of this Agreement the proper officers and trustees of each party to this
Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the U.S. Real Estate Fund and the VK Real Estate
Securities Fund will consult with each other before issuing any press releases
or otherwise making any public statements with respect to this Agreement or the
transactions contemplated herein and shall not issue any press release or make
any public statement prior to such consultation, except as may be required by
law or the rules of any national securities exchange on which such party's
securities are traded.
K. TAX STATUS OF REORGANIZATION. The intention of the parties that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the VK Real Estate Securities Fund nor the U.S. Real
Estate Fund shall take any action, or cause any to be taken (including, without
limitation, the filing of any tax return) that is inconsistent with such
treatment or results in the failure of the transaction to qualify as a
reorganization within meaning of Section 368(a) of the Code. At or prior to the
Closing Date, the VK Real Estate Securities Fund and the U.S. Real Estate Fund
will take such action, or cause such action to be taken, as is reasonably
necessary to enable Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel to
the U.S. Real Estate Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing
Date, the U.S. Real Estate Fund shall declare and pay to its stockholders a
dividend or other distribution in an amount large enough so that it will have
distributed substantially all (and in any event not less than 98%) of its
investment company taxable income (computed without regard to any deduction for
dividends paid) and realized net capital gain, if any, for the current taxable
year through the Closing Date.
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7. CONDITIONS TO OBLIGATIONS OF THE U.S. REAL ESTATE FUND.
The obligations of the U.S. Real Estate Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction, or written
waiver the U.S. Real Estate Fund, of the following conditions:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions
contemplated herein shall have been approved by the affirmative vote of the
holders of a majority of the outstanding shares of common stock of the U.S.
Real Estate Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the VK Real Estate Securities Fund contained
herein shall be true in all material respects as of the Closing Date, and as of
the Closing Date there shall have been no material adverse change in the
financial condition, results of operations, business properties or assets of the
VK Real Estate Securities Fund, and the U.S. Real Estate Fund shall have
received a certificate of the President or Vice President of the VK Real Estate
Securities Fund satisfactory in form and substance to the U.S. Real Estate Fund
so stating. The VK Real Estate Securities Fund shall have performed and complied
in all material respects with all agreements, obligations and covenants required
by this Agreement to be so performed or complied with by it on or prior to the
Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall
have become effective and no stop orders under the Securities Act pertaining
thereto shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent, jurisdiction or other legal restraint or prohibition (an
"Injunction") preventing the consummation of the transactions contemplated by
this Agreement shall be in effect nor shall any proceeding by any state local or
federal government agency or entity asking any of the foregoing be pending.
There shall not have been any action taken or any statute, rule, regulation or
order enacted, entered, enforced or deemed applicable to the transactions
contemplated by this Agreement which makes the consummation of the transactions
contemplated by this Agreement illegal or which has a material adverse effect on
business operations of the VK Real Estate Securities Fund.
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F. TAX OPINION. The U.S. Real Estate Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
Van Kampen Series Fund and U.S. Real Estate Fund, dated as of the Closing
Date, addressed to the Van Kampen Series Fund i I and U.S. Real Estate Fund,
that the consummation of the transactions set forth in this Agreement comply
with the requirements of a reorganization as described in Section 368(a) of the
Code, substantially in the form attached as Annex A.
G. OPINION OF COUNSEL. The U.S. Real Estate Fund shall have received
the opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
VK Real Estate Securities Fund, dated as of the Closing Date, addressed to the
U.S. Real Estate Fund substantially in the and to the effect that (i) the VK
Real Estate Securities Fund is duly formed and in good standing as a business
trust under the laws of the State of Delaware; (ii) the VK Real Estate
Securities Fund is registered as an open-end, management investment company
under the 1940 Act, (iii) this Agreement and the reorganization provided for
herein and the execution of this Agreement have been duly authorized and
approved by all requisite action of the VK Real Estate Securities Fund and this
Agreement has been duly executed and delivered by the VK Real Estate Fund and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the VK Real Estate Securities
Fund; (iv) neither the execution or delivery by the VK Real Estate Securities
Fund of this Agreement nor the consummation by the VK Real Estate Securities
Fund of the transactions contemplated thereby contravene the Declaration of
Trust or, to the best of their knowledge, violate any provision of any statute
or any published regulation or any judgment or order disclosed to counsel by
the VK Real Estate Securities Fund as being applicable to the VK Real Estate
Securities Fund; (v) to the knowledge of such counsel, based solely an the
certificate of an appropriate officer of the VK Real Estate Securities Fund
attached hereto, there is no pending or threatened litigation which would have
the effect of prohibiting any material business practice or the acquisition of
any material property or the conduct of any material business of the VK Real
Estate Securities Fund or might have a material adverse effect on the value of
any assets of the VK Real Estate Securities Fund; (vi) the VK Real Estate
Securities Fund shares have been duly authorized and upon issuance thereof in
accordance with this Agreement will, subject to certain matters regarding the
liability of a shareholder of a Delaware business trust, be validly issued,
fully paid and nonassessable, (vii) except as to financial statements and
schedules and other financial and statistical data included or incorporated by
reference therein and subject to usual and customary qualifications with
respect to Rule 10b-5 type opinions, as of the effective date of the
Registration Statement filed pursuant to the Agreement, the portions thereof
pertaining to the VK Real Estate Securities Fund comply as to form in all
material respects with the requirements of the Securities Act, the Securities
Exchange Act and the 1940 Act and the rules and regulations of the SEC
thereunder and no facts have come to counsel's attention which would cause them
to believe that as of the effectiveness of the portions of the Registration
Statement applicable to VK Real Estate Securities Fund, the Registration
Statement contained any untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein not misleading, and (viii) to the best of their knowledge
and information
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<PAGE> 141
and subject to the qualifications set forth below, the execution and delivery by
the VK Real Estate Fund of the Agreement and the consummation of the
transactions therein contemplated do not require, under the laws of the States
of Delaware or Illinois or the federal laws of the United States, the consent,
approval, authorization, registration, qualification or order of, or filing
with, any court or governmental agency or body (except such as have been
obtained). Counsel need express no opinion, however, as to any such consent
approval, authorization, registration, qualification, order or filing (a) which
may be required as a result of the involvement of other parties to the Agreement
in the transactions contemplated by the Agreement because of their legal or
regulatory status or because of any other facts specifically pertaining to them,
(b) the absence of which does not deprive the U.S. Real Estate Fund of any
material benefit under the Agreement, or (c) which can be readily obtained
without significant delay or expense to the U.S. Real Estate Fund, without loss
to the MS Real Estate Fund of any material benefit under the Agreement and
without any material adverse effect on the MS Real Estate Fund during the period
such consent, approval, authorization, registration, qualification or order was
obtained. The foregoing opinion relates only to consents, approvals,
authorizations, registrations, qualifications, orders or filings under (a) laws
which are specifically referred to in this opinion, (b) laws of the States of
Delaware and Illinois and the federal laws of the United States which, in
counsel's experience, are normally applicable to transactions of the type
provided for in the Agreement and (c) court orders and judgments disclosed to
counsel by the VK Real Estate Securities Fund in connection with the opinion. In
addition, although counsel need not specifically considered the possible
applicability to the VK Real Estate Securities Fund of any other laws, orders or
judgments, nothing has come to their attention in connection with their
representation of the VK Real Estate Fund in this transaction that has caused
them to conclude that any other consent, approval, authorization, registration,
qualification, order or filing is required.
H. OFFICER CERTIFICATES. The U.S. Real Estate Fund shall have
received a certificate of an authorized officer of the VK Real Estate Fund,
dated as of the Closing Date, certifying that the representations and warranties
set forth in Section 5 are true and correct on the Closing Date, together with
certified copies of the resolutions adopted by the Board of Trustees shall be
furnished to the U.S. Real Estate Fund.
8. CONDITIONS TO OBLIGATIONS OF VK REAL ESTATE SECURITIES FUND.
The obligations of the VK Real Estate Securities Fund hereunder With respect to
the consummation of the Reorganization are subject to the satisfaction, or
written waiver by the VK Real Estate Securities Fund of the following
conditions:
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<PAGE> 142
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of common stock of the U.S. Real Estate
Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the
representations and warranties of the MS Real Estate Fund contained herein shall
be true in all material respects as of the Closing Date, and as of the Closing
Date there shall have been no material adverse change in the financial
condition, results of operations, business, properties or assets of the U.S.
Real Estate Fund, and the VK Real Estate Securities Fund shall have received a
certificate of an authorized officer of the U.S. Real Estate Fund satisfactory
in form and substance to the VK Real Estate Securities Fund so stating. The U.S.
Real Estate Fund shall have performed and complied in all material respects with
all agreements, obligations and covenants required by this Agreement to be so
performed or complied with by them on or prior to the Closing Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations, and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not be any
action taken, or any statute, rule, regulation or order enacted, entered,
enforced or deemed applicable to the transactions contemplated by this Agreement
which makes the consummation of the transactions contemplated by this Agreement
illegal.
F. TAX OPINION. The VK Real Estate Securities Fund shall have obtained an
opinion from Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel for the
Van Kampen Series Fund and the U.S. Real Estate Fund, dated as of the Closing
Date, addressed to the VK Real Estate Securities Fund, that the consummation of
the transactions set forth in this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Code substantially in the
form attached as Annex A.
G. OPINION OF COUNSEL. The VK Real Estate Securities Fund shall have
received the opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois), counsel
for the Van Kampen Series Fund and U.S. Real Estate Securities Fund, dated as of
the Closing Date, addressed to the VK Real Estate Securities Fund, substantially
in the form and to the effect that (i) the Morgan Stanley Fund is duly formed
and existing as a corporation in
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good standing under the laws of the State of Maryland; (ii) the Board of
Directors has designated the U.S. Real Estate Fund as a series of the Van Kampen
Series Fund;(iii) the U.S. Real Estate Fund is registered as an open-end,
management investment company under the 1940 Act (iv) this Agreement and the
reorganization provided for herein and the execution of this Agreement have been
duly authorized by all requisite action of the Morgan Stanley Fund on behalf of
the MS Real Estate Fund and this Agreement has been duly executed and delivered
by the Van Kampen Series Fund on behalf of the U.S. Real Estate Fund and
(assuming the Agreement is a valid and binding obligation of the other parties
thereto) is a valid and binding obligation of the Van Kampen Series Fund on
behalf of U.S. Real Estate Fund; (v) neither the execution or delivery by the
Van Kampen Series Fund on behalf of the U.S. Real Estate Fund of this Agreement
nor the consummation by the Van Kampen Series Fund or U.S. Real Estate Fund of
the transactions contemplated thereby contravene the Van Kampen Series Fund's
Articles of Incorporation or, to their knowledge, violate any provision of any
statute, or any published regulation or any judgment or order disclosed to
counsel by the Van Kampen Series Fund as being applicable to the U.S. Real
Estate Fund; (vi) to their knowledge based solely on the certificate of an
appropriate officer of the U.S. Real Estate Fund attached thereto, there is no
pending, or threatened litigation involving the U.S. Real Estate Fund except as
disclosed therein; (vii) except as to financial statements and schedules and
other financial and statistical data included or incorporated by reference
therein and subject to usual and customary qualifications with respect to Rule
10b-5 type opinions as of the effective date of the Registration Statement filed
pursuant to the Agreement, the portions thereof pertaining to the U.S. Real
Estate Fund comply as to form in all material respects with their requirements
of the Securities Act, the Securities Exchange Act and the 1940 Act and the
rules and regulations of the SEC thereunder and no facts have come to counsel's
attention which cause them to believe that as of effectiveness of the portions
of the Registration Statement applicable to the Van Kampen Series Fund and U.S.
Real Estate Fund, the Registration Statement contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein not misleading, and (viii)
to their knowledge and subject to the qualifications set forth below, the
execution and delivery by the Van Kampen Series Fund on behalf of the U.S. Real
Estate Fund of the Agreement and the consummation of the transactions therein
contemplated do not require, under the laws of the States of Maryland or
Illinois, or the federal laws of the United States, the consent. approval,
authorization, registration, qualification or order of, or filing with, any
court or governmental agency or body except such as have been obtained under the
Securities Act the 1940 Act or the rules and regulations thereunder.) Counsel
need express no opinion, however, as to any such consent, approval,
authorization, registration, qualification, order or filing: (a) which may be
required as a result of the involvement of their parties to the Agreement in the
transactions contemplated by the Agreement because of their legal or regulatory
status or because of any other facts specifically pertaining to them; (b) the
absence of which does not deprive the VK Real Estate Securities Fund of any
material benefit under such agreements; or (c) which can be readily obtained
without significant delay or expense to the VK Real Estate Securities Fund,
without loss to the VK Real Estate Securities Fund
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<PAGE> 144
of any material benefit under the Agreement and without any material adverse
effect on them during the period such consent, approval, authorization,
registration, qualification or order was obtained. The foregoing opinion relates
only to consents, approvals, authorizations, registrations, qualifications,
orders or filings under (a) laws which are specifically referred to in the
opinion, (b) laws of the States of Maryland and Illinois and the federal laws of
the United States which, in our experience, are normally applicable to
transactions of the type provided for in the Agreement and (c) court orders and
judgments disclosed to them by the U.S. Real Estate Fund in connection with
the opinion. In addition, although counsel need not specifically have considered
the possible applicability to the U.S. Real Estate Fund of any other laws,
orders or judgments, nothing has come to their attention in connection with
their representation of the U.S. Real Estate Fund in this transaction that
has caused them to conclude that any other consent, approval, authorization,
registration, qualification, order or filing is required.
H. THE ASSETS. The Assets, as set forth in Schedule 1, as amended, shall
consist solely of securities which are in conformity with the VK Real Estate
Fund's investment objectives, policies and restrictions as set forth in the U.S
Real Estate Securities Fund's Prospectus, a copy of which has been delivered to
the U.S. Real Estate Fund.
I. SHAREHOLDER LIST. The U.S. Real Estate Fund shall have delivered to
the VK Real Estate Securities Fund an updated list of all shareholders of the
U.S. Real Estate Fund, as reported by the U.S. Real Estate Fund's
transfer agent, as of one (1) business day prior to the Closing Date with each
shareholder's respective holdings in the U.S. Real Estate Fund, taxpayer
Identification numbers, Form W-9 and last known address.
J. OFFICER CERTIFICATES. The VK Real Estate Securities Fund should have
received a certificate of an authorized officer of the U.S. Real Estate Fund,
dated as of the Closing Date, certifying that the representations and warranties
set forth in Section 4 are true and correct on the Closing Date, together with
certified copies of the resolutions adopted by the Board of Directors and
shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
(A) The parties hereto may, by agreement in writing authorized by the
respective Boards, amend this Agreement at any time before or after approval
thereof by the shareholders of the U.S. Real Estate Fund; provided, however,
that after receipt of U.S. Real Estate Fund shareholder approval, no
amendment shall be made by the parties hereto which substantially changes the
terms of Sections 1, 2 and 3 hereof without obtaining U.S. Real Estate Fund's
shareholder approval thereof.
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<PAGE> 145
(B) At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
(C) This Agreement may be terminated, and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(i) by the mutual consents of the respective Boards of the U.S. Real
Estate Fund and the VK Real Estate Securities Fund;
(ii) by the U.S. Real Estate Fund, if the VK Real Estate Securities Fund
breaches in any material respect any of its representations, warranties,
covenants or agreements contained in this Agreement;
(iii) by the VK Real Estate Securities Fund, if the U.S. Real Estate Fund
breaches in any material respect any of its representations, warranties,
covenants or agreements contained in this Agreement;
(iv) by either the U.S. Real Estate Fund or VK Real Estate Securities Fund,
if the Closing has not occurred on or prior to June 30, 1998 (provided that the
rights to terminate this Agreement pursuant to this subsection (C)(iv) shall not
be available to any party whose failure to fulfill any of its obligations under
this Agreement has been the cause of or resulted in the failure of the Closing
to occur on or before such date);
(v) by the VK Real Estate Securities Fund in the event that: (a) all the
conditions precedent to the U.S. Real Estate Fund's obligation to close, as set
forth in Section 7 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the VK Real Estate Securities Fund gives the U.S.
Real Estate Fund written assurance of its intent to close irrespective of the
satisfaction or nonsatisfaction of all conditions precedent to the VK Real
Estate Securities Fund's obligation to close, as set forth in Section 8 of this
Agreement; and (c) the U.S. Real Estate Fund then fails or refuses to close
within the earlier of five (5) business days or June 30, 1998; or
(vi) by the U.S. Real Estate Fund in the event that: (a) all the conditions
precedent to the VK Real Estate Securities Fund's obligation to close, as set
forth in Section 8 of this Agreement, have been fully satisfied (or can be fully
satisfied at the Closing); (b) the U.S. Real Estate Fund gives the VK Real
21
<PAGE> 146
Estate Securities Fund written assurance of its intent to close irrespective of
the satisfaction or nonsatisfaction of all the conditions precedent to the U.S.
Real Estate Fund's obligation to close as set forth in Section 7 of this
Agreement; and (c) the VK Real Estate Securities Fund then fails or refuses to
close within the earlier of five (5) business days or June 30, 1998.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the U.S.
Real Estate Fund and VK Real Estate Securities Fund pursuant to Section 9(C),
written notice thereof shall forthwith be given by the terminating party to the
other party hereto, and this Agreement shall therefore terminate and become void
and have no effect, and the transactions contemplated herein and thereby shall
be abandoned, without further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties include or provided for
herein, or in the Schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three year period except
that any representation or warranty with respect to taxes shall survive for the
expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the VK Real Estate Securities Fund's and the
U.S. Real Estate Fund's right to seek indemnity pursuant to this Agreement shall
survive for a period of ninety (90) days beyond the expiration of the Survival
Period of the representation, warranty, covenant or agreement upon which
indemnity is sought. In no event shall the VK Real Estate Securities Fund or the
U.S. Real Estate Fund be obligated to indemnify the other if indemnity is not
sought within ninety (90) days of the expiration of the applicable Survival
Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold
the other and its officers, directors, agents and persons controlled by or
controlling any of them (each an "Indemnified Party") harmless from and against
any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees) including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may
22
<PAGE> 147
have been involved as a party or otherwise or with which such Indemnified Party
may be or may have been threatened, (collectively, the "Losses"): arising out of
or related to any claim of a breach of any representation, warranty or covenant
made herein by the Indemnitor, provided, however, that no Indemnified Party
shall be indemnified hereunder against any Losses arising directly from such
Indemnified Party's (i) willful misfeasance, (ii) bad faith, (iii) gross
negligence or (iv) reckless disregard of the duties involved in the conduct of
such Indemnified Party's position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to Indemnitor within
the earlier of ten (10) days of receipt of written notice to Indemnified Party
or thirty (30) days from discovery by Indemnified Party of any matters which
may give rise to a claim for indemnification or reimbursement under this
Agreement. The failure to give such notice shall not affect the right of
Indemnified Party to indemnity hereunder unless such failure has materially and
adversely affected the rights of the Indemnitor; provided that in any event
such notice shall have been given prior to the expiration of the Survival
Period. At any time after ten (10) days from the giving of such notice,
Indemnified Party may, at its option, resist, settle or otherwise compromise,
or pay such claim unless it shall have received notice from Indemnitor that
Indemnitor intends, at Indemnitor's sole cost and expense, to assume the
defense of any such matter, in which case Indemnified Party shall have the
right, at no cost or expense to Indemnitor, to participate in such defense: If
Indemnitor does not assume the defense of such matter, and in any event until
Indemnitor states in writing that it will assume the defense, Indemnitor shall
pay all costs of Indemnified Party arising out of the defense until the defense
is assumed; provided, however, that Indemnified Party shall consult with
Indemnitor and obtain Indemnitor's prior written consent to any payment or
settlement of any such claim. Indemnitor's shall keep Indemnified Party fully
apprised at all times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor apprised at all
times as to the status of the defense. Following indemnification as provided
for hereunder, Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
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13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes hereunder if
in writing and delivered personally or sent by registered mail or certified
mail, postage prepaid. Notice to the MS Real Estate Fund shall be addressed to
the U.S. Real Estate Fund c/o Van Kampen Investment Advisory Corp., One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: General Counsel, or at such
other address as the U.S. Real Estate Fund may designate by written notice to
the VK Real Estate Securities Fund. Notice to the VK Real Estate Securities Fund
shall be addressed to the VK Real Estate Fund c/o Van Kampen Asset Management
Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention: General
Counsel, or at such other address and to the attention of such other person as
the VK Real Estate Securities Fund may designate by written notice to the U.S.
Real Estate Fund. Any notice shall be deemed to have been served or given as of
the date such notice is delivered personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their successors and assigns. This Agreement shall not be assigned
by any party without the prior written consent of the other party hereto.
15. BOOKS AND RECORDS.
The U.S. Real Estate Fund and the VK Real Estate Securities Fund agree that
copies of the books and records of the U.S. Real Estate Fund relating to the
Assets including, but not limited to all files, records, written materials;
e.g., closing transcripts, surveillance files and credit reports shall be
delivered by the U.S. Real Estate Fund to the VK Real Estate Securities Fund at
the Closing Date. In addition to, and without limiting the foregoing, the U.S.
Real Estate Fund and the VK Real Estate Securities Fund agree to take such
action as may be necessary in order that the VK Real Estate Securities Fund
shall have reasonable access to such other books and records as may be
reasonably requested, all for three complete fiscal and tax years after the
Closing Date; namely, general ledger, journal entries, voucher registers;
distribution journal; payroll register, monthly balance owing report; income tax
returns; tax depreciation schedules; and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written or
oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be
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<PAGE> 149
amended, modified or changed or terminated orally. This Agreement may be
executed in one or more counterparts, all of which shall be considered one and
the same agreement, and shall become effective when one or more counterparts
have been executed by the Van Kampen Series Fund on behalf of U.S. Real Estate
Fund and VK Real Estate Securities Fund and delivered to each of the parties
hereto. The headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement
This Agreement is for the sole benefit of the parties thereto, and nothing in
this Agreement, expressed or implied, is intended to confer upon any other
person any rights or remedies under or by reason of this Agreement. This
Agreement shall be governed by and construed in accordance with the laws of the
State of Illinois without regard to principles of conflicts or choice of law.
17. LIMITATION OF LIABILITY.
Consistent with the VK Real Estate Securities Fund's Declaration of Trust,
notice is hereby given and the parties hereto acknowledge and agree that this
instrument is executed by of the Trustees of the VK Real Estate Securities Fund
on behalf of the VK Real Estate Securities Fund as Trustees and not individually
and that the obligations of this instrument are not binding upon any of the
Trustees or shareholders of the VK Real Estate Securities Fund individually but
binding only upon the assets and property of the VK Real Estate Securities Fund.
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IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN REAL ESTATE
SECURITIES FUND,
a Delaware business trust
______________________________________
Dennis J. McDonnell
President
Attest:___________________
Nicholas Dalmaso
Assistant Secretary
VAN KAMPEN SERIES FUND, INC.,
a Maryland corporation on behalf of
VAN KAMPEN U.S. REAL ESTATE FUND
______________________________________
Dennis J. McDonnell
President
Attest:___________________
Nicholas Dalmaso
Assistant Secretary
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APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN
REAL ESTATE SECURITIES FUND
Dated April 30, 1998, as
Supplemented on July 14, 1998
<PAGE> 152
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is a
diversified, open-end management investment company. This Statement of
Additional Information is not a prospectus. This Statement of Additional
Information should be read in conjunction with the Fund's prospectus (the
"Prospectus") dated as of the same date as this Statement of Additional
Information. This Statement of Additional Information does not include all the
information a prospective investor should consider before purchasing shares of
the Fund. Investors should obtain and read the Prospectus prior to purchasing
shares of the Fund. A Prospectus may be obtained without charge by writing or
calling Van Kampen American Capital Distributors, Inc. at One Parkview Plaza,
Oakbrook Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General Information......................................... B- 2
Investment Policies and Techniques.......................... B- 3
Investment Restrictions..................................... B-11
Trustees and Officers....................................... B-13
Legal Counsel............................................... B-22
Investment Advisory Agreement............................... B-22
Distributor................................................. B-23
Distribution and Service Plans.............................. B-24
Transfer Agent.............................................. B-25
Portfolio Transactions and Brokerage........................ B-25
Determination of Net Asset Value............................ B-26
Purchase and Redemption of Shares........................... B-27
Exchange Privilege.......................................... B-29
Tax Status of the Fund...................................... B-29
Fund Performance............................................ B-29
Other Information........................................... B-30
Report of Independent Accountants........................... B-31
Financial Statements........................................ B-32
Notes to Financial Statements............................... B-41
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED APRIL 30, 1998.
B-1
<PAGE> 153
GENERAL INFORMATION
The Fund was incorporated originally in Maryland on April 14, 1994 under
the name American Capital Real Estate Securities Fund, Inc. As of August 19,
1995, the Fund was reorganized as a series of Van Kampen American Capital Real
Estate Securities Fund (the "Trust"), a business trust organized under the laws
of the State of Delaware, and adopted its current name.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor"), and ACCESS
Investor Services, Inc. ("ACCESS") are wholly-owned subsidiaries of Van Kampen
American Capital, Inc. ("Van Kampen American Capital" or "VKAC"), which is an
indirect wholly-owned subsidiary of Morgan Stanley Dean Witter & Co. The
principal office of the Fund, the Adviser, the Distributor and VKAC is located
at One Parkview Plaza, Oakbrook Terrace, Illinois 60181.
Morgan Stanley Dean Witter & Co. and various of its directly or indirectly
owned subsidiaries, including Morgan Stanley Asset Management Inc., an
investment adviser, Morgan Stanley & Co. Incorporated, a registered
broker-dealer and investment adviser, and Morgan Stanley International, are
engaged in a wide range of financial services. Their principal businesses
include securities underwriting, distribution and trading; merger, acquisition,
restructuring and other corporate finance advisory activities; merchant banking;
stock brokerage and research services; credit services; asset management;
trading of futures, options, foreign exchange, commodities and swaps (involving
foreign exchange, commodities, indices and interest rates): real estate advice,
financing and investing; and global custody, securities clearance services and
securities lending.
VKAC's equity fund philosophy is to normally remain fully invested to
achieve consistent long-term returns.
VKAC believes that investment real estate is an asset class that often is
overlooked by investors.
As of April 3, 1998, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A shares, Class B shares
or Class C shares of the Fund, except as set forth below.
<TABLE>
<CAPTION>
AMOUNT OF CLASS
NAME AND ADDRESS OWNERSHIP AT OF PERCENTAGE
OF HOLDER APRIL 3, 1998 SHARES OWNERSHIP
---------------- ------------- ------ ----------
<S> <C> <C> <C>
Merrill Lynch Pierce 666,442 shares B 11.41%
Fenner & Smith Inc. 124,316 shares C 9.26%
Mutual Fund Operations
Attn Fund Administration
4800 Deer Lake Dr., E. 3rd FL
Jacksonville, FL 32246-6484
Van Kampen American Capital Trust 544,238 shares A 13.42%
Company 503,052 shares B 8.62%
2800 Post Oak Blvd. 94,254 shares C 7.02%
Houston, Texas 77056
PaineWebber for the Benefit of 74,747 shares C 5.57%
Schoellkopf Shenandoah
Partnership, Ltd.
3303 Lee Parkway
Suite 405
Dallas, TX 75219-5109
</TABLE>
Van Kampen American Capital Trust Company acts as custodian for certain
employee benefits and individual retirement accounts.
B-2
<PAGE> 154
INVESTMENT POLICIES AND TECHNIQUES
The Fund's primary investment objective is to seek to provide long-term
growth of capital. Current income is a secondary investment objective. The
following disclosures supplement disclosures set forth in the Prospectus.
Readers must refer also to the Prospectus for a complete presentation.
DEPOSITARY RECEIPTS
The Fund may invest in the securities of foreign issuers in the form of
American Depositary Receipts (ADRs), European Depositary Receipts (EDRs) or
other securities convertible into securities of foreign issuers. These
securities may not necessarily be denominated in the same currency as the
securities into which they may be converted but rather in the currency of the
market in which they are traded. ADRs are receipts typically issued by an
American bank or trust company which evidence ownership of underlying securities
issued by a foreign corporation. EDRs are receipts issued in Europe by banks or
depositories which evidence a similar ownership arrangement. Generally, ADRs in
registered form, are designed for use in United States securities markets and
EDRs, in bearer form, are designed for use in European securities markets.
OPTIONS, FUTURES CONTRACTS AND RELATED OPTIONS
The Fund may engage in transactions in options, futures contracts and
options on futures contracts. Set forth below is certain additional information
regarding options, futures contracts and related options. See Prospectus for
further information.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return or total return than would be
realized on the underlying securities alone.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
writer at a specified price during a certain period. The Fund sells call options
either on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund would own or have
the right to acquire securities of the type that it would be obligated to
deliver if any outstanding option were exercised. An option is for cross-hedging
purposes if it is not covered but is designed to provide a hedge against a
security which the Fund owns or has the right to acquire. In such circumstances,
the Fund collateralizes the option by maintaining in a segregated account with
the Fund's Custodian, cash or liquid securities in an amount not less than the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund sells put options only on a
secured basis, which means that, at all times during the option period, the Fund
would maintain in a segregated account with its Custodian cash or liquid
securities in an amount of not less than the exercise price of the option, or
would hold a put on the same underlying security at an equal or greater exercise
price.
Closing Purchase Transactions and Offsetting Transactions. In order to
terminate its position as a seller of a call or put option, the Fund could enter
into a "closing purchase transaction," which is the purchase of a call (put) on
the same underlying security and having the same exercise price and expiration
date as the call (put) previously written by the Fund. The Fund would realize a
gain (loss) if the premium plus commission paid in the closing purchase
transaction is less (greater) than the premium it received on the sale of the
option. The Fund would also realize a gain if an option it has written lapses
unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a seller, but would provide an asset of
equal value to its obligation under the option written. If
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the Fund is not able to enter into a closing purchase transaction or to purchase
an offsetting option with respect to an option it has written, it will be
required to maintain the securities subject to the call or the collateral
underlying the put until a closing purchase transaction can be entered into (or
the option is exercised or expires), even though it might not be advantageous to
do so.
The exercise price of call options may be below ("in-the-money"), equal to
("at-the-money"), or above ("out-of-the-money") the current market value of the
underlying securities or futures contracts at the time the options are written.
The converse applies to put options.
Risks of Selling Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect (i.e., hedge) against
anticipated increases in the prices of securities it wishes to acquire. In
addition, the Fund may purchase call options for capital appreciation. Since the
premium paid for a call option is typically a small fraction of the price of the
underlying security, a given amount of funds will purchase call options covering
a much larger quantity of such security than could be purchased directly. By
purchasing call options, the Fund could benefit from any significant increase in
the price of the underlying security to a greater extent than had it invested
the same amount in the security directly. However, because of the very high
volatility of option premiums, the Fund would bear a significant risk of losing
the entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Put options may be purchased to protect (i.e., hedge) against anticipated
declines in the market value of either specific portfolio securities or of the
Fund's assets generally. Alternatively, put options may be purchased for capital
appreciation in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OPTIONS ON STOCK INDEXES
Options on stock indexes are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash which amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The seller of the option is obligated, in return for
the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indexes are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on The Chicago Board Options Exchange, the American Stock Exchange and other
exchanges. The Fund may sell or purchase options which are listed on an exchange
as well as options which are traded over-the-counter.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction on an exchange, or it
may let the option expire unexercised.
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RISK FACTORS APPLICABLE TO OPTIONS ON U.S. GOVERNMENT SECURITIES
Treasury Bonds and Notes. Because trading interest in options written on
Treasury bonds and notes tends to center on the most recently auctioned issues,
the exchanges will not continue indefinitely to introduce options with new
expirations to replace expiring options on particular issues. Instead, the
expirations introduced at the commencement of options trading on a particular
issue will be allowed to run their course, with the possible addition of a
limited number of new expirations as the original ones expire. Options trading
on each issue of bonds or notes will thus be phased out as new options are
listed on more recent issues, and options representing a full range of
expirations will not ordinarily be available for every issue on which options
are traded.
Treasury Bills. Because the deliverable Treasury bill changes from week to
week, sellers of Treasury bill calls cannot provide in advance for their
potential exercise settlement obligations by acquiring and holding the
underlying security. However, if the Fund holds a long position in Treasury
bills with a principal amount of the securities deliverable upon exercise of the
option, the position may be hedged from a risk standpoint by the writing of a
call option. For so long as the call option is outstanding, the Fund will hold
the Treasury bills in a segregated account with its Custodian so that it will be
treated as being covered.
Mortgage-Related Securities. The following special considerations will be
applicable to options on mortgage-related securities. Currently such options are
only traded over-the-counter. Since the remaining principal balance of a
mortgage-related security declines each month as a result of mortgage payments,
the Fund as a seller of a mortgage-related call holding mortgage-related
securities as "cover" to satisfy its delivery obligation in the event of
exercise may find that the mortgage-related securities it holds no longer have a
sufficient remaining principal balance for this purpose. Should this occur, the
Fund will purchase additional mortgage-related securities from the same pool (if
obtainable) or replacement mortgage-related securities in the cash market in
order to maintain its cover. A mortgage-related security held by the Fund to
cover an option position in any but the nearest expiration month may cease to
represent cover for the option in the event of a decline in the coupon rate at
which new pools are originated under the FHA/VA loan ceiling in effect at any
given time. If this should occur, the Fund will no longer be covered, and the
Fund will either enter into a closing purchase transaction or replace such
mortgage-related security with a mortgage-related security which represents
cover. When the Fund closes its position or replaces such mortgage-related
security, it may realize an unanticipated loss and incur transaction costs.
FOREIGN CURRENCY OPTIONS
The Fund may purchase put and call options on foreign currencies to reduce
the risk of currency exchange fluctuation. Premiums paid for such put and call
options will be limited to no more than 5% of the Fund's net assets at any given
time. Options on foreign currencies operate similarly to options on securities,
and are traded primarily in the over-the-counter market, although options on
foreign currencies are traded on United States and foreign exchanges.
Exchange-traded options are expected to be purchased by the Fund from time to
time and over-the-counter options may also be purchased, but only when the
Adviser believes that a liquid secondary market exists for such options,
although there can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are
affected by all of those factors which influence foreign exchange rates and
investment generally. See "Investment Practices -- Using Options, Futures
Contracts and Related Options" in the Prospectus.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
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There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and related
options in accordance with rules and interpretations of the Commodity Futures
Trading Commission ("CFTC") under which the Fund would be exempt from
registration as a "commodity pool."
Types of Contracts. An interest rate futures contract is an agreement
pursuant to which a party agrees to take or make delivery of a specified debt
security (such as U.S. Treasury bonds, U.S. Treasury notes, U.S. Treasury bills
and GNMA Certificates) at a specified future time and at a specified price.
Interest rate futures contracts also include cash settlement contracts based
upon a specified interest rate such as the London interbank offering rate for
dollar deposits, LIBOR.
A stock index futures contract is an agreement pursuant to which a party
agrees to take or make delivery of cash equal to a specified dollar amount times
the difference between the stock index value at a specified time and the price
at which the futures contract is originally struck. No physical delivery of the
underlying stocks in the index is made.
Currently, stock index futures contracts can be purchased with respect to
the Standard & Poor's 500 Stock Index on the Chicago Mercantile Exchange
("CME"), the New York Stock Exchange Composite Index on the New York Futures
Exchange and the Value Line Stock Index on the Kansas City Board of Trade.
Differences in the stocks included in the indexes may result in differences in
correlation of the futures contracts with movements in the value of the
securities being hedged.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no purchase price is paid or received upon the purchase or sale of a
futures contract. Initially, the Fund is required to deposit with its Custodian
in an account in the broker's name an amount of cash or liquid securities equal
to a percentage (which will normally range between 2% and 10%) of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is otherwise
fully invested ("anticipatory hedge"). Such purchase of a futures contract
serves as a temporary
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substitute for the purchase of individual securities, which may be purchased in
an orderly fashion once the market has stabilized. As individual securities are
purchased, an equivalent amount of futures contracts could be terminated by
offsetting sales. The Fund may sell futures contracts in anticipation of or in a
general market or market sector decline that may adversely affect the market
value of the Fund's securities ("defensive hedge"). To the extent that the
Fund's portfolio of securities changes in value in correlation with the
underlying security or index, the sale of futures contracts substantially
reduces the risk to the Fund of a market decline and, by so doing, provides an
alternative to the liquidation of securities positions in the Fund with
attendant transaction costs. Ordinarily transaction costs associated with
futures transactions are lower than the transaction costs which would be
incurred in the purchase or sale of the underlying securities.
Foreign stock index futures traded outside the United States include the
Nikkei Index of 225 Japanese stocks traded on the Singapore International
Monetary Exchange ("Nikkei Index"), Osaka Index of 50 Japanese stocks traded on
the Osaka Exchange, Financial Times Stock Exchange Index of the 100 largest
stocks on the London Stock Exchange, the All Ordinaries Share Price Index of 307
stocks on the Sydney, Melbourne Exchanges, Hang Seng Index of 33 stocks on the
Hong Kong Stock Exchange, Barclays Share Price Index of 40 stocks on the New
Zealand Stock Exchange and Toronto Index of 35 stocks on the Toronto Stock
Exchange. Futures and futures options on the Nikkei Index are traded on the
Chicago Mercantile Exchange and United States commodity exchanges may develop
futures and futures options on other indices of foreign securities. Futures and
options on United States devised index of foreign stocks are also being
developed. Investments in securities of foreign entities and securities
denominated in foreign currencies involve risks not typically involved in
domestic investment, including fluctuations in foreign exchange rates, future
foreign political and economic developments, and the possible imposition of
exchange controls or other foreign or United States governmental laws or
restrictions applicable to such investments.
Special Risks Associated with Futures Transactions. There are several risks
connected with the use of futures contracts as a hedging device. These include
the risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities, currency or index the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation, or no correlation, between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities, currency or index upon which the
futures contract is based. If the price of the futures contract moves less than
the price of the securities being hedged, the hedge will not be fully effective.
To compensate for this imperfect correlation, the Fund could buy or sell futures
contracts in a greater dollar amount than the dollar amount of securities being
hedged if the historical volatility of the securities being hedged is greater
than the historical volatility of the securities, currency or index underlying
the futures contract. Conversely, the Fund could buy or sell futures contracts
in a lesser dollar amount than the dollar amount of the securities being hedged
if the historical volatility of the securities being hedged is less than the
historical volatility of the securities, currency or index underlying the
futures contract. It is also possible that the value of futures contracts held
by the Fund could decline at the same time as portfolio securities being hedged;
if this occurred, the Fund would lose money on the futures contract in addition
to suffering a decline in value in the portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities, currency or index
underlying the futures contract due to certain market distortions. First, all
participants in the futures market are subject to margin depository and
maintenance requirements. Rather than meet additional margin depositary
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the futures
market and the securities or index underlying the futures contract. Second, from
the point of view of speculators, the deposit requirements in the futures market
are less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures markets and because of the imperfect correlation between movements in
futures contracts and movements in the securities underlying them, a correct
forecast of general market trends by the Adviser may still not result in a
successful hedging transaction.
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There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movement, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
predict correctly the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, there is no guarantee that the
price of the securities being hedged will, in fact, correlate with the price
movements in a futures contract and thus provide an offset to losses on the
futures contract. Option on futures contracts to be sold or purchased by the
Fund will be traded on United States or foreign exchange or over-the-counter.
The Fund will not enter into futures contracts or option transaction
(except for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of its initial margin and premiums on open
futures contracts and options exceeds 5% of the fair market value of the Fund's
assets; however, in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. In order to prevent leverage in connection with the purchase of
futures contracts by the Fund, an amount of cash or liquid securities equal to
the market value of the obligation under the futures contracts (less any related
margin deposits) will be maintained in a segregated account with the custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and sell options on futures contracts. Options
on futures contracts to be sold or purchased by the Fund will be traded on
United States or foreign exchanges or over-the-counter. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract (a long position if the option is a call
and a short position if the option is a put), at a specified exercise price at
any time during the option period. As a writer of an option on a futures
contract, the Fund is subject to initial margin and maintenance requirements
similar to those applicable to futures contracts. In addition, net option
premiums received by the Fund are required to be included as initial margin
deposits. When an option on a futures contract is exercised, delivery of the
futures position is accompanied by cash representing the difference between the
current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purposes as the sale of a futures contract; at the same time, it
could sell put options at a lower strike price (a
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"put bear spread") to offset part of the cost of the strategy to the Fund. The
purchase of call options on futures contracts is intended to serve the same
purpose as the actual purchase of the futures contract.
In addition to the risks described above which apply to all options
transactions, there are several special risks relating to options on futures.
The Adviser will not purchase options on futures on any exchange unless, in the
Adviser's opinion, a liquid secondary exchange market for such options exists.
Compared to the use of futures, the purchase of options on futures involves less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). However there may be
circumstances, such as when there is no movement in the level of the index or in
the price of the underlying security, when the use of an option on a future
would result in a loss to the Fund when the use of a future would not.
Additional Risks of Options and Futures Transactions. Each of the United
States exchanges has established limitations governing the maximum number of
call or put options on the same underlying security or futures contract (whether
or not covered) which may be sold by a single investor, whether acting alone or
in concert with others (regardless of whether such options are written on the
same or different exchanges or are held or written on one or more accounts or
through one or more brokers). Option positions of all investment companies
advised by the Adviser are combined for purposes of these limits. An exchange
may order the liquidation of positions found to be in violation of these limits
and it may impose other sanctions or restrictions. These position limits may
restrict the number of listed options which the Fund may write.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures or related options, the Fund could
experience delays or losses in liquidating open positions purchased or incur a
loss of all or part of its margin deposits with the broker. Transactions are
entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
ADDITIONAL RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS
ON FOREIGN CURRENCIES
Unlike transactions entered into by the Fund in futures contracts, options
on foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) by the Securities and Exchange Commission ("SEC"). To the contrary,
such instruments are traded through financial institutions acting as
market-makers, although foreign currency options are also traded on certain
national securities exchanges, such as the Philadelphia Stock Exchange and the
Chicago Board Options Exchange, subject to SEC regulation. Similarly, options on
currencies may be traded over-the-counter. In an over-the-counter trading
environment, many of the protections afforded to exchange participants will not
be available. For example, there are no daily price fluctuation limits, and
adverse market movements could, therefore, continue to an unlimited extent over
a period of time. Although the purchaser of an option cannot lose more than the
amount of the premium plus related transaction costs, this entire amount could
be lost. Moreover, the option seller and a trader of forward contracts could
lose amounts substantially in excess of their initial investments, due to the
margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the Fund
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example,
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exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the Fund's
ability to act upon economic events occurring in foreign markets during
nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
FORWARD COMMITMENTS
Relative to a Forward Commitment purchase, the Fund maintains a segregated
account (which is marked to market daily) of cash, cash equivalents or liquid
securities (which may have maturities which are longer than the term of the
Forward Commitment) with the Fund's custodian in an aggregate amount equal to
the amount of its commitment as long as the obligation to purchase continues.
Since the market value of both the securities or currency subject to the Forward
Commitment and the securities or currency held in the segregated account may
fluctuate, the use of Forward Commitments may magnify the impact of interest
rate changes on the Fund's net asset value.
A Forward Commitment sale is covered if the Fund owns or has the right to
acquire the underlying securities or currency subject to the Forward Commitment.
A Forward Commitment sale is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in value of a security or
currency which the Fund owns or has the right to acquire. In either
circumstance, the Fund maintains in a segregated account (which is marked to
market daily) either the security or currency covered by the Forward Commitment
or cash, cash equivalents or liquid securities (which may have maturities which
are longer than the term of the Forward Commitment) with the Fund's custodian in
an aggregate amount equal to the amount of its commitment as long as the
obligation to sell continues. By entering into a Forward Commitment sale
transaction, the Fund foregoes or reduces the potential for both gain and loss
in the security which is being hedged by the Forward Commitment sale. See the
Prospectus for further information.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with banks or broker-dealers
deemed to be creditworthy by the Adviser under guidelines approved by the
Trustees. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are fully
collateralized by the underlying debt securities and are considered to be loans
under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund
pays for such securities only upon physical delivery or evidence of book entry
transfer to the account of a custodian or bank acting as agent. The seller under
a repurchase agreement is required to maintain the value of the underlying
securities marked to market daily at not less than the repurchase price. The
underlying securities (normally securities of the U.S. Government, or its
agencies and instrumentalities) may have maturity dates exceeding one year. The
Fund does not bear the risk of a decline in value of the underlying securities
unless the seller defaults under its repurchase obligation. In the event of a
bankruptcy or other default of a seller of a repurchase agreement, the Fund
could experience both delays in liquidating the underlying securities and loss
including: (a) possible decline in the value of the underlying security during
the period while the Fund seeks to enforce its rights thereto, (b) possible lack
of access to income on the underlying security during this period, and
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<PAGE> 162
(c) expenses of enforcing its rights. See "Investment Practices -- Repurchase
Agreements" in the Prospectus for further information.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without approval by the vote of a majority of its
outstanding voting shares, which is defined by the 1940 Act as the lesser of (i)
67% or more of the voting securities present at the meeting, if the holders of
more than 50% of the outstanding voting securities of the Fund are present or
represented by proxy; or (ii) more than 50% of the outstanding voting
securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. These
restrictions provide that the Fund shall not:
1. Engage in the underwriting of securities of other issuers, except that
the Fund may sell an investment position even though it may be deemed
to be an underwriter under the federal securities laws.
2. With respect to 75% of its total assets, invest more than 5% of its
assets in the securities of any one issuer (except the U.S. Government,
its agencies and instrumentalities) or purchase more than 10% of the
outstanding voting securities of any one issuer, except that the Fund
may purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
3. Borrow money except temporarily from banks to facilitate payment of
redemption requests and then only in amounts not exceeding 33 1/3% of
its net assets, or pledge more than 10% of its net assets in connection
with permissible borrowings or purchase additional securities when
money borrowed exceeds 5% of its net assets. Margin deposits or
payments in connection with the writing of options, or in connection
with the purchase or sale of forward contracts, futures, foreign
currency futures and related options, are not deemed to be a pledge or
other encumbrance.
4. Lend money or securities except by the purchase of a portion of an
issue of bonds, debentures or other obligations of types commonly
distributed to institutional investors publicly or privately (in the
latter case the investment will be subject to the stated limits on
investments in "restricted securities"), and except by the purchase of
securities subject to repurchase agreements.
5. Buy or sell real estate including real estate limited partnerships,
provided that the foregoing prohibition does not apply to a purchase
and sale of (i) securities which are secured by real estate, (ii)
securities representing interests in real estate, and (iii) securities
of companies operating in the real estate industry, including real
estate investment trusts. The Fund may hold and sell real estate
acquired as a result of the ownership of its securities.
6. Invest in commodities or commodity contracts, except that the Fund may
enter into transactions in options, futures contracts or related
options including foreign currency futures contracts and related
options and forward contracts.
7. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts, forward contracts, forward commitments and other investment
strategies and instruments that would be considered "senior securities"
but for the maintenance by the Fund of a segregated account with its
custodian or some other form of "cover."
8. Concentrate its investment in any one industry, except that the Fund
will invest more than 25% of its total assets in the real estate
industry and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
9. Write, purchase or sell puts, calls or combinations thereof, except
that the Fund may (a) write covered or fully collateralized call
options, write secured put options, and enter into closing or
B-11
<PAGE> 163
offsetting purchase transactions with respect to such options, (b)
purchase and sell options to the extent that the premiums paid for all
such options owned at any time do not exceed 10% of its total assets
and (c) engage in transactions in futures contracts and related options
transactions provided that such transactions are entered into for bona
fide hedging purposes (or meet certain conditions as specified in CFTC
regulations), and provided further that the aggregate initial margin
and premiums do not exceed 5% of the fair market value of the Fund's
total assets.
10. The Fund may not make short sales of securities, unless at the time of
the sale it owns or has the right to acquire an equal amount of such
securities; provided that this prohibition does not apply to the
writing of options or the sale of forward contracts, futures, foreign
currency futures or related options.
In addition to the foregoing fundamental investment policies which may not
be changed without shareholder approval, the Fund is subject to the following
policies which may be amended by the Fund's Trustees and which apply at the time
of purchase of portfolio securities.
1. The Fund may not make investments for the purpose of exercising control
or management although the Fund retains the right to vote securities
held by it and except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act.
2. The Fund may not purchase securities on margin but the Fund may obtain
such short-term credits as may be necessary for the clearance of
purchases and sales of securities. The deposit or payment by the Fund
of initial or maintenance margin in connection with forward contracts,
futures, foreign currency futures or related options is not considered
the purchase of a security on margin.
3. The Fund may not invest in the securities issued by other investment
companies as part of a merger, reorganization or other acquisition,
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
4. The Fund may not invest more than 5% of its net assets in warrants or
rights valued at the lower of cost or market, nor more than 2% of its
net assets in warrants or rights (valued on such basis) which are not
listed on the New York Stock Exchange or American Stock Exchange.
Warrants or rights acquired in units or attached to other securities
are not subject to the foregoing limitation.
5. The Fund may not invest in securities of any company if any officer or
trustee/director of the Fund or of the Adviser owns more than 1/2 of 1%
of the outstanding securities of such company, and such officers and
trustees/directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such issuer.
6. The Fund may not invest in interests in oil, gas, or other mineral
exploration or development programs or invest in oil, gas, or mineral
leases, except that the Fund may acquire securities of public companies
which themselves are engaged in such activities.
7. The Fund may not invest more than 5% of its total assets in securities
of unseasoned issuers which have been in operation directly or through
predecessors for less than three years, except that the Fund may
purchase securities of other investment companies to the extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief from
the provisions of the 1940 Act.
8. The Fund may not purchase or otherwise acquire any security if, as a
result, more than 15% of its net assets, taken at current value, would
be invested in securities that are illiquid by virtue of the absence of
a readily available market. This policy does not apply to restricted
securities eligible for resale pursuant to Rule 144A under the
Securities Act of 1933 which the Board of Trustees or the Adviser under
Board approved guidelines, may determine are liquid nor does it apply
to other securities for
B-12
<PAGE> 164
which, notwithstanding legal or contractual restrictions on resale, a
liquid market exists. Also excluded from this limitation on restricted
securities are securities purchased by the Fund of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief from the provisions of the 1940 Act.
The Fund may, notwithstanding any other fundamental investment policy or
limitation, invest all of its assets in the securities of a single open-end
management investment company with substantially the same fundamental investment
objectives, policies and restrictions as the Fund.
TRUSTEES AND OFFICERS
The tables below list the trustees and officers of the Fund and other
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with VK/AC
Holding, Inc. ("VKAC Holding"), Van Kampen American Capital, Inc. ("Van Kampen
American Capital" or "VKAC"), Van Kampen American Capital Investment Advisory
Corp. ("Advisory Corp."), Van Kampen American Capital Asset Management, Inc.
("Asset Management"), Van Kampen American Capital Distributors, Inc., the
distributor of the Fund's shares (the "Distributor"), Van Kampen American
Capital Advisors Corp., Van Kampen Merritt Equity Advisors Corp., Van Kampen
American Capital Insurance Agency of Illinois, Inc., VK/AC System, Inc., Van
Kampen American Capital Record Keeping Services, Inc., American Capital
Contractual Services, Inc., Van Kampen American Capital Trust Company, Van
Kampen American Capital Exchange Corporation, and ACCESS Investors Services
Inc., the Fund's transfer agent ("ACCESS"). Advisory Corp. and Asset Management
sometimes are referred to herein collectively as the "Advisers". For purposes
hereof, the term "Fund Complex" includes each of the open-end investment
companies advised by the Advisers (excluding the Van Kampen American Capital
Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Co-founder, and prior to August 1996,
1632 Morning Mountain Road Chairman, Chief Executive Officer and President, MDT
Raleigh, NC 27614 Corporation (now known as Getinge/Castle, Inc., a
Date of Birth: 07/14/32 subsidiary of Getinge Industrier AB), a company which
develops, manufactures, markets and services medical and
scientific equipment. Trustee/Director of each of the
funds in the Fund Complex.
Richard M. DeMartini*..................... President and Chief Operating Officer, Individual Asset
Two World Trade Center Management Group, a division of Morgan Stanley Dean
66th Floor Witter & Co. Mr. DeMartini is a Director of InterCapital
New York, NY 10048 Funds, Dean Witter Distributors, Inc. and Dean Witter
Date of Birth: 10/12/52 Trust Company. Trustee of the TCW/DW Funds. Director of
the National Healthcare Resources, Inc. Formerly Vice
Chairman of the Board of the National Association of
Securities Dealers, Inc. and Chairman of the Board of the
Nasdaq Stock Market, Inc. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
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<PAGE> 165
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an executive
Sears Tower search firm. Prior to 1997, Partner, Ray & Berndtson,
233 South Wacker Drive Inc., an executive recruiting and management consulting
Suite 7000 firm. Formerly, Executive Vice President of ABN AMRO,
Chicago, IL 60606 N.A., a Dutch bank holding company. Prior to 1992,
Date of Birth: 06/03/48 Executive Vice President of La Salle National Bank.
Trustee on the University of Chicago Hospitals Board, The
International House Board and the Women's Board of the
University of Chicago. Trustee/Director of each of the
funds in the Fund Complex.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of the
11 DuPont Circle, N.W. United States. Formerly, advisor to the Dennis Trading
Washington, D.C. 20036 Group Inc. Prior to 1992, President and Chief Executive
Date of Birth: 02/29/52 Officer, Director and Member of the Investment Committee
of the Joyce Foundation, a private foundation.
Trustee/Director of each of the funds in the Fund
Complex.
Jack E. Nelson............................ President, Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President, Nelson Ivest Brokerage Services Inc.,
Date of Birth: 02/13/36 a member of the National Association of Securities
Dealers, Inc. ("NASD") and Securities Investors
Protection Corp. ("SIPC"). Trustee/Director of each of
the funds in the Fund Complex.
Don G. Powell*............................ Chairman, President and a Director of VKAC. Chairman and
2800 Post Oak Blvd. a Director of the Advisers and the Distributor. Chairman
Houston, TX 77056 and a Director of ACCESS. Director or officer of certain
Date of Birth: 10/19/39 other subsidiaries of VKAC. Chairman of the Board of
Governors and the Executive Committee of the Investment
Company Institute. Prior to November 1996, President,
Chief Executive Officer and a Director of VKAC Holding.
Trustee/Director of each of the funds in the Fund Complex
and other funds advised by the Advisers or Van Kampen
American Capital Management, Inc.
Phillip B. Rooney......................... Vice Chairman and Director of The ServiceMaster Company,
One ServiceMaster Way a business and consumer services company. Director of
Downers Grove, IL 60515 Illinois Tool Works, Inc., a manufacturing company; the
Date of Birth: 07/08/44 Urban Shopping Centers Inc., a retail mall management
company; and Stone Container Corp., a paper manufacturing
company. Trustee, University of Notre Dame. Formerly,
President and Chief Executive Officer, Waste Management,
Inc., an environmental services company, and prior to
that President and Chief Operating Officer, Waste
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex.
Fernando Sisto............................ Professor Emeritus and, prior to 1995, Dean of the
155 Hickory Lane Graduate School, Stevens Institute of Technology.
Closter, NJ 07624 Director, Dynalysis of Princeton, a firm engaged in
Date of Birth: 08/02/24 engineering research. Trustee/Director of each of the
funds in the Fund Complex.
</TABLE>
B-14
<PAGE> 166
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom (Illinois), legal counsel to the funds in the Fund
Chicago, IL 60606 Complex, and other open-end and closed-end funds advised
Date of Birth: 08/22/39 by the Advisers or Van Kampen American Capital
Management, Inc. Trustee/Director of each of the funds in
the Fund Complex, and other open-end and closed-end funds
advised by the Advisers or Van Kampen American Capital
Management, Inc.
</TABLE>
- ---------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. DeMartini and
Powell are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter & Co. or its affiliates.
B-15
<PAGE> 167
OFFICERS
Messrs. McDonnell, Hegel, Nyberg, Wood, Sullivan, Dalmaso, Martin,
Wetherell and Hill are located at One Parkview Plaza, Oakbrook Terrace, IL
60181. The Fund's other officers are located at 2800 Post Oak Blvd., Houston, TX
77056.
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell......... President Executive Vice President and a Director of
Date of Birth: 05/20/42 VKAC and VK/AC Holding, Inc. President,
Chief Operating Officer and a Director of
the Advisers, Van Kampen American Capital
Advisors, Inc., and Van Kampen American
Capital Management, Inc. President and a
Director of Van Kampen Merritt Equity
Advisors Corp. Prior to April of 1997, he
was a Director of Van Kampen Merritt Equity
Holdings Corp. Prior to September of 1996,
Mr. McDonnell was Chief Executive Officer
and Director of MCM Group, Inc., McCarthy,
Crisanti & Maffei, Inc. and Chairman and
Director of MCM Asia Pacific Company,
Limited and MCM (Europe) Limited. Prior to
November 1996, Executive Vice President and
a Director of VKAC Holding. Prior to July
of 1996, Mr. McDonnell was President, Chief
Operating Officer and Trustee of VSM Inc.
and VCJ Inc. President of each of the funds
in the Fund Complex. President, Chairman of
the Board and Trustee of other investment
companies advised by the Advisers or their
affiliates.
Peter W. Hegel.............. Vice President Executive Vice President of the Advisers,
Date of Birth: 06/25/56 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Prior to July of 1996, Mr.
Hegel was a Director of VSM Inc. Prior to
September of 1996, he was a Director of
McCarthy, Crisanti & Maffei, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Curtis W. Morell............ Vice President and Chief Senior Vice President of the Advisers, Vice
Date of Birth: 08/04/46 Accounting Officer President and Chief Accounting Officer of
each of the funds in the Fund Complex and
certain other investment companies advised
by the Advisers or their affiliates.
</TABLE>
B-16
<PAGE> 168
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Ronald A. Nyberg............ Vice President and Secretary Executive Vice President, General Counsel,
Date of Birth: 07/29/53 Secretary and Director of VKAC and VK/AC
Holding, Inc. Mr. Nyberg is also Executive
Vice President, General Counsel and a
Director of Van Kampen Merritt Equity
Holdings Corp. Executive Vice President,
General Counsel, Assistant Secretary and a
Director of the Advisers and the
Distributor, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Management, Inc., Van Kampen American
Capital Exchange Corporation, American
Capital Contractual Services, Inc. and Van
Kampen American Capital Trust Company.
Executive Vice President, General Counsel
and Assistant Secretary of ACCESS. Director
or officer of certain other subsidiaries of
VKAC. Prior to June of 1997, Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to April of 1997,
he was Executive Vice President, General
Counsel and Director of Van Kampen Merritt
Equity Advisors Corp. Prior to July of
1996, Mr. Nyberg was Executive Vice
President and General Counsel of VSM Inc.
and Executive Vice President and General
Counsel of VCJ Inc. Prior to September of
1996, he was General Counsel of McCarthy,
Crisanti & Maffei, Inc. Vice President and
Secretary of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Alan T. Sachtleben.......... Vice President Executive Vice President of the Advisers,
Date of Birth: 04/20/42 Van Kampen American Capital Management,
Inc. and Van Kampen American Capital
Advisors, Inc. Vice President of each of
the funds in the Fund Complex and certain
other investment companies advised by the
Advisers or their affiliates.
Paul R. Wolkenberg.......... Vice President Executive Vice President and Director of
Date of Birth: 11/10/44 VKAC, and VK/AC Holding Inc. Executive Vice
President of the AC Adviser and the
Distributor. President and a Director of
ACCESS. President and Chief Operating
Officer of Van Kampen American Capital
Record Keeping Services, Inc. Vice
President of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
B-17
<PAGE> 169
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Edward C. Wood III.......... Vice President and Chief Senior Vice President of the Advisers and
Date of Birth: 01/11/56 Financial Officer Van Kampen American Capital Management,
Inc. Vice President and Chief Financial
Officer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
John L. Sullivan............ Treasurer First Vice President of the Advisers.
Date of Birth: 08/20/55 Treasurer of each of the funds in the Fund
Complex and certain other investment
companies advised by the Advisers or their
affiliates.
Tanya M. Loden.............. Controller Vice President of the Advisers. Controller
Date of Birth: 11/19/59 of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Nicholas Dalmaso............ Assistant Secretary Associate General Counsel and Assistant
Date of Birth: 03/01/65 Secretary of VKAC. Vice President,
Associate General Counsel and Assistant
Secretary of the Advisers, the Distributor,
Van Kampen American Capital Advisors, Inc.
and Van Kampen American Capital Management,
Inc. Assistant Secretary of each of the
funds in the Fund Complex and other
investment companies advised by the
Advisers or their affiliates.
Huey P. Falgout, Jr......... Assistant Secretary Vice President and a Senior Attorney of
Date of Birth: 11/15/63 VKAC. Vice President and Assistant
Secretary of the Advisers, the Distributor,
ACCESS, Van Kampen American Capital
Management, Inc., American Capital
Contractual Services, Inc., Van Kampen
American Capital Exchange Corporation and
Van Kampen American Capital Advisors, Inc.
Assistant Secretary of each of the funds in
the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
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<PAGE> 170
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Scott E. Martin............. Assistant Secretary Senior Vice President, Deputy General
Date of Birth: 08/20/56 Counsel and Assistant Secretary of VKAC and
VKAC Holding, Inc. Senior Vice President,
Deputy General Counsel and Secretary of the
Advisers, the Distributor, ACCESS American
Capital Contractual Services, Inc., Van
Kampen American Capital Management, Inc.,
Van Kampen American Capital Exchange
Corporation, Van Kampen American Capital
Advisors, Inc., Van Kampen American Capital
Insurance Agency of Illinois, Inc., VKAC
System, Inc., Van Kampen American Capital
Record Keeping Services, Inc. and Van
Kampen Merritt Equity Advisors Corp. Prior
to April of 1997, Senior Vice President,
Deputy General Counsel and Secretary of Van
Kampen American Capital Services, Inc. and
Van Kampen Merritt Holdings Corp. Prior to
September of 1996, Mr. Martin was Deputy
General Counsel and Secretary of McCarthy,
Crisanti & Maffei, Inc., and prior to July
of 1996, he was Senior Vice President,
Deputy General Counsel and Secretary of VSM
Inc. and VCJ Inc. Assistant Secretary of
each of the funds in the Fund Complex and
other investment companies advised by the
Advisers or their affiliates.
Weston B. Wetherell......... Assistant Secretary Vice President, Associate General Counsel
Date of Birth: 06/15/56 and Assistant Secretary of VKAC, the
Advisers, the Distributor, Van Kampen
American Capital Management, Inc. and Van
Kampen American Capital Advisors, Inc.
Prior to September of 1996, Mr. Wetherell
was Assistant Secretary of McCarthy,
Crisanti & Maffei, Inc. Assistant Secretary
of each of the funds in the Fund Complex
and other investment companies advised by
the Advisers or their affiliates.
Steven M. Hill.............. Assistant Treasurer Vice President of the Advisers. Assistant
Date of Birth: 10/16/64 Treasurer of each of the funds in the Fund
Complex and other investment companies
advised by the Advisers or their
affiliates.
Michael Robert Sullivan..... Assistant Controller Assistant Vice President of the Advisers.
Date of Birth: 03/30/33 Assistant Controller of each of the funds
in the Fund Complex and other investment
companies advised by the Advisers or their
affiliates.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 64 operating funds in the Fund Complex. For purposes of the following
compensation and benefits discussion, the Fund Complex is divided into the
following three groups: the funds advised by Asset Management (the "AC Funds"),
the funds advised by Advisory Corp. excluding funds organized as series of the
Morgan Stanley Fund, Inc. (the "VK Funds") and the funds advised by Advisory
Corp. organized as series of the Morgan Stanley Fund, Inc. (the "MS Funds").
Each trustee/director who is not an affiliated person of VKAC, the Advisers, the
Distributor, ACCESS,
B-19
<PAGE> 171
Van Kampen American Capital or Morgan Stanley Dean Witter & Co. (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to the funds in the Fund Complex. Each fund in the Fund Complex
(except the money market series of the MS Funds) provides a deferred
compensation plan to its Non-Affiliated Trustees that allows trustees/directors
to defer receipt of their compensation and earn a return on such deferred
amounts. Deferring compensation has the economic effect as if the Non-
Affiliated Trustee reinvested his or her compensation into the funds. Each fund
in the Fund Complex (except the money market series of the MS Funds) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met as more fully described below.
The trustees recently reviewed and adopted a standardized compensation and
benefits program for each fund in the Fund Complex. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes an annual retainer in
an amount equal to $50,000 per calendar year, due in four quarterly installments
on the first business day of each quarter. Payment of the annual retainer is
allocated among the funds in the Fund Complex (except the money market series of
the MS Funds) on the basis of the relative net assets of each fund as of the
last business day of the preceding calendar quarter. Effective January 1, 1998,
the compensation of each Non-Affiliated Trustee includes a per meeting fee from
each fund in the Fund Complex (except the money market series of the MS Funds)
in the amount of $200 per quarterly or special meeting attended by the
Non-Affiliated Trustee, due on the date of the meeting, plus reasonable expenses
incurred by the Non-Affiliated Trustee in connection with his or her services as
a trustee, provided that no compensation will be paid in connection with certain
telephonic special meetings.
For each AC Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from the AC
Funds includes an annual retainer in an amount equal to $35,000 per calendar
year, due in four quarterly installments on the first business day of each
calendar quarter. The AC Funds pay each Non-Affiliated Trustee a per meeting fee
in the amount of $2,000 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Payment of the annual retainer and the regular meeting
fee is allocated among the AC Funds (i) 50% on the basis of the relative net
assets of each AC Fund to the aggregate net assets of all the AC Funds and (ii)
50% equally to each AC Fund, in each case as of the last business day of the
preceding calendar quarter. Each AC Fund which is the subject of a special
meeting of the trustees generally pays each Non-Affiliated Trustee a per meeting
fee in the amount of $125 per special meeting attended by the Non-Affiliated
Trustee, due on the date of such meeting, plus reasonable expenses incurred by
the Non-Affiliated Trustee in connection with his or her services as a trustee,
provided that no compensation will be paid in connection with certain telephonic
special meetings.
For each VK Fund's last fiscal year and the period up to and including
December 31, 1997, the compensation of each Non-Affiliated Trustee from each VK
Fund includes an annual retainer in an amount equal to $2,500 per calendar year,
due in four quarterly installments on the first business day of each calendar
quarter. Each Non-Affiliated Trustee receives a per meeting fee from each VK
Fund in the amount of $125 per regular quarterly meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee. Each Non-Affiliated Trustee receives a per meeting fee
from each VK Fund in the amount of $125 per special meeting attended by the
Non-Affiliated Trustee, due on the date of such meeting, plus reasonable
expenses incurred by the Non-Affiliated Trustee in connection with his or her
services as a trustee, provided that no compensation will be paid in connection
with certain telephonic special meetings.
For the period from July 2, 1997 up to and including December 31, 1997, the
compensation of each Non-Affiliated Trustee from the MS Funds was based
generally on the compensation amounts and methodology used by such funds prior
to their joining the current Fund Complex on July 2, 1997. Each trustee/director
was elected as a director of the MS Funds on July 2, 1997. Prior to July 2,
1997, the MS Funds were part of another fund complex (the "Prior Complex") and
the former directors of the MS Funds were paid an aggregate fee allocated among
the funds in the Prior Complex that resulted in individual directors receiving
total compensation between approximately $8,000 to $10,000 from the MS Funds
during such funds' last fiscal year.
B-20
<PAGE> 172
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such Fund prior to such Non-Affiliated Trustee's retirement,
has at least 10 years of service (including years of service prior to adoption
of the retirement plan) and retires at or after attaining the age of 60, is
eligible to receive a retirement benefit equal to $2,500 per year for each of
the ten years following such retirement from such Fund. Non-Affiliated Trustees
retiring prior to the age of 60 or with fewer than 10 years but more than 5
years of service may receive reduced retirement benefits from such Fund. Each
trustee/director has served as a member of the Board of Trustees of the Fund
since he or she was first appointed or elected in the year set forth below. The
retirement plan contains a Fund Complex retirement benefit cap of $60,000 per
year.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<TABLE>
<CAPTION>
FUND COMPLEX
----------------------------------------------------------
AGGREGATE AGGREGATE TOTAL
YEAR FIRST PENSION OR ESTIMATED MAXIMUM COMPENSATION
APPOINTED OR AGGREGATE COMPENSATION RETIREMENT BENEFITS ANNUAL BENEFITS BEFORE DEFERRAL
ELECTED TO THE BEFORE DEFERRAL FROM THE ACCRUED AS PART OF FROM THE FUND UPON FROM FUND
NAME(1) BOARD FUND(2) EXPENSES(3) RETIREMENT(4) COMPLEX(5)
------- -------------- ------------------------ ------------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
J. Miles Branagan* 1994 $800 $30,328 $60,000 $111,197
Linda Hutton Heagy* 1995 800 3,141 60,000 111,197
R. Craig Kennedy* 1995 800 2,229 60,000 111,197
Jack E. Nelson* 1995 800 15,820 60,000 104,322
Jerome L. Robinson 1995 800 32,020 15,750 107,947
Phillip B. Rooney* 1997 600 0 60,000 74,697
Dr. Fernando Sisto* 1994 800 60,208 60,000 111,197
Wayne W. Whalen* 1995 800 10,788 60,000 111,197
</TABLE>
- ---------------
* Currently a member of the Board of Trustees. Mr. Phillip B. Rooney became a
member of the Board of Trustees effective April 14, 1997 and thus does not
have a full fiscal year of information to report.
(1) Persons not designated by an asterisk are not currently members of the Board
of Trustees, but were members of the Board of Trustees during the Fund's
most recently completed fiscal year. Mr. Robinson retired from the Board of
Trustees on December 31, 1997. Trustees not eligible for compensation are
not included in the compensation table.
(2) The amounts shown in this column represent the Aggregate Compensation before
Deferral with respect to the Fund's fiscal year ended December 31, 1997. The
following trustees deferred compensation from the Fund during the fiscal
year ended December 31, 1997: Mr. Branagan, $800; Ms. Heagy, $800; Mr.
Kennedy, $400; Mr. Nelson, $800; Mr. Robinson, $800; Mr. Rooney, $400; Dr.
Sisto, $400; and Mr. Whalen, $800. Amounts deferred are retained by the Fund
and earn a rate of return determined by reference to either the return on
the common shares of the Fund or other funds in the Fund Complex as selected
by the respective Non-Affiliated Trustee, with the same economic effect as
if such Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act,
B-21
<PAGE> 173
each Fund may invest in securities of those funds selected by the
Non-Affiliated Trustees in order to match the deferred compensation
obligation. The cumulative deferred compensation (including interest)
accrued with respect to each trustee, including former trustees, from the
Fund as of December 31, 1997 is as follows: Mr. Branagan, $1,423; Dr.
Caruso, $1,730; Mr. Gaughan, $376; Ms. Heagy, $2,225; Mr. Kennedy, $1,504;
Mr. Lipshie, $0; Mr. Miller, $1,509; Mr. Nelson, $2,600; Mr. Rees, $205; Mr.
Robinson, $2,605; Mr. Rooney, $403; Dr. Sisto, $1,654; Mr. Vernon, $0; and
Mr. Whalen, $2,600. The deferred compensation plan is described above the
Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits expected to be accrued by the operating investment companies in the
Fund Complex for each of the current trustees for the Funds' respective
fiscal years ended in 1997. The retirement plan is described above the
Compensation Table.
(4) For Mr. Robinson, this is the sum of the actual annual benefits payable by
the operating investment companies in the Fund Complex as of the date of his
retirement for each year of the 10-year period since his retirement. For the
remaining trustees, this is the sum of the estimated maximum annual benefits
payable by the operating investment companies in the Fund Complex for each
year of the 10-year period commencing in the year of such trustee's
anticipated retirement. The Retirement Plan is described above the
Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all operating investment companies in the Fund Complex as of December 31,
1997 before deferral by the trustees under the deferred compensation plan.
Because the funds in the Fund Complex have different fiscal year ends, the
amounts shown in this column are presented on a calendar year basis. Certain
trustees deferred all or a portion of their aggregate compensation from the
Fund Complex during the calendar year ended December 31, 1997. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund
Complex. To the extent permitted by the 1940 Act, the Fund may invest in
securities of those investment companies selected by the Non-Affiliated
Trustees in order to match the deferred compensation obligation. The
Advisers and their affiliates also serve as investment adviser for other
investment companies; however, with the exception of Mr. Whalen, the
Non-Affiliated Trustees were not trustees of such investment companies.
Combining the Fund Complex with other investment companies advised by the
Advisers and their affiliates, Mr. Whalen received Total Compensation of
$268,447 during the calendar year ended December 31, 1997.
As of April 3, 1998, the trustees and officers of the Fund as a group owned
less than 1% of the outstanding shares of the Fund.
LEGAL COUNSEL
Skadden, Arps, Slate, Meagher & Flom (Illinois).
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets and to place orders for
the purchase and sale of its portfolio securities. The Adviser obtains and
evaluates economic, statistical, and financial information to formulate and
implement the Fund's investment programs. The Adviser also furnishes at no cost
to the Fund (except as noted herein) the services of sufficient executive and
clerical personnel for the Fund as are necessary to prepare registration
statements, prospectuses, shareholder reports, and notices and proxy
solicitation materials. In addition, the Adviser furnishes at no cost to the
Fund the services of the Fund's President, one or more Vice Presidents as
needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. Charges are
allocated among the investment
B-22
<PAGE> 174
companies advised or subadvised by the Adviser. A portion of these amounts were
paid to the Adviser or its parent in reimbursement of personnel, office space,
facilities and equipment costs attributable to the provision of accounting
services to the Fund. The services provided by the Adviser are at cost. The Fund
also pays service fees, distribution fees, custodian fees, legal and auditing
fees, the costs of reports to shareholders and all other ordinary expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the company for any actions or omissions if
it acted without willful misfeasance, bad faith, negligence or reckless
disregard of its obligations.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at the annual
rate of 1% of the average daily net assets of the Fund.
The Fund's average net asset value for purposes of computing the advisory
fee is determined by taking the average of all of the determinations of net
asset value for each business day during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month. The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any direct or indirect majority owned subsidiary of VK/AC Holding,
Inc., in connection with the purchase and sale of portfolio investments of the
Fund, less any direct expenses incurred by such subsidiary of VK/AC Holding,
Inc. in connection with obtaining such payments. The Adviser agrees to use its
best efforts to recapture tender solicitation fees and exchange offer fees for
the Fund's benefit, and to advise the Trustees of the Fund of any other
commissions, fees, brokerage or similar payments which may be possible under
applicable laws for the Adviser or any direct or indirect majority owned
subsidiary of VK/AC Holding, Inc. to receive in connection with the Fund's
portfolio transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitations applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the distribution plans.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it will terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
During the fiscal years ended December 31, 1995, 1996 and 1997, the Adviser
received $98,904, $312,156 and $1,010,205, respectively, in advisory fees from
the Fund. For such period, the Fund paid $48,971, $58,843 and $31,772,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser in reimbursement of personnel, facilities and equipment
costs attributable to the provision of accounting services to the Fund.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers. The Distributor's obligation is an agency or "best efforts"
arrangement under which the Distributor is required to take and pay for only
such shares of the Fund as may be sold to the public. The Distributor is not
obligated to sell any stated number of shares. The Distributor bears the cost of
printing (but not typesetting) prospectuses used in connection with this
offering and certain other costs including the cost of supplemental sales
literature and advertising. The Distribution and Service Agreement is
B-23
<PAGE> 175
renewable from year to year if approved (a) by the Fund's Trustees or by a vote
of a majority of the Fund's outstanding voting securities and (b) by the
affirmative vote of a majority of Trustees who are not parties to the
Distribution and Service Agreement or interested persons of any party, by votes
cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal periods are shown in the chart below. Advantage Capital Corporation is a
former affiliated dealer of the Fund.
<TABLE>
<CAPTION>
DEALER REALLOWANCES
AMOUNTS RECEIVED BY
TOTAL UNDERWRITING RETAINED ADVANTAGE CAPITAL
COMMISSIONS BY DISTRIBUTOR CORPORATION
------------------ -------------- -------------------
<S> <C> <C> <C>
Fiscal Year Ended December 31, 1995............. $ 68,340 $ 7,152 $ 3,322
Fiscal Year Ended December 31, 1996............. $206,662 $21,129 N/A
Fiscal Year Ended December 31, 1997............. $601,275 $67,390 N/A
</TABLE>
DISTRIBUTION AND SERVICE PLANS
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through an agreement (the "Distribution and Service Agreement") with the
Distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
The Distributor has entered into an agreement with The Prudential Insurance
Company of America under which the Fund shall be offered pursuant to the
PruArray Program. Trustees and other fiduciaries of retirement plans seeking to
invest in multiple fund families through broker-dealer retirement plan alliance
programs should contact Prudential for further information concerning the
PruArray Program including, but not limited to, minimum size and operational
requirements.
For the fiscal year ended December 31, 1997, the Fund's aggregate expenses
under the Plans for Class A shares were $81,025 or 0.25% of the Class A shares'
average net assets. Such expenses were paid to reimburse
B-24
<PAGE> 176
'the Distributor for payments made to financial intermediaries for servicing
Fund shareholders and for administering the Plans. For the fiscal year ended
December 31, 1997, the Fund's aggregate expenses under the Plans for Class B
shares were $488,536 or 1.00% of the Class B shares' average net assets. Such
expenses were paid to reimburse the Distributor for the following payments:
$379,882 for commissions and transaction fees paid to financial intermediaries
in respect of sales of Class B shares of the Fund and $108,654 for fees paid to
financial intermediaries for servicing Class B shareholders and administering
the Plans. For the fiscal year ended December 31, 1997, the Fund's aggregate
expenses under the Plans for Class C shares were $163,967 or 1.00% of the Class
C shares' average net assets. Such expenses were paid to reimburse the
Distributor for the following payments: $124,729 for commissions and transaction
fees paid to financial intermediaries in respect of sales of Class C shares of
the Fund and $39,238 for fees paid to financial intermediaries for servicing
Class C shareholders and administering the Class C Plan.
TRANSFER AGENT
During the fiscal years ended December 31, 1995, 1996 and 1997, ACCESS,
shareholder service agent and dividend disbursing agent for the Fund, received
fees, determined on a cost plus profit basis, aggregating $107,182, $115,264 and
$199,910, respectively, for these services. Beginning in 1998, the transfer
agency prices are determined through negotiations with the Fund's Board of
Trustees and are based on competitive market benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of the
commissions paid on such transactions. It is the policy of the Adviser to seek
the best security price available with respect to each transaction. In
over-the-counter transactions, orders are placed directly with a principal
market maker unless it is believed that a better price and execution can be
obtained by using a broker. Except to the extent that the Fund may pay higher
brokerage commissions for brokerage and research services (as described herein),
on a portion of its transactions executed on securities exchanges, the Adviser
seeks the best security price at the most favorable commission rate. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Fund as a factor in the
selection of firms to execute portfolio transactions for the Fund.
Section 28(e) of the Securities Exchange Act of 1934 ("Section 28(e)")
permits an investment adviser, under certain circumstances, to cause an account
to pay a broker or dealer who supplies brokerage and research services, a
commission for effecting a securities transaction in excess of the amount of
commission another broker or dealer would have charged for effecting the
transaction. Brokerage and research services include (a) furnishing advice as to
the value of securities, the advisability of investing in, purchasing or selling
securities, and the availability of securities or purchasers or sellers of
securities, (b) furnishing analyses and reports concerning issuers, industries,
securities, economic factors and trends, portfolio strategy, and the performance
of accounts, and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody).
Pursuant to provisions of the Advisory Agreement, the Fund's Trustees have
authorized the Adviser to cause the Fund to incur brokerage commissions in an
amount higher than the lowest available rate in return for research services
provided to the Adviser. The Adviser is of the opinion that the continued
receipt of supplemental investment research services from dealers is essential
to its provision of high quality portfolio management services to the Fund. The
Adviser undertakes that such higher commissions will not be paid by the Fund
unless (a) the Adviser determines in good faith that the amount is reasonable in
relation to the services in terms of the particular transaction or in terms of
the Adviser's overall responsibilities with respect
B-25
<PAGE> 177
to the accounts as to which they exercise investment discretion, (b) such
payment is made in compliance with the provisions of Section 28(e) and other
applicable state and federal laws, and (c) in the opinion of the Adviser, the
total commissions paid by the Fund are reasonable in relation to the expected
benefits to the Fund over the long term. The investment advisory fee paid by the
Fund under the Advisory Agreement is not reduced as a result of the Adviser's
receipt of research services.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. Research services furnished by firms
through which the Fund effects its securities transactions may be used by the
Adviser in servicing all of its accounts; not all of such services may be used
by the Adviser in connection with the Fund. In the opinion of the Adviser, the
benefits from research services to each of the accounts, including the Fund,
managed by the Adviser cannot be measured separately. Because the volume and
nature of the trading activities of the accounts are not uniform, the amount of
commissions in excess of the lowest available rate paid by each account for
brokerage and research services will vary. However, in the opinion of the
Adviser, such costs to the Fund will not be disproportionate to the benefits
received by the Fund on a continuing basis.
The Adviser seeks to allocate portfolio transactions equitably whenever
concurrent decisions are made to purchase or sell securities by the Fund and
another advisory account. In some cases, this procedure could have an adverse
effect on the price or the amount of securities available to the Fund. In making
such allocations among the Fund and other advisory accounts, the main factors
considered by the Adviser are the respective investment objectives, the relative
size of portfolio holdings of the same or comparable securities, the
availability of cash for investment, the size of investment commitments
generally held, and opinions of the persons responsible for recommending the
investment.
During the fiscal year ended December 31, 1997, the Fund paid $582,776 in
brokerage commissions on transactions totalling $253,413,916 to brokers selected
primarily on the basis of research services provided to the Adviser.
Effective October 31, 1996, Morgan Stanley Group Inc. ("Morgan Stanley")
became an affiliate of the Adviser. Effective May 31, 1997, Dean Witter Discover
& Co. ("Dean Witter") became an affiliate of the Adviser. The negotiated
commission paid to an affiliated broker on any transaction would be comparable
to that payable to a non-affiliated broker in a similar transaction.
The Fund paid the following commissions to these brokers during the periods
shown:
<TABLE>
<CAPTION>
AFFILIATED BROKERS
------------------
MORGAN DEAN
BROKERS STANLEY WITTER
-------- -------- -------
<S> <C> <C> <C>
Fiscal year 1995............................................ $ 93,865 N/A N/A
Fiscal year 1996............................................ $138,961 0 N/A
Fiscal year 1997............................................ $777,851 0 $7,608
Fiscal year 1997 Percentage:
Commissions with affiliate to total commissions........... -- N/A 0.98%
Value of brokerage transactions with affiliate to total
transactions........................................... -- N/A 0.07%
</TABLE>
DETERMINATION OF NET ASSET VALUE
The net asset value per share is determined as of the close of the New York
Stock Exchange (the "Exchange") (currently 4:00 p.m. New York time) on each
business day on which the Exchange is open. The net asset value of Fund shares
is computed by dividing the value of all securities plus other assets, less
liabilities, by the number of shares outstanding, and adjusting to the nearest
cent per share.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
on each business day in New York (i.e., a day on which the Exchange is open). In
addition, European or Far Eastern securities trading generally or in a
particular country or countries may not take place on all business days in New
York. Furthermore, trading takes place in Japanese markets on certain Saturdays
and in various foreign markets on days which are not business days in
B-26
<PAGE> 178
New York and on which the Fund's net asset value is not calculated and on which
the Fund does not effect sales, redemptions and repurchases of its shares. There
may be significant variations in the net asset value of Fund shares on days when
net asset value is not calculated and on which shareholders cannot redeem on
account of changes in prices of stocks traded in foreign stock markets.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class.
PURCHASE AND REDEMPTION OF SHARES
The following information supplements the section in the Fund's Prospectus
captioned "Purchase of Shares."
LETTER OF INTENT
The Fund will escrow shares totaling 5% of the dollar amount of the Letter
of Intent to be held by ACCESS in the name of the shareholder. The Letter of
Intent does not obligate the investor to purchase the indicated amount. In the
event the Letter of Intent goal is not achieved within the 13-month period, the
investor is required to pay the difference between sales charges otherwise
applicable to the purchases made during this period and sales charges actually
paid. Such payment may be made directly to the Distributor or, if not paid, the
Distributor will liquidate sufficient escrowed shares to obtain such difference.
If the goal is exceeded in an amount which qualifies for a lower sales charge, a
price adjustment is made by refunding the investor in shares of the Fund the
amount of excess sales charges, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed. The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
For purposes of the CDSC -- Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC -- Class A rather than a front-end load sales charge. In determining
whether a CDSC -- Class A is payable, it is assumed that shares held the longest
are the first to be redeemed.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC -- CLASS B
AND C")
As described in the Prospectus under "Purchase of Shares," redemptions of
Class B shares and Class C shares will be subject to a CDSC. The CDSC -- Class B
and C may be waived on redemptions of Class B shares and Class C shares in the
circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC -- Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of long-
continued and indefinite duration." While the Fund does not specifically adopt
the balance of the Code's definition which pertains to furnishing the Secretary
of Treasury with such proof as he or she may require, the
B-27
<PAGE> 179
Distributor will require satisfactory proof of death or disability before it
determines to waive the CDSC -- Class B and C.
In cases of disability or death, the CDSC -- Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC -- Class B and C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC -- Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more Participating Funds
(as defined in the Prospectus); in such event, as described below, the Fund will
"tack" the period for which the original shares were held onto the holding
period of the shares acquired in the transfer or rollover for purposes of
determining what, if any, CDSC -- Class B and C is applicable in the event that
such acquired shares are redeemed following the transfer or rollover. The charge
also will be waived on any redemption which results from the return of an excess
contribution pursuant to Section 408(d)(4) or (5) of the Code, the return of
excess deferral amounts pursuant to Code Section 401(k)(8) or 402(g)(2), or from
the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge will be waived on any minimum
distribution required to be distributed in accordance with Code Section
401(a)(9).
The Fund does not intend to waive the CDSC -- Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC -- Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC -- Class
B and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC -- Class B and C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
180 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest at net
asset value, with credit for any CDSC -- Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C shares of the Fund, provided that the reinvestment is
effected within 180 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC -- Class C to subsequent redemptions.
B-28
<PAGE> 180
(f) Redemption by Adviser
The Fund may waive the CDSC -- Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. Van Kampen American Capital and its
subsidiaries, including ACCESS, and the Fund employ procedures considered by
them to be reasonable to confirm that instructions communicated by telephone are
genuine. Such procedures include requiring certain personal identification
information prior to acting upon telephone instructions, tape recording
telephone communications, and providing written confirmation of instructions
communicated by telephone. If reasonable procedures are employed, neither Van
Kampen American Capital, ACCESS nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital, ACCESS and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund will be subject
to tax if, among other things, it fails to distribute net capital gains, or if
its annual distributions, as a percentage of its income, are less than the
distributions required by tax laws.
FUND PERFORMANCE
The Fund's average annual total return (computed in the manner described in
the Prospectus) for Class A shares of the Fund for (i) the one year period ended
December 31, 1997 was 14.91% and (ii) the three year and seven month period
ended December 31, 1997 was 18.43%. The Fund's average annual total return
(computed in the manner described in this Prospectus) for Class B shares of the
Fund for (i) the one year period ended December 31, 1997 was 15.76% and (ii) the
three year and seven month period ended December 31, 1997 was 18.71%. The
average annual total return (computed in the manner described in the Prospectus)
for Class C shares of the Fund for (i) the one year period ended December 31,
1997 was 18.78% and (ii) the three year and seven month period ended December
31, 1997 was 19.22%. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
B-29
<PAGE> 181
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.
Future results will be affected by changes in the general level of prices of
securities available for purchase and sale by the Fund.
Total return is computed separately for Class A shares, Class B shares and
Class C shares.
From time to time, in reports or other communications, or in advertising or
sales materials the Adviser may graphically illustrate the relative average
annual returns of the following categories for the prior 10-year period:
Inflation, Short-Term Government Securities, Long-Term Government Securities,
Equity REITs and Common Stocks.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Fund.
The Fund's primary investment objective is to seek to provide long-term
growth of capital. Current income is a secondary investment objective. The Fund
seeks to achieve its investment objectives by investing principally in
securities of companies in the real estate industry. In addition, Fund attempts
to remain fully invested to achieve consistent long-term performance. Investment
real estate is an asset class that often is overlooked by investors. Now, with
many real estate investment trusts being publicly traded, investors have an
opportunity to add this important asset to their portfolios.
OTHER INFORMATION
CUSTODY OF ASSETS -- All securities owned by the Fund and all cash, including
proceeds from the sale of shares of the Fund and of securities in the Fund's
investment portfolio, are held by State Street Bank and Trust Company, 225 West
Franklin Street, Boston, Massachusetts 02110, as Custodian.
SHAREHOLDER REPORTS -- Semi-annual statements are furnished to shareholders, and
annually such statements are audited by the independent accountants.
INDEPENDENT ACCOUNTANTS -- Price Waterhouse LLP, 200 East Randolph Drive,
Chicago, Illinois 60601, the independent accountants for the Fund, performs
annual audits of the Fund's financial statements.
B-30
<PAGE> 182
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS AND BOARD OF TRUSTEES OF
VAN KAMPEN AMERICAN CAPITAL REAL ESTATE SECURITIES FUND
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen American Capital Real
Estate Securities Fund (the "Fund") at December 31, 1997, and the results of its
operations, the changes in its net assets and the financial highlights for each
of the periods presented, in conformity with generally accepted accounting
principles. These financial statements and financial highlights (hereafter
referred to as "financial statements") are the responsibility of the Fund's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at December 31, 1997 by correspondence with the
custodian and brokers and the application of alternative auditing procedures
where confirmations from brokers were not received, provide a reasonable basis
for the opinion expressed above.
PRICE WATERHOUSE LLP
Chicago, Illinois
February 6, 1998
B-31
<PAGE> 183
PORTFOLIO OF INVESTMENTS
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON AND PREFERRED STOCKS 95.6%
APARTMENTS 18.7%
12,600 Amli Residential Properties Trust......................................... $ 280,350
112,800 Avalon Properties, Inc.................................................... 3,489,750
148,900 Bay Apartment Communities, Inc............................................ 5,807,100
155,900 Essex Property Trust, Inc................................................. 5,456,500
21,900 Irvine Apartment Communities, Inc......................................... 696,694
128,100 Oasis Residential, Inc.................................................... 2,858,231
41,100 Pennsylvania Real Estate Investment....................................... 1,009,519
182,458 Security Capital Atlantic, Inc............................................ 3,854,425
122,700 Walden Residential Properties, Inc........................................ 3,128,850
----------
26,581,419
----------
DEVELOPMENT 4.7%
192,680 Atlantic Gulf Communities Corp. (a)....................................... 867,060
24,741 Atlantic Gulf Communities Corp. - Convertible Preferred Ser B (a)......... 247,410
35,402 Atlantic Gulf Communities Corp. - Convertible Preferred Ser B,
144A - Private Placement (a) (b).......................................... 354,020
49,482 Atlantic Gulf Communities Corp. Warrants, 16,494 shares of each
Class A, B and C, expiring 06/23/04 (a)................................... 72,805
100,191 Atlantic Gulf Communities Corp. Warrants, 33,397 shares of each
Class A, B and C, expiring 06/24/01, 144A
- Private Placement (a) (b)............................................... 0
212,500 Brookfield Properties Corp................................................ 3,542,375
85,300 Brookfield Properties Corp. - Common Share Installment Receipts (a)....... 1,013,364
28,400 Catellus Development Corp. (a)............................................ 568,000
----------
6,665,034
----------
HEALTHCARE FACILITIES 6.2%
252,500 Nationwide Health Properties, Inc......................................... 6,438,750
62,690 Omega Healthcare Investors, Inc........................................... 2,421,401
----------
8,860,151
----------
HOTEL & LODGING 10.9%
68,000 American General Hospitality Corp......................................... 1,819,000
147,300 Capstar Hotel Co. (a)..................................................... 5,054,231
122,600 Extended Stay America, Inc. (a)........................................... 1,524,838
</TABLE>
See Notes to Financial statements
B-32
<PAGE> 184
PORTFOLIO OF INVESTMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
HOTEL & LODGING (CONTINUED)
292,600 Host Marriott Corp. (a).............................................. $ 5,742,275
52,500 Suburban Lodges of America, Inc. (a)................................. 698,906
24,900 Vail Resorts, Inc. (a)............................................... 645,844
-----------
15,485,094
-----------
MANUFACTURED HOME COMMUNITIES 6.6%
208,094 Chateau Properties, Inc.............................................. 6,554,961
104,000 Manufactured Home Communities, Inc................................... 2,808,000
-----------
9,362,961
-----------
OFFICE/INDUSTRIAL 27.7%
210,600 Arden Realty Group, Inc.............................................. 6,475,950
156,000 Bedford Property Investors, Inc...................................... 3,412,500
193,600 Brandywine Realty Trust.............................................. 4,864,200
141,000 CarrAmerica Realty Corp.............................................. 4,467,939
63,986 Equity Office Properties Trust....................................... 2,019,558
143,900 Great Lakes REIT, Inc................................................ 2,797,056
219,900 Pacific Gulf Properties, Inc......................................... 5,222,625
174,200 Prime Group Realty Trust............................................. 3,527,550
46,800 Reckson Associates Realty Corp....................................... 1,187,550
97,900 Trizec Hahn Corp..................................................... 2,270,056
199,020 Wellsford Real Properties, Inc., 144A - Private Placement (a) (b).... 3,109,688
-----------
39,354,672
-----------
PRODUCER MANUFACTURING 0.1%
1,300 ITT Corp. (a)........................................................ 107,738
-----------
SELF-STORAGE 3.2%
33,500 Public Storage, Inc.................................................. 984,062
120,900 Shurgard Storage Centers, Inc., Class A.............................. 3,506,100
-----------
4,490,162
-----------
SHOPPING CENTERS 7.2%
160,400 Burnham Pacific Properties, Inc...................................... 2,456,125
179,500 Federal Realty Investment Trust...................................... 4,622,125
22,300 First Washington Realty Trust, Inc. - Preferred Ser A
(Convertible into 28,589 common shares).............................. 747,050
</TABLE>
B-33
<PAGE> 185
Portfolio of Investments (Continued)
December 31, 1997
<TABLE>
<CAPTION>
Number
of Shares Description Market Value
- ---------------------------------------------------------------------------------------------------
<S> <C>................................................................... <C>
SHOPPING CENTERS (CONTINUED)
70,500 Pan Pacific Retail Properties, Inc.................................... $ 1,506,937
800 Ramco-Gershenson Properties Trust..................................... 15,750
59,900 Western Investment Real Estate Trust.................................. 823,625
------------
10,171,612
------------
SHOPPING MALLS 10.3%
137,400 CBL & Associates Properties, Inc...................................... 3,392,062
90,400 First Union Real Estate Investments................................... 1,469,000
572,800 Taubman Centers, Inc.................................................. 7,446,400
65,800 Urban Shopping Centers, Inc........................................... 2,294,775
------------
14,602,237
------------
TOTAL COMMON AND PREFERRED STOCKS 95.6%........................................... 135,681,080
------------
CONVERTIBLE CORPORATE OBLIGATIONS 0.5%
Brookfield Properties Corp. - Installment Receipts
Representing Subordinated Debenture
($868,400 par, 6.00% coupon, 02/14/07 maturity).................................... 698,107
------------
TOTAL LONG-TERM INVESTMENTS 96.1%
(Cost $121,582,426).............................................................. 136,379,187
Repurchase Agreement 5.4%
Swiss Bank Corp. ($7,660,000 par collateralized by U.S.
Government obligations in a pooled cash account, dated 12/31/97,
to be sold on 01/02/98 at $7,662,596) (Cost $7,660,000)............................ 7,660,000
------------
TOTAL INVESTMENTS 101.5%
(Cost $129,242,426).............................................................. 144,039,187
LIABILITIES IN EXCESS OF OTHER ASSETS (1.5%)....................................... (2,091,581)
------------
NET ASSETS 100.0%................................................................. $141,947,606
============
</TABLE>
(a) Non-income producing security as this stock does not declare dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
See Notes to Financial Statements
B-34
<PAGE> 186
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1997
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $129,242,426).............................................. $144,039,187
Receivables:
Fund Shares Sold.................................................................. 1,060,434
Dividends......................................................................... 887,143
Investments Sold.................................................................. 320,287
Interest.......................................................................... 17,416
Unamortized Organizational Costs................................................... 4,403
Other.............................................................................. 977
------------
Total Assets...................................................................... 146,329,847
------------
LIABILITIES:
Payables:
Investments Purchased............................................................. 3,881,015
Distributor and Affiliates........................................................ 126,860
Investment Advisory Fee........................................................... 114,763
Income Distributions.............................................................. 91,318
Fund Shares Repurchased........................................................... 69,474
Custodian Bank.................................................................... 10,660
Trustees' Deferred Compensation and Retirement Plans............................... 22,858
Accrued Expenses................................................................... 65,293
------------
Total Liabilities................................................................. 4,382,241
------------
NET ASSETS......................................................................... $141,947,606
============
NET ASSETS CONSIST OF:
Capital............................................................................ $124,906,541
Net Unrealized Appreciation........................................................ 14,796,761
Accumulated Net Realized Gain...................................................... 2,266,205
Accumulated Distributions in Excess of Net Investment Income....................... (21,901)
------------
NET ASSETS......................................................................... $141,947,606
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$51,313,568 and 3,715,666 shares of beneficial interest issued and
outstanding)................................................................... $13.81
Maximum sales charge (4.75%* of offering price).................................. .69
------------
Maximum offering price to public................................................. $14.50
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$73,198,558 and 5,304,248 shares of beneficial interest issued and
outstanding)................................................................... $13.80
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$17,435,480 and 1,264,396 shares of beneficial interest issued and
outstanding)................................................................... $13.79
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
B-35
<PAGE> 187
STATEMENT OF OPERATIONS
For the Year ended December 31, 1997
<TABLE>
<S> <C>
INVESTMENT INCOME:
Dividends............................................................................ $ 4,183,631
Interest............................................................................. 406,183
------------
Total Income........................................................................ 4,589,814
------------
EXPENSES:
Investment Advisory Fee.............................................................. 1,010,205
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $93,668,
$506,509 and $130,234, respectively).............................................. 730,411
Shareholder Services................................................................. 268,613
Registration and Filing Fees......................................................... 80,023
Trustees' Fees and Expenses.......................................................... 13,143
Legal................................................................................ 4,517
Amortization of Organizational Costs................................................. 3,397
Other................................................................................ 155,948
------------
Total Expenses...................................................................... 2,266,257
------------
NET INVESTMENT INCOME................................................................ $ 2,323,557
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain.................................................................... $ 15,177,147
------------
Unrealized Appreciation/Depreciation
Beginning of the Period............................................................. 11,896,592
End of the Period................................................................... 14,796,761
------------
Net Unrealized Appreciation During the Period........................................ 2,900,169
------------
NET REALIZED AND UNREALIZED GAIN..................................................... $ 18,077,316
============
NET INCREASE IN NET ASSETS FROM OPERATIONS........................................... $ 20,400,873
============
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 188
STATEMENT OF CHANGES IN NET ASSETS
For the Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1997 December 31, 1996
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income............................................ $ 2,323,557 $ 842,531
Net Realized Gain................................................ 15,177,147 2,148,797
Net Unrealized Appreciation During the Period.................... 2,900,169 9,735,736
------------ -----------
Change in Net Assets from Operations............................. 20,400,873 12,727,064
------------ -----------
Distributions from Net Investment Income......................... (2,323,557) (842,531)
Distributions in Excess of Net Investment Income................. (152,383) (144,086)
------------ -----------
Distributions from and in Excess of Net Investment Income*....... (2,475,940) (986,617)
Distributions from Net Realized Gain*............................ (12,883,431) (1,848,388)
------------ -----------
Total Distributions.............................................. (15,359,371) (2,835,005)
------------ -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES.............. 5,041,502 9,892,059
------------ -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold........................................ 130,239,448 28,516,882
Net Asset Value of Shares Issued Through
Dividend Reinvestment......................................... 12,862,961 2,353,502
Cost of Shares Repurchased....................................... (63,666,603) (6,887,785)
------------ -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS............... 79,435,806 23,982,599
------------ -----------
TOTAL INCREASE IN NET ASSETS..................................... 84,477,308 33,874,658
NET ASSETS:
Beginning of the Period.......................................... 57,470,298 23,595,640
------------ -----------
End of the Period
(Including accumulated distributions in excess of net
investment income of $21,901 and $7,420 respectively)........... $141,947,606 $57,470,298
============ ===========
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1997 December 31, 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares.......................................... $ (1,094,042) $ (433,206)
Class B Shares.......................................... (1,102,759) (431,231)
Class C Shares.......................................... (279,139) (122,180)
------------ -----------
$ (2,475,940) $ (986,617)
============ ===========
Distributions from Net Realized Gain:
Class A Shares.......................................... $ (4,664,049) $ (717,981)
Class B Shares.......................................... (6,626,846) (877,571)
Class C Shares.......................................... (1,592,536) (252,836)
------------ -----------
$(12,883,431) $(1,848,388)
============ ===========
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 189
FINANCIAL HIGHLIGHTS
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class A Shares 1997 1996 1995 (a) 1994 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period.......................................... $13.008 $ 10.00 $ 9.27 $9.43
------- ------- ------ -----
Net Investment Income.......................................................... .364 .351 .27 .23
Net Realized and Unrealized Gain/Loss.......................................... 2.220 3.514 .85 (.18)
------- ------- ------ -----
Total from Investment Operations.................................................. 2.584 3.865 1.12 .05
------- ------- ------ -----
Less:
Distributions from and in Excess of
Net Investment Income......................................................... .380 .380 .2456 .153
Return of Capital Distribution................................................. -0- -0- .1444 .057
Distributions from Net Realized Gain........................................... 1.402 .477 -0- -0-
------- ------- ------ -----
Total Distributions............................................................... 1.782 .857 .39 .21
------- ------- ------ -----
Net Asset Value, End of the Period................................................ $13.810 $13.008 $10.00 $9.27
======= ======= ====== =====
Total Return (b).................................................................. 20.66% 39.82% 12.39% .24%(c)
Net Assets at End of the Period (In millions)..................................... $ 51.3 $ 23.3 $ 8.5 $ 4.6
Ratio of Expenses to Average Net Assets**......................................... 1.77% 2.60% 2.67% 1.26%
Ratio of Net Investment Income to Average Net Assets**............................ 2.77% 3.21% 2.92% 4.28%
Portfolio Turnover................................................................ 159% 97% 94% 28%*
Average Commission Paid Per Equity Share Traded (d)............................... $ .0594 $ .0486 - -
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would
have been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets........................................... N/A 2.61% 3.16% 3.03%
Ratio of Net Investment Income to Average Net Assets.............................. N/A 3.19% 2.44% 2.52%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
See Notes to Financial Statements
B-38
<PAGE> 190
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class B Shares 1997 1996 1995 (a) 1994 (a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........................................ $13.008 $ 10.00 $ 9.28 $ 9.43
------- ------- ------ ------
Net Investment Income........................................................ .272 .266 .19 .20
Net Realized and Unrealized Gain/Loss........................................ 2.206 3.519 .843 (.176)
------- ------- ------ ------
Total from Investment Operations................................................ 2.478 3.785 1.033 .024
Less: ------- ------- ------ ------
Distributions from and in Excess of
Net Investment Income....................................................... .284 .300 .197 .1268
Return of Capital Distribution............................................... -0- -0- .116 .0472
Distributions from Net Realized Gain......................................... 1.402 .477 -0- -0-
------- ------- ------ ------
Total Distributions............................................................. 1.686 .777 .313 .174
------- ------- ------ ------
Net Asset Value, End of the Period.............................................. $13.800 $13.008 $10.00 $ 9.28
======= ======= ====== ======
Total Return (b)................................................................ 19.76% 38.82% 11.37% (.04%)(c)
Net Assets at End of the Period (In millions)................................... $ 73.2 $ 26.5 $ 12.0 $ 9.1
Ratio of Expenses to Average Net Assets**....................................... 2.52% 3.37% 3.50% 1.84%
Ratio of Net Investment Income to Average Net Assets**.......................... 2.03% 2.39% 2.07% 3.81%
Portfolio Turnover.............................................................. 159% 97% 94% 28%*
Average Commission Paid Per Equity Share Traded (d)............................. $ .0594 $ .0486 - -
*Non-Annualized
**If certain expenses had not been assumed by VKAC, total return would
have been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets......................................... N/A 3.39% 3.99% 3.60%
Ratio of Net Investment Income to Average Net Assets............................ N/A 2.37% 1.58% 2.05%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
See Notes to Financial Statements
B-39
<PAGE> 191
FINANCIAL HIGHLIGHTS (CONTINUED)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated.
<TABLE>
<CAPTION>
June 9, 1994
(Commencement of
Investment
Operations) to
Year Ended December 31, December 31,
Class C Shares 1997 1996 1995 (a) 1994 (a)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........................................... $12.999 $ 9.99 $ 9.28 $ 9.43
------- ------- ------ ------
Net Investment Income............................................................ .271 .266 .20 .22
Net Realized and Unrealized Gain/Loss............................................ 2.206 3.520 .823 (.178)
------- ------- ------ ------
Total from Investment Operations................................................... 2.477 3.786 1.023 .042
------- ------- ------ ------
Less:
Distributions from and in Excess of
Net Investment Income........................................................... .284 .300 .197 .1399
Return of Capital Distribution.................................................. -0- -0- .116 .0521
Distributions from Net Realized Gain............................................ 1.402 .477 -0- -0-
------- ------- ------ ------
Total Distribution................................................................. 1.686 .777 .313 .192
------- ------- ------ ------
Net Asset Value, End of the Period................................................. $13.790 $12.999 $ 9.99 $ 9.28
======= ======= ====== ======
Total Return (b)................................................................... 19.78% 38.86% 11.26% .15%(c)
Net Assets at End of the Period (In millions)...................................... $ 17.4 $ 7.7 $ 3.1 $ 1.3
Ratio of Expenses to Average Net Assets**.......................................... 2.52% 3.38% 3.54% 1.62%
Ratio of Net Investment Income to
Average Net Assets**............................................................. 2.00% 2.39% 2.11% 3.92%
Portfolio Turnover................................................................. 159% 97% 94% 28%*
Average Commission Paid Per Equity Share Traded (d)................................ $ .0594 $ .0486 - -
*Non-Annualized.
**If certain expenses had not been assumed by VKAC, total return would
have been lower and the ratios would have been
as follows:
Ratio of Expenses to Average Net Assets............................................ N/A 3.40% 4.03% 3.38%
Ratio of Net Investment Income to Average Net Assets............................... N/A 2.38% 1.62% 2.15%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
(d) Represents the average brokerage commission paid per equity share traded
during the period for trades where commissions were applicable. This
disclosure was not required in fiscal periods prior to 1996.
See Notes to Financial Statements
B-40
<PAGE> 192
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen American Capital Real Estate Securities Fund (the "Fund") is
organized as a Delaware business trust, and is registered as a diversified open-
end management investment company under the Investment Company Act of 1940, as
amended. The Fund's primary investment objective is to seek long-term growth of
capital by investing principally in securities of companies operating in the
real estate industry. The Fund commenced investment operations on June 9, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION-Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Unlisted securities and listed securities for which the last sales price is not
available are valued at the last bid price. For those securities where
quotations or prices are not available, valuations are determined in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. SECURITY TRANSACTIONS-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
in which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may
invest independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised by Van Kampen American Capital Asset Management, Inc. (the "Adviser") or
its affiliates, the daily aggregate of which is invested in repurchase
agreements. Repurchase agreements are fully collateralized by the underlying
debt security. The Fund will make payment for such securities only upon physical
delivery or evidence of book entry transfer to the account of the custodian
bank. The seller is required to maintain the value of the underlying security at
not less than the repurchase proceeds due the Fund.
C. INCOME AND EXPENSES-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
B-41
<PAGE> 193
NOTES TO FINANCIAL STATEMENTS (Continued)
December 31, 1997
D. ORGANIZATIONAL COSTS-The Fund has reimbursed Van Kampen American Capital
Distributors, Inc. or its affiliates (collectively "VKAC") for costs incurred in
connection with the Fund's organization in the amount of $16,000. These costs
are being amortized on a straight line basis over the 60 month period ending May
31, 1999. The Adviser has agreed that in the event any of the initial shares of
the Fund originally purchased by VKAC are redeemed by the Fund during the
amortization period, the Fund will be reimbursed for any unamortized
organizational costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. FEDERAL INCOME TAXES-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales.
At December 31, 1997, for federal income tax purposes cost of long- and short-
term investments is $129,401,768; the aggregate gross unrealized appreciation is
$15,544,158 and the aggregate gross unrealized depreciation is $906,739,
resulting in net unrealized appreciation of $14,637,419.
F. DISTRIBUTION OF INCOME AND GAINS-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains. All short-term capital gains are included
in ordinary income for tax purposes.
For Federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
December 31, 1997. The Fund designated $3,828,135 as a 28% rate capital gain
distribution and $545,346 as a 20% rate capital gain distribution. Shareholders
were sent a 1997 Form 1099-DIV in January 1998 representing their proportionate
share of the capital gain distribution to be reported on their income tax
returns.
The Fund distributes the return of capital it receives from the Real Estate
Investment Trusts (the "REITs") in which the Fund invests. The REITs pay
distributions based on cash flow, without regard to depreciation and
amortization. As a result, a portion of the distributions paid to the Fund and
subsequently distributed to shareholders may be a return of capital.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1997 fiscal year have been identified and appropriately reclassified. As
a result, permanent differences relating to the characterization of
distributions for tax purposes totaling $134,781 were reclassified from
accumulated undistributed net investment income to accumulated net realized
gain/loss. Additionally, permanent book and tax differences relating to the
recognition of certain expenses which are not deductible for tax purposes
totaling $3,121 were reclassified from accumulated undistributed net investment
income to capital.
B-42
<PAGE> 194
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee equal to
1.00% of the average net assets of the Fund. This fee is payable monthly.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $3,700 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended December 31, 1997, the Fund recognized expenses of
approximately $31,800 representing VKAC's cost of providing accounting services
to the Fund. These services are provided by VKAC at cost.
ACCESS Investor Services, Inc. ("ACCESS"), an affiliate of the Adviser, serves
as the shareholder servicing agent for the Fund. For the year ended December 31,
1997, the Fund recognized expenses of approximately $199,900, representing
ACCESS' cost of providing transfer agency and shareholder services plus a
profit.
For the year ended December 31, 1997, the Fund reimbursed VKAC approximately
$2,000 related to the direct cost of consolidating the VKAC open-end fund
complex. Payment was contingent upon the realization by the Fund of cost
efficiencies in shareholder services resulting from the consolidation.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund provides deferred compensation and retirement plans for its trustees
who are not officers of VKAC. Under the deferred compensation plan, trustees may
elect to defer all or a portion of their compensation to a later date. Benefits
under the retirement plan are payable for a ten-year period and are based upon
each trustee's years of service to the Fund. The maximum annual benefit per
trustee under the plan is equal to $2,500.
For the year ended December 31, 1997, the Fund paid brokerage commissions to
Dean Witter, an affiliate of VKAC, totaling $7,608.
At December 31,1997, VKAC owned 10,605 and 53 shares of Classes A and B,
respectively.
3. CAPITAL TRANSACTIONS
The Fund has outstanding three classes of shares of beneficial interest,
Classes A, B and C, each with a par value of $.01 per share. There are an
unlimited number of shares of each class authorized.
At December 31, 1997, capital aggregated $44,679,411, $65,025,381 and
$15,201,749 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:
B-43
<PAGE> 195
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
<TABLE>
<CAPTION>
SHARES VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................................... 5,170,889 $ 72,826,990
Class B....................................... 3,529,184 48,022,266
Class C....................................... 692,679 9,390,192
---------- ------------
Total Sales..................................... 9,392,752 $130,239,448
========== ============
Dividend Reinvestment:
Class A....................................... 393,875 $ 5,266,583
Class B....................................... 458,508 6,117,855
Class C....................................... 110,872 1,478,523
---------- ------------
Total Dividend Reinvestment..................... 963,255 $ 12,862,961
========== ============
Repurchases:
Class A....................................... (3,640,808) $(52,082,516)
Class B....................................... (721,539) (9,824,495)
Class C....................................... (127,832) (1,759,592)
---------- ------------
Total Repurchases............................... (4,490,179) $(63,666,603)
========== ============
</TABLE>
At December 31, 1996, capital aggregated $18,669,483, $20,711,364 and
$6,093,009 for Classes A, B, and C, respectively. For the year ended December
31, 1996, transactions were as follow:
<TABLE>
<CAPTION>
SHARES VALUE
- -----------------------------------------------------------------------------
<S> <C> <C>
Sales:
Class A.......................................... 1,142,133 $13,064,447
Class B.......................................... 1,012,720 11,615,644
Class C.......................................... 336,995 3,836,791
--------- -----------
Total Sales........................................ 2,491,848 $28,516,882
========= ===========
Dividend Reinvestment:
Class A.......................................... 89,245 $ 1,046,880
Class B.......................................... 86,852 1,022,967
Class C.......................................... 24,037 283,655
--------- -----------
Total Dividend Reinvestment........................ 200,134 $ 2,353,502
========= ===========
Repurchases:
Class A.......................................... (289,138) $(3,174,901)
Class B.......................................... (265,477) (2,844,469)
Class C.......................................... (78,881) (868,415)
--------- -----------
Total Repurchases.................................. (633,496) $(6,887,785)
========= ===========
</TABLE>
B-44
<PAGE> 196
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
December 31, 1997
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC for Class B and C
shares will be imposed on most redemptions made within five years of the
purchase for Class B and one year of the purchase for Class C as detailed in the
following schedule.
CONTINGENT DEFERRED
SALES CHARGE
YEAR OF REDEMPTION CLASS B CLASS C
First 4.00% 1.00%
Second 4.00% None
Third 3.00% None
Fourth 2.50% None
Fifth 1.50% None
Sixth and Thereafter None None
For the year ended December 31, 1997, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$67,200 and CDSC on the redeemed shares of approximately $116,400. Sales charges
do not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $214,589,921 and $149,389,626,
respectively.
5. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00% each
of Class B and Class C net assets are accrued daily. Included in these fees for
the year ended December 31, 1997, are payments retained by VKAC of approximately
$509,300.
B-45
<PAGE> 197
SUPPLEMENT DATED JULY 14, 1998 TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER 28, 1997,
AS PREVIOUSLY SUPPLEMENTED ON JANUARY 2, 1998
VKAC GLOBAL GOVERNMENT SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER 28, 1997
VKAC RESERVE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 28, 1997,
AS PREVIOUSLY SUPPLEMENTED ON JANUARY 2, 1998
VKAC STRATEGIC INCOME FUND
VKAC UTILITY FUND
VKAC PACE FUND
VKAC AGGRESSIVE GROWTH FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 28, 1997,
AS PREVIOUSLY SUPPLEMENTED ON JANUARY 2, 1998
VKAC HIGH YIELD FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 28, 1997
MORGAN STANLEY AGGRESSIVE EQUITY FUND
MORGAN STANLEY AMERICAN VALUE FUND
MORGAN STANLEY MID CAP GROWTH FUND
MORGAN STANLEY U.S. REAL ESTATE FUND
MORGAN STANLEY VALUE FUND
MORGAN STANLEY ASIAN GROWTH FUND
MORGAN STANLEY EMERGING MARKETS FUND
MORGAN STANLEY GLOBAL EQUITY FUND
MORGAN STANLEY GLOBAL EQUITY ALLOCATION FUND
MORGAN STANLEY INTERNATIONAL MAGNUM FUND
MORGAN STANLEY JAPANESE EQUITY FUND
MORGAN STANLEY LATIN AMERICAN FUND
MORGAN STANLEY EMERGING MARKETS DEBT FUND
MORGAN STANLEY GLOBAL FIXED INCOME FUND
MORGAN STANLEY HIGH YIELD FUND
MORGAN STANLEY WORLDWIDE HIGH INCOME FUND
MORGAN STANLEY GROWTH AND INCOME FUND
MORGAN STANLEY EUROPEAN EQUITY FUND
VKAC GREAT AMERICAN COMPANIES FUND
VKAC GROWTH FUND
VKAC PROSPECTOR FUND
VKAC SHORT-TERM GLOBAL INCOME FUND
VKAC TAX FREE MONEY FUND
STATEMENT OF ADDITIONAL INFORMATION DATED DECEMBER 29, 1997,
AS PREVIOUSLY SUPPLEMENTED ON JANUARY 2, 1998
VKAC CORPORATE BOND FUND
VKAC EMERGING GROWTH FUND
VKAC HIGH INCOME CORPORATE BOND FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 28, 1998
VKAC U.S. GOVERNMENT TRUST FOR INCOME
STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 17, 1998
VKAC SMALL CAPITALIZATION FUND
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 30, 1998
VKAC GROWTH AND INCOME FUND
VKAC HIGH YIELD MUNICIPAL FUND
MFSPTSAIRN 8/98
<PAGE> 198
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 27, 1998
VKAC FOREIGN SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 1998
VKAC U.S. GOVERNMENT FUND
VKAC INSURED TAX FREE INCOME FUND
VKAC CALIFORNIA INSURED TAX FREE FUND
VKAC TAX FREE HIGH INCOME FUND
VKAC MUNICIPAL INCOME FUND
VKAC INTERMEDIATE TERM MUNICIPAL INCOME FUND
VKAC FLORIDA INSURED TAX FREE INCOME FUND
VKAC NEW YORK TAX FREE INCOME FUND
VKAC PENNSYLVANIA TAX FREE INCOME FUND
VKAC COMSTOCK FUND
VKAC EQUITY INCOME FUND
VKAC GLOBAL MANAGED ASSETS FUND
VKAC GOVERNMENT SECURITIES FUND
VKAC HARBOR FUND
VKAC LIFE INVESTMENT TRUST
VKAC ENTERPRISE FUND
VKAC LIMITED MATURITY GOVERNMENT FUND
VKAC REAL ESTATE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 9, 1998
VKAC PRIME RATE INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION DATED FEBRUARY 19, 1998
VKAC SENIOR FLOATING RATE FUND
The Board of Trustees or the Board of Directors, as the case may be (the
"Board"), of each of the funds listed above (the "Funds") recently approved
changing the name of each Fund. The Funds' name changes coincide with recent
name changes affecting the Funds' investment advisers, distributor and
shareholder service/transfer agent as well as the name of the parent corporation
for such entities. As shown below, each of these Van Kampen-related service
providers is truncating or changing its name to coordinate and simplify the
mutual fund operations under the Van Kampen brand name. Likewise, the Board
approved similarly changing the names of the existing Van Kampen American
Capital retail open-end funds and the existing Morgan Stanley retail open-end
funds which are serviced by these Van Kampen-related service providers also to
emphasize the Van Kampen brand name and better coordinate the Van Kampen family
of funds. For Funds organized as business trusts (or series of business trusts)
or corporations (or series of corporations), the Board authorized name changes
to the respective business trust names or corporation names in addition to
changing the Funds' names.
Effective July 14, 1998, all references in the attached Statement of
Additional Information to the names of Van Kampen-related service providers (and
their parent) and the Fund name and, where applicable, the business trust or
corporate name of which the Fund is a series, will refer to the new names shown
in the schedule below.
<TABLE>
<CAPTION>
CURRENT SERVICE PROVIDER NAME NEW SERVICE PROVIDER NAME
----------------------------- -------------------------
<S> <C>
Van Kampen American Capital, Inc. Van Kampen Investments Inc.
Van Kampen American Capital Asset Management, Inc. Van Kampen Asset Management Inc.
Van Kampen American Capital Investment Advisory Van Kampen Investment Advisory Corp.
Corp.
Van Kampen American Capital Distributors, Inc. Van Kampen Funds Inc.
ACCESS Investor Services, Inc. Van Kampen Investor Services Inc.
CURRENT NAME NEW NAME
- -------------------------------------------------- --------------------------------------------------
Van Kampen American Capital U.S. Government Trust Van Kampen U.S. Government Trust
Van Kampen American Capital U.S. Government Fund Van Kampen U.S. Government Fund
</TABLE>
<PAGE> 199
<TABLE>
<CAPTION>
CURRENT NAME NEW NAME
------------ --------
<S> <C>
Van Kampen American Capital Tax Free Trust Van Kampen Tax Free Trust
Van Kampen American Capital Insured Tax Free Van Kampen Insured Tax Free Income Fund
Income Fund
Van Kampen American Capital Tax Free High Income Van Kampen Tax Free High Income Fund
Fund
Van Kampen American Capital California Insured Van Kampen California Insured Tax Free Fund
Tax Free Fund
Van Kampen American Capital Municipal Income Van Kampen Municipal Income Fund
Fund
Van Kampen American Capital Intermediate Term Van Kampen Intermediate Term Municipal Income
Municipal Income Fund Fund
Van Kampen American Capital Florida Insured Tax Van Kampen Florida Insured Tax Free Income Fund
Free Income Fund
Van Kampen American Capital New York Tax Free Van Kampen New York Tax Free Income Fund
Income Fund
Van Kampen American Capital Trust Van Kampen Trust
Van Kampen American Capital High Yield Fund Van Kampen High Yield Fund
Van Kampen American Capital Short-Term Global Van Kampen Short-Term Global Income Fund
Income Fund
Van Kampen American Capital Strategic Income Van Kampen Strategic Income Fund
Fund
Van Kampen American Capital Equity Trust Van Kampen Equity Trust
Van Kampen American Capital Utility Fund Van Kampen Utility Fund
Van Kampen American Capital Great American Van Kampen Great American Companies Fund
Companies Fund
Van Kampen American Capital Growth Fund Van Kampen Growth Fund
Van Kampen American Capital Prospector Fund Van Kampen Prospector Fund
Van Kampen American Capital Aggressive Growth Van Kampen Aggressive Growth Fund
Fund
Van Kampen American Capital Pennsylvania Tax Free Van Kampen Pennsylvania Tax Free Income Fund
Income Fund
Van Kampen American Capital Tax Free Money Fund Van Kampen Tax Free Money Fund
Van Kampen American Capital Foreign Securities Van Kampen Foreign Securities Fund
Fund
Van Kampen American Capital Comstock Fund Van Kampen Comstock Fund
Van Kampen American Capital Corporate Bond Fund Van Kampen Corporate Bond Fund
Van Kampen American Capital Emerging Growth Fund Van Kampen Emerging Growth Fund
Van Kampen American Capital Enterprise Fund Van Kampen Enterprise Fund
Van Kampen American Capital Equity Income Fund Van Kampen Equity Income Fund
Van Kampen American Capital Global Managed Assets Van Kampen Global Managed Assets Fund
Fund
Van Kampen American Capital Government Securities Van Kampen Government Securities Fund
Fund
Van Kampen American Capital Growth and Income Fund Van Kampen Growth and Income Fund
Van Kampen American Capital Harbor Fund Van Kampen Harbor Fund
Van Kampen American Capital High Income Corporate Van Kampen High Income Corporate Bond Fund
Bond Fund
Van Kampen American Capital Life Investment Trust Van Kampen Life Investment Trust
</TABLE>
<PAGE> 200
<TABLE>
<CAPTION>
CURRENT NAME NEW NAME
------------ --------
<S> <C>
Van Kampen American Capital Limited Maturity Van Kampen Limited Maturity Government Fund
Government Fund
Van Kampen American Capital Pace Fund Van Kampen Pace Fund
Van Kampen American Capital Real Estate Securities Van Kampen Real Estate Securities Fund
Fund
Van Kampen American Capital Reserve Fund Van Kampen Reserve Fund
Van Kampen American Capital Small Capitalization Van Kampen Small Capitalization Fund
Fund
Van Kampen American Capital Tax-Exempt Trust Van Kampen Tax-Exempt Trust
Van Kampen American Capital High Yield Municipal Van Kampen High Yield Municipal Fund
Fund
Van Kampen American Capital U.S. Government Trust Van Kampen U.S. Government Trust for Income
for Income
Van Kampen American Capital World Portfolio Series Van Kampen World Portfolio Series Trust
Trust
Van Kampen American Capital Global Government Van Kampen Global Government Securities Fund
Securities Fund
Morgan Stanley Fund, Inc. Van Kampen Series Fund, Inc.
Morgan Stanley Aggressive Equity Fund Van Kampen Aggressive Equity Fund
Morgan Stanley American Value Fund Van Kampen American Value Fund
Morgan Stanley Asian Growth Fund Van Kampen Asian Growth Fund
Morgan Stanley Emerging Markets Fund Van Kampen Emerging Markets Fund
Morgan Stanley Emerging Markets Debt Fund Van Kampen Emerging Markets Debt Fund
Morgan Stanley European Equity Fund Van Kampen European Equity Fund
Morgan Stanley Global Equity Fund Van Kampen Global Equity Fund
Morgan Stanley Global Equity Allocation Fund Van Kampen Global Equity Allocation Fund
Morgan Stanley Global Fixed Income Fund Van Kampen Global Fixed Income Fund
Morgan Stanley Growth and Income Fund Van Kampen Growth and Income Fund II
Morgan Stanley High Yield Fund Van Kampen High Yield & Total Return Fund
Morgan Stanley International Magnum Fund Van Kampen International Magnum Fund
Morgan Stanley Japanese Equity Fund Van Kampen Japanese Equity Fund
Morgan Stanley Latin American Fund Van Kampen Latin American Fund
Morgan Stanley Mid Cap Growth Fund Van Kampen Mid Cap Growth Fund
Morgan Stanley U.S. Real Estate Fund Van Kampen U.S. Real Estate Fund
Morgan Stanley Value Fund Van Kampen Value Fund
Morgan Stanley Worldwide High Income Fund Van Kampen Worldwide High Income Fund
Van Kampen American Capital Prime Rate Income Van Kampen Prime Rate Income Trust
Trust
Van Kampen American Capital Senior Floating Rate Van Kampen Senior Floating Rate Fund
Fund
</TABLE>
<PAGE> 201
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF
VAN KAMPEN SERIES FUND, INC.
DATED SEPTEMBER , 1998
[TO COME]
<PAGE> 202
APPENDIX D
VAN KAMPEN REAL ESTATE SECURITIES FUND
UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
<PAGE> 203
Portfolio of Investments
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
===============================================================================================
Description Shares Market Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Common and Preferred Stocks 93.8%
Apartments 15.1%
Avalon Bay Community Inc............................................... 154,100 $ 5,855,800
Equity Residential Properties Trust.................................... 38,700 1,835,830
Essex Property Trust, Inc.............................................. 162,400 5,034,400
Irvine Apartment Communities, Inc...................................... 81,500 2,358,406
Pennsylvania Real Estate Investment.................................... 104,600 2,320,813
Security Capital Atlantic, Inc......................................... 190,058 4,240,669
Security Capital Pacific Trust......................................... 14,300 321,750
Smith (Charles E.) Residential Realty.................................. 7,100 227,200
------------
22,194,868
------------
Casino Operators 0.5%
Station Casinos Inc.................................................... 53,400 784,313
------------
Development 4.2%
Atlantic Gulf Communities Corp. (a)................................... 188,680 389,152
Atlantic Gulf Communities Corp. - Convertible
Preferred Ser B (a).................................................... 24,741 167,002
Atlantic Gulf Communities Corp. - Convertible
Preferred Ser B, 144A - Private Placement (a) (b)...................... 35,402 238,964
Atlantic Gulf Communities Corp. Warrants, 16,494 shares of each
Classes A, B and C, expiring 06/23/04 (a).............................. 49,482 24,741
Atlantic Gulf Communities Corp. Warrants, 33,397 shares of each
Classes A, B and C, expiring 06/24/01 144A - Private Placement (a) (b). 100,191 50,097
Brookfield Properties Corp............................................. 388,700 5,367,947
------------
6,237,903
------------
Hotel & Lodging 7.6%
Capstar Hotel Co. (a).................................................. 76,300 2,136,400
Host Marriott Corp. (a)................................................ 136,800 2,436,750
Starwood Hotels and Resorts............................................ 137,830 6,658,911
------------
11,232,061
------------
Manufactured Home Communities 5.8%
Chateau Properties, Inc................................................ 228,994 6,583,578
Manufactured Home Communities, Inc..................................... 10,400 250,900
Sun Communties, Inc.................................................... 52,500 1,739,062
------------
8,573,540
------------
</TABLE>
8 See Notes to Financial Statements
<PAGE> 204
Portfolio of Investments (Continued)
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
==============================================================================================
Description Shares Market Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Motor Vehicle Facilities 0.3%
Capital Automotive.................................................. 28,000 $ 397,250
-----------
Office/Industrial 37.9%
Arden Realty Group, Inc............................................. 284,900 7,371,788
Beacon Capital Partners Inc., 144A - Private Placement (b).......... 140,800 2,816,000
Bedford Property Investors, Inc..................................... 36,000 657,000
Brandywine Realty Trust............................................. 252,700 5,654,162
CarrAmerica Realty Corp............................................. 252,700 7,170,362
Crescent Real Estate Equities Trust................................. 5,600 188,300
Equity Office Properties Trust...................................... 175,986 4,993,603
Great Lakes REIT, Inc............................................... 187,200 3,264,300
Kilroy Realty Corp.................................................. 69,000 1,725,000
Mack California Realty Corp......................................... 65,000 2,234,375
Meridan Industrial Trust, Inc....................................... 32,800 754,400
Pacific Gulf Properties, Inc........................................ 182,000 3,935,750
Prime Group Realty Trust............................................ 182,100 3,118,463
Reckson Associates Realty Corp...................................... 72,500 1,712,813
Reckson Service Inds Inc. (a)....................................... 11,600 38,425
SL Green Realty Corp................................................ 115,900 2,607,750
Spieker Properties, Inc............................................. 70,400 2,728,000
Trizec Hahn Corp.................................................... 98,100 2,103,018
Wellsford Real Properties, Inc., 144A - Private Placement (a) (b)... 199,020 2,811,157
-----------
55,884,666
-----------
Self-Storage 4.0%
PS Business Parks Inc. California................................... 132,674 3,117,839
Public Storage, Inc................................................. 44,700 1,251,600
Shurgard Storage Centers, Inc., Class A............................. 57,300 1,590,075
-----------
5,959,514
-----------
Shopping Centers 11.5%
Burnham Pacific Properties, Inc..................................... 323,600 4,591,075
Federal Realty Investment Trust..................................... 246,400 5,929,000
First Washington Realty Trust, Inc. - Preferred Ser A
(Convertible into 28,589 common shares)............................. 22,300 642,519
Pan Pacific Retail Properties, Inc.................................. 90,000 1,743,750
</TABLE>
9 See Notes to Financial Statements
<PAGE> 205
Portfolio of Investments (Continued)
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
================================================================================================
Description Shares Market Value
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Shopping Centers (Continued)
Ramco-Gershenson Properties Trust ................................... 800 $ 15,200
Regency Realty Corp. ................................................ 87,400 2,195,925
Vornado Realty Trust ................................................ 46,200 1,833,563
------------
16,951,032
------------
Shopping Malls 6.9%
CBL & Associates Properties, Inc. ................................... 68,700 1,665,975
Taubman Centers, Inc. ............................................... 422,900 6,026,325
Urban Shopping Centers, Inc. ........................................ 76,300 2,403,450
------------
10,095,750
------------
Total Common and Preferred Stocks 93.8% ........................................ 138,310,897
------------
Convertible Corporate Obligations 0.6%
Brookfield Properties Corp. - Installment Receipts Representing
Subordinated Debenture ($868,400 par, 6.00% coupon, 02/14/07 maturity)
Convertible to 57,893 common shares ............................................ 858,413
------------
Total Long-Term Investments 94.4%
(Cost $137,229,235) .......................................................... 139,169,310
Repurchase Agreement 1.9%
BA Securities ($2,730,000 par, collateralized by U.S. Government obligations in
a pooled cash account, dated 06/30/98, to be sold on 07/01/98 at $2,730,459)
(Cost $2,730,000) ............................................................ 2,730,000
------------
Total Investments 96.3%
(Cost $139,959,235) .......................................................... 141,899,310
Other Assets in Excess of Liabilities 3.7% ..................................... 5,483,405
------------
Net Assets 100.0% .............................................................. $147,382,715
============
</TABLE>
(a) Non-income producing security as this stock currently does not declare
dividends.
(b) 144A securities are those which are exempt from registration under Rule
144A of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
10 See Notes to Financial Statements
<PAGE> 206
Statement of Assets and Liabilities
June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
================================================================================================
Assets:
<S> <C>
Total Investments (Cost $139,959,235)............................................ $141,899,310
Cash............................................................................. 4,646
Receivables:
Investments Sold............................................................ 4,438,161
Dividends................................................................... 1,225,088
Fund Shares Sold............................................................ 1,115,593
Interest.................................................................... 17,463
Unamortized Organizational Costs................................................. 2,861
Other............................................................................ 13,612
------------
Total Assets................................................................ 148,716,734
------------
Liabilities:
Payables:
Investments Purchased....................................................... 806,035
Fund Shares Repurchased..................................................... 259,972
Investment Advisory Fee..................................................... 120,033
Distributor and Affiliates.................................................. 106,102
Income Distributions........................................................ 8,933
Trustees' Deferred Compensation and Retirement Plans............................. 28,819
Accrued Expenses................................................................. 4,125
------------
Total Liabilities........................................................... 1,334,019
------------
Net Assets....................................................................... $147,382,715
============
Net Assets Consist of:
Capital.......................................................................... $142,327,931
Accumulated Net Realized Gain.................................................... 2,370,319
Net Unrealized Appreciation...................................................... 1,940,075
Accumulated Undistributed Net Investment Income.................................. 744,390
------------
Net Assets....................................................................... $147,382,715
============
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of
$51,860,346 and 4,079,655 shares of beneficial interest issued and
outstanding)........................................................... $ 12.71
Maximum sales charge (4.75%* of offering price)........................ .63
------------
Maximum offering price to public....................................... $ 13.34
============
Class B Shares:
Net asset value and offering price per share (Based on net assets of
$76,871,703 and 6,051,600 shares of beneficial interest issued and
outstanding)........................................................... $ 12.70
============
Class C Shares:
Net asset value and offering price per share (Based on net assets of
$18,650,666 and 1,469,322 shares of beneficial interest issued and
outstanding)........................................................... $ 12.69
============
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced.
11 See Notes to Financial Statements
<PAGE> 207
Statement of Operations
For the Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
==================================================================================================
Investment Income:
<S> <C>
Dividends.......................................................................... $ 3,855,914
Interest........................................................................... 191,931
-------------
Total Income.................................................................. 4,047,845
-------------
Expenses:
Investment Advisory Fee............................................................ 725,689
Distribution (12b-1) and Service Fees (Attributed to Classes A, B and C of $64,710,
$378,152 and $88,122, respectively)........................................... 530,984
Shareholder Services............................................................... 125,837
Registration and Filing Fees....................................................... 33,517
Trustees' Fees and Expenses........................................................ 7,509
Legal.............................................................................. 2,353
Amortization of Organizational Costs............................................... 1,542
Other.............................................................................. 74,528
-------------
Total Expenses................................................................ 1,501,959
-------------
Net Investment Income.............................................................. $ 2,545,886
=============
Realized and Unrealized Gain/Loss:
Net Realized Gain.................................................................. $ 2,529,165
-------------
Unrealized Appreciation/Depreciation
Beginning of the Period....................................................... 14,796,761
End of the Period............................................................. 1,940,075
-------------
Net Unrealized Depreciation During the Period...................................... (12,856,686)
-------------
Net Realized and Unrealized Loss................................................... $(10,327,521)
=============
Net Decrease in Net Assets From Operations......................................... $ (7,781,635)
=============
</TABLE>
12 See Notes to Financial Statements
<PAGE> 208
Statement of Operations
For the Six Months Ended June 30, 1998 (Unaudited)
<TABLE>
<CAPTION>
=================================================================================================
Six Months Ended Year Ended
June 30, 1998 December 31, 1997
- -----------------------------------------------+---------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income......................................... $ 2,545,886 $ 2,323,557
Net Realized Gain............................................. 2,529,165 15,177,147
Net Unrealized Appreciation/Depreciation During the Period.... (12,856,686) 2,900,169
------------- -------------
Change in Net Assets from Operations.......................... (7,781,635) 20,400,873
------------- -------------
Distributions from Net Investment Income...................... (1,779,595) (2,323,557)
Distributions in Excess of Net Investment Income.............. -0- (152,383)
------------- -------------
Distributions from and in Excess of Net Investment Income*.... (1,779,595) (2,475,940)
Distributions from Net Realized Gain*......................... (2,425,051) (12,883,431)
------------- -------------
Total Distributions........................................... (4,204,646) (15,359,371)
------------- -------------
Net Change in Net Assets from Investment Activities........... (11,986,281) 5,041,502
------------- -------------
From Capital Transactions:
Proceeds from Shares Sold..................................... 85,374,574 130,239,448
Net Asset Value of Shares Issued Through
Dividend Reinvestment....................................... 3,504,224 12,862,961
Cost of Shares Repurchased.................................... (71,457,408) (63,666,603)
------------- -------------
Net Change in Net Assets from Capital Transactions............ 17,421,390 79,435,806
------------- -------------
Total Increase in Net Assets.................................. 5,435,109 84,477,308
Net Assets:
Beginning of the Period....................................... 141,947,606 57,470,298
------------- -------------
End of the Period
(Including accumulated undistributed net investment
income of $744,390 and ($21,901) respectively)............ $ 147,382,715 $ 141,947,606
============= =============
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended Year Ended
*Distributions by Class June 30, 1998 December 31, 1997
=====================================================================================
<S> <C> <C>
Distributions from and in Excess of
Net Investment Income:
Class A Shares............................. $ (754,964) $ (1,094,042)
Class B Shares............................. (829,394) (1,102,759)
Class C Shares............................. (195,237) (279,139)
------------ ------------
$ (1,779,595) $ (2,475,940)
============ ============
Distributions from Net Realized Gain:
Class A Shares............................. $ (868,204) $ (4,664,049)
Class B Shares............................. (1,263,468) (6,626,846)
Class C Shares............................. (293,379) (1,592,536)
------------ ------------
$ (2,425,051) $(12,883,431)
============ ============
</TABLE>
13 See Notes to Financial Statements
<PAGE> 209
Financial Highlights
The following schedule presents financial highlights for one share
of the Fund outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
====================================================================================================================
June 9, 1994
(Commencement of
Six Months Investment
Ended Year Ended December 31, Operations) to
June 30, ------------------------------ December 31,
Class A Shares 1998 1997 1996 1995 (a) 1994 (a)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period..... $ 13.810 $13.008 $ 10.00 $ 9.27 $ 9.43
--------- ------- ------- ------ ------
Net Investment Income.................... .258 .364 .351 .27 .23
Net Realized and Unrealized Gain/Loss.... (.944) 2.220 3.514 .85 (.18)
--------- ------- ------- ------ ------
Total from Investment Operations............. (.686) 2.584 3.865 1.12 .05
--------- ------- ------- ------ ------
Less:
Distributions from and in Excess of Net
Investment Income...................... .190 .380 .380 .2456 .153
Return of Capital Distribution........... -0- -0- -0- .1444 .057
Distributions from Net Realized Gain..... .222 1.402 .477 -0- -0-
--------- ------- ------- ------ ------
Total Distributions.......................... .412 1.782 .857 .39 .21
--------- ------- ------- ------ ------
Net Asset Value, End of the Period........... $ 12.712 $13.810 $13.008 $10.00 $ 9.27
========= ======= ======= ====== ======
Total Return (b)............................. (4.93%)* 20.66% 39.82% 12.39% .24%(c)
Net Assets at End of the Period (In millions) $ 51.9 $ 51.3 $ 23.3 $ 8.5 $ 4.6
Ratio of Expenses to Average Net Assets** 1.58% 1.77% 2.60% 2.67% 1.26%
Ratio of Net Investment Income to Average
Net Assets**............................... 3.98% 2.77% 3.21% 2.92% 4.28%
Portfolio Turnover........................... 65%* 159% 97% 94% 28%*
</TABLE>
*Non-Annualized
**If certain expenses had not been assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets N/A N/A 2.61% 3.16% 3.03%
Ratio of Net Investment Income to Average
Net Assets................................. N/A N/A 3.19% 2.44% 2.52%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding.
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
14 See Notes to Financial Statements
<PAGE> 210
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
============================================================================================================================
June 9, 1994
(Commencement of
Six Months Year Ended Investment
Ended December 31, Operations) to
June 30, ---------------------------------- December 31,
Class B Shares 1998 1997 1996 1995 (a) 1994 (a)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period........... $ 13.800 $13.008 $ 10.00 $ 9.28 $ 9.43
--------- ------- ------- ------ ------
Net Investment Income............................ .208 .272 .266 .19 .20
Net Realized and Unrealized Gain/Loss............ (.941) 2.206 3.519 .843 (.176)
--------- ------- ------- ------ ------
Total from Investment Operations.................. (.733) 2.478 3.785 1.033 .024
--------- ------- ------- ------ ------
Less:
Distributions from and in Excess of
Net Investment Income.......................... .142 .284 .300 .197 .1268
Return of Capital Distribution.................. -0- -0- -0- .116 .0472
Distributions from Net Realized Gain............ .222 1.402 .477 -0- -0-
--------- ------- ------- ------ ------
Total Distributions............................... .364 1.686 .777 .313 .174
--------- ------- ------- ------ ------
Net Asset Value, End of the Period................ $ 12.703 $13.800 $13.008 $10.00 $ 9.28
========= ======= ======= ====== ======
Total Return (b).................................. (5.29%)* 19.76% 38.82% 11.37% (.04%)(c)
Net Assets at End of the Period (In millions)..... $ 76.9 $ 73.2 $ 26.5 $ 12.0 $ 9.1
Ratio of Expenses to Average Net Assets**......... 2.34% 2.52% 3.37% 3.50% 1.84%
Ratio of Net Investment Income to
Average Net Assets**............................ 3.25% 2.03% 2.39% 2.07% 3.81%
Portfolio Turnover................................ 65%* 159% 97% 94% 28%*
</TABLE>
*Non-Annualized
**If certain expenses had not been assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets............ N/A N/A 3.39% 3.99% 3.60%
Ratio of Net Investment Income to
Average Net Assets............................... N/A N/A 2.37% 1.58% 2.05%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding.
(b) Total Return is based upon net asset value which does not include payment of
the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the Fund's investment
strategy was implemented) through December 31, 1994, non-annualized.
15 See Notes to Financial Statements
<PAGE> 211
Financial Highlights (Continued)
The following schedule presents financial highlights for one share of the Fund
outstanding throughout the periods indicated. (Unaudited)
<TABLE>
<CAPTION>
==================================================================================================================
June 9, 1994
(Commencement of
Six Months Investment
Ended Year Ended Operations) to
June 30, December 31, December 31,
Class C Shares 1998 1997 1996 1995 (a) 1994 (a)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the Period..... $13.790 $12.999 $ 9.99 $ 9.28 $ 9.43
------- ------- ------ ------ -------
Net Investment Income................... .206 .271 .266 .20 .22
Net Realized and Unrealized Gain/Loss... (.939) 2.206 3.520 .823 (.178)
------- ------- ------ ------ -------
Total from Investment Operations............. (.733) 2.477 3.786 1.023 .042
------- ------- ------ ------ -------
Less:
Distributions from and in Excess of
Net Investment Income.............. .142 .284 .300 .197 .1399
Return of Capital Distribution.......... -0- -0- -0- .116 .0521
Distributions from Net Realized Gain.... .222 1.402 .477 -0- -0-
------- ------- ------ ------ -------
Total Distribution........................... .364 1.686 .777 .313 .192
------- ------- ------ ------ -------
Net Asset Value, End of the Period........... $12.693 $13.790 $12.999 $ 9.99 $ 9.28
======= ======= ======= ====== =======
Total Return (b)............................. (5.29%)/*/ 19.78% 38.86% 11.26% .15%(c)
Net Assets at End of the Period (In
millions)............................... $ 18.6 $ 17.4 $ 7.7 $ 3.1 $ 1.3
Ratio of Expenses to Average Net Assets/**/.. 2.34% 2.52% 3.38% 3.54% 1.62%
Ratio of Net Investment Income to
Average Net Assets/**/.................. 3.27% 2.00% 2.39% 2.11% 3.92%
Portfolio Turnover........................... 65%/*/ 159% 97% 94% 28%/*/
</TABLE>
/*/ Non-Annualized.
/**/ If certain expenses had not been assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net Assets...... N/A N/A 3.40% 4.03% 3.38%
Ratio of Net Investment Income to
Average Net Assets...................... N/A N/A 2.38% 1.62% 2.15%
</TABLE>
N/A = Not Applicable
(a) Based on average shares outstanding
(b) Total Return is based upon net asset value which does not include payment
of the maximum sales charge or contingent deferred sales charge.
(c) Total return calculated from June 30, 1994 (date the FundOs investment
strategy was implemented) through December 31, 1994, non-annualized.
16 See Notes to Financial Statements
<PAGE> 212
Notes to Financial Statements
June 30, 1998 (Unaudited)
================================================================================
1. Significant Accounting Policies
Van Kampen Real Estate Securities Fund, formerly known as Van Kampen American
Capital Real Estate Securities Fund, (the "Fund") is organized as a Delaware
business trust, and is registered as a diversified open-end management
investment company under the Investment Company Act of 1940, as amended. The
Fund's primary investment objective is to seek long-term growth of capital by
investing principally in securities of companies operating in the real estate
industry. The Fund commenced investment operations on June 9, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. Security Valuation-Investments in securities listed on a securities exchange
are valued at their sale price as of the close of such securities exchange.
Unlisted securities and listed securities for which the last sales price is not
available are valued at the last bid price. For those securities where
quotations or prices are not available, valuations are determined in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Fund may invest in repurchase agreements, which are short-term investments
in which the Fund acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund may
invest independently in repurchase agreements, or transfer uninvested cash
balances into a pooled cash account along with other investment companies
advised by Van Kampen Asset Management Inc. (the "Adviser") or its affiliates,
the daily aggregate of which is invested in repurchase agreements. Repurchase
agreements are fully collateralized by the underlying debt security. The Fund
will make payment for such securities only upon physical delivery or evidence of
book entry transfer to the account of the custodian bank. The seller is required
to maintain the value of the underlying security at not less than the repurchase
proceeds due the Fund.
C. Income and Expenses-Dividend income is recorded on the ex-dividend date and
interest income is recorded on an accrual basis. Expenses of the Fund are
allocated on a pro rata basis to each class of shares, except for distribution
and service fees and transfer agency costs which are unique to each class of
shares.
17
<PAGE> 213
Notes to Financial Statements (Continued)
June 30, 1998 (Unaudited)
================================================================================
D. Organizational Costs-The Fund has reimbursed Van Kampen Funds Inc. or its
affiliates (collectively "Van Kampen") for costs incurred in connection with the
Fund's organization in the amount of $16,000. These costs are being amortized on
a straight line basis over the 60 month period ending May 31, 1999. The Adviser
has agreed that in the event any of the initial shares of the Fund originally
purchased by Van Kampen are redeemed by the Fund during the amortization period,
the Fund will be reimbursed for any unamortized organizational costs in the same
proportion as the number of shares redeemed bears to the number of initial
shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
Net realized gains or losses may differ for financial reporting and tax
purposes primarily as a result of the deferral of losses for tax purposes
resulting from wash sales.
At June 30, 1998, for federal income tax purposes cost of long- and short-term
investments is $140,070,146; the aggregate gross unrealized appreciation is
$6,215,988 and the aggregate gross unrealized depreciation is $4,386,824,
resulting in net unrealized appreciation of $1,829,164.
F. Distribution of Income and Gains-The Fund declares and pays dividends
quarterly from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains. All short-term capital gains are included
in ordinary income for tax purposes.
The Fund distributes the return of capital it receives from the Real Estate
Investment Trusts (the "REITs") in which the Fund invests. The REITs pay
distributions based on cash flow, without regard to depreciation and
amortization. As a result, a portion of the distributions paid to the Fund and
subsequently distributed to shareholders may be a return of capital.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee equal to
1.00% of the average net assets of the Fund. This fee is payable monthly. On
April 23, 1998, the Board of Trustees approved a subadvisory agreement with
Morgan Stanley Asset Management Inc. (the "Subadviser") to provide advisory
services to the Fund and the Adviser with respect to the Fund's investments. The
Adviser will pay 50% of its advisory fee to the Subadviser. This subadvisory
agreement will become effective October 1, 1998.
For the six months ended June 30, 1998, the Fund recognized expenses of
approximately $2,400 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the six months ended June 30, 1998, the Fund recognized expenses of
approximately $36,800 representing Van Kampen's cost of providing accounting
services to the Fund.
18
<PAGE> 214
Notes to Financial Statements (Continued)
June 30, 1998 (Unaudited)
================================================================================
Van Kampen Investor Services Inc. ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the six months ended
June 30, 1998, the Fund recognized expenses of approximately $91,100. Beginning
in 1998, the transfer agency fees are determined through negotiations with the
Fund's Board of Trustees and are based on competetive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors
of Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
At June 30, 1998, Van Kampen owned 10,605 Class A shares and 53 Class B
shares, respectively.
3. Capital Transactions
The Fund has outstanding three classes of shares of beneficial interest,
Classes A, B and C, each with a par value of $.01 per share. There are an
unlimited number of shares of each class authorized.
At June 30, 1998, capital aggregated $49,501,666, $74,950,271 and $17,875,994
for Classes A, B, and C, respectively. For the six months ended June 30, 1998,
transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
=======================================================================================
<S> <C> <C>
Sales:
Class A............................................. 4,792,340 $ 63,229,710
Class B............................................. 1,367,088 18,125,621
Class C............................................. 306,062 4,019,243
----------- ------------
Total Sales........................................... 6,465,490 $ 85,374,574
=========== ============
Dividend Reinvestment:
Class A............................................. 109,654 $ 1,412,368
Class B............................................. 131,823 1,699,964
Class C............................................. 30,418 391,892
----------- ------------
Total Dividend Reinvestment........................... 271,895 $ 3,504,224
=========== ============
Repurchases:
Class A............................................. (4,538,005) $(59,819,823)
Class B............................................. (751,559) (9,900,695)
Class C............................................. (131,554) (1,736,890)
----------- ------------
Total Repurchases..................................... (5,421,118) $(71,457,408)
=========== ============
</TABLE>
19
<PAGE> 215
Notes to Financial Statements (Continued)
June 30, 1998 (Unaudited)
================================================================================
At December 31, 1997, capital aggregated $44,679,411, $65,025,381 and
$15,201,749 for Classes A, B, and C, respectively. For the year ended December
31, 1997, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
================================================================================
<S> <C> <C>
Sales:
Class A..................................... 5,170,889 $ 72,826,990
Class B..................................... 3,529,184 48,022,266
Class C..................................... 692,679 9,390,192
----------- -------------
Total Sales................................... 9,392,752 $130,239,448
=========== =============
Dividend Reinvestment:
Class A..................................... 393,875 $ 5,266,583
Class B..................................... 458,508 6,117,855
Class C..................................... 110,872 1,478,523
----------- -------------
Total Dividend Reinvestment................... 963,255 $ 12,862,961
=========== =============
Repurchases:
Class A..................................... (3,640,808) $(52,082,516)
Class B..................................... (721,539) (9,824,495)
Class C..................................... (127,832) (1,759,592)
----------- -------------
Total Repurchases............................. (4,490,179) $(63,666,603)
=========== =============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares will
automatically convert to Class A shares after the eighth year following
purchase. The CDSC for Class B and C shares will be imposed on most redemptions
made within five years of the purchase for Class B and one year of the purchase
for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
-----------------------
Year of Redemption Class B Class C
================================================================================
<S> <C> <C>
First.................................................. 4.00% 1.00%
Second................................................. 4.00% None
Third.................................................. 3.00% None
Fourth................................................. 2.50% None
Fifth.................................................. 1.50% None
Sixth and Thereafter................................... None None
</TABLE>
20
<PAGE> 216
Notes to Financial Statements (Continued)
June 30, 1998 (Unaudited)
================================================================================
For the six month ended June 30, 1998, Van Kampen, as Distributor for the
Fund, received net commissions on sales of the Fund's Class A shares of
approximately $29,500 and CDSC on the redeemed shares of approximately $97,600.
Sales charges do not represent expenses of the Fund.
4. Investment Transactions
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $103,839,058 and $90,892,291,
respectively.
5. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940 and a service plan (collectively
the "Plans"). The Plans govern payments for the distribution of the Fund's
shares, ongoing shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the six month ended June 30, 1998, are payments retained by Van Kampen of
approximately $336,100.
21
<PAGE> 217
APPENDIX E
VK REAL ESTATE SECURITIES FUND
U.S. REAL ESTATE FUND
PRO FORMA FINANCIAL STATEMENTS
June 30, 1998 (Unaudited)
<PAGE> 218
VK REAL ESTATE SECURITIES FUND - U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS
June 30, 1998
<TABLE>
<CAPTION>
(Unaudited) VK Real US Real Proforma
Estate Shr Estate Shr Shares Value (000)
-------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stocks and Equivalents 94.1%
Apartments 15.1%
Avalon Bay Community, Inc. 154,100 38,300 192,400 $ 7,311
Equity Residential Properties Trust 38,700 10,800 49,500 2,348
Essex Property Trust, Inc. 162,400 40,000 202,400 6,274
Irvine Apartment Communities, Inc. 81,500 19,900 101,400 2,934
Pennsylvania Real Estate Investment Trust 104,600 26,800 131,400 2,915
Security Capital Atlantic, Inc. 190,058 47,032 237,090 5,290
Security Capital Pacific Trust 14,300 3,700 18,000 405
Smith, Charles E Residential Realty, Inc. 7,100 2,300 9,400 301
-----------------
27,778
-----------------
Casino Operators 0.5%
Station Casinos Inc. (a) 53,400 13,000 66,400 975
-----------------
Development 4.3%
Atlantic Gulf Communities Corp. (a) 188,680 45,224 233,904 482
Atlantic Gulf Communities Corp. - Convertible
Preferred Series B (a) 24,741 5,829 30,570 206
Atlantic Gulf Communities Corp. - Preferred Shares,
144A - Private Placement (a) (b) 35,402 8,207 43,609 294
Atlantic Gulf Communities Corp. Warrants
16,494 VKAC, 9,609 MS, 26,103 total shares
each of Classes A, B and C, expiring 06/23/04(a) 49,482 28,827 78,309 39
Atlantic Gulf Communities Corp. Warrants, 33,397
shares Class A, B and C, expiring 06/24/01, 144A -
Private Placement(a) (b) 100,191 0 100,191 50
Brookfield Properties Corp. 388,700 99,700 488,400 6,745
-----------------
7,816
-----------------
Hotel & Lodging 7.7%
Capstar Hotel Co. (a) 76,300 18,800 95,100 2,663
Hammons, John Q. Hotels, Inc. (a) 0 12,200 12,200 86
Host Marriott Corp. (a) 136,800 34,400 171,200 3,050
Starwood Hotels and Resorts 137,830 34,251 172,081 8,314
-----------------
14,113
-----------------
Manufactured Home Communities 5.8%
Chateau Properties, Inc. 228,994 63,148 292,142 8,399
Manufactured Home Communities, Inc. 10,400 3,300 13,700 331
Sun Communities, Inc. 52,500 5,300 57,800 1,915
-----------------
10,645
-----------------
</TABLE>
<PAGE> 219
VK REAL ESTATE SECURITIES FUND - U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
June 30, 1998
<TABLE>
<CAPTION>
(Unaudited) VK Real US Real Proforma
Estate Shr Estate Shr Shares Value (000)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Motor Vehicle Facilities 0.3%
Capital Automotive 28,000 6,900 34,900 $ 495
-----------------
Office/Industrial 37.9%
Arden Realty Group, Inc. 284,900 70,800 355,700 9,205
Beacon Capital Partners Inc. - 144A (b) 140,800 37,100 177,900 3,558
Bedford Property Investors, Inc. 36,000 6,500 42,500 776
Brandywine Realty Trust 252,700 60,766 313,466 7,014
CarrAmerica Realty Corp. 252,700 62,700 315,400 8,949
Crescent Real Estate Equities Trust 5,600 1,400 7,000 235
Equity Office Properties Trust 175,986 43,706 219,692 6,234
Great Lakes REIT, Inc. 187,200 48,000 235,200 4,101
Kilroy Realty Corp. 69,000 17,600 86,600 2,165
Mack California Realty Corp. 65,000 16,300 81,300 2,795
Meridan Industrial Trust, Inc. 32,800 8,200 41,000 943
Pacific Gulf Porperties, Inc. 182,000 41,400 223,400 4,831
Prime Group Realty Trust 182,100 41,200 223,300 3,824
Reckson Associates Realty Corp. 72,500 19,100 91,600 2,164
Reckson Service Inds Inc. (a) 11,600 3,056 14,656 49
SL Green Reality Corp 115,900 28,600 144,500 3,251
Spieker Properties, Inc. 70,400 17,500 87,900 3,406
Trizec Hahn Corp 98,100 25,200 123,300 2,643
Wellsford Real Properties, Inc., 144A - Private
Placement (a) (b) 199,020 45,351 244,371 3,452
-----------------
69,595
-----------------
Self-Storage 4.1%
PS Business Parks Inc. Class A 132,674 9,379 142,053 3,338
PS Business Parks Inc. 0 25,788 25,788 606
Public Storage, Inc. 44,700 11,100 55,800 1,562
Shurgard Storage Centers, Inc., Class A 57,300 15,300 72,600 2,015
-----------------
7,521
-----------------
Shopping Centers 11.5%
Burnham Pacific Properties, Inc. 323,600 79,600 403,200 5,720
Federal Realty Investment Trust 246,400 61,000 307,400 7,397
First Washington Realty Trust, Inc. - Preferred Ser A 22,300 5,500 27,800 801
Pan Pacific Retail Properties, Inc. 90,000 22,200 112,200 2,174
Ramco-Gershenson Properties Trust 800 200 1,000 19
Regency Realty Corp. 87,400 21,700 109,100 2,741
Vornado Realty Trust 46,200 11,100 57,300 2,274
-----------------
21,126
-----------------
</TABLE>
<PAGE> 220
VK REAL ESTATE SECURITIES FUND - U.S. REAL ESTATE FUND
PROFORMA PORTFOLIO OF INVESTMENTS (CONTINUED)
<TABLE>
<CAPTION>
(Unaudited) VK Real US Real Proforma
Estate Shr Estate Shr Shares Value (000)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Shopping Malls 6.9%
CBL & Associates Properties, Inc. 68,700 18,100 86,800 $ 2,105
Taubman Centers, Inc. 422,900 103,000 525,900 7,494
Urban Shopping Centers, Inc. 76,300 21,500 97,800 3,081
-----------------
12,680
-----------------
Total Common Stocks and Equivalents 94.1% 172,744
-----------------
Convertible Corporate Obligations 0.6%
Brookfield Properties Corp. - Installment Receipts representing
Subordinated Debenture ($868 VKAC par, $224 MS par, totaling
$1,092 par, 6.00% coupon, 02/14/07 maturity) 1,078
-----------------
Total Long-Term Investments (94.7%) 173,822
-----------------
Repurchase Agreements 1.8%
BA Securities ($2,730 par, collateralized by U.S. Government
obligations in a pooled cash account, dated 06/30/98,
to be sold on 07/01/98 at $2,730) 2,730
Chase Securities ($537 par, dated 06/30/98, to be sold on 0701/98
at $537, collateralized by $335 par of U.S. Treasury Bonds, 11.25%
coupon, due 02/15/15) 537
-----------------
Total Repurchase Agreements 3,267
-----------------
Total Investments 96.5%
(Cost $139,959) 177,089
Other Assets in Excess of Liabilities 3.5% 6,415
-----------------
Net Assets 100.0% $183,504
=================
</TABLE>
(a) Non-income producing security as this stock currently does not
declare dividends.
(b) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933. These securities may only be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
<PAGE> 221
VK REAL ESTATE SECURITIES FUND - U.S. REAL ESTATE FUND
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
June 30, 1998
(Unaudited)
Amounts in thousands
<TABLE>
<CAPTION>
VK Real
Estate Securities US Real
Fund Estate Fund Adjustments Proforma
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Investments (Cost of $139,959,
$35,041, and $175,000, respectively) $141,899 $35,190 $177,089
Other Assets Less Liabilities 5,484 1,067 (136) 6,415
-------------------------------------------------------------------
Net Assets $147,383 $36,257 (136) $183,504
===================================================================
Net Assets Consist of:
Capital $142,328 $34,799 $177,127
Accumulated Undistributed Net Investment
Income 745 4 (136) 613
Net Unrealized Appreciation/Depreciation
on Investments 1,940 149 2,089
Accumulated Net Realized Gain/Loss
on Investments 2,370 1,305 3,675
-------------------------------------------------------------------
Net Assets $147,383 $36,257 (136) $183,504
===================================================================
Class A Shares:
Net Assets $51,860 $16,873 (48) $68,685
Shares Outstanding 4,080 1,081 5,409
---------------------------- ------------
Net Asset Value per Share $12.71 $15.61 $12.70
============================ ============
Class B Shares:
Net Assets $76,872 $15,197 (71) $91,998
Shares Outstanding 6,052 978 7,250
---------------------------- ------------
Net Asset Value per Share $12.70 $15.54 $12.69
============================ ============
Class C Shares:
Net Assets $18,651 $4,187 (17) $22,821
Shares Outstanding 1,469 269 1,799
---------------------------- ------------
Net Asset Value per Share $12.69 $15.55 $12.68
============================ ============
(1) The pro forma statements are presented as if the Reorganization was
effective June 30, 1998. The pro forma statements give effect to the
proposed exchange of stock for assets and liabilities with the VK Real Estate
Securities Fund being the surviving entity. The proposed transaction
will be accounted for in accordance with generally accepted accounting
principles as a tax-free reorganization. The historical cost basis of the
investments is carried over to the surviving entity.
(2) The pro forma statements presumes the issuance by the VK Real Estate
Securities Fund of approximately 1,329,000 class A shares, 1,198,000 class B
shares and 330,000 class C shares in exchange for the assets and liabilities of
the U.S. Real Estate Fund.
(3) In connection with this transaction, the VK Real Estate Securities Fund
will incur a non-recurring cost associated with the transaction of
approximately $136,000, or $0.012 per share.
</TABLE>
<PAGE> 222
VK REAL ESTATE SECURITIES FUND - U.S. REAL ESTATE FUND
PROFORMA CONDENSED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1998
(Unaudited)
Amounts in thousands
<TABLE>
<CAPTION>
VK Real
Estate US Real
Securities Fund Estate Fund Adjustments Proforma
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends $3,856 $893 $4,749
Interest 192 48 240
------------------------------------------------------------------------
Total Income 4,048 941 0 4,989
------------------------------------------------------------------------
Expenses:
Investment Advisory Fees 726 185 911
Fees Waived (2) 0 (89) 7 (82)
Distribution (12b-1) and Service Fees 531 109 640
All Other Expenses (1) 245 151 (13) 383
------------------------------------------------------------------------
Total Expenses 1,502 356 (6) 1,852
------------------------------------------------------------------------
Net Investment Income $2,546 $585 $6 $3,137
========================================================================
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments $2,529 $953 $3,482
Net Change in Unrealized Appreciation/
Depreciation During the Period (12,857) (3,544) (16,401)
------------------------------------------------------------------------
Net Realized and Unrealized Gain/Loss
on Investments ($10,328) ($2,591) $0 ($12,919)
========================================================================
Net Increase/Decrease in Net Assets
from Operations ($7,782) ($2,006) $6 ($9,794)
========================================================================
</TABLE>
(1) Reflects the reduction of other operating expenses as a result of the
elimination of certain duplicative expenses and the results of operating a
larger, more efficient fund rather than two smaller funds.
(2) Reflects the waiver of expenses associated with the expense cap of the
combined fund.
<PAGE> 223
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of (i) not
acting in good faith in the reasonable belief that such person's actions were
not in the best interests of the Trust, (ii) having acted with willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office or (iii) for a criminal proceeding
had reasonable cause to believe the conduct was unlawful (collectively,
"Disabling Conduct"). Absent a court determination that an officer or trustee
seeking indemnification was not liable on the merits or guilty of Disabling
Conduct in the conduct of his or her office, the decision by the Registrant to
indemnify such person must be based upon the reasonable determination of
independent counsel or non-party independent trustees, after review of the
facts, that such officer or trustee is not guilty of Disabling Conduct in the
conduct of his or her office.
The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately that he or
she is entitled to the indemnification and only if the following conditions are
met: (1) the trustee or officer provides security for the undertaking; (2) the
Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
ITEM 16. EXHIBITS
<TABLE>
<C> <C> <S> <C>
(1) -- (a) First Amended and Restated Agreement and Declaration of
Trust(1)
-- (b) Certificate of Amendment(1)
-- (c) Amended and Restated Certificate of Designation(2)
(2) -- Amended and Restated Bylaws(1)
(4) -- Agreement and Plan of Reorganization for Van Kampen U.S. Real
Estate Fund into Van Kampen Real Estate Securities Fund(3)
(5) -- Specimen Stock Certificate for:
-- (a) Class A Shares(2)
-- (b) Class B Shares(2)
</TABLE>
C-1
<PAGE> 224
<TABLE>
<C> <C> <S> <C>
-- (c) Class C Shares(2)
(6) -- Investment Advisory Agreement(2)
(7) -- (a) Distribution and Service Agreement(2)
-- (b) Dealer Agreement(2)
-- (c) Form of Broker Agreement(2)
-- (d) Form of Bank Agreement(2)
(9) -- (a) Custodian Agreement(2)
-- (b) Data Access Services Agreement(2)
(10) -- (a) Plan of Distribution Pursuant to Rule 12b-1(2)
-- (b) Service Plan(2)
-- (c) Amended Multi-Class Plan(2)
(11) -- Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
relating to Van Kampen Real Estate Securities Fund(2)
(12) -- Tax Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
relating to the Reorganization++
(13) -- (a) Fund Accounting Agreement(2)
(14) -- (a) Consent of PricewaterhouseCoopers LLP relating to Van Kampen
U.S. Real Estate Fund+
-- (b) Consent of PricewaterhouseCoopers LLP relating to Van Kampen
Real Estate Securities Fund+
(16) -- Power of Attorney(2)
(17) -- (a) Copy of 24f-2 Election of Registrant(2)
-- (b) Form of proxy card for Van Kampen U.S. Real Estate Fund+
-- (c) Prospectus of Van Kampen U.S. Real Estate Fund dated
September , 1998.++
</TABLE>
- ---------------
+ Filed herein.
++ To be filed by amendment. See undertaking 3 under Item 17 as it relates to
Exhibit 12.
(1) Incorporated herein by reference to Post-Effective Amendment No. 5 to
Registrant's Registration Statement on Form N-1A, File Number 33-77800,
filed on April 22, 1996.
(2) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File Number 33-77800,
filed on April 29, 1997.
(3) Included as Appendix A to the Statement of Additional Information.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-2
<PAGE> 225
SIGNATURES
AS REQUIRED BY THE SECURITIES ACT OF 1933, THIS REGISTRATION STATEMENT HAS
BEEN SIGNED ON BEHALF OF THE REGISTRANT IN THE CITY OF OAKBROOK TERRACE AND
STATE OF ILLINOIS, ON THE 22ND DAY OF SEPTEMBER, 1998.
VAN KAMPEN AMERICAN CAPITAL REAL
ESTATE SECURITIES FUND
By /s/ RONALD A. NYBERG
------------------------------------
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED, ON SEPTEMBER 22, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
Principal Executive Officer:
/s/ DENNIS J. MCDONNELL* President
- -----------------------------------------------------
Dennis J. McDonnell
Principal Financial Officer:
/s/ EDWARD C. WOOD III* Vice President and Chief Financial Officer
- -----------------------------------------------------
Edward C. Wood III
Trustees:
/s/ J. MILES BRANAGAN* Trustee
- -----------------------------------------------------
J. Miles Branagan
/s/ RICHARD M. DeMARTINI* Trustee
- -----------------------------------------------------
Richard M. DeMartini
/s/ LINDA HUTTON HEAGY* Trustee
- -----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
- -----------------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON* Trustee
- -----------------------------------------------------
Jack E. Nelson
Trustee
- -----------------------------------------------------
Don. G. Powell
/s/ PHILLIP B. ROONEY* Trustee
- -----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO Sc.D.* Trustee
- -----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee and Chairman
- -----------------------------------------------------
Wayne W. Whalen
- ------------
* Signed by Ronald A. Nyberg pursuant to a power of attorney.
/s/ RONALD A. NYBERG
- -----------------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-3
<PAGE> 226
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN REAL ESTATE SECURITIES FUND
<TABLE>
<CAPTION>
EXHIBIT
- -------
<C> <C> <S> <C>
(14) -- (a) Consent of PricewaterhouseCoopers LLP relating to Van Kampen
U.S. Real Estate Fund
(14) -- (b) Consent of PricewaterhouseCoopers LLP relating to Van Kampen
Real Estate Securities Fund
(17) -- (b) Form of proxy card for Van Kampen U.S. Real Estate Fund
</TABLE>
<PAGE> 1
EXHIBIT (14)(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information of Van Kampen Real Estate Securities Fund dated April 14,
1998 constituting part of this registration statement on Form N-14 of Van Kampen
Real Estate Securities Fund (the "Registration Statement") of our report dated
August 11, 1998, relating to the financial statements and financial highlights
of Van Kampen Series Fund, Inc. appearing in the June 30, 1998 Annual Report to
Shareholders of Van Kampen Series Fund, Inc., which are also incorporated by
reference into the Registration Statement.
/S/ PRICEWATERHOUSECOOPERS LLP
200 E Randolph St.
Chicago, Illinois 60601
September 22, 1998
<PAGE> 1
EXHIBIT (14)(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Statement of
Additional Information constituting part of this registration statement on Form
N-14 of Van Kampen Real Estate Securities Fund (the "Registration Statement") of
our report dated February 7, 1998, relating to the financial statements and
financial highlights appearing in the December 31, 1997 Annual Report to
Shareholders of Van Kampen Real Estate Securities Fund which are also
incorporated by reference into the Registration Statement.
/S/ PRICEWATERHOUSECOOPERS LLP
200 E. Randolph St.
Chicago, Illinois 60601
<PAGE> 1
EXHIBIT (17)(b)
PROXY
VAN KAMPEN U.S. REAL ESTATE FUND
SPECIAL MEETING OF SHAREHOLDERS
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned holder of shares of Common Stock, par value $0.001 per
share ( the "Shares"), of the VAN KAMPEN U.S. REAL ESTATE FUND, a series of
Van Kampen Series Fund, Inc., a Maryland corporation (the "U.S. Real Estate
Fund"), hereby appoints Dennis J. McDonnell, Ronald A. Nyberg, Weston B.
Wetherell and Nicholas Dalmaso, and each of them, with full power of
substitution and revocation, as proxies to represent the undersigned at the
Special Meeting of Shareholders to be held at the offices of Van Kampen
Investments, Inc., One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
on , 1998 at 1:30 p.m., and any and all adjournments thereof (the
"Special Meeting"), and thereat to vote all Shares which the undersigned
would be entitled to vote, with all powers the undersigned would possess
if personally present, in accordance with the following instructions.
If more than one of the proxies, or their substitutes, are present at
the Special Meeting or any adjournment thereof, they jointly (or, if only one is
present and voting then that one) shall have authority and may exercise all
powers granted hereby. This Proxy, when properly executed, will be voted in
accordance with the instructions marked hereon by the undersigned. IF NO
SPECIFICATION IS MADE, THIS PROXY WILL BE VOTED "FOR" THE PROPOSAL DESCRIBED
HEREIN AND IN THE DISCRETION OF THE PROXIES UPON SUCH OTHER BUSINESS AS MAY
PROPERLY COME BEFORE THE MEETING.
Account No. No. of Shares Class of Shares Proxy No.
<TABLE>
<S> <C> <C> <C> <C> <C>
1. FOR AGAINST ABSTAIN
--- ------- ------- The proposal to approve the Agreement and Plan of
Reorganization pursuant to which the Van Kampen U.S. Real Estate Fund
--- ------- ------- would (i) transfer all of its assets to the Van Kampen Real Estate
Securities Fund (the "VK Real Estate Securities Fund") in exchange solely for Class A,
B, and C shares of beneficial interest of the VK Real Estate Securities Fund and
VK Real Estate Securities Fund's assumption of the liabilities of the Van Kampen
U.S. Real Estate Fund, (ii) distribute such shares of the VK Real Estate Securities
Fund to the holders of shares of the Van Kampen U.S. Real Estate Fund and (iii) be
dissolved, all as more fully described in the Prospectus/Proxy Statement.
</TABLE>
The undersigned hereby acknowledges receipt of the accompanying Notice
of Special Meeting and Prospectus/Proxy Statement for the Special Meeting to be
held on , 1998 at 1:30 p.m.
Please sign this Proxy exactly as your name or names appear on the books of
the Van Kampen U.S. Real Estate Fund. When signing as attorney, trustee,
executor, administrator, custodian, guardian or corporate officer, please give
full title. If shares are held jointly, each holder should sign.
<TABLE>
<S> <C>
- ------------------------------------ ----------------------------------------
Shareholder signature 1998
Date
- ------------------------------------ ----------------------------------------
Co-owner signature (if applicable) 1998
Date
</TABLE>
