UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-9279
Van Kampen Equity Trust II
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Ronald Robison
1221 Avenue of the Americas, New York, New York 10020
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: 8/31
Date of reporting period: 8/31/04
Item 1. Report to Shareholders.
The Trust's annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
Technology Fund performed during the annual period. The portfolio
management team will provide an overview of the market conditions and
discuss some of the factors that affected investment performance during
the reporting period. In addition, this report includes the fund's
financial statements and a list of fund investments as of August 31,
2004.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE
FUND BEING OFFERED. THE PROSPECTUS CONTAINS INFORMATION ABOUT THE FUND,
INCLUDING THE INVESTMENT OBJECTIVES, RISKS, CHARGES AND EXPENSES. PLEASE
READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO
PASS. THERE IS NO ASSURANCE THAT A MUTUAL FUND WILL ACHIEVE ITS
INVESTMENT OBJECTIVE. FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE
POSSIBILITY THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL
DECLINE AND THAT THE VALUE OF FUND SHARES MAY THEREFORE BE LESS THAN WHAT
YOU PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS
FUND.
<Table>
<Caption>
---------------------------------------------------------------------------------------
NOT FDIC INSURED OFFER NO BANK GUARANTEE MAY LOSE VALUE
---------------------------------------------------------------------------------------
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT
---------------------------------------------------------------------------------------
</Table>
Performance Summary as of 8/31/04
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the Pacific Stock
Exchange (PSE) Technology Index from 7/31/99 (the first month-end after
inception) through 8/31/04. Class A shares, adjusted for sales charges.
(LINE GRAPH)
<Table>
<Caption>
PACIFIC STOCK EXCHANGE TECHNOLOGY
VAN KAMPEN TECHNOLOGY FUND INDEX
-------------------------- ---------------------------------
7/99 9426 10513
10676 10526
12/99 18935 16303
23870 19488
6/00 21213 18472
23657 17421
12/00 14009 13659
6491 11106
6/01 6676 12172
3694 8674
12/01 4972 11529
4824 11492
6/02 3333 8613
2259 6469
12/02 2537 7687
2583 7655
6/03 3167 9431
3444 10340
12/03 3954 11695
3870 11979
6/04 4065 12334
8/04 3593 10925
</Table>
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 07/26/99 since 07/26/99 since 07/26/99
- ----------------------------------------------------------------------------------------------
W/MAX W/MAX W/MAX
5.75% 5.00% 1.00%
AVERAGE ANNUAL W/O SALES SALES W/O SALES SALES W/O SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGE
Since Inception -16.95% -17.91% -17.59% -17.59% -17.59% -17.59%
5-year -19.06 -20.01 -19.68 -19.93 -19.68 -19.68
1-year -1.27 -6.95 -2.10 -6.99 -2.10 -3.08
- ----------------------------------------------------------------------------------------------
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
VANKAMPEN.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST.
The returns shown in this report do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Performance of share classes will vary due to differences in sales charges and
expenses. Average annual total return with sales charges includes payment of the
maximum sales charge of 5.75 percent for Class A shares, a contingent deferred
sales charge of 5.00 percent for Class B shares (in year one and declining to
zero after year five), a contingent deferred sales charge of 1.00 percent for
Class C shares in year one and combined Rule 12b-1 fees and service fees of up
to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares.
Figures shown above assume reinvestment of all dividends and capital gains.
Pacific Stock Exchange (PSE) Technology Index measures the performance of 100
technology stocks from 15 industrial groups. The index does not include any
expenses, fees or sales charges, which would lower performance. The index is
unmanaged and should not be considered an investment. Source for index
performance: Lipper Inc.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
Van Kampen Technology Fund is managed by the Adviser's Multi-Cap Growth team.(1)
Current members include Gary Lewis, Managing Director of the Adviser; David
Walker, Dudley Brickhouse, and Janet Luby, Executive Directors of the Adviser;
Matthew Hart, Vice President of the Adviser; and Scott Miller, Senior Associate
of the Adviser.
MARKET CONDITIONS
Technology stocks produced a marginally positive return during the fund's fiscal
year. The reporting period began on a strong note, as the technology sector
delivered stellar performance during the final four months of 2003. During this
time, an improving economy fueled demand for technology products and services,
resulting in robust earnings growth and a high level of investor enthusiasm.
The technology sector began to lose ground in January, however, due to emerging
concerns that earnings had peaked and were poised to slow. Following a 10-month
rally in tech stocks, many investors elected to reduce their holdings in the
sector. The resulting sell-off continued through the spring, then accelerated
during the summer once it became evident that the U.S. economy was not
recovering at as rapid a pace as was previously thought. Since technology firms
are highly sensitive to trends in corporate spending, slower-than-expected
economic growth is viewed as significantly negative for the industry. As a
result, technology stocks have produced a negative total return and
underperformed the broader U.S. market so far in 2004. Fortunately, their strong
performance during the first four months of the period was enough to offset the
subsequent weakness, allowing the sector to finish the fund's reporting period
in positive territory.
PERFORMANCE ANALYSIS
Van Kampen Technology Fund returned -1.27 percent for the 12 months ended August
31, 2004 (Class A shares unadjusted for sales charge). The fund's
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDING AUGUST 31, 2004
<Table>
<Caption>
- -----------------------------------------------------------------------------------
PACIFIC STOCK EXCHANGE
CLASS A CLASS B CLASS C TECHNOLOGY INDEX
-1.27% -2.10% -2.10% 3.18%
- -----------------------------------------------------------------------------------
</Table>
The performance for the three share classes varies because each has different
expenses. The fund's total return figures assume the reinvestment of all
distributions, but do not reflect the deduction of any applicable sales charges.
Such costs would lower performance. Past performance is no guarantee of future
results. See Performance Summary for standardized performance information and
index definitions.
(1)Team members may change at any time without notice.
2
benchmark, the Pacific Stock Exchange Technology Index, returned 3.18 percent
for the same period.
Although the fund underperformed its benchmark, generally speaking, we believe
we have positioned the fund well in the market environment. Early in the period,
our investment strategy led us to overweight the fund in those areas of the
technology sector with a high level of sensitivity to the economy, such as
semiconductor (computer chip) companies. At its peak, the fund's weighting in
semiconductor stocks reached about 45 percent of assets, compared with a roughly
18 percent weighting in the benchmark. Given the continued improvement in the
economy, this positioning proved beneficial to performance during the first four
months of the reporting period.
As noted above, the positive environment for stocks quickly dissipated during
the first quarter, leading to a sharp turnaround in the stock prices of
economically-sensitive companies. Recognizing that this represented a meaningful
shift and not simply a brief market correction, we quickly elected to adopt a
more conservative positioning by reducing the fund's weighting in semiconductor
and semiconductor equipment stocks. This proved very helpful to performance in
the second half of the period given the continued sell-off in these areas.
Unfortunately, we did not re-position the portfolio rapidly enough and it was
highly exposed to the initial stages of the sell-off. As a result, the fund
underperformed its benchmark by a wide margin during the second half of January,
and this was enough to cause it to underperform for the entire period.
Since then, we continued to believe the backdrop for technology stocks would
remain challenging, and have maintained a defensive positioning in the
portfolio. In other words, we invested the fund less aggressively than it had
been earlier in the period, in order to better withstand short-term market
weakness. This entailed holding a more diversified portfolio and investing the
fund in larger companies that we believe may provide more stable growth
potential, such as IBM. At the same time, the fund continued to hold a reduced
position in the volatile semiconductor equipment sectors. We have also elected
to maintain the fund's below-benchmark weighting in software, another area that
is sensitive to trends in corporate spending.
Another notable element of the fund's defensive positioning is its 20 percent
weighting in the health-care sector, a weighting which is high relative to
comparable funds. Here, we tended to focus on device manufacturers and
biotechnology companies with high-potential products that we believe will
receive approval from the Food and Drug Administration (FDA). For example,
Biogen Idec has created a drug called Antegren, a state-of-the-art treatment for
multiple sclerosis that has had its approval process "fast-tracked" by the FDA.
The company also sells Rituxin, a non-Hodgkin's lymphoma drug that may be used
to treat other illnesses as well. Both drugs are expected to result in
substantial cash flow for Biogen Idec.
3
The two stocks that made the most significant positive contribution to returns
during the period were the Internet companies eBay and Yahoo!. EBay is a
longstanding fund holding that performed very well during the past year. In its
role as a 24-hour worldwide shopping mart, the company has become hugely
profitable. This has been reflected in its stock price, which rose from
approximately $55 a year ago to over $86 by the end of the period. Yahoo!,
meanwhile, has benefited from the maturing of the Internet advertising market.
Once seen as being inferior to print, radio, and television advertising,
Internet ads have experienced increasing "click-through" from web surfers and
actually are proving more effective than other types of media. As one of the
world's most heavily trafficked websites, Yahoo! has become an important
beneficiary of this trend.
We remain cautious on the outlook for technology stocks, since we see no near-
term catalyst to spark better-than-expected earnings from the sector.
Nonetheless, we continue to believe that technology stocks offer the potential
for long-term appreciation as part of a well-diversified portfolio.
There is no guarantee the securities mentioned will continue to perform well or
be held by the fund in the future.
4
<Table>
TOP 10 HOLDINGS AS OF 8/31/04
eBay, Inc. 4.8%
Yahoo!, Inc. 3.9
Cisco Systems, Inc. 3.6
International Business Machines Corp. 3.5
Symantec Corp. 3.3
QUALCOMM, Inc. 3.3
Microsoft Corp. 3.1
Juniper Networks, Inc. 2.8
St. Jude Medical, Inc. 2.7
Biogen Idec, Inc. 2.6
SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF 8/31/04
Communications Equipment 14.9%
Semiconductors 11.9
Systems Software 10.6
Biotechnology 9.9
Health Care Equipment 7.9
Data Processing & Outsourcing Services 7.2
Computer Hardware 6.5
Internet Software & Services 6.2
Internet Retail 5.6
Semiconductor Equipment 4.8
Application Software 4.2
Aerospace & Defense 2.3
Health Care Supplies 2.0
Home Entertainment Software 1.9
Computer Storage & Peripherals 1.2
Pharmaceuticals 1.2
Wireless Telecommunication Services 0.9
Office Electronics 0.7
------
Total Long-Term Investments 99.9%
Short-Term Investments 0.8
Liabilities in Excess of Other Assets (0.7)
------
Total Net Assets 100.0%
</Table>
Subject to change daily. Provided for informational purposes only and should not
be deemed as a recommendation to buy or sell the securities mentioned or
securities in the industries shown above. All percentages are as a percentage of
net assets. Van Kampen is a wholly owned subsidiary of a global securities firm
which is engaged in a wide range of financial services including, for example,
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services.
5
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Van Kampen fund provides a complete schedule of portfolio holdings
in its semiannual and annual reports within 60 days of the end of the
fund's second and fourth fiscal quarters by filing the schedule
electronically with the Securities and Exchange Commission (SEC). The
semiannual reports are filed on Form N-CSRS and the annual reports are
filed on Form N-CSR. Van Kampen also delivers the semiannual and annual
reports to fund shareholders, and makes these reports available on its
public web site, www.vankampen.com. In addition to the semiannual and
annual reports that Van Kampen delivers to shareholders and makes
available through the Van Kampen public web site, each fund files a
complete schedule of portfolio holdings with the SEC for the fund's first
and third fiscal quarters on Form N-Q. Van Kampen does not deliver the
reports for the first and third fiscal quarters to shareholders, nor are
the reports posted to the Van Kampen public web site. You may, however,
obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS
filings) by accessing the SEC's web site, http://www.sec.gov. You may
also review and copy them at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at 1-202-942-8090. You
can also request copies of these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the
SEC, Washington, DC 20549-0102.
In addition to filing a complete schedule of portfolio holdings with the
SEC each fiscal quarter, each Van Kampen fund makes portfolio holdings
information available by periodically providing the information on its
public web site, www.vankampen.com. Each Van Kampen fund provides a
complete schedule of portfolio holdings on the public web site on a
calendar-quarter basis approximately 30 days after the close of the
calendar quarter. Furthermore, each Van Kampen open-end fund provides
partial lists of its portfolio holdings (such as top 10 or top 15 fund
holdings) to the public web site each month with a delay of approximately
15 days.
You may obtain copies of a fund's fiscal quarter filings, or its monthly
or calendar-quarter web site postings, by contacting Van Kampen Client
Relations at 1-800-847-2424.
6
ANNUAL HOUSEHOLDING NOTICE
To reduce fund expenses, the fund attempts to eliminate duplicate
mailings to the same address. The fund delivers a single copy of certain
shareholder documents to investors who share an address, even if the
accounts are registered under different names. The fund's prospectuses
and shareholder reports (including annual privacy notices) will be
delivered to you in this manner indefinitely unless you instruct us
otherwise. You can request multiple copies of these documents by either
calling 1-800-341-2911 or writing to Van Kampen Investor Services at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor
Services has received your instructions, we will begin sending individual
copies for each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The fund's policies and procedures with respect to the voting of proxies
relating to the fund's portfolio securities and information on how the
fund voted proxies relating to portfolio securities during the most
recent 12-month period ended June 30 is available without charge, upon
request, by calling 1-800-847-2424 or by visiting our web site at
www.vankampen.com. This information is also available on the Securities
and Exchange Commission's web site at http://www.sec.gov.
7
Expense Example
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing cost (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 3/1/04 - 8/31/04.
ACTUAL EXPENSE
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total
costs of owning different funds that have transactional costs, such as sales
charges (loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------------------------------------------
3/1/04 8/31/04 3/1/04-8/31/04
Class A
Actual................................... $1,000.00 $ 910.80 $11.05
Hypothetical............................. 1,000.00 1,013.54 11.64
(5% annual return before expenses)
Class B
Actual................................... 1,000.00 907.50 14.72
Hypothetical............................. 1,000.00 1,009.74 15.51
(5% annual return before expenses)
Class C
Actual................................... 1,000.00 907.50 14.72
Hypothetical............................. 1,000.00 1,009.74 15.51
(5% annual return before expenses)
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 2.30%, 3.07%,
and 3.07% for Class A, B, and C Shares, respectively, multiplied by the
average account value over the period, multiplied by 184/366 (to reflect the
one-half year period).
Assumes all dividends and distributions were reinvested.
8
VAN KAMPEN TECHNOLOGY FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------
COMMON STOCKS 99.9%
AEROSPACE & DEFENSE 2.3%
Lockheed Martin Corp. ...................................... 125,000 $ 6,722,500
------------
APPLICATION SOFTWARE 4.2%
Autodesk, Inc. ............................................. 125,000 5,551,250
PeopleSoft, Inc. (a)........................................ 125,000 2,175,000
SAP AG--ADR (Germany)....................................... 125,000 4,557,500
------------
12,283,750
------------
BIOTECHNOLOGY 9.9%
Amgen, Inc. (a)............................................. 115,000 6,818,350
Biogen, Inc. (a)............................................ 125,000 7,416,250
Celgene Corp. (a)........................................... 25,000 1,418,750
Genentech, Inc. (a)......................................... 125,000 6,097,500
Gilead Sciences, Inc. (a)................................... 100,000 6,913,000
------------
28,663,850
------------
COMMUNICATIONS EQUIPMENT 14.9%
Cisco Systems, Inc. (a)..................................... 550,000 10,318,000
Corning, Inc. (a)........................................... 125,000 1,265,000
Ericsson, Class B--ADR (Sweden) (a)......................... 50,000 1,352,000
Harris Corp. ............................................... 115,000 5,538,400
Juniper Networks, Inc. (a).................................. 350,000 8,011,500
Motorola, Inc. ............................................. 150,000 2,422,500
QUALCOMM, Inc. ............................................. 250,000 9,512,500
Research in Motion, Ltd. (Canada) (a)....................... 25,000 1,505,500
Scientific-Atlanta, Inc. ................................... 115,000 3,132,600
------------
43,058,000
------------
COMPUTER HARDWARE 6.5%
Apple Computer, Inc. (a).................................... 125,000 4,311,250
Dell Computer Corp. (a)..................................... 125,000 4,355,000
International Business Machines Corp. ...................... 120,000 10,162,800
------------
18,829,050
------------
COMPUTER STORAGE & PERIPHERALS 1.2%
EMC Corp. (a)............................................... 125,000 1,346,250
Lexmark International, Inc., Class A (a).................... 25,000 2,211,250
------------
3,557,500
------------
DATA PROCESSING & OUTSOURCING SERVICES 7.2%
Automatic Data Processing, Inc. ............................ 125,000 4,971,250
Computer Sciences Corp. (a)................................. 115,000 5,330,250
DST Systems, Inc. (a)....................................... 115,000 5,202,600
First Data Corp. ........................................... 125,000 5,281,250
------------
20,785,350
------------
HEALTH CARE EQUIPMENT 7.9%
Biomet, Inc. ............................................... 125,000 5,706,250
Boston Scientific Corp. (a)................................. 100,000 3,573,000
</Table>
See Notes to Financial Statements 9
VAN KAMPEN TECHNOLOGY FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------
HEALTH CARE EQUIPMENT (CONTINUED)
Guidant Corp. .............................................. 100,000 $ 5,980,000
St. Jude Medical, Inc. (a).................................. 115,000 7,733,750
------------
22,993,000
------------
HEALTH CARE SUPPLIES 2.0%
Millipore Corp. (a)......................................... 115,000 5,784,500
------------
HOME ENTERTAINMENT SOFTWARE 1.9%
Electronic Arts, Inc. (a)................................... 110,000 5,475,800
------------
INTERNET RETAIL 5.6%
Amazon.com, Inc. (a)........................................ 65,000 2,479,100
eBay, Inc. (a).............................................. 160,000 13,846,400
------------
16,325,500
------------
INTERNET SOFTWARE & SERVICES 6.2%
Google, Inc., Class A (a)................................... 65,000 6,659,250
Yahoo!, Inc. (a)............................................ 400,000 11,404,000
------------
18,063,250
------------
OFFICE ELECTRONICS 0.7%
Zebra Technologies Corp., Class A (a)....................... 37,500 2,143,125
------------
PHARMACEUTICALS 1.2%
DOV Pharmaceutical, Inc. (a)................................ 100,000 1,570,000
Sepracor, Inc. (a).......................................... 35,000 1,736,350
------------
3,306,350
------------
SEMICONDUCTOR EQUIPMENT 4.8%
Applied Materials, Inc. (a)................................. 125,000 1,986,250
KLA-Tencor Corp. (a)........................................ 125,000 4,670,000
Lam Research Corp. (a)...................................... 125,000 2,693,750
Novellus Systems, Inc. (a).................................. 125,000 3,053,750
Teradyne, Inc. (a).......................................... 125,000 1,608,750
------------
14,012,500
------------
SEMICONDUCTORS 11.9%
Advanced Micro Devices, Inc. (a)............................ 125,000 1,428,750
Analog Devices, Inc. ....................................... 125,000 4,340,000
Broadcom Corp., Class A (a)................................. 100,000 2,714,000
Intel Corp. ................................................ 200,000 4,258,000
Linear Technology Corp. .................................... 125,000 4,471,250
Marvell Technology Group Ltd. (Bermuda) (a)................. 125,000 2,890,000
Maxim Integrated Products, Inc. ............................ 125,000 5,428,750
Micron Technology, Inc. (a)................................. 125,000 1,438,750
National Semiconductor Corp. (a)............................ 125,000 1,666,250
Texas Instruments, Inc. .................................... 125,000 2,442,500
Xilinx, Inc. ............................................... 125,000 3,428,750
------------
34,507,000
------------
</Table>
10 See Notes to Financial Statements
VAN KAMPEN TECHNOLOGY FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- --------------------------------------------------------------------------------------
SYSTEMS SOFTWARE 10.6%
Adobe Systems, Inc. ........................................ 125,000 $ 5,733,750
Microsoft Corp. ............................................ 325,000 8,872,500
NCR Corp. (a)............................................... 115,000 5,079,550
Oracle Corp. (a)............................................ 150,000 1,495,500
Symantec Corp. (a).......................................... 200,000 9,592,000
------------
30,773,300
------------
WIRELESS TELECOMMUNICATION SERVICES 0.9%
Nextel Communications, Inc., Class A (a).................... 110,000 2,550,900
------------
TOTAL LONG-TERM INVESTMENTS 99.9%
(Cost $263,432,090).................................................. 289,835,225
REPURCHASE AGREEMENT 0.8%
UBS Securities LLC ($2,409,000 par collateralized by U.S. Government
obligations in a pooled cash account, interest rate of 1.55%, dated
08/31/04, to be sold on 09/01/04 at $2,409,104)
(Cost $2,409,000).................................................... 2,409,000
------------
TOTAL INVESTMENTS 100.7%
(Cost $265,841,090).................................................. 292,244,225
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7%).......................... (2,148,475)
------------
NET ASSETS 100.0%..................................................... $290,095,750
============
</Table>
Percentages are calculated as a percentage of net assets.
(a) Non-income producing security as this stock currently does not declare
dividends.
ADR--American Depositary Receipt
See Notes to Financial Statements 11
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
August 31, 2004
<Table>
ASSETS:
Total Investments (Cost $265,841,090)....................... $ 292,244,225
Receivables:
Investments Sold.......................................... 6,267,403
Fund Shares Sold.......................................... 207,294
Dividends................................................. 118,150
Interest.................................................. 104
Other....................................................... 51,597
---------------
Total Assets............................................ 298,888,773
---------------
LIABILITIES:
Payables:
Investments Purchased..................................... 6,640,540
Distributor and Affiliates................................ 812,797
Fund Shares Repurchased................................... 616,624
Investment Advisory Fee................................... 220,752
Custodian Bank............................................ 19,518
Accrued Expenses............................................ 412,257
Trustees' Deferred Compensation and Retirement Plans........ 70,535
---------------
Total Liabilities....................................... 8,793,023
---------------
NET ASSETS.................................................. $ 290,095,750
===============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $ 1,883,826,666
Net Unrealized Appreciation................................. 26,403,135
Accumulated Net Investment Loss............................. (70,884)
Accumulated Net Realized Loss............................... (1,620,063,167)
---------------
NET ASSETS.................................................. $ 290,095,750
===============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $108,691,993 and 28,012,336 shares of
beneficial interest issued and outstanding)............. $ 3.88
Maximum sales charge (5.75%* of offering price)......... .24
---------------
Maximum offering price to public........................ $ 4.12
===============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $146,739,794 and 39,364,950 shares of
beneficial interest issued and outstanding)............. $ 3.73
===============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $34,663,963 and 9,297,713 shares of
beneficial interest issued and outstanding)............. $ 3.73
===============
</Table>
* On sales of $50,000 or more, the sales charge will be reduced.
12 See Notes to Financial Statements
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL STATEMENTS continued
Statement of Operations
For the Year Ended August 31, 2004
<Table>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $11,835)..... $ 673,517
Interest.................................................... 18,984
------------
Total Income............................................ 692,501
------------
EXPENSES:
Shareholder Services........................................ 3,586,052
Investment Advisory Fee..................................... 3,093,146
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $316,022, $1,734,510 and $423,882,
respectively)............................................. 2,474,414
Custody..................................................... 37,520
Legal....................................................... 32,408
Trustees' Fees and Related Expenses......................... 20,024
Other....................................................... 448,590
------------
Total Expenses.......................................... 9,692,154
------------
NET INVESTMENT LOSS......................................... $ (8,999,653)
============
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 66,812,421
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 87,144,534
End of the Period......................................... 26,403,135
------------
Net Unrealized Depreciation During the Period............... (60,741,399)
------------
NET REALIZED AND UNREALIZED GAIN............................ $ 6,071,022
============
NET DECREASE IN NET ASSETS FROM OPERATIONS.................. $ (2,928,631)
============
</Table>
See Notes to Financial Statements 13
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, 2004 AUGUST 31, 2003
----------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Loss...................................... $ (8,999,653) $ (8,866,411)
Net Realized Gain/Loss................................... 66,812,421 (79,234,441)
Net Unrealized Appreciation/Depreciation During the
Period................................................. (60,741,399) 175,267,856
------------ -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES...... (2,928,631) 87,167,004
------------ -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................ 46,861,256 162,947,100
Cost of Shares Repurchased............................... (95,116,672) (180,950,468)
------------ -------------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS....... (48,255,416) (18,003,368)
------------ -------------
TOTAL INCREASE/DECREASE IN NET ASSETS.................... (51,184,047) 69,163,636
NET ASSETS:
Beginning of the Period.................................. 341,279,797 272,116,161
------------ -------------
End of the Period (Including accumulated net investment
loss of $70,884 and $61,268, respectively)............. $290,095,750 $ 341,279,797
============ =============
</Table>
14 See Notes to Financial Statements
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED AUGUST 31,
CLASS A SHARES ---------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD.......................... $ 3.93 $ 2.90 $ 5.49 $ 26.81 $ 11.17
------ ------ ------- ------- -------
Net Investment Loss............. (.09)(a) (.08)(a) (.11)(a) (.18)(a) (.16)
Net Realized and Unrealized
Gain/ Loss.................... .04 1.11 (2.48) (21.14) 15.80
------ ------ ------- ------- -------
Total from Investment
Operations...................... (.05) 1.03 (2.59) (21.32) 15.64
------ ------ ------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD.......................... $ 3.88 $ 3.93 $ 2.90 $ 5.49 $ 26.81
====== ====== ======= ======= =======
Total Return (b).................. -1.27% 35.52% -47.18% -79.51% 139.93%
Net Assets at End of the Period
(In millions)................... $108.7 $125.3 $ 103.5 $ 198.8 $ 928.8
Ratio of Expenses to Average Net
Assets.......................... 2.34% 2.88% 2.39% 1.65% 1.47%
Ratio of Net Investment Loss to
Average Net Assets.............. (2.13%) (2.73%) (2.31%) (1.48%) (1.14%)
Portfolio Turnover................ 180% 152% 142% 274% 167%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
See Notes to Financial Statements 15
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS continued
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED AUGUST 31,
CLASS B SHARES ----------------------------------------------------------
2004 2003 2002 2001 2000
----------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD.......................... $ 3.81 $ 2.83 $ 5.41 $ 26.59 $ 11.16
------ ------ ------- ------- --------
Net Investment Loss............. (.12)(a) (.10)(a) (.14)(a) (.28)(a) (.28)
Net Realized and Unrealized
Gain/Loss..................... .04 1.08 (2.44) (20.90) 15.71
------ ------ ------- ------- --------
Total from Investment
Operations...................... (.08) .98 (2.58) (21.18) 15.43
------ ------ ------- ------- --------
NET ASSET VALUE, END OF THE
PERIOD.......................... $ 3.73 $ 3.81 $ 2.83 $ 5.41 $ 26.59
====== ====== ======= ======= ========
Total Return (b).................. -2.10% 34.63% -47.69% -79.65% 138.17%
Net Assets at End of the Period
(In millions)................... $146.7 $172.7 $ 133.8 $ 288.4 $1,442.2
Ratio of Expenses to Average Net
Assets.......................... 3.11% 3.65% 3.16% 2.40% 2.23%
Ratio of Net Investment Loss to
Average Net Assets.............. (2.91%) (3.50%) (3.08%) (2.24%) (1.89%)
Portfolio Turnover................ 180% 152% 142% 274% 167%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 5%, charged on certain redemptions
made within one year of purchase and declining to 0% after the fifth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of 1% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
16 See Notes to Financial Statements
VAN KAMPEN TECHNOLOGY FUND
FINANCIAL HIGHLIGHTS continued
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED AUGUST 31,
CLASS C SHARES ---------------------------------------------------------
2004 2003 2002 2001 2000
---------------------------------------------------------
NET ASSET VALUE, BEGINNING OF THE
PERIOD.......................... $ 3.81 $ 2.83 $ 5.41 $ 26.59 $ 11.16
------ ------ ------- ------- -------
Net Investment Loss............. (.12)(a) (.10)(a) (.14)(a) (.28)(a) (.27)
Net Realized and Unrealized
Gain/Loss..................... .04 1.08 (2.44) (20.90) 15.70
------ ------ ------- ------- -------
Total from Investment
Operations...................... (.08) .98 (2.58) (21.18) 15.43
------ ------ ------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD.......................... $ 3.73 $ 3.81 $ 2.83 $ 5.41 $ 26.59
====== ====== ======= ======= =======
Total Return (b).................. -2.10% 34.63% -47.69% -79.65% 138.17%
Net Assets at End of the Period
(In millions)................... $ 34.7 $ 43.4 $ 34.7 $ 80.3 $ 412.0
Ratio of Expenses to Average Net
Assets.......................... 3.11% 3.66% 3.16% 2.40% 2.22%
Ratio of Net Investment Loss to
Average Net Assets.............. (2.91%) (3.51%) (3.08%) (2.23%) (1.88%)
Portfolio Turnover................ 180% 152% 142% 274% 167%
</Table>
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
See Notes to Financial Statements 17
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Technology Fund (the "Fund") is organized as a series of Van Kampen
Equity Trust II (the "Trust"), a Delaware statutory trust, and is registered as
a diversified, open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment
objective is to seek capital appreciation. The Fund commenced investment
operations on July 26, 1999 with three classes of common shares: Class A, Class
B, and Class C.
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 U.S. 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 sales price as of the close of such securities exchange.
Equity securities traded on NASDAQ are valued at the NASDAQ Official Closing
Price. Listed securities and unlisted securities for which the last sales price
is not available are valued at the mean of the bid and asked prices. For those
securities where quotations or prices are not available, valuations are
determined in accordance with procedures established in good faith by the Board
of Trustees. Short-term securities with remaining maturities of 60 days or less
are valued at amortized cost, which approximates market value.
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 whereby the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Asset Management (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. Income and expenses of the Fund
are allocated on a pro rata basis to each class of shares, except for
distribution and service fees and transfer agency costs which are unique to each
class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
18
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At August 31, 2004, the Fund had an accumulated capital loss carryforward
for tax purposes of $1,613,130,160, which will expire between August 31, 2007
and August 31, 2009.
At August 31, 2004, the cost and related gross unrealized appreciation and
depreciation are as follows:
<Table>
Cost of investments for tax purposes........................ $272,774,098
============
Gross tax unrealized appreciation........................... $ 33,818,755
Gross tax unrealized depreciation........................... (14,348,628)
------------
Net tax unrealized appreciation on investments.............. $ 19,470,127
============
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares and pays dividends
annually from net investment income and from net realized gains, if any.
Distributions from net realized gains for book purposes may include short-term
capital gains, which are included as ordinary income for tax purposes.
Due to inherent differences in the recognition of income, expenses, and
realized gains/losses under U.S. generally accepted accounting principles and
federal income tax purposes, permanent differences between book and tax basis
reporting for the 2004 fiscal year have been identified and appropriately
reclassified on the Statement of Assets and Liabilities. At August 31, 2004, a
permanent book to tax basis difference relating to a net operating loss totaling
$8,988,041 was reclassified from accumulated net investment loss to capital.
Additionally, a permanent book to tax basis difference related to the Fund's
investment in other regulated investment companies totaling $1,996 was
reclassified from accumulated net investment loss to accumulated net realized
loss.
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of the deferral of losses related to wash sale
transactions.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<Table>
<Caption>
AVERAGE DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .90%
Next $500 million........................................... .85%
Over $1 billion............................................. .80%
</Table>
For the year ended August 31, 2004, the Fund recognized expenses of
approximately $13,700 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom LLP, counsel to the Fund, of which a trustee of the Fund
is an affiliated person.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to each fund. For the year ended August 31,
2004, the Fund recognized expenses of approximately $43,700 representing Van
Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen") cost of
providing accounting and legal services to the Fund,
19
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
which are reported as part of "Other" and "Legal" expenses, respectively, on the
Statement of Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
August 31, 2004, the Fund recognized expenses of approximately $3,060,300,
representing shareholder servicing fees paid to VKIS. Shareholder servicing fees
are determined through negotiations with the Fund's Board of Trustees.
Certain officers and trustees of the Fund are also officers and trustees 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.
Amounts deferred are retained by the Fund, and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of $41,119 are included in
"Other" assets on the Statement of Assets and Liabilities at August 31, 2004.
Appreciation/depreciation and distributions received from these investments are
recorded with an offsetting increase/decrease in the deferred compensation
obligation and do not affect the net asset value of the Fund. Benefits under the
retirement plan are payable upon retirement 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.
For the year ended August 31, 2004, the Fund paid brokerage commissions to
Morgan Stanley DW Inc., an affiliate of the Adviser, totaling $172,477.
3. CAPITAL TRANSACTIONS
At August 31, 2004, capital aggregated $706,137,686, $900,535,250, and
$277,153,730 for Classes A, B and C, respectively. For the year ended August 31,
2004, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 6,150,421 $ 25,762,027
Class B................................................... 4,247,442 17,108,738
Class C................................................... 998,901 3,990,491
----------- ------------
Total Sales................................................. 11,396,764 $ 46,861,256
=========== ============
Repurchases:
Class A................................................... (10,011,554) $(41,639,851)
Class B................................................... (10,250,621) (41,029,111)
Class C................................................... (3,094,335) (12,447,710)
----------- ------------
Total Repurchases........................................... (23,356,510) $(95,116,672)
=========== ============
</Table>
20
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
At August 31, 2003, capital aggregated $725,383,116, $929,002,064, and
$286,684,943 for Classes A, B and C, respectively. For the year ended August 31,
2003, transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 45,209,810 $ 130,925,282
Class B................................................... 8,338,529 25,325,522
Class C................................................... 2,195,056 6,696,296
----------- -------------
Total Sales................................................. 55,743,395 $ 162,947,100
=========== =============
Repurchases:
Class A................................................... (49,042,951) $(142,389,017)
Class B................................................... (10,222,198) (29,649,186)
Class C................................................... (3,071,460) (8,912,265)
----------- -------------
Total Repurchases........................................... (62,336,609) $(180,950,468)
=========== =============
</Table>
Class B Shares and any dividend reinvestment plan Class B Shares received
thereon automatically convert to Class A Shares eight years after the end of the
calendar month in which the shares were purchased. For the years ended August
31, 2004 and 2003, 124,894 and 63,082 Class B Shares automatically converted to
Class A Shares, respectively, and are shown in the above tables as sales of
Class A Shares and repurchases of Class B Shares. Class C Shares do not possess
a conversion feature. 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 Shares and within one year of the purchase for
Class C Shares as detailed in the following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 5.00% 1.00%
Second...................................................... 4.00% None
Third....................................................... 3.00% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth and Thereafter........................................ None None
</Table>
For the year ended August 31, 2004, Van Kampen, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A Shares of approximately
$76,100 and CDSC on redeemed shares of Classes B and C of approximately
$485,800. Sales charges do not represent expenses of the Fund.
21
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $615,258,472 and $671,498,695,
respectively.
5. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares, and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively, the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares, and Class C Shares; the provision of ongoing shareholder
services with respect to such classes of shares; and the maintenance of
shareholder accounts with respect to such classes of shares.
Annual fees under the Plans of up to .25% of Class A average daily net
assets and 1.00% each of Class B and Class C average daily net assets are
accrued daily. The annual fees for Class A Shares are paid quarterly and the
annual fees for Class C Shares are paid monthly. For Class B Shares, 75% of the
annual fees are paid monthly, while 25% of the annual fees are paid quarterly.
The amount of distribution expenses incurred by Van Kampen and not yet
reimbursed ("unreimbursed receivable") was approximately $26,880,400 and
$209,300 for Class B and Class C Shares, respectively. These amounts may be
recovered from future payments under the distribution plan or CDSC. To the
extent the unreimbursed receivable has been fully recovered, any excess 12b-1
fees will be refunded to the Fund on a quarterly basis.
Included in the fees for the year ended August 31, 2004, are payments
retained by Van Kampen of approximately $1,336,000 and payments made to Morgan
Stanley, an affiliate of the Adviser, of approximately $238,200.
6. LEGAL MATTERS
The Adviser, certain affiliates of the Adviser, and certain investment companies
advised by the Adviser or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. The consolidated action also names as defendants certain
individual Trustees and Directors of certain investment companies advised by
affiliates of the Adviser; the complaint does not, however, name the individual
Trustees of any Van Kampen funds. The consolidated amended complaint generally
alleges that defendants violated their statutory disclosure obligations and
fiduciary duties by failing properly to disclose (i) that the Adviser and
certain affiliates of the Adviser allegedly offered economic incentives to
brokers and others to steer investors to the funds advised by the Adviser or its
affiliates rather than funds managed by other companies, and (ii) that the funds
advised by the Adviser or its affiliates, including the Fund, allegedly paid
excessive commissions to brokers in return for their alleged efforts to steer
investors to these funds. The complaint seeks, among other things, unspecified
compensatory damages, rescissionary damages, fees and costs.
The Adviser and certain affiliates of the Adviser are also named as
defendants in a derivative suit which additionally names as defendants certain
individual Trustees of certain Van Kampen funds; the named investment companies,
including the Fund, are listed as nominal defendants. The complaint alleges that
defendants caused the Van Kampen funds to pay economic incentives to a
proprietary sales force to promote the sale of proprietary mutual funds. The
complaint also alleges that the Van Kampen funds paid excessive commissions to
Morgan Stanley and its affiliates in connection with the sales of the funds.
22
VAN KAMPEN TECHNOLOGY FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
The complaint seeks, among other things, the removal of the current Trustees of
the funds, rescission of the management contracts for the funds, disgorgement of
profits by Morgan Stanley and its affiliates and monetary damages. This
complaint has been coordinated with the consolidated complaint described in the
preceding paragraph.
The defendants have moved to dismiss each of these actions and otherwise
intend to defend them vigorously. While the defendants believe that they have
meritorious defenses, the ultimate outcome of these matters is not presently
determinable at this early stage of litigation, and no provision has been made
in the Fund's financial statements for the effect, if any, of these matters.
7. INDEMNIFICATIONS
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
23
VAN KAMPEN TECHNOLOGY FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of Van Kampen Technology Fund
We have audited the accompanying statement of assets and liabilities of Van
Kampen Technology Fund (the "Fund"), including the portfolio of investments, as
of August 31, 2004, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of August 31, 2004, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Van Kampen Technology Fund at August 31, 2004, the results of its operations for
the year then ended, the changes in its net assets for each of the two years in
the period then ended, and the financial highlights for each of the five years
in the period then ended in conformity with U.S. generally accepted accounting
principles.
-s- Ernst & Young LLP
Chicago, Illinois
October 7, 2004
24
VAN KAMPEN TECHNOLOGY FUND
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT
1221 Avenue of the Americas
New York, NY 10020
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1221 Avenue of the Americas
New York, NY 10020
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1713
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER, & FLOM LLP
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
25
VAN KAMPEN TECHNOLOGY FUND
TRUSTEES AND OFFICERS INFORMATION
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management (the "Adviser"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). The
term "Fund Complex" includes each of the investment companies advised by the
Adviser or its affiliates as of the date of this Statement of Additional
Information. Trustees serve until reaching their retirement age or until their
successors are duly elected and qualified. Officers are annually elected by the
trustees.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 85 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Director of
the Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago. Director of
St. Vincent de Paul
Center, a Chicago based
day care facility serving
the children of low
income families. Board
member of the Illinois
Manufacturer's
Association.
J. Miles Branagan (71) Trustee Trustee Private investor. 83 Trustee/Director/Managing
1632 Morning Mountain Road since 1999 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
26
<Table>
<Caption>
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 83 Trustee/Director/Managing
33971 Selva Road since 1999 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (63) Trustee Trustee President of CAC, L.L.C., 85 Trustee/Director/Managing
CAC, L.L.C. since 2003 a private company General Partner of funds
4350 LaJolla Village Drive offering capital in the Fund Complex.
Suite 980 investment and management Director of Stericycle,
San Diego, CA 92122-6223 advisory services. Prior Inc., GATX Corporation,
to February 2001, Vice and Trustee of The
Chairman and Director of Scripps Research
Anixter International, Institute and the
Inc., a global University of Chicago
distributor of wire, Hospitals and Health
cable and communications Systems. Prior to January
connectivity products, 2004, Director of
and IMC Global Inc., an TeleTech Holdings Inc.
international company and Arris Group, Inc.
that mines, manufactures Prior to May 2002,
and sells essential crop Director of Peregrine
nutrients and feed Systems Inc. Prior to
ingredients to farmers. July 2000, Director of
Prior to July 2000, Allied Riser
Managing Partner of Communications Corp.,
Equity Group Corporate Matria Healthcare Inc.,
Investment (EGI), a Transmedia Networks,
company that makes Inc., CNA Surety, Corp.
private investments in and Grupo Azcarero Mexico
other companies. (GAM).
</Table>
27
<Table>
<Caption>
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of 83 Trustee/Director/Managing
Heidrick & Struggles since 1999 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (52) Trustee Trustee Director and President of 83 Trustee/Director/Managing
1744 R Street, NW since 1999 the German Marshall Fund General Partner of funds
Washington, DC 20009 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (68) Trustee Trustee Prior to 1998, President 85 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
28
<Table>
<Caption>
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (68) Trustee Trustee President of Nelson 83 Trustee/Director/Managing
423 Country Club Drive since 1999 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (63) Trustee Trustee President Emeritus and 85 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey, Ph.D. Trustee Trustee Previously Chief 83 Trustee/Director/Managing
(62) since 1999 Communications Officer of General Partner of funds
815 Cumberstone Road the National Academy of in the Fund Complex.
Harwood, MD 20776 Sciences/National Director of Fluor Corp.,
Research Council, an an engineering,
independent, federally procurement and
chartered policy construction
institution, from 2001 to organization, since
November 2003 and Chief January 2004 and Director
Operating Officer from of Neurogen Corporation,
1993 to 2001. Director of a pharmaceutical company,
the Institute for Defense since January 1998.
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, Director
of the Rocky Mountain
Institute and Trustee of
Colorado College. Prior
to 1993, Executive
Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
29
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
INTERESTED TRUSTEES:*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief 83 Trustee/Director/Managing
1221 Avenue of the Americas President since Executive Officer of General Partner of funds
New York, NY 10020 and Chief 1999; funds in the Fund in the Fund Complex.
Executive President Complex. Chairman,
Officer and Chief President, Chief
Executive Executive Officer and
Officer Director of the Adviser
since 2002 and Van Kampen Advisors
Inc. since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
30
<Table>
<Caption>
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (58) Trustee Trustee Advisory Director of 85 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm 85 Trustee/Director/Managing
333 West Wacker Drive since 1999 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom LLP, legal in the Fund Complex.
counsel to funds in the
Fund Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Adviser by reason of
their current or former positions with Morgan Stanley or its affiliates.
31
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
OFFICERS:
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stefanie V. Chang (37) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Amy Doberman (42) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeitus Investment Management,
Inc from January 1997 to July 2000.
James M. Dykas (38) Chief Financial Officer Officer Executive Director of Van Kampen Asset Management and Morgan
1 Parkview Plaza and Treasurer since 1999 Stanley Investment Management. Chief Financial Officer and
Oakbrook Terrace, IL 60181 Treasurer of funds in the Fund Complex. Prior to August
2004, Assistant Treasurer of funds in the Fund Complex.
Joseph J. McAlinden (61) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Chief since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Investment Officer Management Inc. and Morgan Stanley Investments LP and
Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
</Table>
32
<Table>
<Caption>
VAN KAMPEN TECHNOLOGY FUND
TRUSTEE AND OFFICER INFORMATION continued
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (65) Executive Vice Officer Principal Executive Officer--office of the Funds (since
1221 Avenue of the Americas President and since 2003 November 2003). Chief Executive Officer and Chairman of
New York, NY 10020 Principal Executive Investor Services. Executive Vice President and Principal
Officer Executive Officer of funds in the Fund Complex. Managing
Director of Morgan Stanley. Chief Administrative Officer,
Managing Director and Director of Morgan Stanley Investment
Advisors Inc., Morgan Stanley Services Company Inc. and
Managing Director and Director of Morgan Stanley
Distributors Inc. Chief Executive Officer and Director of
Morgan Stanley Trust. Executive Vice President and Principal
Executive Officer of the Institutional and Retail Morgan
Stanley Funds; Director of Morgan Stanley SICAV; previously
Chief Global Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1999 August 2004. Director and Managing Director of Van Kampen
Oakbrook Terrace, IL 60181 Investments, the Adviser, Van Kampen Advisors Inc. and
certain other subsidiaries of Van Kampen Investments. Prior
August 2004, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
</Table>
33
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
We are required by federal law to provide you with a copy of our Privacy
Policy annually.
The following Policy applies to current and former individual clients of Van
Kampen Investments Inc., Van Kampen Asset Management, Van Kampen Advisors Inc.,
Van Kampen Funds Inc., Van Kampen Investor Services Inc. and Van Kampen Exchange
Corp., as well as current and former individual investors in Van Kampen mutual
funds, unit investment trusts, and related companies.
This Policy is not applicable to partnerships, corporations, trusts or other
non-individual clients or account holders, nor is this Policy applicable to
individuals who are either beneficiaries of a trust for which we serve as
trustee or participants in an employee benefit plan administered or advised by
us. This Policy is, however, applicable to individuals who select us to be a
custodian of securities or assets in individual retirement accounts, 401(k)
accounts, 529 Educational Savings Accounts, accounts subject to the Uniform
Gifts to Minors Act, or similar accounts.
Please note that we may amend this Policy at any time, and will inform you
of any changes to this Policy as required by law.
WE RESPECT YOUR PRIVACY
We appreciate that you have provided us with your personal financial
information. We strive to maintain the privacy of such information while we help
you achieve your financial objectives. This Policy describes what non-public
personal information we collect about you, why we collect it, and when we may
share it with others.
We hope this Policy will help you understand how we collect and share
non-public personal information that we gather about you. Throughout this
Policy, we refer to the non-public information that personally identifies you or
your accounts as "personal information."
1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU?
To serve you better and manage our business, it is important that we collect and
maintain accurate information about you. We may obtain this information from
applications and other forms you submit to us, from your dealings with us, from
consumer reporting agencies, from our Web sites and from third parties and other
sources.
For example:
-- We may collect information such as your name, address, e-mail address,
telephone/fax numbers, assets, income and investment objectives through
applications and other forms you submit to us.
-- We may obtain information about account balances, your use of
account(s) and the types of products and services you prefer to receive
from us through your dealings and transactions with us and other
sources.
-- We may obtain information about your creditworthiness and credit
history from consumer reporting agencies.
-- We may collect background information from and through third-party
vendors to verify representations you have made and to comply with
various regulatory requirements.
-- If you interact with us through our public and private Web sites, we
may collect information that you provide directly through online
communications (such as an e-mail address). We may also collect
information about your Internet service provider, your domain name,
your computer's operating system and Web browser,
(continued on back)
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY continued
your use of our Web sites and your product and service preferences,
through the use of "cookies." "Cookies" recognize your computer each
time you return to one of our sites, and help to improve our sites'
content and personalize your experience on our sites by, for example,
suggesting offerings that may interest you. Please consult the Terms of
Use of these sites for more details on our use of cookies.
2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU?
To provide you with the products and services you request, to serve you better
and to manage our business, we may disclose personal information we collect
about you to our affiliated companies and to non-affiliated third parties as
required or permitted by law.
A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose
personal information that we collect about you to our affiliated companies
except to enable them to provide services on our behalf or as otherwise required
or permitted by law.
B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal
information that we collect about you to non-affiliated third parties except to
enable them to provide services on our behalf, to perform joint marketing
agreements with other financial institutions, or as otherwise required or
permitted by law. For example, some instances where we may disclose information
about you to non-affiliated third parties include: for servicing and processing
transactions, to offer our own products and services, to protect against fraud,
for institutional risk control, to respond to judicial process or to perform
services on our behalf. When we share personal information with these companies,
they are required to limit their use of personal information to the particular
purpose for which it was shared and they are not allowed to share personal
information with others except to fulfill that limited purpose.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE
COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures to help
safeguard the personal information we collect about you. We have internal
policies governing the proper handling of client information. Third parties that
provide support or marketing services on our behalf may also receive personal
information, and we require them to adhere to confidentiality standards with
respect to such information.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling
1-800-847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2004 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 77, 177, 277
TECH ANR
10/04 RN04-02172P-Y08/04
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen
International Advantage Fund performed during the annual period. The
portfolio management team will provide an overview of the market
conditions and discuss some of the factors that affected investment
performance during the reporting period. In addition, this report
includes the fund's financial statements and a list of fund investments
as of August 31, 2004.
THIS MATERIAL MUST BE PRECEDED OR ACCOMPANIED BY A PROSPECTUS FOR THE
FUND BEING OFFERED. THE PROSPECTUS CONTAINS INFORMATION ABOUT THE FUND,
INCLUDING THE INVESTMENT OBJECTIVES, RISKS, CHARGES, AND EXPENSES. PLEASE
READ THE PROSPECTUS CAREFULLY BEFORE INVESTING.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO
PASS. THERE IS NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. THE FUND IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT THE MARKET VALUES OF SECURITIES OWNED BY THE FUND WILL DECLINE AND
THAT THE VALUE OF THE FUND SHARES MAY THEREFORE BE LESS THAN WHAT YOU
PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS FUND.
PLEASE SEE THE PROSPECTUS FOR MORE COMPLETE INFORMATION ON INVESTMENT
RISKS.
<Table>
<Caption>
---------------------------------------------------------------------------------------
NOT FDIC INSURED OFFER NO BANK GUARANTEE MAY LOSE VALUE
---------------------------------------------------------------------------------------
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT
---------------------------------------------------------------------------------------
</Table>
Performance Summary as of 8/31/04
PERFORMANCE OF A $10,000 INVESTMENT
This chart compares your fund's performance to that of the MSCI AC World Free
Index ex-USA from 9/30/2001 (the first month-end after inception) through
8/31/2004. Class A shares, adjusted for sales charges.
(LINE GRAPH)
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL MSCI ALL COUNTRY WORLD FREE INDEX
ADVANTAGE FUND EX-USA
------------------------ ---------------------------------
9/01 9428 10000
12/01 10137 10889
10308 11111
6/02 10089 10775
8024 8695
12/02 8538 9292
7756 8613
6/03 9392 10323
10093 11219
12/03 11547 13139
11964 13774
6/04 11679 13678
8/04 11039 13386
</Table>
<Table>
<Caption>
A SHARES B SHARES C SHARES
since 9/26/01 since 9/26/01 since 9/26/01
- --------------------------------------------------------------------------------------------
W/MAX W/MAX W/MAX
5.75% 5.00% 1.00%
AVERAGE ANNUAL W/O SALES SALES W/O SALES SALES W/O SALES SALES
TOTAL RETURNS CHARGES CHARGE CHARGES CHARGE CHARGES CHARGE
Since Inception 6.32% 4.19% 5.55% 4.62% 5.92% 5.92%
1-Year 10.48 4.12 9.83 4.83 10.95 9.95
- --------------------------------------------------------------------------------------------
</Table>
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
VANKAMPEN.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS AND
PRINCIPAL VALUE WILL FLUCTUATE AND FUND SHARES, WHEN REDEEMED, MAY BE WORTH MORE
OR LESS THAN THEIR ORIGINAL COST.
The returns shown in this report do not reflect the deduction of taxes that a
shareholder would pay on fund distributions or the redemption of fund shares.
Performance of share classes will vary due to differences in sales charges and
expenses. Average annual total return with sales charges includes payment of the
maximum sales charge of 5.75 percent for Class A shares, a contingent deferred
sales charge of 5.00 percent for Class B shares (in year one and declining to
zero after year five), a contingent deferred sales charge of 1.00 percent for
Class C shares in year one, and combined Rule 12b-1 fees and service fees of up
to 0.25 percent for Class A shares and 1.00 percent for Class B and C shares.
Figures shown above assume reinvestment of all distributions. The fund's adviser
has waived or reimbursed fees and expenses from time to time; absent such
waivers/reimbursements, the fund's returns would have been lower.
The MSCI All Country World Free ex-USA is generally representative of world
stock markets, excluding the United States. The index does not include any
expenses, fees or sales charges, which would lower performance. The index is
unmanaged and should not be considered an investment. Source for index
performance: Lipper Inc.
1
Fund Report
FOR THE 12-MONTH PERIOD ENDED AUGUST 31, 2004
Van Kampen International Advantage Fund is managed by the adviser's Global Core
team.(1) Current members include Sandra Yeager, Jamie Wood, Michael Allison, and
Mark Laskin.
MARKET CONDITIONS
The 12 months ended August 31, 2004, were a mixed period for global stock
markets. During the first eight months of the period, markets benefited from
strong economic growth in many regions of the world, in particular from healthy
gross domestic product growth in the United States, Japan and the United
Kingdom. Especially encouraging was the fact that Japan's export strength
"flowed down" into the country's domestic economy, with markedly improved
consumer spending and consumer confidence. Meanwhile, Europe as a whole was held
back by weak domestic demand, although European exporters profited from economic
strength in Eastern Europe and China.
In the last four months of the fund's annual period, major stock markets sold
off for several reasons. The sell-off began with concerns over central bank
tightening in China, leading to sharp declines in the prices of emerging-market
stocks; emerging markets comprise approximately 10 percent of the fund's
benchmark. The Chinese central bank's actions also hurt Japanese exporters, who
rely on economic activity from China. Likewise, it negatively affected some
European stocks. Lastly, in the minds of some investors, China's credit-
tightening moves cast doubt on the prospects for continued global growth, given
that so much economic expansion has been driven by that country.
In early April, following months of concern over the lack of job creation,
strong job growth statistics in the U.S. gave a short-term boost to the markets
and showed many market participants that the U.S. recovery was genuine. At the
same time, stronger job-growth numbers inevitably heightened expectations of
inflation and higher interest rates. As the market began to "price in" these two
factors, economically sensitive stocks suffered. Later in the period, rising oil
prices were the predominant issue for the market. Recent spikes in the price of
oil have cast doubt on the profitability of many companies and raised concerns
over whether U.S. consumer confidence will falter.
(1)Team members may change at any time without notice.
2
PERFORMANCE ANALYSIS
During the 12-month period ended August 31, 2004, the fund posted a total return
of 10.48 percent (Class A shares unadjusted for sales charges), compared with
the 22.65 percent return of its benchmark, the MSCI All Country World Free Index
ex-USA.
The fund's underperformance compared with its benchmark is mainly attributable
to two allocation decisions during the period. First and foremost was the fund's
underweight relative to the benchmark in oil stocks, which, as noted above,
posted sharp gains as the price of crude oil rose as high as $45 per barrel amid
political uncertainty in the Middle East and supply/demand concerns. Our
expectations had been that the oil price would come down from pre-Iraq war highs
as Iraqi supply came on line and the risk premium moderated. Within the oil
sector, the benchmark includes British Petroleum (BP), a stock that drove
performance in the index. However, the fund did not invest in BP, which
detracted from comparative performance. Because we feel that oil stocks have
become significantly overvalued, we have maintained the fund's underweight
allocation compared with the benchmark.
In addition, the fund's overweight relative to the benchmark in semiconductors,
a sector that had performed extremely well up to the end of August 2003,
detracted from performance. Market expectations for the sector became inflated,
and semiconductors sold off dramatically as the sector's more recent financial
results seemed to be implying a significant weakening of demand. The worst-
performing individual issue within the portfolio during the period,
STMicroelectronics, a semiconductor firm, was hurt by the unfavorable market
conditions within the sector in 2004. However, we believe the sell-off in
semiconductors was overdone, and remain optimistic regarding the industry's
economic prospects, valuations that we believe are attractive, and our outlook
for corporate technology spending in the U.S. over the coming months.
On the plus side, the fund benefited from its position in Porsche, the German
car manufacturer, which we believed was undervalued. Investors were pessimistic
about the initial prospects for Porsche's new 4x4 vehicle, the Cayenne, which
subsequently enjoyed strong U.S. sales. In Japan, the fund also posted gains
from its holdings in Promise, a consumer finance company. Given that Japanese
interest rates are extremely low, Promise can charge a significant
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDING AUGUST 31, 2004
<Table>
<Caption>
- ------------------------------------------------------------
MSCI AC WORLD FREE
CLASS A CLASS B CLASS C EX-USA INDEX
10.48% 9.83% 10.95% 22.65%
- ------------------------------------------------------------
</Table>
The performance for the three share classes varies because each has different
expenses. The fund's total return figures assume the reinvestment of all
distributions, but do not reflect the deduction of any applicable sales charges.
Such costs would lower performance. Past performance is no guarantee of future
results. See Performance Summary for standardized performance information and
index definitions.
3
premium in its issuance of consumer loans. Another Japanese stock that posted
positive performance for the fund was Mitsubishi Estates, a real-estate company
with significant holdings in the Tokyo metropolitan area. As the Japanese
economy has improved, the company is benefiting from increased property values.
Our outlook for global stock markets remains guarded, but positive. There has
been a measurable slowdown in growth, but we believe that this represents the
normal part of a growth cycle: After a rapid early expansion, there typically is
a slower phase before global markets settle into more steady, measured growth.
We think this is the type of environment where better-quality companies could
outperform, as opposed to some of the lower-quality companies that attracted
investors during the previous 12 months. The fund is positioned accordingly,
with a focus on quality stocks within our investment process. We rigorously
analyze stocks, looking for strong balance sheets, robust company franchises,
good management and sound cash flow generation. We believe that valuations for
many high-quality companies remain attractive, as their share prices have fallen
while earnings have continued to improve. This is especially true in continental
Europe, some emerging-market countries, and certain sectors in Japan.
There is no guarantee the securities mentioned will continue to perform well or
be held by the fund in the future.
4
<Table>
TOP TEN HOLDINGS AS OF 8/31/04
GlaxoSmithKline Plc 3.0%
Novartis, AG 2.9
Royal Dutch Petroleum Co. 2.2
Kookmin Bank 1.8
Wolters Kluwer, NV 1.8
Vodafone Group Plc 1.7
Royal Bank of Scotland Group Plc 1.7
Prudential Corp. Plc 1.7
France Telecom, SA 1.7
Sony Corp. 1.7
</Table>
<Table>
SUMMARY OF INVESTMENTS BY COUNTRY CLASSIFICATION AS OF
8/31/04
Japan 22.2%
United Kingdom 19.7
Netherlands 12.1
Switzerland 8.2
France 8.2
Germany 7.7
Italy 3.9
Taiwan-Republic of China 2.5
Spain 2.1
Republic of Korea 1.8
Australia 1.7
United States 1.5
Norway 1.1
Canada 0.9
Indonesia 0.9
Hong Kong 0.6
Finland 0.6
Singapore 0.6
Ireland 0.5
India 0.5
Brazil 0.4
Israel 0.3
------
Total Long-Term Investments 98.0%
Short-Term Investments 2.2
Foreign Currency 0.5
Liabilities in Excess of Other Assets -0.7
------
Total Net Assets 100.0%
</Table>
Subject to change daily. Provided for informational purposes only and should not
be deemed as a recommendation to buy or sell the securities mentioned or
securities in the industries shown above. All percentages are as a percentage of
total net assets. Van Kampen is a wholly owned subsidiary of a global securities
firm which is engaged in a wide range of financial services including, for
example, securities trading and brokerage activities, investment banking,
research and analysis, financing and financial advisory services.
5
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Van Kampen fund provides a complete schedule of portfolio holdings
in its semiannual and annual reports within 60 days of the end of the
fund's second and fourth fiscal quarters by filing the schedule
electronically with the Securities and Exchange Commission (SEC). The
semiannual reports are filed on Form N-CSRS and the annual reports are
filed on Form N-CSR. Van Kampen also delivers the semiannual and annual
reports to fund shareholders, and makes these reports available on its
public web site, www.vankampen.com. In addition to the semiannual and
annual reports that Van Kampen delivers to shareholders and makes
available through the Van Kampen public web site, each fund files a
complete schedule of portfolio holdings with the SEC for the fund's first
and third fiscal quarters on Form N-Q. Van Kampen does not deliver the
reports for the first and third fiscal quarters to shareholders, nor are
the reports posted to the Van Kampen public web site. You may, however,
obtain the Form N-Q filings (as well as the Form N-CSR and N-CSRS
filings) by accessing the SEC's web site, http://www.sec.gov. You may
also review and copy them at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at 1-202-942-8090. You
can also request copies of these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the
SEC, Washington, DC 20549-0102.
In addition to filing a complete schedule of portfolio holdings with the
SEC each fiscal quarter, each Van Kampen fund makes portfolio holdings
information available by periodically providing the information on its
public web site, www.vankampen.com. Each Van Kampen fund provides a
complete schedule of portfolio holdings on the public web site on a
calendar-quarter basis approximately 30 days after the close of the
calendar quarter. Furthermore, each Van Kampen open-end fund provides
partial lists of its portfolio holdings (such as top 10 or top 15 fund
holdings) to the public web site each month with a delay of approximately
15 days.
You may obtain copies of a fund's fiscal quarter filings, or its monthly
or calendar-quarter web site postings, by contacting Van Kampen Client
Relations at 1-800-847-2424.
6
HOUSEHOLDING NOTICE
To reduce fund expenses, the fund attempts to eliminate duplicate
mailings to the same address. The fund delivers a single copy of certain
shareholder documents to investors who share an address, even if the
accounts are registered under different names. The fund's prospectuses
and shareholder reports (including annual privacy notices) will be
delivered to you in this manner indefinitely unless you instruct us
otherwise. You can request multiple copies of these documents by either
calling 1-800-341-2911 or writing to Van Kampen Investor Services at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, IL 60181. Once Investor
Services has received your instructions, we will begin sending individual
copies for each account within 30 days.
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The fund's policies and procedures with respect to the voting of proxies
relating to the fund's portfolio securities and information on how the
fund voted proxies relating to portfolio securities during the most
recent twelve month period ended June 30 is available without charge,
upon request, by calling 1-800-847-2424 or by visiting our web site at
www.vankampen.com. This information is also available on the Securities
and Exchange Commission's web site at http://www.sec.gov.
7
Expense Example
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing cost (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example that follows is based on an investment of $1,000 invested at the
beginning of the period and held for the entire period 3/1/04 - 8/31/04.
ACTUAL EXPENSE
The first line of the table on the following page provides information about
actual account values and actual expenses. You may use the information in this
line, together with the amount you invested, to estimate the expenses that you
paid over the period. Simply divide your account value by $1,000 (for example,
an $8,600 account value divided by $1,000 = 8.6), then multiply the result by
the number in the first line under the heading entitled "Expenses Paid During
Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total
costs of owning different funds that have transactional costs, such as sales
charges (loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD*
---------------------------------------------------
3/1/04 8/31/04 3/1/04-8/31/04
Class A
Actual................................... $1,000.00 $ 920.34 $ 8.25
Hypothetical............................. 1,000.00 1,016.54 8.67
(5% annual return before expenses)
Class B
Actual................................... 1,000.00 917.88 10.80
Hypothetical............................. 1,000.00 1,013.84 11.34
(5% annual return before expenses)
Class C
Actual................................... 1,000.00 922.55 8.31
Hypothetical............................. 1,000.00 1,016.54 8.72
(5% annual return before expenses)
</Table>
* Expenses are equal to the Fund's annualized expense ratio of 1.71%, 2.24%,
and 1.72% for Class A, B, and C Shares, respectively, multiplied by the
average account value over the period, multiplied by 184/366 (to reflect the
one-half year period). These ratios reflect an expense cap.
Assumes all dividends and distributions were reinvested.
8
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------
COMMON STOCKS 96.5%
AUSTRALIA 1.7%
National Australia Bank, Ltd. .............................. 6,950 $ 130,865
Qantas Airways, Ltd. ....................................... 74,884 180,421
-----------
311,286
-----------
BRAZIL 0.4%
Petroleo Brasileiro SA--ADR................................. 2,074 63,775
-----------
CANADA 0.9%
Inco, Ltd. (a).............................................. 4,928 168,705
-----------
FINLAND 0.6%
Nokia Oyj................................................... 9,400 110,173
-----------
FRANCE 8.2%
BNP Paribas, SA............................................. 3,199 193,979
Cap Gemini, SA (a).......................................... 10,381 294,312
France Telecom, SA.......................................... 12,832 303,766
M6-Metropole Television..................................... 6,300 157,350
Sanofi Aventis.............................................. 1,336 95,221
Schneider Electric, SA...................................... 3,203 200,777
Total, SA................................................... 1,245 242,847
-----------
1,488,252
-----------
GERMANY 7.7%
Allianz, AG................................................. 2,829 272,945
Deutsche Bank, AG........................................... 1,971 134,212
Deutsche Telekom, AG (a).................................... 8,769 153,098
Karstadtquelle, AG.......................................... 11,967 189,686
SAP, AG..................................................... 1,458 212,718
Siemens, AG................................................. 3,300 226,076
Volkswagen, AG.............................................. 5,372 206,559
-----------
1,395,294
-----------
HONG KONG 0.6%
Sun Hung Kai Properties, Ltd. .............................. 12,000 111,538
-----------
INDIA 0.5%
Ranbaxy Laboratories, Ltd.--GDR............................. 4,191 87,340
-----------
INDONESIA 0.9%
PT Telekomunikasi Indonesia--ADR............................ 9,829 159,820
-----------
IRELAND 0.5%
Bank of Ireland............................................. 7,215 97,134
-----------
ISRAEL 0.3%
Teva Pharmaceutical Industries, Ltd.--ADR................... 2,216 60,386
-----------
</Table>
See Notes to Financial Statements 9
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------
ITALY 3.9%
ENI S.p.A. ................................................. 3,992 $ 81,758
SanPaolo IMI S.p.A. ........................................ 23,566 263,860
Telecom Italia S.p.A. ...................................... 48,451 145,214
UniCredito Italiano S.p.A. ................................. 45,656 219,162
-----------
709,994
-----------
JAPAN 22.2%
Canon, Inc. ................................................ 5,600 267,975
Daiwa Securities Group, Inc. ............................... 25,000 162,717
Fanuc, Ltd. ................................................ 3,800 203,438
Fuji Television Network, Inc. .............................. 67 147,408
Honda Motor Co., Ltd. ...................................... 5,100 254,334
Kao Corp. .................................................. 7,000 172,618
Matsushita Electric Industrial Co., Ltd. ................... 13,000 175,304
Millea Holdings, Inc. ...................................... 13 179,951
Mitsubishi Estate Co., Ltd. ................................ 24,000 270,835
Mitsui Sumitomo Insurance Co., Ltd. ........................ 7,000 62,117
NTT DoCoMo, Inc. ........................................... 124 230,756
Shin-Etsu Chemical Co., Ltd. ............................... 6,400 224,119
SMC Corp. .................................................. 2,300 221,598
Sony Corp. ................................................. 8,700 301,471
Sumitomo Chemical Co., Ltd. ................................ 49,000 220,553
Sumitomo Trust and Banking Co., Ltd. ....................... 26,000 158,024
Takeda Chemical Industries, Ltd. ........................... 4,900 221,900
Tokyo Electric Power Co., Inc. ............................. 10,200 236,100
Tokyo Electron, Ltd. ....................................... 4,300 221,534
Toshiba Corp. .............................................. 29,000 107,668
-----------
4,040,420
-----------
NETHERLANDS 12.1%
Aegon, NV................................................... 12,285 131,115
ASML Holding, NV (a)........................................ 19,147 244,941
Koninklijke Ahold, NV (a)................................... 37,366 230,356
Koninklijke Numico, NV (a).................................. 5,796 182,471
Koninklijke Philips Electronics, NV......................... 8,763 202,211
Royal Dutch Petroleum Co. .................................. 7,977 402,941
Unilever, NV................................................ 3,572 214,203
VNU, NV..................................................... 10,389 265,301
Wolters Kluwer, NV.......................................... 19,545 322,423
-----------
2,195,962
-----------
NORWAY 1.1%
Telenor, ASA................................................ 28,331 205,088
-----------
REPUBLIC OF KOREA 1.8%
Kookmin Bank (a)............................................ 10,248 327,509
-----------
SINGAPORE 0.6%
United Overseas Bank, Ltd. ................................. 14,000 108,898
-----------
</Table>
10 See Notes to Financial Statements
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------
SPAIN 2.1%
Altadis, SA................................................. 5,657 $ 176,441
Amadeus Global Travel Distribution, SA...................... 31,022 211,278
-----------
387,719
-----------
SWITZERLAND 8.2%
Compagnie Financiere Richemont, AG.......................... 6,891 176,217
Credit Suisse Group......................................... 4,545 141,913
Nestle, SA.................................................. 723 171,170
Novartis, AG................................................ 11,550 534,566
STMicroelectronics, NV (a).................................. 11,103 188,301
UBS, AG..................................................... 4,175 280,192
-----------
1,492,359
-----------
TAIWAN-REPUBLIC OF CHINA 2.5%
Hon Hai Precision Industry Co., Ltd.--GDR................... 20,768 147,451
Taiwan Semiconductor Manufacturing Co., Ltd.--ADR........... 39,324 296,896
-----------
444,347
-----------
UNITED KINGDOM 19.7%
3i Group Plc................................................ 10,666 110,368
Acambis Plc (a)............................................. 14,371 79,928
Amvescap Plc................................................ 30,084 157,413
Barclays Plc................................................ 22,448 208,387
BP Plc...................................................... 10,541 93,717
British Sky Broadcasting Group Plc.......................... 30,316 261,462
Carnival Plc................................................ 4,597 221,294
GlaxoSmithKline Plc......................................... 26,966 550,285
HSBC Holdings Plc........................................... 18,246 284,110
MFI Furniture Plc........................................... 72,271 161,368
Prudential Plc.............................................. 39,206 310,546
Royal Bank of Scotland Group Plc............................ 11,136 310,834
Smiths Group Plc............................................ 14,443 180,853
Standard Chartered Plc...................................... 7,814 132,952
Vedanta Resources Plc....................................... 36,457 207,205
Vodafone Group Plc.......................................... 138,123 314,634
-----------
3,585,356
-----------
</Table>
See Notes to Financial Statements 11
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
NUMBER OF
DESCRIPTION SHARES VALUE
- -------------------------------------------------------------------------------------
TOTAL COMMON STOCKS 96.5%............................................. $17,551,355
-----------
INVESTMENT COMPANY 1.5%
UNITED STATES 1.5%
Ishares Tr MSCI EAFE Index Fd............................... 1,947 269,718
-----------
TOTAL LONG-TERM INVESTMENTS 98.0%
(Cost $17,738,513)................................................... 17,821,073
SHORT-TERM INVESTMENT 2.2%
(Cost $399,000)...................................................... 399,000
-----------
TOTAL INVESTMENTS 100.2%
(Cost $18,137,513)................................................... 18,220,073
FOREIGN CURRENCY 0.5%
(Cost $87,692)....................................................... 87,867
LIABILITIES IN EXCESS OF OTHER ASSETS (0.7%).......................... (117,044)
-----------
NET ASSETS 100.0%..................................................... $18,190,896
===========
</Table>
Percentages are calculated as a percentage of net assets.
(a) Non-income producing security as this stock currently does not declare
dividends.
ADR--American Depositary Receipt
GDR--Global Depositary Receipt
SUMMARY OF LONG-TERM INVESTMENTS BY INDUSTRY CLASSIFICATION
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------------
Diversified Banks........................................... $ 2,435,714 13.4%
Pharmaceuticals............................................. 1,629,627 9.0
Integrated Telecommunication Services....................... 966,986 5.3
Integrated Oil & Gas........................................ 885,038 4.9
Consumer Electronics........................................ 678,986 3.7
Publishing.................................................. 587,724 3.2
Packaged Foods.............................................. 567,843 3.1
Broadcasting & Cable TV..................................... 566,220 3.1
Diversified Capital Markets................................. 556,318 3.1
Wireless Telecommunication Services......................... 545,390 3.0
Semiconductors.............................................. 485,197 2.7
Semiconductor Equipment..................................... 466,475 2.6
</Table>
12 See Notes to Financial Statements
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
PORTFOLIO OF INVESTMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- --------------------------------------------------------------------------------------
xAutomobile Manufacturers................................... $ 460,893 2.5%
Life & Health Insurance..................................... 441,660 2.4
Industrial Machinery........................................ 425,036 2.3
Industrial Conglomerates.................................... 406,929 2.2
Real Estate Management & Development........................ 382,373 2.1
Diversified Metals & Mining................................. 375,910 2.1
IT Consulting & Other Services.............................. 294,312 1.6
Multi-line Insurance........................................ 272,945 1.5
Financial................................................... 269,718 1.5
Office Electronics.......................................... 267,975 1.5
Asset Management & Custody Banks............................ 267,782 1.5
Property & Casualty......................................... 242,068 1.3
Electric Utilities.......................................... 236,100 1.3
Food Retail................................................. 230,356 1.3
Specialty Chemicals......................................... 224,119 1.2
Hotels...................................................... 221,294 1.2
Diversified Chemicals....................................... 220,553 1.2
Application Software........................................ 212,718 1.2
Data Processing & Outsourcing Services...................... 211,278 1.2
Electrical Components & Equipment........................... 200,777 1.1
Department Stores........................................... 189,686 1.0
Airlines.................................................... 180,421 1.0
Tobacco..................................................... 176,441 1.0
Apparel & Accessories....................................... 176,217 1.0
Household Products.......................................... 172,618 0.9
Investment Banking & Brokerage.............................. 162,717 0.9
Specialty Stores............................................ 161,368 0.9
Electronic Equipment Manufacturers.......................... 147,451 0.8
Communications Equipment.................................... 110,173 0.6
Computer Hardware........................................... 107,668 0.6
----------- ----
$17,821,073 98.0%
=========== ====
</Table>
See Notes to Financial Statements 13
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
August 31, 2004
<Table>
ASSETS:
Total Investments (Cost $18,137,513)........................ $18,220,073
Foreign Currency (Cost $87,692)............................. 87,867
Cash........................................................ 824
Receivables:
Investments Sold.......................................... 96,242
Dividends................................................. 51,927
Fund Shares Sold.......................................... 41,169
Forward Foreign Currency Contracts........................ 31,566
Expense Reimbursement from Adviser........................ 18,528
Other....................................................... 14,912
-----------
Total Assets............................................ 18,563,108
-----------
LIABILITIES:
Payables:
Investments Purchased..................................... 280,506
Distributor and Affiliates................................ 12,242
Fund Shares Repurchased................................... 4,079
Accrued Expenses............................................ 45,399
Trustees' Deferred Compensation and Retirement Plans........ 29,986
-----------
Total Liabilities....................................... 372,212
-----------
NET ASSETS.................................................. $18,190,896
===========
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $17,044,495
Accumulated Net Realized Gain............................... 1,096,728
Net Unrealized Appreciation................................. 116,160
Accumulated Undistributed Net Investment Income............. (66,487)
-----------
NET ASSETS.................................................. $18,190,896
===========
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $13,889,893 and 1,278,408 shares of
beneficial interest issued and outstanding)............. $ 10.86
Maximum sales charge (5.75%* of offering price)......... .66
-----------
Maximum offering price to public........................ $ 11.52
===========
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $2,626,980 and 244,769 shares of
beneficial interest issued and outstanding)............. $ 10.73
===========
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $1,674,023 and 154,440 shares of
beneficial interest issued and outstanding)............. $ 10.84
===========
</Table>
* On sales of $50,000 or more, the sales charge will be reduced.
14 See Notes to Financial Statements
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL STATEMENTS continued
Statement of Operations
For the Year Ended August 31, 2004
<Table>
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $34,855)..... $ 289,123
Interest.................................................... 1,854
----------
Total Income............................................ 290,977
----------
EXPENSES:
Investment Advisory Fee..................................... 123,322
Shareholder Reports......................................... 51,611
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $22,809, $14,303 and $3,527,
respectively)............................................. 40,639
Accounting.................................................. 36,032
Audit....................................................... 28,943
Shareholder Services........................................ 26,950
Registration and Filing Fees................................ 21,718
Trustees' Fees and Related Expenses......................... 19,380
Custody..................................................... 17,325
Legal....................................................... 15,071
Other....................................................... 21,538
----------
Total Expenses.......................................... 402,529
Expense Reduction ($123,322 Investment Advisory Fee and
$28,695 Other)........................................ 152,017
Less Credits Earned on Cash Balances.................... 142
----------
Net Expenses............................................ 250,370
----------
NET INVESTMENT INCOME....................................... $ 40,607
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $1,280,357
Forward Foreign Currency Contracts........................ 17,927
Foreign Currency Transactions............................. (108,707)
----------
Net Realized Gain........................................... 1,189,577
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 855,551
----------
End of the Period:
Investments............................................. 82,560
Forward Foreign Currency Contracts...................... 31,566
Foreign Currency Translation............................ 2,034
----------
116,160
----------
Net Unrealized Depreciation During the Period............... (739,391)
----------
NET REALIZED AND UNREALIZED GAIN............................ $ 450,186
==========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 490,793
==========
</Table>
See Notes to Financial Statements 15
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
<Table>
<Caption>
FOR THE FOR THE
YEAR ENDED YEAR ENDED
AUGUST 31, 2004 AUGUST 31, 2003
----------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income..................................... $ 40,607 $ 31,290
Net Realized Gain/Loss.................................... 1,189,577 (109,597)
Net Unrealized Appreciation/Depreciation During the
Period.................................................. (739,391) 991,515
----------- -----------
Change in Net Assets from Operations...................... 490,793 913,208
----------- -----------
Distributions from Net Investment Income:
Class A Shares.......................................... -0- (137,983)
Class B Shares.......................................... -0- (49,829)
Class C Shares.......................................... -0- (43,996)
----------- -----------
Total Distributions....................................... -0- (231,808)
----------- -----------
NET CHANGE IN NET ASSETS FROM INVESTMENT ACTIVITIES....... 490,793 681,400
----------- -----------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold................................. 14,371,201 5,632,593
Net Asset Value of Shares Issued Through Dividend
Reinvestment............................................ -0- 230,905
Cost of Shares Repurchased................................ (4,300,199) (2,044,934)
----------- -----------
NET CHANGE IN NET ASSETS FROM CAPITAL TRANSACTIONS........ 10,071,002 3,818,564
----------- -----------
TOTAL INCREASE IN NET ASSETS.............................. 10,561,795 4,499,964
NET ASSETS:
Beginning of the Period................................... 7,629,101 3,129,137
----------- -----------
End of the Period (Including accumulated undistributed net
investment income of ($66,487) and ($25,108),
respectively)........................................... $18,190,896 $ 7,629,101
=========== ===========
</Table>
16 See Notes to Financial Statements
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL HIGHLIGHTS
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 26, 2001
AUGUST 31, (COMMENCEMENT
CLASS A SHARES ---------------- OF OPERATIONS) TO
2004 2003 AUGUST 31, 2002
--------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD............ $ 9.83 $ 9.43 $ 10.00
------ ------ -------
Net Investment Income (a)......................... .04 .09 .03
Net Realized and Unrealized Gain/Loss............. .99 .88 (.28)
------ ------ -------
Total from Investment Operations.................... 1.03 .97 (.25)
------ ------ -------
Less:
Distributions from Net Investment Income.......... -0- .57 .31
Distributions from Net Realized Gain.............. -0- -0- .01
------ ------ -------
Total Distributions................................. -0- .57 .32
------ ------ -------
NET ASSET VALUE, END OF THE PERIOD.................. $10.86 $ 9.83 $ 9.43
====== ====== =======
Total Return (b)*................................... 10.48% 11.20% -2.60%**
Net Assets at End of the Period (In millions)....... $ 13.9 $ 5.6 $ 1.6
Ratio of Expenses to Average Net Assets (c)*........ 1.72% 1.75% 1.78%
Ratio of Net Investment Income to Average Net
Assets*........................................... .38% .98% .33%
Portfolio Turnover.................................. 68% 43% 62%**
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (c)...... 2.86% 4.85% 15.81%
Ratio of Net Investment Loss to Average Net
Assets......................................... (.76%) (2.11%) (13.70%)
</Table>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.75% or contingent deferred
sales charge (CDSC). On purchases of $1 million or more, a CDSC of 1% may be
imposed on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratios would decrease by .03% for the period ended August 31,
2002.
See Notes to Financial Statements 17
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL HIGHLIGHTS continued
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
YEAR ENDED SEPTEMBER 26, 2001
AUGUST 31, (COMMENCEMENT
CLASS B SHARES ---------------- OF OPERATIONS) TO
2004 2003 AUGUST 31, 2002
--------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD............ $ 9.77 $ 9.38 $ 10.00
------ ------ -------
Net Investment Loss (a)........................... (.03) -0-(d) (.04)
Net Realized and Unrealized Gain/Loss............. .99 .89 (.27)
------ ------ -------
Total from Investment Operations.................... .96 .89 (.31)
------ ------ -------
Less:
Distributions from Net Investment Income.......... -0- .50 .30
Distributions from Net Realized Gain.............. -0- -0- .01
------ ------ -------
Total Distributions................................. -0- .50 .31
------ ------ -------
NET ASSET VALUE, END OF THE PERIOD.................. $10.73 $ 9.77 $ 9.38
====== ====== =======
Total Return (b)*................................... 9.83% 10.40% -3.37%**
Net Assets at End of the Period (In millions)....... $ 2.6 $ 1.2 $ .9
Ratio of Expenses to Average Net Assets (c)*........ 2.35% 2.50% 2.53%
Ratio of Net Investment Loss to Average Net Assets
*................................................. (.28%) (.02%) (.45%)
Portfolio Turnover.................................. 68% 43% 62%**
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (c)...... 3.30% 5.60% 16.56%
Ratio of Net Investment Loss to Average Net
Assets......................................... (1.23%) (3.12%) (14.48%)
</Table>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 5%, charged on certain redemptions
made within one year of purchase and declining to 0% after the fifth year.
If the sales charge was included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of up to 1% and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratios would decrease by .03% for the period ended August 31,
2002.
(d) Amount is less than $.01.
18 See Notes to Financial Statements
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
FINANCIAL HIGHLIGHTS continued
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<Table>
<Caption>
SEPTEMBER 26, 2001
YEAR ENDED AUGUST 31, (COMMENCEMENT
CLASS C SHARES --------------------- OF OPERATIONS) TO
2004 2003 AUGUST 31, 2002
-------------------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD......... $ 9.77 $ 9.38 $ 10.00
------ ------ -------
Net Investment Income/Loss (a)................. .07 -0-(d) (.04)
Net Realized and Unrealized Gain/Loss.......... 1.00 .89 (.27)
------ ------ -------
Total from Investment Operations................. 1.07 .89 (.31)
------ ------ -------
Less:
Distributions from Net Investment Income....... -0- .50 .30
Distributions from Net Realized Gain........... -0- -0- .01
------ ------ -------
Total Distributions.............................. -0- .50 .31
------ ------ -------
NET ASSET VALUE, END OF THE PERIOD............... $10.84 $ 9.77 $ 9.38
====== ====== =======
Total Return (b)*................................ 10.95%(e)(f) 10.40%(e) -3.37%**
Net Assets at End of the Period (In millions).... $ 1.7 $ .8 $ .6
Ratio of Expenses to Average Net Assets (c)*..... 1.77%(e) 2.50%(e) 2.53%
Ratio of Net Investment Income/Loss to Average
Net Assets*.................................... .59%(e)(f) .00%(e) (.44%)
Portfolio Turnover............................... 68% 43% 62%**
* If certain expenses had not been voluntarily assumed by Van Kampen, total return would have
been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net Assets (c)... 2.92%(e) 5.60%(e) 16.56%
Ratio of Net Investment Loss to Average Net
Assets...................................... (.56%)(e)(f) (3.09%)(e) (14.47%)
</Table>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1% charged on certain redemptions
made within one year of purchase. If the sale charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of up to 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(c) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratios would decrease by .03% for the period ended August 31,
2002.
(d) Amount is less than $.01.
(e) The Total Return, Ratio of Expenses to Average Net Assets and Ratio of Net
Investment Income/Loss to Average Net Assets reflect actual 12b-1 fees of
less than 1% (See footnote 7).
(f) Certain non-recurring payments were made to Class C Shares, resulting in an
increase to the Total Return and Ratio of Net Investment Income/Loss to
Average Net Assets of .31%.
See Notes to Financial Statements 19
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen International Advantage Fund (the "Fund") is organized as a series of
the Van Kampen Equity Trust II, a Delaware statutory trust, and is registered as
a diversified, open-end management investment company under the Investment
Company Act of 1940 (the "1940 Act"), as amended. The Fund's investment
objective is to seek long-term capital appreciation through investments in a
diversified portfolio of equity securities of foreign issuers. The Fund
commenced investment operations on September 26, 2001, with three classes of
common shares: Class A, Class B, and Class C.
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 U.S. 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.
Equity securities traded on NASDAQ are valued at the NASDAQ Official Closing
Price. Unlisted securities and listed securities for which the last sale price
is not available are valued at the mean of the bid and asked prices. For those
securities where quotations or prices are not available, valuations are
determined in accordance with procedures established in good faith by the Board
of Trustees. Most foreign markets close before the New York Stock Exchange
(NYSE). Occasionally, developments that could affect the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If these
developments are expected to materially affect the value of the securities, the
valuations may be adjusted to reflect the estimated fair value as of the close
of the NYSE, as determined in good faith under procedures established by the
Board of Trustees. Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value. Forward
foreign currency contracts are valued using quoted foreign exchange rates.
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 (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.
20
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
C. INCOME AND EXPENSES Dividend income is recorded net of applicable withholding
taxes on the ex-dividend date and interest income is recorded on an accrual
basis. Income and expenses of the Fund are allocated on a pro rata basis to each
class of shares, except for distribution and service fees and transfer agency
costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
At August 31, 2004, the cost and related gross unrealized appreciation and
depreciation were as follows:
<Table>
Cost of investments for tax purposes........................ $18,152,513
===========
Gross tax unrealized appreciation........................... $ 1,015,061
Gross tax unrealized depreciation........................... (947,501)
-----------
Net tax unrealized appreciation on investments.............. $ 67,560
===========
</Table>
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares and pays dividends
annually from net investment income and from net realized gains, if any.
Distributions from net realized gains for book purposes may include short-term
capital gains, which are included in ordinary income for tax purposes.
The tax character of distributions paid during the years ended August 31,
2004 and 2003 were as follows:
<Table>
<Caption>
2004 2003
Distribution paid from:
Ordinary income........................................... $-0- $238,396
Long-term capital gain.................................... -0- -0-
---- --------
$-0- $238,396
==== ========
</Table>
Due to inherent differences in the recognition of income, expenses and
realized gain/losses under U.S. generally accepted accounting principles and
federal income tax purposes, permanent differences between book and tax basis
reporting have been identified and appropriately reclassified on the Statement
of Assets and Liabilities. Permanent book and tax differences relating to the
recognition of net realized losses on foreign currency transactions totaling
$90,780 were reclassified from accumulated net realized gain to accumulated
undistributed net investment income. A permanent book and tax difference
relating to the Fund's investment in other regulated investment companies
totaling $85 was reclassified from accumulated undistributed net investment
income to accumulated net realized gain. Additionally, a permanent book and tax
difference relating to expenses which are not deductible for tax purposes
totaling $8,879 was reclassified from accumulated undistributed net investment
income to capital.
21
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
As of August 31, 2004, the components of distributable earnings on a tax
basis were as follows:
<Table>
Undistributed ordinary income............................... $673,022
Undistributed long-term capital gain........................ 537,298
</Table>
Net realized gains or losses may differ for financial and tax reporting
purposes as a result of the deferral of losses relating to wash sales
transactions.
F. FOREIGN CURRENCY TRANSLATION The market values of foreign securities, forward
foreign currency contracts and other assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the mean of the quoted bid
and ask prices of such currencies against the U.S. dollar. Purchases and sales
of portfolio securities are translated at the rate of exchange prevailing when
such securities were acquired or sold. The cost of securities is determined
using historical exchange rates. Gains and losses on the sale of securities are
not segregated for financial reporting purposes between amounts arising from
changes in exchange rates and amounts arising from changes in the market prices
of securities. Realized gain and loss on foreign currency includes the net
realized amount from the sale of foreign currency and the amount realized
between trade date and settlement date on securities transactions. Income and
expenses are translated at rates prevailing when accrued.
G. EXPENSE REDUCTIONS During the year ended August 31, 2004, the Fund's custody
fee was reduced by $142 as a result of credits earned on cash balances.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<Table>
<Caption>
AVERAGE DAILY NET ASSETS % PER ANNUM
First $500 million.......................................... .90%
Next $500 million........................................... .85%
Over $1 billion............................................. .80%
</Table>
The Adviser has entered into a subadvisory agreement with Morgan Stanley
Investment Management Ltd. (the "Subadviser", a wholly owned subsidiary of
Morgan Stanley) to provide advisory services to the Fund and the Adviser with
respect to the Fund's investments. The Adviser pays 50% of its investment
advisory fee to the Subadviser. For the year ended August 31, 2004, the Adviser
waived approximately $123,300 of its advisory fees and assumed $13,072 of
accounting expenses and $15,623 of the Fund's other expenses. This waiver is
voluntary and can be discontinued at any time. This resulted in net expense
ratios of 1.72%, 2.35% and 1.77% for Classes A, B and C Shares, respectively.
For the year ended August 31, 2004, the Fund recognized expenses of
approximately $3,600 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom LLP, counsel to the Fund, of which a trustee of the Fund
is an affiliated person.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Fund. The Adviser
allocates the cost of such services to
22
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
each fund. With respect to the Accounting Services agreement, the Adviser
reimburses the cost of such services to each fund with assets less than $25
million. For the year ended August 31, 2004, $13,072 was allocated to the Fund
and is reported as part of "Accounting" expenses in the Statement of Operations.
For year ended August 31, 2004, the Fund recognized expenses of approximately
$11,500 representing Van Kampen Investments Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing legal services to the Fund, which
are reported as part of "Legal" expenses in the Statement of Operations.
Van Kampen Investor Services Inc. (VKIS), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended
August 31, 2004, the Fund recognized expenses of approximately $18,900
representing transfer agency fees paid to VKIS. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees.
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.
Amounts deferred are retained by the Fund, and to the extent permitted by the
1940 Act, as amended, may be invested in the common shares of those funds
selected by the trustees. Investments in such funds of approximately $13,400 are
included in "Other" assets on the Statement of Assets and Liabilities at August
31, 2004. Appreciation/depreciation and distributions received from these
investments are recorded with an offsetting increase/decrease in the deferred
compensation obligation and do not affect the net asset value of the Fund.
Benefits under the retirement plan are payable upon retirement 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 August 31, 2004, Morgan Stanley Investment Management Inc., an affiliate
of the Adviser, owned 88,147 shares of Class A, 65,512 shares of Class B, and
65,512 shares of Class C.
For the year ended August 31, 2004, the Fund paid brokerage commissions to
Morgan Stanley DW Inc., an affiliate of the Adviser, totaling $1,797.
23
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
3. CAPITAL TRANSACTIONS
At August 31, 2004, capital aggregated $12,964,690, $2,505,699 and $1,574,106
for Classes A, B, and C, respectively. For the year ended August 31, 2004,
transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 1,056,044 $11,837,854
Class B................................................... 154,978 1,715,972
Class C................................................... 73,527 817,375
--------- -----------
Total Sales................................................. 1,284,549 $14,371,201
========= ===========
Repurchases:
Class A................................................... (347,556) $(3,894,120)
Class B................................................... (31,077) (343,120)
Class C................................................... (5,779) (62,959)
--------- -----------
Total Repurchases........................................... (384,412) $(4,300,199)
========= ===========
</Table>
At August 31, 2003, capital aggregated $5,027,736, $1,134,129 and $820,507
for Classes A, B, and C, respectively. For the year ended August 31, 2003,
transactions were as follows:
<Table>
<Caption>
SHARES VALUE
Sales:
Class A................................................... 551,362 $ 4,775,616
Class B................................................... 29,905 263,644
Class C................................................... 70,097 593,333
-------- -----------
Total Sales................................................. 651,364 $ 5,632,593
======== ===========
Dividend Reinvestment:
Class A................................................... 16,539 $ 137,608
Class B................................................... 5,929 49,324
Class C................................................... 5,285 43,973
-------- -----------
Total Dividend Reinvestment................................. 27,753 $ 230,905
======== ===========
Repurchases:
Class A................................................... (165,110) $(1,465,104)
Class B................................................... (11,659) (97,807)
Class C................................................... (57,492) (482,023)
-------- -----------
Total Repurchases........................................... (234,261) $(2,044,934)
======== ===========
</Table>
Class B shares, including any dividend reinvestment plan Class B Shares
received there on, automatically convert to Class A shares eight years after the
end of the calendar month in which the shares were purchased. For the years
ended August 31, 2004 and 2003, 459 and 0 Class B Shares automatically converted
to Class A Shares, respectively, and are shown in the above table as sales of
Class A Shares and repurchases of Class B Shares. Class B and
24
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
C Shares are offered without a front-end sales charge, but are subject to a
contingent deferred sales charge (CDSC). The CDSC will be imposed on most
redemptions made within five years of the purchase for Class B and one year of
the purchase for Class C as detailed in the following schedule.
<Table>
<Caption>
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE
OF DOLLAR AMOUNT
SUBJECT TO CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
First....................................................... 5.00% 1.00%
Second...................................................... 4.00% None
Third....................................................... 3.00% None
Fourth...................................................... 2.50% None
Fifth....................................................... 1.50% None
Sixth and Thereafter........................................ None None
</Table>
For the year ended August 31, 2004, Van Kampen, as Distributor for the Fund,
received commissions on sales of the Fund's Class A Shares of approximately
$6,900 and CDSC on redeemed shares of approximately $2,400. Sales charges do not
represent expenses of the Fund.
4. REDEMPTION FEE
Effective January 1, 2004, the Fund assesses a 2% redemption fee on the proceeds
of Class A Shares of the Fund that are redeemed (either by sale or exchange)
within 60 days of purchase. The redemption fee is paid directly to the Fund. For
the year ended August 31, 2004, the Fund received redemption fees of $19, which
are reported as part of "Cost of Shares Repurchased" in the Statement of Changes
in Net Assets.
5. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $19,011,714 and $9,131,388, respectively.
6. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio, foreign currency exposure, or generate potential gain. All of the
Fund's holdings, including derivative instruments, are marked to market each day
with the change in value reflected in unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
taking delivery of a security underlying a forward commitment. In this instance,
the recognition of gain or loss is postponed until the disposal of the security
underlying the forward commitment.
Purchasing securities on a forward commitment involves a risk that the
market value at the time of delivery may be lower than the agreed upon purchase
price resulting in an
25
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
unrealized loss. Selling securities on a forward commitment involves different
risks and can result in losses more significant than those arising from the
purchase of such securities. Risks may arise as a result of the potential
inability of the counterparties to meet the terms of their contracts.
A forward foreign currency contract is a commitment to purchase or sell a
foreign currency at a future date at a negotiated forward rate. Upon the
settlement of the contract, a realized gain or loss is recognized and is
included as a component of realized gain/loss on forward foreign currency
contracts. Risks may arise as a result of the potential inability of the
counterparties to meet the terms of their contracts.
The following forward foreign currency contracts were outstanding as of
August 31, 2004:
<Table>
<Caption>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
LONG CONTRACTS
Australian Dollar,
380,000 expiring 09/02/04................................. $268,429 $ 5,906
650,000 expiring 11/05/04................................. 456,237 2,310
Canadian Dollar,
960,000 expiring 09/02/04................................. 730,629 17,379
176,176 expiring 09/02/04................................. 134,083 1,918
1,075,000 expiring 11/05/04............................... 817,425 1,857
Danish Krone,
550,000 expiring 09/02/04................................. 90,083 350
Hong Kong Dollar,
1,400,000 expiring 09/02/04............................... 179,499 2
Pound Sterling,
100,000 expiring 09/02/04................................. 180,397 (458)
142,395 expiring 09/02/04................................. 256,875 (2,390)
98,027 expiring 09/02/04.................................. 179,837 (2,459)
100,000 expiring 09/02/04................................. 180,397 1,122
153,618 expiring 11/05/04................................. 275,632 (426)
Swedish Krona,
2,671,375 expiring 09/02/04............................... 356,368 1,368
2,850,000 expiring 11/05/04............................... 379,938 3,332
-------------
29,811
-------------
</Table>
26
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
<Table>
<Caption>
UNREALIZED
CURRENT APPRECIATION/
VALUE DEPRECIATION
SHORT CONTRACTS
Euro Currency,
587,358 expiring 09/02/04................................. $715,589 $(2,338)
251,073 expiring 09/02/04................................. 305,887 4,113
110,000 expiring 09/02/04................................. 134,015 (1,850)
215,000 expiring 09/02/04................................. 261,938 (2,674)
145,000 expiring 09/02/04................................. 176,656 2,639
373,370 expiring 11/05/04................................. 454,582 (655)
671,162 expiring 11/05/04................................. 817,147 (1,579)
312,000 expiring 11/05/04................................. 379,864 (3,259)
Japanese Yen,
19,528,740 expiring 09/02/04.............................. 179,041 457
19,795,500 expiring 09/02/04.............................. 181,486 (2,211)
30,000,000 expiring 11/05/04.............................. 275,890 169
20,000,000 expiring 11/05/04.............................. 183,926 (1,386)
Norwegian Krone,
624,779 expiring 09/02/04................................. 90,818 (1,085)
Pound Sterling,
168,300 expiring 09/02/04................................. 303,608 6,392
Swiss Franc,
327,174 expiring 09/02/04................................. 258,644 3,879
225,639 expiring 09/02/04................................. 178,377 2,478
228,906 expiring 11/05/04................................. 181,335 (1,335)
-------------
1,755
-------------
$31,566
=======
</Table>
7. DISTRIBUTION AND SERVICE PLANS
With respect to its Class A Shares, Class B Shares and Class C Shares, the Fund
and its shareholders have adopted a distribution plan pursuant to Rule 12b-1
under the 1940 Act, as amended, and a service plan (collectively, the "Plans").
The Plans govern payments for: the distribution of the Fund's Class A Shares,
Class B Shares and Class C Shares; the provision of ongoing shareholder services
with respect to such classes of shares; and the maintenance of shareholder
accounts with respect to such classes of shares.
Annual fees under the Plans of up to .25% of Class A average daily net
assets and up to 1.00% each of Class B and Class C average daily net assets are
accrued daily. The annual fees for Class A Shares are paid quarterly and the
annual fees for Class C Shares are paid monthly. For Class B Shares, 75% of the
annual fees are paid monthly, while 25% of the annual fees are paid quarterly.
The amount of distribution expenses incurred by Van Kampen and not yet
reimbursed ("unreimbursed receivable") was approximately $37,900 and $800 for
Class B and C Shares, respectively. This amount may be recovered from future
payments under the distribution plan or CDSC. To the extent the unreimbursed
receivable has been fully recovered, any excess 12b-1 fees will be refunded to
the Fund on a quarterly basis.
27
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
NOTES TO FINANCIAL STATEMENTS -- AUGUST 31, 2004 continued
Included in the fees for the year ended August 31, 2004, are payments
retained by Van Kampen of approximately $11,000 and payments made to Morgan
Stanley DW Inc., an affiliate of the Adviser, of approximately $2,100.
8. INDEMNIFICATIONS
The Fund enters into contracts that contain a variety of indemnifications. The
Fund's maximum exposure under these arrangements is unknown. However, the Fund
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
9. LEGAL MATTERS
The Adviser, certain affiliates of the Adviser, and certain investment companies
advised by the Adviser or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. The consolidated action also names as defendants certain
individual Trustees and Directors of certain investment companies advised by
affiliates of the Adviser; the complaint does not, however, name the individual
Trustees of any Van Kampen funds. The consolidated amended complaint generally
alleges that defendants violated their statutory disclosure obligations and
fiduciary duties by failing properly to disclose (i) that the Adviser and
certain affiliates of the Adviser allegedly offered economic incentives to
brokers and others to steer investors to the funds advised by the Adviser or its
affiliates rather than funds managed by other companies, and (ii) that the funds
advised by the Adviser or its affiliates, including the Fund, allegedly paid
excessive commissions to brokers in return for their alleged efforts to steer
investors to these funds. The complaint seeks, among other things, unspecified
compensatory damages, rescissionary damages, fees and costs.
The Adviser and certain affiliates of the Adviser are also named as
defendants in a derivative suit which additionally names as defendants certain
individual Trustees of certain Van Kampen funds; the named investment companies,
including the Fund, are listed as nominal defendants. The complaint alleges that
defendants caused the Van Kampen funds to pay economic incentives to a
proprietary sales force to promote the sale of proprietary mutual funds. The
complaint also alleges that the Van Kampen funds paid excessive commissions to
Morgan Stanley and its affiliates in connection with the sales of the funds. The
complaint seeks, among other things, the removal of the current Trustees of the
funds, rescission of the management contracts for the funds, disgorgement of
profits by Morgan Stanley and its affiliates and monetary damages. This
complaint has been coordinated with the consolidated complaint described in the
previous paragraph.
The defendants have moved to dismiss each of these actions and otherwise
intend to defend them vigorously. While the defendants believes that they have
meritorious defenses, the ultimate outcome of these matters is not presently
determinable at this early stage of the litigation, and no provision has been
made in the Fund's financial statements for the effect, if any, of these
matters.
28
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Trustees of Van Kampen International Advantage
Fund
We have audited the accompanying statement of assets and liabilities of Van
Kampen International Advantage Fund (the "Fund"), including the portfolio of
investments, as of August 31, 2004, and the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the two
years in the period then ended and for the period from September 26, 2001
(commencement of operations) to August 31, 2002. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements and financial highlights. Our
procedures included confirmation of securities owned as of August 31, 2004, by
correspondence with the custodian and brokers or by other appropriate auditing
procedures where replies from brokers were not received. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Van Kampen International Advantage Fund at August 31, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the two years in the period then ended and for the period from September 26,
2001 (commencement of operations) to August 31, 2002 in conformity with U.S.
generally accepted accounting principles.
-s- Ernst & Young LLP
Chicago, Illinois
October 7, 2004
29
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
BOARD OF TRUSTEES
DAVID C. ARCH
J. MILES BRANAGAN
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUZANNE H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT
1221 Avenue of the Americas
New York, New York 10020
INVESTMENT SUBADVISER
MORGAN STANLEY INVESTMENT MANAGEMENT, LTD.
25 Cabot Square
Canary Wharf, London
United Kingdom E14 4QA
DISTRIBUTOR
VAN KAMPEN FUNDS INC.
1221 Avenue of the Americas
New York, New York 10020
SHAREHOLDER SERVICING AGENT
VAN KAMPEN INVESTOR SERVICES INC.
P.O. Box 947
Jersey City, New Jersey 07303-0947
CUSTODIAN
STATE STREET BANK
AND TRUST COMPANY
225 Franklin Street
P.O. Box 1173
Boston, Massachusetts 02110
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, Illinois 60606
For federal income tax purposes, the following information is furnished with
respect to the distributions paid by the Fund during its taxable year ended
August 31, 2004. Provided the Fund makes a distribution in December 2004, the
Fund intends to pass through foreign tax credits of $34,855 and has derived
gross income from sources within foreign countries amounting to $278,720. In
January, the Fund provides tax information to shareholders for the preceding
calendar year.
* "Interested persons" of the Fund, as defined in the Investment Company Act
of 1940, as amended.
30
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEES AND OFFICERS INFORMATION
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management (the "Adviser"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). The
term "Fund Complex" includes each of the investment companies advised by the
Adviser or its affiliates as of the date of this Statement of Additional
Information. Trustees serve until reaching their retirement age or until their
successors are duly elected and qualified. Officers are annually elected by the
trustees.
INDEPENDENT TRUSTEES:
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief 85 Trustee/Director/Managing
Blistex Inc. since 2003 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Director of
the Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago. Director of
St. Vincent de Paul
Center, a Chicago based
day care facility serving
the children of low
income families. Board
member of the Illinois
Manufacturer's
Association.
J. Miles Branagan (71) Trustee Trustee Private investor. 83 Trustee/Director/Managing
1632 Morning Mountain Road since 2001 Co-founder, and prior to General Partner of funds
Raleigh, NC 27614 August 1996, Chairman, in the Fund Complex.
Chief Executive Officer
and President, MDT
Corporation (now known as
Getinge/Castle, Inc., a
subsidiary of Getinge
Industrier AB), a company
which develops,
manufactures, markets and
services medical and
scientific equipment.
</Table>
31
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 83 Trustee/Director/Managing
33971 Selva Road since 2001 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
Rod Dammeyer (63) Trustee Trustee President of CAC, L.L.C., 85 Trustee/Director/Managing
CAC, L.L.C. since 2003 a private company General Partner of funds
4350 LaJolla Village Drive offering capital in the Fund Complex.
Suite 980 investment and management Director of Stericycle,
San Diego, CA 92122-6223 advisory services. Prior Inc., GATX Corporation,
to February 2001, Vice and Trustee of The
Chairman and Director of Scripps Research
Anixter International, Institute and the
Inc., a global University of Chicago
distributor of wire, Hospitals and Health
cable and communications Systems. Prior to January
connectivity products, 2004, Director of
and IMC Global Inc., an TeleTech Holdings Inc.
international company and Arris Group, Inc.
that mines, manufactures Prior to May 2002,
and sells essential crop Director of Peregrine
nutrients and feed Systems Inc. Prior to
ingredients to farmers. July 2000, Director of
Prior to July 2000, Allied Riser
Managing Partner of Communications Corp.,
Equity Group Corporate Matria Healthcare Inc.,
Investment (EGI), a Transmedia Networks,
company that makes Inc., CNA Surety, Corp.
private investments in and Grupo Azcarero Mexico
other companies. (GAM).
</Table>
32
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of 83 Trustee/Director/Managing
Heidrick & Struggles since 2001 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 of Chicago Hospitals
Board, Vice Chair of the
Board of the YMCA of
Metropolitan Chicago and
a member of the Women's
Board of the University
of Chicago. Prior to
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (52) Trustee Trustee Director and President of 83 Trustee/Director/Managing
1744 R Street, NW since 2001 the German Marshall Fund General Partner of funds
Washington, DC 20009 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (68) Trustee Trustee Prior to 1998, President 85 Trustee/Director/Managing
736 North Western Avenue since 2003 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
</Table>
33
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (68) Trustee Trustee President of Nelson 83 Trustee/Director/Managing
423 Country Club Drive since 2001 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (63) Trustee Trustee President Emeritus and 85 Trustee/Director/Managing
1126 E. 59th Street since 2003 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey, Ph.D. Trustee Trustee Previously Chief 83 Trustee/Director/Managing
(62) since 2001 Communications Officer of General Partner of funds
815 Cumberstone Road the National Academy of in the Fund Complex.
Harwood, MD 20776 Sciences/National Director of Fluor Corp.,
Research Council, an an engineering,
independent, federally procurement and
chartered policy construction
institution, from 2001 to organization, since
November 2003 and Chief January 2004 and Director
Operating Officer from of Neurogen Corporation,
1993 to 2001. Director of a pharmaceutical company,
the Institute for Defense since January 1998.
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, Director
of the Rocky Mountain
Institute and Trustee of
Colorado College. Prior
to 1993, Executive
Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
</Table>
34
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
INTERESTED TRUSTEES:*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief 83 Trustee/Director/Managing
1221 Avenue of the Americas President since Executive Officer of General Partner of funds
New York, NY 10020 and Chief 2001; funds in the Fund in the Fund Complex.
Executive President Complex. Chairman,
Officer and Chief President, Chief
Executive Executive Officer and
Officer Director of the Adviser
since 2002 and Van Kampen Advisors
Inc. since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
</Table>
35
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (58) Trustee Trustee Advisory Director of 85 Trustee/Director/Managing
1 Parkview Plaza since 2001 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm 85 Trustee/Director/Managing
333 West Wacker Drive since 2001 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom LLP, legal in the Fund Complex.
counsel to funds in the
Fund Complex.
</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 certain
funds in the Fund Complex by reason of his firm currently acting as legal
counsel to such funds in the Fund Complex. Messrs. Merin and Powers are
interested persons of funds in the Fund Complex and the Adviser by reason of
their current or former positions with Morgan Stanley or its affiliates.
36
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
OFFICERS:
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stefanie V. Chang (37) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Amy Doberman (42) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeitus Investment Management,
Inc from January 1997 to July 2000.
James M. Dykas (38) Chief Financial Officer Officer Executive Director of Van Kampen Asset Management and Morgan
1 Parkview Plaza and Treasurer since 2001 Stanley Investment Management. Chief Financial Officer and
Oakbrook Terrace, IL 60181 Treasurer of funds in the Fund Complex. Prior to August
2004, Assistant Treasurer of funds in the Fund Complex.
Joseph J. McAlinden (61) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Chief since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Investment Officer Management Inc. and Morgan Stanley Investments LP and
Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
</Table>
37
<Table>
<Caption>
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
TRUSTEE AND OFFICER INFORMATION continued
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Ronald E. Robison (65) Executive Vice Officer Principal Executive Officer--office of the Funds (since
1221 Avenue of the Americas President and since 2003 November 2003). Chief Executive Officer and Chairman of
New York, NY 10020 Principal Executive Investor Services. Executive Vice President and Principal
Officer Executive Officer of funds in the Fund Complex. Managing
Director of Morgan Stanley. Chief Administrative Officer,
Managing Director and Director of Morgan Stanley Investment
Advisors Inc., Morgan Stanley Services Company Inc. and
Managing Director and Director of Morgan Stanley
Distributors Inc. Chief Executive Officer and Director of
Morgan Stanley Trust. Executive Vice President and Principal
Executive Officer of the Institutional and Retail Morgan
Stanley Funds; Director of Morgan Stanley SICAV; previously
Chief Global Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 2001 August 2004. Director and Managing Director of Van Kampen
Oakbrook Terrace, IL 60181 Investments, the Adviser, Van Kampen Advisors Inc. and
certain other subsidiaries of Van Kampen Investments. Prior
August 2004, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
</Table>
38
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
We are required by federal law to provide you with a copy of our Privacy
Policy annually.
The following Policy applies to current and former individual clients of Van
Kampen Investments Inc., Van Kampen Asset Management, Van Kampen Advisors Inc.,
Van Kampen Funds Inc., Van Kampen Investor Services Inc. and Van Kampen Exchange
Corp., as well as current and former individual investors in Van Kampen mutual
funds, unit investment trusts, and related companies.
This Policy is not applicable to partnerships, corporations, trusts or other
non-individual clients or account holders, nor is this Policy applicable to
individuals who are either beneficiaries of a trust for which we serve as
trustee or participants in an employee benefit plan administered or advised by
us. This Policy is, however, applicable to individuals who select us to be a
custodian of securities or assets in individual retirement accounts, 401(k)
accounts, 529 Educational Savings Accounts, accounts subject to the Uniform
Gifts to Minors Act, or similar accounts.
Please note that we may amend this Policy at any time, and will inform you
of any changes to this Policy as required by law.
WE RESPECT YOUR PRIVACY
We appreciate that you have provided us with your personal financial
information. We strive to maintain the privacy of such information while we help
you achieve your financial objectives. This Policy describes what non-public
personal information we collect about you, why we collect it, and when we may
share it with others.
We hope this Policy will help you understand how we collect and share
non-public personal information that we gather about you. Throughout this
Policy, we refer to the non-public information that personally identifies you or
your accounts as "personal information."
1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU?
To serve you better and manage our business, it is important that we collect and
maintain accurate information about you. We may obtain this information from
applications and other forms you submit to us, from your dealings with us, from
consumer reporting agencies, from our Web sites and from third parties and other
sources.
For example:
-- We may collect information such as your name, address, e-mail address,
telephone/fax numbers, assets, income and investment objectives through
applications and other forms you submit to us.
-- We may obtain information about account balances, your use of
account(s) and the types of products and services you prefer to receive
from us through your dealings and transactions with us and other
sources.
-- We may obtain information about your creditworthiness and credit
history from consumer reporting agencies.
-- We may collect background information from and through third-party
vendors to verify representations you have made and to comply with
various regulatory requirements.
-- If you interact with us through our public and private Web sites, we
may collect information that you provide directly through online
communications (such as an e-mail address). We may also collect
information about your Internet service provider, your domain name,
your computer's operating system and Web browser,
(continued on back)
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY continued
your use of our Web sites and your product and service preferences,
through the use of "cookies." "Cookies" recognize your computer each
time you return to one of our sites, and help to improve our sites'
content and personalize your experience on our sites by, for example,
suggesting offerings that may interest you. Please consult the Terms of
Use of these sites for more details on our use of cookies.
2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU?
To provide you with the products and services you request, to serve you better
and to manage our business, we may disclose personal information we collect
about you to our affiliated companies and to non-affiliated third parties as
required or permitted by law.
A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose
personal information that we collect about you to our affiliated companies
except to enable them to provide services on our behalf or as otherwise required
or permitted by law.
B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal
information that we collect about you to non-affiliated third parties except to
enable them to provide services on our behalf, to perform joint marketing
agreements with other financial institutions, or as otherwise required or
permitted by law. For example, some instances where we may disclose information
about you to non-affiliated third parties include: for servicing and processing
transactions, to offer our own products and services, to protect against fraud,
for institutional risk control, to respond to judicial process or to perform
services on our behalf. When we share personal information with these companies,
they are required to limit their use of personal information to the particular
purpose for which it was shared and they are not allowed to share personal
information with others except to fulfill that limited purpose.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE
COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures to help
safeguard the personal information we collect about you. We have internal
policies governing the proper handling of client information. Third parties that
provide support or marketing services on our behalf may also receive personal
information, and we require them to adhere to confidentiality standards with
respect to such information.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling
1-800-847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
(VAN KAMPEN INVESTMENTS LOGO)
Copyright (C)2004 Van Kampen
Funds Inc. All rights reserved.
Member NASD/SIPC. 185, 285, 385
IA ANR 10/04 RN04-02210P-Y08/04
Item 2. Code of Ethics.
(a) The Trust has adopted a code of ethics (the "Code of Ethics") that
applies to its principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing similar
functions, regardless of whether these individuals are employed by the Trust or
a third party.
(b) No information need be disclosed pursuant to this paragraph.
(c) Due to personnel changes at the Adviser, the list of Covered Officers
set forth in Exhibit B and the General Counsel designee to whom questions about
the application of the Code should be referred in Exhibit C have been amended.
(d) The Trust has not granted a waiver or an implicit waiver from a
provision of its Code of Ethics.
(e) Not applicable.
(f)
(1) The Trust's Code of Ethics is attached hereto as Exhibit 11A.
(2) Not applicable.
(3) Not applicable.
Item 3. Audit Committee Financial Expert.
The Trust's Board of Trustees has determined that it has three "audit committee
financial experts" serving on its audit committee, each of whom are
"independent" Trustees : J. Miles Branagan, Jerry Choate and R. Craig Kennedy.
Under applicable securities laws, a person who is determined to be an audit
committee financial expert will not be deemed an "expert" for any purpose,
including without limitation for the purposes of Section 11 of the Securities
Act of 1933, as a result of being designated or identified as an audit committee
financial expert. The designation or identification of a person as an audit
committee financial expert does not impose on such person any duties,
obligations, or liabilities that are greater than the duties, obligations, and
liabilities imposed on such person as a member of the audit committee and Board
of Trustees in the absence of such designation or identification.
Item 4. Principal Accountant Fees and Services.
(a)(b)(c)(d) and (g). Based on fees billed for the periods shown:
2004
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES........................ $54,500 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES...... $0 $159,500(2)
TAX FEES................ $3,500(3) $42,141(4)
ALL OTHER FEES.......... $0 $222,168(5)
TOTAL NON-AUDIT FEES.............. $3,500 $423,809
TOTAL............................. $58,000 $423,809
2003
REGISTRANT COVERED ENTITIES(1)
AUDIT FEES........................ $48,260 N/A
NON-AUDIT FEES
AUDIT-RELATED FEES...... $0 $88,000(2)
TAX FEES................ $2,740(3) $70,314(4)
ALL OTHER FEES.......... $0 $331,980(6)
TOTAL NON-AUDIT FEES.............. $2,740 $490,294
TOTAL............................. $51,000 $490,294
N/A- Not applicable, as not required by Item 4.
(1) Covered Entities include the Adviser (excluding sub-advisors)
and any entity controlling, controlled by or under common
control with the Adviser that provides ongoing services to the
Registrant.
(2) Audit-Related Fees represent assurance and related services
provided that are reasonably related to the performance of the
audit of the financial statements of the Covered Entities' and
funds advised by the Adviser or its affiliates, specifically
attestation services provided in connection with a SAS 70
Report.
(3) Tax Fees represent tax advice and compliance services provided
in connection with the review of the Registrant's tax.
(4) Tax Fees represent tax advice services provided to Covered
Entities, including research and identification of PFIC
entities.
(5) All Other Fees represent attestation services provided in
connection with performance presentation standards.
(6) All Other Fees represent attestation services provided in
connection with performance presentation standards, general
industry education seminars provided, and a regulatory review
project performed.
(e)(1) The audit committee's pre-approval policies and procedures are as
follows:
JOINT AUDIT COMMITTEE
AUDIT AND NON-AUDIT SERVICES
PRE-APPROVAL POLICY AND PROCEDURES
OF THE
VAN KAMPEN FUNDS
AS ADOPTED JULY 23, 2003(1)
1. STATEMENT OF PRINCIPLES
The Audit Committee of the Board is required to review and, in its sole
discretion, pre-approve all Covered Services to be provided by the Independent
Auditors to the Fund and Covered Entities in order to assure that services
performed by the Independent Auditors do not impair the auditor's independence
from the Fund.(2)
The SEC has issued rules specifying the types of services that an
independent auditor may not provide to its audit client, as well as the audit
committee's administration of the engagement of the independent auditor. The
SEC's rules establish two different approaches to pre-approving services, which
the SEC considers to be equally valid. Proposed services either: may be
pre-approved without consideration of specific case-by-case services by the
Audit Committee ("general pre-approval"); or require the specific pre-approval
of the Audit Committee ("specific pre-approval"). The Audit Committee believes
that the combination of these two approaches in this Policy will result in an
effective and efficient procedure to pre-approve services performed by the
Independent Auditors. As set forth in this Policy, unless a type of service has
received general pre-approval, it will require specific pre-approval by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
authority has been delegated) if it is to be provided by the Independent
Auditors. Any proposed services exceeding pre-approved cost levels or budgeted
amounts will also require specific pre-approval by the Audit Committee.
For both types of pre-approval, the Audit Committee will consider
whether such services are consistent with the SEC's rules on auditor
independence. The Audit Committee will also consider whether the Independent
Auditors are best positioned to provide the most effective and efficient
services, for reasons such as its familiarity with the Fund's business, people,
culture, accounting systems, risk profile and other factors, and whether the
service might enhance the Fund's ability to manage or control risk or improve
audit quality. All such factors will be considered as a whole, and no one factor
should necessarily be determinative.
The Audit Committee is also mindful of the relationship between fees
for audit and non-audit services in deciding whether to pre-approve any such
services and may determine for each fiscal year, the appropriate ratio between
the total amount of fees for Audit, Audit-related and Tax services for the Fund
(including any Audit-related or Tax service fees for Covered Entities that were
subject to pre-approval), and the total amount of fees for certain permissible
non-audit services classified as All Other services for the Fund (including any
such services for Covered Entities subject to pre-approval).
- --------
(1) This Joint Audit Committee Audit and Non-Audit Services Pre-Approval
Policy and Procedures (the "Policy"), adopted as of the date above, supercedes
and replaces all prior versions that may have been adopted from time to time.
(2) Terms used in this Policy and not otherwise defined herein shall have
the meanings as defined in the Joint Audit Committee Charter.
The appendices to this Policy describe the Audit, Audit-related, Tax
and All Other services that have the general pre-approval of the Audit
Committee. The term of any general pre-approval is 12 months from the date of
pre-approval, unless the Audit Committee considers and provides a different
period and states otherwise. The Audit Committee will annually review and
pre-approve the services that may be provided by the Independent Auditors
without obtaining specific pre-approval from the Audit Committee. The Audit
Committee will add to or subtract from the list of general pre-approved services
from time to time, based on subsequent determinations.
The purpose of this Policy is to set forth the policy and procedures by
which the Audit Committee intends to fulfill its responsibilities. It does not
delegate the Audit Committee's responsibilities to pre-approve services
performed by the Independent Auditors to management.
The Fund's Independent Auditors have reviewed this Policy and believes
that implementation of the Policy will not adversely affect the Independent
Auditors' independence.
2. DELEGATION
As provided in the Act and the SEC's rules, the Audit Committee may
delegate either type of pre-approval authority to one or more of its members.
The member to whom such authority is delegated must report, for informational
purposes only, any pre-approval decisions to the Audit Committee at its next
scheduled meeting.
3. AUDIT SERVICES
The annual Audit services engagement terms and fees are subject to the
specific pre-approval of the Audit Committee. Audit services include the annual
financial statement audit and other procedures required to be performed by the
Independent Auditors to be able to form an opinion on the Fund's financial
statements. These other procedures include information systems and procedural
reviews and testing performed in order to understand and place reliance on the
systems of internal control, and consultations relating to the audit. The Audit
Committee will monitor the Audit services engagement as necessary, but no less
than on a quarterly basis, and will also approve, if necessary, any changes in
terms, conditions and fees resulting from changes in audit scope, Fund structure
or other items.
In addition to the annual Audit services engagement approved by the
Audit Committee, the Audit Committee may grant general pre-approval to other
Audit services, which are those services that only the Independent Auditors
reasonably can provide. Other Audit services may include statutory audits and
services associated with SEC registration statements (on Forms N-1A, N-2, N-3,
N-4, etc.), periodic reports and other documents filed with the SEC or other
documents issued in connection with securities offerings.
The Audit Committee has pre-approved the following Audit services. All
other Audit services not listed below must be specifically pre-approved by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
has been delegated):
- Statutory audits or financial audits for the Fund
- Services associated with SEC registration statements (including new
funds), periodic reports and other documents filed with the SEC or
other documents issued in connection with securities offerings (e.g.,
comfort letters for closed-end fund offerings, consents), and
assistance in responding to SEC comment letters
- Consultations by the Fund's management as to the
accounting or disclosure treatment of transactions or events and/or the
actual or potential impact of final or proposed rules, standards or
interpretations by the SEC, FASB, or other regulatory or standard
setting
bodies (Note: Under SEC rules, some consultations may be "audit
related" services rather than "audit" services)
4. AUDIT-RELATED SERVICES
Audit-related services are assurance and related services that are
reasonably related to the performance of the audit or review of the Fund's
financial statements or, to the extent they are Covered Services, the Covered
Entities' financial statements, or that are traditionally performed by the
Independent Auditors. Because the Audit Committee believes that the provision of
Audit-related services does not impair the independence of the auditor and is
consistent with the SEC's rules on auditor independence, the Audit Committee may
grant general pre-approval to Audit-related services. Audit-related services
include, among others, accounting consultations related to accounting, financial
reporting or disclosure matters not classified as "Audit services"; assistance
with understanding and implementing new accounting and financial reporting
guidance from rulemaking authorities; agreed-upon or expanded audit procedures
related to accounting and/or billing records required to respond to or comply
with financial, accounting or regulatory reporting matters; and assistance with
internal control reporting requirements under Forms N-SAR and/or N-CSR.
The Audit Committee has pre-approved the following Audit-related
services. All other Audit-related services not listed below must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated):
- Attest procedures not required by statute or regulation (including
agreed upon procedures related to the Closed-End Fund asset coverage
tests required by the rating agencies and/or lenders)
- Due diligence services pertaining to potential fund mergers
- Issuance of SAS-70 reports on internal controls of Morgan Stanley Trust
Co. and MSIM Trade Operations
- Consultations by the Fund's management as to the accounting or
disclosure treatment of transactions or events and/or the actual or
potential impact of final or proposed rules, standards or
interpretations by the SEC, FASB, or other regulatory or standard-
setting bodies (Note: Under SEC rules, some
consultations may be "audit" services rather than "audit-related"
services)
- Information systems reviews not performed in connection with the audit
(e.g., application data center and technical reviews)
- General assistance with implementation of the requirements of SEC rules
or listing standards promulgated pursuant to the Sarbanes-Oxley Act
- Audit of record keeping services performed by Morgan Stanley Trust Fund
related to the New Jersey State Retirement Plan
5. TAX SERVICES
The Audit Committee believes that the Independent Auditors can provide
Tax services to the Fund and, to the extent they are Covered Services, the
Covered Entities, such as tax compliance, tax planning and tax advice without
impairing the auditor's independence, and the SEC has stated that the
Independent Auditors may provide such services. Hence, the Audit Committee
believes it may grant general pre-approval to those Tax services that have
historically been provided by the Independent Auditors, that the Audit Committee
has reviewed and believes would not impair the independence of the Independent
Auditors, and that are consistent with the SEC's rules on auditor independence.
The Audit Committee will not permit the retention of the Independent Auditors in
connection with a transaction initially recommended by the Independent Auditors,
the sole business purpose of which may be tax avoidance and the tax treatment of
which may not be supported in the Internal Revenue Code and related regulations.
The Audit
Committee will consult with Director of Tax or outside counsel to
determine that the tax planning and reporting positions are consistent with this
policy.
Pursuant to the preceding paragraph, the Audit Committee has
pre-approved the following Tax Services. All Tax services involving large and
complex transactions not listed below must be specifically pre-approved by the
Audit Committee (or by any member of the Audit Committee to which pre-approval
has been delegated), including tax services proposed to be provided by the
Independent Auditors to any executive officer or trustee/director/managing
general partner of the Fund, in his or her individual capacity, where such
services are paid for by the Fund (generally applicable only to internally
managed investment companies):
- U.S. federal, state and local tax planning and advice
- U.S. federal, state and local tax compliance
- International tax planning and advice
- International tax compliance
- Review of federal, state, local and international income, franchise,
and other tax returns
- Identification of Passive Foreign Investment Companies
- Review of closed-end funds pro rata allocation of taxable income and
capital gains to common and preferred shares.
- Domestic and foreign tax planning, compliance, and advice
- Assistance with tax audits and appeals before the IRS and similar
state, local and foreign agencies
- Tax advice and assistance regarding statutory, regulatory or
administrative developments (e.g., excise tax reviews, evaluation of
Fund's tax compliance function)
- Review the calculations of taxable income from corporate actions
including reorganizations related to bankruptcy filings and provide
guidance related to the foregoing
6. ALL OTHER SERVICES
The Audit Committee believes, based on the SEC's rules prohibiting the
Independent Auditors from providing specific non-audit services, that other
types of non-audit services are permitted. Accordingly, the Audit Committee
believes it may grant general pre-approval to those permissible non-audit
services classified as All Other services that it believes are routine and
recurring services, would not impair the independence of the auditor and are
consistent with the SEC's rules on auditor independence.
The Audit Committee has pre-approved the following All Other services.
Permissible All Other services not listed below must be specifically
pre-approved by the Audit Committee (or by any member of the Audit Committee to
which pre-approval has been delegated):
- Risk management advisory services, e.g., assessment and testing of
security infrastructure controls
The following is a list of the SEC's prohibited non-audit services. The
SEC's rules and relevant guidance should be consulted to determine the precise
definitions of these services and the applicability of exceptions to certain of
the prohibitions:
- Bookkeeping or other services related to the accounting records or
financial statements of the audit client
- Financial information systems design and implementation
- Appraisal or valuation services, fairness opinions or contribution-in-
kind reports
- Actuarial services
- Internal audit outsourcing services
- Management functions
- Human resources
- Broker-dealer, investment adviser or investment banking services
- Legal services
- Expert services unrelated to the audit
7. PRE-APPROVAL FEE LEVELS OR BUDGETED AMOUNTS
Pre-approval fee levels or budgeted amounts for all services to be
provided by the Independent Auditors will be established annually by the Audit
Committee. Any proposed services exceeding these levels or amounts will require
specific pre-approval by the Audit Committee. The Audit Committee is mindful of
the overall relationship of fees for audit and non-audit services in determining
whether to pre-approve any such services. For each fiscal year, the Audit
Committee may determine the appropriate ratio between the total amount of fees
for Audit, Audit-related, and Tax services for the Fund (including any
Audit-related or Tax services fees for Covered Entities subject to
pre-approval), and the total amount of fees for certain permissible non-audit
services classified as All Other services for the Fund (including any such
services for Covered Entities subject to pre-approval).
8. PROCEDURES
All requests or applications for services to be provided by the
Independent Auditors that do not require specific approval by the Audit
Committee will be submitted to the Fund's Chief Financial Officer and must
include a detailed description of the services to be rendered. The Fund's Chief
Financial Officer will determine whether such services are included within the
list of services that have received the general pre-approval of the Audit
Committee. The Audit Committee will be informed on a timely basis of any such
services rendered by the Independent Auditors. Requests or applications to
provide services that require specific approval by the Audit Committee will be
submitted to the Audit Committee by both the Independent Auditors and the Fund's
Chief Financial Officer, and must include a joint statement as to whether, in
their view, the request or application is consistent with the SEC's rules on
auditor independence.
The Audit Committee has designated the Fund's Chief Financial Officer
to monitor the performance of all services provided by the Independent Auditors
and to determine whether such services are in compliance with this Policy. The
Fund's Chief Financial Officer will report to the Audit Committee on a periodic
basis on the results of its monitoring. Both the Fund's Chief Financial Officer
and management will immediately report to the chairman of the Audit Committee
any breach of this Policy that comes to the attention of the Fund's Chief
Financial Officer or any member of management.
9. ADDITIONAL REQUIREMENTS
The Audit Committee has determined to take additional measures on an
annual basis to meet its responsibility to oversee the work of the Independent
Auditors and to assure the auditor's independence from the Fund, such as
reviewing a formal written statement from the Independent Auditors delineating
all relationships between the Independent Auditors and the Fund, consistent with
Independence Standards Board No. 1, and discussing with the Independent Auditors
its methods and procedures for ensuring independence.
10. COVERED ENTITIES
Covered Entities include the Fund's investment adviser(s) and any
entity controlling, controlled by or under common control with the Fund's
investment adviser(s) that provides ongoing services to the Fund(s). Beginning
with non-audit service contracts entered into on or after May 6, 2003, the
Fund's audit committee must pre-approve non-audit services provided not
only to the Fund but also to the Covered Entities if the engagements relate
directly to the operations and financial reporting of the Fund. This list of
Covered Entities would include:
- Van Kampen Investments, Inc.
- Van Kampen Investment Advisory Corporation
- Van Kampen Asset Management Inc.
- Van Kampen Advisors Inc.
- Van Kampen Funds Inc.
- Van Kampen Trust Company
- Van Kampen Investor Services Inc.
- Van Kampen Management Inc.
- Morgan Stanley Investment Management Inc.
- Morgan Stanley Investments LP
- Morgan Stanley Trust Company
(e)(2) Beginning with non-audit service contracts entered into on or after May
6, 2003, the audit committee also is required to pre-approve services to Covered
Entities to the extent that the services are determined to have a direct impact
on the operations or financial reporting of the Registrant. 100% of such
services were pre-approved by the audit committee pursuant to the Audit
Committee's pre-approval policies and procedures (attached hereto).
(f) Not applicable.
(g) See table above.
(h) The audit committee of the Board of Trustees has considered whether the
provision of services other than audit services performed by the auditors to the
Registrant and Covered Entities is compatible with maintaining the auditors'
independence in performing audit services.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Please refer to Item #1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable.
Item 8. Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers.
Not applicable.
Item 9. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 10. Controls and Procedures.
(a) The Trust's principal executive officer and principal financial officer have
concluded that the Trust's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Trust in this Form N-CSR
was recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange
Commission's rules and forms, based upon such officers' evaluation of these
controls and procedures as of a date within 90 days of the filing date of the
report.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11. Exhibits.
(a) The Code of Ethics for Principal Executive and Senior Financial Officers is
attached hereto.
(b)(1) A certification for the Principal Executive Officer of the registrant is
attached hereto as part of EX-99.CERT.
(b)(2) A certification for the Principal Financial Officer of the registrant is
attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(Registrant) Van Kampen Equity Trust II
By: /s/ Ronald E. Robison
---------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: October 20, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
By: /s/ Ronald E. Robison
---------------------
Name: Ronald E. Robison
Title: Principal Executive Officer
Date: October 20, 2004
By: /s/ James M. Dykas
------------------
Name: James M. Dykas
Title: Principal Financial Officer
Date: October 20, 2004