AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 2004
SECURITIES ACT FILE NO. 333-116994
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM N-14
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
[X] Pre-Effective Amendment No. 1
[ ] Post-Effective Amendment No. ____
(Check appropriate box or boxes)
---------------------
VAN KAMPEN HIGH INCOME
CORPORATE BOND FUND
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1221 AVENUE OF THE AMERICAS, NEW YORK, NEW YORK 10020
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (212) 762-7975
(Area Code and Telephone Number)
---------------------
BARRY FINK, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(Name and Address of Agent for Service)
---------------------
COPIES TO:
WAYNE W. WHALEN, ESQ.
CHARLES B. TAYLOR, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
The Registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the securities act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said section 8(a),
may determine.
Title of securities being registered: common shares of beneficial interest,
par value $0.01 per share. The Registrant has registered an indefinite number of
its common shares of beneficial interest based on Section 24(f) of the
Investment Company Act of 1940, as amended, and is in a continuous offering of
such shares under an effective registration statement (File Nos. 002-62115 and
811-02851). No filing fee is due herewith because of reliance on Section 24(f)
of the Investment Company Act of 1940, as amended.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
EXPLANATORY NOTE
This Registration Statement is organized as follows:
-- Questions and Answers to Shareholders of Van Kampen High Yield Fund
-- Notice of Special Meeting of Shareholders of Van Kampen High Yield Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen High Yield Fund into Van Kampen High Income Corporate Bond Fund
-- Prospectus of Van Kampen High Income Corporate Bond Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen High Yield Fund into Van Kampen High Income
Corporate Bond Fund
-- Part C Information
-- Exhibits
-- SEPTEMBER 2004 --
--------------------------------------------------------------------------------
IMPORTANT NOTICE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TO VAN KAMPEN HIGH YIELD FUND
SHAREHOLDERS
--------------------------------------------------------------------------------
QUESTIONS & ANSWERS
--------------------------------------------------------------------------------
We recommend that you read the complete Prospectus/Proxy Statement. For your
convenience, we have provided a brief overview of the issue to be voted on.
--------------------------------------------------------------------------------
Q
WHY IS A SHAREHOLDER MEETING BEING HELD?
A You are being asked to
approve a reorganization (the "Reorganization") of Van Kampen High Yield Fund
(the "Target Fund") into Van Kampen High Income Corporate Bond Fund (the
"Acquiring Fund"), a fund that pursues similar investment objectives and
investment strategies. If the proposed Reorganization is approved and completed,
an account will be set up in your name and you will become a shareholder of the
Acquiring Fund, and the Target Fund will be dissolved. Please refer to the
Prospectus/Proxy Statement for a detailed explanation of the proposed
Reorganization and for a more complete description of the Acquiring Fund.
Q
HOW DOES THE BOARD OF TRUSTEES SUGGEST THAT I VOTE?
A After careful consideration, the
Board of Trustees of the Target Fund (the "Board") has determined that the
proposed Reorganization will benefit the Target Fund's shareholders and
recommends that you cast your vote "FOR" the proposed Reorganization. The Board
anticipates that shareholders of the Target Fund will benefit from (i) certain
economies of scale from the Acquiring Fund's larger net asset size and the
potentially lower operating expenses associated therewith and (ii) the
elimination of the duplication of services and expenses that currently exists as
a result of the separate operations of the funds.
Q
HOW WILL THE REORGANIZATION AFFECT ME?
A Assuming shareholders of the
Target Fund approve the proposed Reorganization, the assets and liabilities of
the Target Fund will be combined with those of the Acquiring Fund, an account
will be set up in your name and you will receive shares of the Acquiring Fund.
The value of the shares you receive in the Reorganization will equal the value
of the shares you own immediately prior to the Reorganization, less the expenses
of the Reorganization.
Q
WILL I HAVE TO PAY ANY SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN
CONNECTION WITH THE REORGANIZATION?
A You will pay no sales loads or
commissions in connection with the Reorganization. As more fully discussed in
the combined Prospectus/Proxy Statement, the holding period with respect to any
contingent deferred sales charge applicable to shares of the Acquiring Fund
acquired in the Reorganization will be measured from the earlier of the time (i)
the holder purchased such shares from the Target Fund or (ii) the holder
purchased shares of any other Van Kampen fund and subsequently exchanged them
for shares of the Target Fund.
Q
HOW DO OPERATING EXPENSES PAID BY THE ACQUIRING FUND COMPARE TO THOSE
PAYABLE BY THE TARGET FUND?
A Management of the funds
anticipates that, as a result of the Reorganization, shareholders of the Target
Fund would be subject to lower total operating expenses as a percentage of net
assets.
Q
WHAT WILL I HAVE TO DO TO OPEN AN ACCOUNT IN THE ACQUIRING FUND? WHAT
HAPPENS TO MY ACCOUNT IF THE REORGANIZATION IS APPROVED?
A If the Reorganization is
approved, an account will be set up in your name and your interest in shares of
the Target Fund automatically will be converted into shares of the Acquiring
Fund, and we will send you written confirmation that this change has taken
place. You will receive the same class of shares of the Acquiring Fund equal in
value to your class of shares of the Target Fund less the expenses of the
Reorganization. Holders of Class A Shares of the Target Fund will receive Class
A Shares of the Acquiring Fund; holders of Class B Shares of the Target Fund
will receive Class B Shares of the Acquiring Fund; and holders of Class C Shares
of the Target Fund will receive Class C Shares of the Acquiring Fund. No
certificates for Acquiring Fund shares will be issued in connection with the
Reorganization, although such certificates will be available upon request. If
you currently hold certificates representing your shares of the Target Fund, it
is not necessary to return such certificates; however, shareholders may want to
present such certificates to receive certificates of the Acquiring Fund (to
simplify substantiation of and to preserve the tax basis of separate lots of
shares).
Q
WILL I HAVE TO PAY ANY FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is
intended to qualify as a "reorganization" within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended. If the
Reorganization so qualifies, in general, a shareholder of the Target Fund will
recognize no gain or loss upon the receipt solely of the shares of the Acquiring
Fund in connection with the Reorganization. Additionally, the Target Fund would
not recognize any gain or loss as a result of the transfer of all of its assets
and liabilities solely in exchange for the shares of the Acquiring Fund or as a
result of its liquidation.
Q
WHAT IF I REDEEM OR EXCHANGE MY SHARES OF THE TARGET FUND BEFORE THE
REORGANIZATION TAKES PLACE?
A If you choose to redeem or
exchange your shares of the Target Fund before the Reorganization takes place,
the redemption or exchange
will be treated as a normal redemption or exchange of shares and generally will
be a taxable transaction, and any applicable contingent deferred sales charges
will be applied.
Q
HOW DO I VOTE MY PROXY?
A You may cast your vote by
mail, phone or internet. To vote by mail, please mark your vote on the enclosed
proxy card and sign, date and return the card in the postage-paid envelope
provided. If you choose to vote via phone or internet, please follow the
instructions found on the proxy card.
Q
WHOM DO I CONTACT FOR FURTHER INFORMATION?
A You can contact your financial
adviser for further information. You may also call Van Kampen's Client Relations
Department at 1-800-231-2808 (Telecommunication Device for the Deaf users may
call 1-800-421-2833) or visit our website at www.vankampen.com where you can
send us an e-mail message by selecting "Contact Us."
ABOUT THE PROXY CARD
--------------------------------------------------------------------------------
Please vote on the proposed Reorganization using blue or black ink to mark an X
in one of the boxes provided on the proxy card.
APPROVAL OF REORGANIZATION- mark "For," "Against" or "Abstain"
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
PROXY
VAN KAMPEN HIGH YIELD FUND
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
FOR AGAINST ABSTAIN
1. The proposal to approve the Agreement and Plan of [ ] [ ] [ ]
Reorganization.
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN HIGH YIELD FUND
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 231-2808
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 17, 2004
A special meeting of shareholders of Van Kampen High Yield Fund, a series of
Van Kampen Trust, will be held at the offices of Van Kampen Investments Inc., 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, on November 17, 2004 at
3:00 p.m. (the "Special Meeting"), for the following purposes:
1. To approve an Agreement and Plan of Reorganization pursuant to which Van
Kampen High Yield Fund would (i) transfer all of its assets and
liabilities to Van Kampen High Income Corporate Bond Fund in exchange
solely for Class A, B and C Shares of Van Kampen High Income Corporate
Bond Fund, (ii) distribute such shares to its shareholders and (iii) be
dissolved.
2. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on August 25, 2004 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF VAN KAMPEN HIGH YIELD FUND REQUESTS THAT YOU VOTE
YOUR SHARES BY INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD,
DATING AND SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED,
WHICH IS ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE
UNITED STATES.
THE BOARD OF TRUSTEES OF VAN KAMPEN HIGH YIELD FUND RECOMMENDS THAT YOU CAST
YOUR VOTE:
FOR THE PROPOSED REORGANIZATION AS DESCRIBED IN THE PROSPECTUS/PROXY
STATEMENT.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY PROMPTLY.
For the Board of Trustees,
Stefanie Chang Yu
Vice President and Secretary
September 1, 2004
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD NO MATTER HOW MANY SHARES YOU OWN.
PROSPECTUS/PROXY STATEMENT
RELATING TO THE ACQUISITION OF THE
ASSETS AND LIABILITIES OF
VAN KAMPEN HIGH YIELD FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 231-2808
This Prospectus/Proxy Statement is furnished to you as a shareholder of Van
Kampen High Yield Fund (the "Target Fund"), a series of Van Kampen Trust. A
special meeting of shareholders of the Target Fund (the "Special Meeting") will
be held at the offices of Van Kampen Investments Inc., 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555 on November 17, 2004 at 3:00 p.m. to
consider the items that are listed below and discussed in greater detail
elsewhere in this Prospectus/Proxy Statement. If shareholders are unable to
attend the Special Meeting or any adjournment thereof, the Board of Trustees of
the Target Fund requests that they vote their shares by completing and returning
the enclosed proxy card.
The purposes of the Special Meeting are:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") pursuant to which the Target Fund would (i) transfer all of its
assets and liabilities to Van Kampen High Income Corporate Bond Fund, the
sole series of a trust of the same name, (the "Acquiring Fund") in exchange
solely for Class A, B and C Shares of the Acquiring Fund, (ii) distribute
such shares to its shareholders and (iii) be dissolved; and
2. To transact such other business as may properly be presented at the Special
Meeting or any adjournment thereof.
The Board of Trustees of the Target Fund has approved a reorganization (the
"Reorganization") by which the Target Fund, an open-end investment company,
would be reorganized into the Acquiring Fund, an open-end investment company
with investment objectives and investment policies and practices similar to
those of the Target Fund and with the same portfolio management personnel as the
Target Fund. The Target Fund and the Acquiring Fund are sometimes referred to
herein each as a "Fund" and collectively as the "Funds."
If Target Fund shareholders approve the Reorganization, the Target Fund will
transfer all of its assets and liabilities to the Acquiring Fund. The Acquiring
Fund will simultaneously issue Class A, B and C Shares to the Target Fund in an
amount equal to the value of the outstanding Class A, B and C Shares of the
Target Fund, less the expenses of the Reorganization. Immediately thereafter,
the Target Fund
will distribute these Class A, B and C Shares of the Acquiring Fund to its
shareholders. After distributing these shares, the Target Fund will be
dissolved. When the Reorganization is complete, Target Fund shareholders will
hold Class A, B and C Shares of the Acquiring Fund. The value of the Acquiring
Fund shares received in the Reorganization will equal the value of the Target
Fund shares held immediately prior to the Reorganization, less the expenses of
the Reorganization. After the Reorganization, the Acquiring Fund will continue
to operate as a registered open-end investment company with the investment
objectives and investment policies and practices described in this
Prospectus/Proxy Statement. It is anticipated that, concurrent with the
completion of the Reorganization, the Acquiring Fund will be renamed the "Van
Kampen High Yield Fund."
This Prospectus/Proxy Statement sets forth concisely the information
shareholders of the Target Fund should know before voting on the Reorganization
and constitutes an offering of Class A, B and C Shares, par value $0.01 per
share, of the Acquiring Fund only. Please read it carefully and retain it for
future reference. A Statement of Additional Information dated September 1, 2004
relating to this Prospectus/Proxy Statement (the "Reorganization SAI") has been
filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. The Funds are subject to the informational
requirements of the Securities Exchange Act of 1934, as amended, and in
accordance therewith file reports and other information with the SEC. A
Prospectus (the "Acquiring Fund Prospectus") and Statement of Additional
Information containing additional information about the Acquiring Fund, each
dated December 30, 2003 (and as currently supplemented), have been filed with
the SEC and are incorporated herein by reference. A copy of the Acquiring Fund
Prospectus accompanies this Prospectus/Proxy Statement. A Prospectus (the
"Target Fund Prospectus") and Statement of Additional Information containing
additional information about the Target Fund, each dated July 31, 2004 have been
filed with the SEC and are incorporated herein by reference. Copies of the
foregoing may be obtained without charge by calling or writing the Target Fund
or the Acquiring Fund at the telephone number or address shown above. If you
wish to request the Reorganization SAI, please ask for the "Reorganization SAI."
In addition, each Fund will furnish, without charge, a copy of its most recent
annual report and semi-annual report to a shareholder upon request. Copies of
each Fund's most recent prospectus, statement of additional information, annual
report and semiannual report can also be obtained on a website maintained by Van
Kampen Investments Inc. at www.vankampen.com. Requests for documents can also be
directed to the Van Kampen Client Relations Department by calling 1-800-231-2808
(TDD users may call 1-800-421-2833) or by writing to the respective Fund at 1
Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois 60181-5555. Reports,
other information and proxy statements filed
2
by the Funds with the SEC can be reviewed and copied at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded
from the SEC's website at www.sec.gov. Information on the operation of the SEC's
Public Reference Room may be obtained by calling the SEC at 1-202-942-8090. You
can also request copies of these materials, upon payment at the prescribed rates
of a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs, SEC, Washington, DC, 20549-0102.
The Board of Trustees of the Target Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
---------------------
No person has been authorized to give any information or make any
representation not contained in this Prospectus/Proxy Statement and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Prospectus/Proxy Statement does not constitute an offer to
sell or a solicitation of an offer to buy any securities in any jurisdiction in
which, or to any person to whom, it is unlawful to make such offer or
solicitation.
---------------------
NEITHER THE SEC NOR ANY STATE REGULATOR HAS APPROVED OR DISAPPROVED OF THESE
SHARES OR PASSED UPON THE ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. A
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Proxy Statement is September 1, 2004.
3
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 5
The Proposed Reorganization............................... 5
Background and Reasons for the Proposed Reorganization.... 5
COMPARISON OF THE TARGET FUND AND THE ACQUIRING FUND........ 7
Investment Objectives and Principal Investment
Strategies.............................................. 7
Principal Investment Risks................................ 9
Management of the Funds................................... 14
Advisory and Other Fees................................... 16
Expenses.................................................. 18
Purchase, Valuation, Redemption and Exchange of Shares.... 20
Capitalization............................................ 24
Annual Performance Information............................ 25
Comparative Performance Information....................... 26
Other Service Providers................................... 27
Governing Law............................................. 27
INFORMATION ABOUT THE REORGANIZATION........................ 28
General................................................... 28
Terms of the Agreement.................................... 29
Reasons for the Proposed Reorganization................... 31
Material Federal Income Tax Consequences of the
Reorganization.......................................... 32
Expenses of the Reorganization............................ 34
Continuation of Shareholder Accounts and Plans; Share
Certificates............................................ 35
Legal Matters............................................. 35
Shareholder Approval...................................... 35
OTHER INFORMATION........................................... 36
Shareholder Information................................... 36
Shareholder Proposals..................................... 37
Solicitation of Proxies................................... 37
Other Matters to Come Before the Meeting.................. 37
VOTING INFORMATION AND MEETING REQUIREMENTS................. 38
4
SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus/Proxy Statement and is qualified in its entirety by reference to the
more complete information contained herein. Shareholders should read the entire
Prospectus/Proxy Statement carefully.
THE PROPOSED REORGANIZATION
The Board of Trustees of the Target Fund (the "Target Fund Board"), including
the trustees who are not "interested persons" of the Target Fund (as defined in
the Investment Company Act of 1940, as amended (the "1940 Act")), has
unanimously approved the Reorganization Agreement. Subject to shareholder
approval, the Reorganization Agreement provides for:
- the transfer of all the assets and liabilities of the Target Fund to the
Acquiring Fund in exchange for Class A, B and C Shares of the Acquiring
Fund;
- the distribution of such shares to Target Fund shareholders; and
- the dissolution of the Target Fund.
If the proposed Reorganization is completed, Target Fund shareholders would
hold shares of the Acquiring Fund with an aggregate value equal to the aggregate
value of Target Fund shares owned immediately prior to the Reorganization, less
expenses of the Reorganization borne by the Target Fund.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
The Reorganization seeks to combine two substantially similar funds to achieve
certain economies of scale and other operational efficiencies. Van Kampen Asset
Management (the "Adviser"), the investment adviser to each Fund, proposed the
Reorganization and the Target Fund Board approved the proposed Reorganization,
based in part upon the similarities of the investment objectives, investment
policies and practices and the portfolio management personnel of the Funds. The
proposed Reorganization would combine the assets of these similar funds by
reorganizing the Target Fund into the Acquiring Fund. The Target Fund Board,
based upon its evaluation of all relevant information, anticipates that the
Reorganization would benefit Target Fund shareholders by (i) achieving certain
economies of scale from the Acquiring Fund's larger net asset size and the
potentially lower operating expenses associated therewith, (ii) eliminating the
duplication of services and expenses that currently exists as a result of the
separate operations of the Funds and (iii) obtaining potentially lower portfolio
transaction costs. The Target Fund Board has determined that the Reorganization
is in the best interests of shareholders of each class of the Target Fund and
that the interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the
5
Acquiring Fund has determined that the Reorganization is in the best interests
of shareholders of each class of the Acquiring Fund and that the interests of
such shareholders will not be diluted as a result of the Reorganization. As a
result of the Reorganization, however, a shareholder of either Fund will hold a
reduced percentage of ownership in the larger combined fund than he or she did
in either of the separate Funds.
The primary investment objective of the Target Fund is to seek to provide a
high level of current income. As a secondary investment objective, the Target
Fund seeks capital appreciation. The primary investment objective of the
Acquiring Fund is to seek to maximize current income. Capital appreciation is a
secondary objective of the Acquiring Fund which is sought only when consistent
with the Acquiring Fund's primary investment objective. The Funds' investment
objectives are similar, although not identical.
The Funds seek to achieve their investment objectives by pursuing similar
investment strategies. Under normal market conditions, the Target Fund's
investment adviser seeks to achieve the Target Fund's investment objectives by
investing primarily in a portfolio of lower-grade domestic corporate debt
securities. The Target Fund buys and sells securities with a view to seeking a
high level of current income and capital appreciation over the long-term. Under
normal market conditions, the Acquiring Fund's investment adviser seeks to
achieve the Acquiring Fund's investment objectives by investing primarily in a
portfolio of high-yielding, high-risk bonds and other income securities, such as
convertible securities and preferred stock. The Acquiring Fund buys and sells
medium- and lower-grade securities with a view towards seeking a high level of
current income and capital appreciation over the long-term. Both the Target Fund
and the Acquiring Fund may invest up to 35% of each of their total assets in
securities issued by foreign governments or foreign corporations and both invest
in a broad range of income securities represented by various companies and
industries and traded on various markets. The Funds' other investment policies,
practices and restrictions are substantially similar, and the Funds are managed
by the same portfolio management personnel. The Target Fund is a series of Van
Kampen Trust, a statutory trust organized under the laws of the State of
Delaware. The Acquiring Fund is the only series of a statutory trust organized
under the laws of the State of Delaware.
In determining whether to recommend approval of the proposed Reorganization to
shareholders of the Target Fund, the Target Fund Board considered a number of
factors, including, but not limited to: (i) Van Kampen Asset Management and the
same portfolio management team currently manage the assets of each of the Target
Fund and the Acquiring Fund; (ii) the expenses and advisory fees applicable to
the Target Fund and the Acquiring Fund before the Reorganization and the
estimated expense ratios of the combined fund after the Reorganization; (iii)
the comparative investment performance of the Target Fund and the Acquiring
Fund; (iv) the
6
effective duration, average yield to maturity and average credit quality of the
portfolios of each the Target Fund and the Acquiring Fund; (v) the future growth
and performance prospects of the Target Fund; (vi) the terms and conditions of
the Reorganization Agreement and whether the proposed Reorganization would
result in dilution of Target Fund shareholder interests; (vii) the advantages of
eliminating duplication of effort in marketing Funds having similar investment
objectives, investment policies and practices, and portfolio management
personnel in addition to the economies of scale potentially realized through the
combination of the two Funds; (viii) the compatibility of the Funds' investment
objectives, policies, risks and restrictions; (ix) the compatibility of the
Funds' service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; (x) the costs estimated to
be incurred by the Target Fund as a result of the Reorganization; and (xi) the
anticipated tax consequences of the Reorganization.
The Target Fund Board requests that shareholders of the Target Fund approve
the proposed Reorganization at the Special Meeting to be held on November 17,
2004. If shareholders of the Target Fund approve the Reorganization, it is
expected that the closing date of the transaction (the "Closing Date") will be
after the close of business on or about December 3, 2004, but it may be at a
different time as described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
COMPARISON OF THE TARGET FUND AND THE ACQUIRING FUND
INVESTMENT OBJECTIVES AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVES. The Target Fund's primary investment objective is to
seek to provide a high level of current income. As a secondary objective the
Target Fund seeks capital appreciation. The Acquiring Fund's primary investment
objective is to seek to maximize current income. Capital appreciation is a
secondary objective of the Acquiring Fund which is sought only when consistent
with the Acquiring Fund's primary investment objective. The Target Fund's
investment objectives are fundamental policies that may not be changed without
shareholder approval of a majority of such Fund's outstanding voting securities,
as defined in the 1940 Act. The Acquiring Fund's investment objectives may be
changed by its Board without shareholder approval, but no change is anticipated.
If the Acquiring Fund's investment objectives change, the Acquiring Fund will
notify shareholders and shareholders should consider whether the Acquiring Fund
remains an appropriate investment in light of their then current financial
position and needs. There are risks inherent in all investments in securities;
accordingly, there can be no assurance that either Fund will achieve its
investment objectives.
7
PRINCIPAL INVESTMENT STRATEGIES. Under normal market conditions, the Target
Fund's investment adviser seeks to achieve the Fund's investment objectives by
investing primarily in a portfolio of lower- grade domestic corporate debt
securities. The Target Fund also may invest up to 35% of its total assets in
debt securities of similar quality issued by foreign governments and foreign
corporations. Under normal market conditions, the Target Fund invests primarily
in securities rated at the time of purchase BB or lower by Standard & Poor's
("S&P") or rated Ba or lower by Moody's Investors Service, Inc. ("Moody's") or
comparably rated short-term securities and unrated securities determined by its
investment adviser to be of comparable quality at the time of purchase. Under
normal market conditions, the Target Fund invests at least 80% of its net assets
(plus any borrowings for investment purposes) in securities regarded as below
investment grade at the time of investment. The Target Fund's policy in the
foregoing sentence may be changed by its Board of Trustees, but no change is
anticipated; if the Target Fund's policy in the foregoing sentence changes, the
Target Fund will notify shareholders at least 60 days prior to implementation of
the change and shareholders should consider whether the Target Fund remains an
appropriate investment in light of the changes. The Fund may invest in preferred
stocks, convertible securities, zero coupon securities and payment-in-kind
securities.
The Fund also may invest up to 5% of its assets in warrants and common stocks.
Further, the Target Fund may purchase and sell derivative instruments such as
options, futures contracts, options on futures contracts, and interest rate
swaps or other interest-rate related transactions. The Target Fund invests in a
broad range of debt securities represented by various companies and industries
and traded on various markets. The Target Fund buys and sells securities with a
view to seeking a high level of current income and capital appreciation over the
long-term.
Under normal market conditions, the Acquiring Fund's investment adviser seeks to
achieve the Acquiring Fund's investment objectives by investing primarily in a
portfolio of high-yielding, high-risk bonds and other income securities,
including convertible securities and preferred stock. The Acquiring Fund may
invest up to 35% of its total assets in securities issued by foreign governments
and foreign corporations. Under normal market conditions, the Acquiring Fund
invests primarily in medium- and lower-grade income securities, which includes
securities rated at the time of purchase BBB or lower by S&P or rated Baa or
lower by Moody's and unrated securities determined by the Fund's investment
adviser to be of comparable quality at the time of purchase. Under normal market
conditions, the Acquiring Fund invests at least 80% of its net assets (plus any
borrowings for investment purposes) in high yield, high risk corporate bonds at
the time of investment. The Fund's policy in the foregoing sentence may be
changed by the Fund's Board of Trustees, but no change is anticipated; if the
Fund's policy in the foregoing sentence changes, the Fund will notify
shareholders at least 60 days prior to implementation of the change and
shareholders should consider whether the Fund remains an
8
appropriate investment in light of the changes. Under normal market conditions,
the Fund invests at least 65% of its total assets in corporate bonds and other
income securities with maturities greater than one year and, while the Fund has
no policy limiting the maturities of the debt securities in which it may invest,
the Fund's investment adviser seeks to moderate risk by normally maintaining a
portfolio duration of two to six years. Duration is a measure of the expected
life of a debt security that was developed as a more precise alternative to the
concept of "term to maturity." Duration incorporates a debt security's yield,
coupon interest payments, final maturity and call features into one measurement.
A duration calculation looks at the present value of a security's entire payment
stream, whereas term to maturity is based solely on the date of a security's
final principal repayment. The Acquiring Fund may invest in securities rated
below B by both Moody's and S&P, common stocks or other equity securities and
income securities on which interest or dividends are not being paid when such
investments are consistent with the Acquiring Fund's investment objectives or
are acquired as part of a unit consisting of a combination of income or equity
securities. Equity securities as referred to herein do not include preferred
stocks (which the Acquiring Fund considers income securities). The Acquiring
Fund will not purchase any such securities which will cause more than 20% of its
total assets to be so invested or which would cause more than 10% of its total
assets to be invested in common stocks, warrants and options on equity
securities at the time of investment. The Fund may purchase and sell certain
derivative instruments, such as options, futures contracts and options on
futures contracts. The Acquiring Fund buys and sells medium- and lower-grade
securities with a view towards seeking a high level of current income and
capital appreciation over the long-term. The Acquiring Fund invests in a broad
range of income securities represented by various companies and industries and
traded on various markets.
OTHER INVESTMENT POLICIES, PRACTICES AND RESTRICTIONS. Each Fund may engage in
repurchase agreements and each Fund may invest up to 15% of each of their net
assets in illiquid securities and certain restricted securities. The Target Fund
may lend its portfolio securities in an amount up to 25% of its net assets, and
the Acquiring Fund may lend its portfolio securities in an amount up to 10% of
its total assets, to broker-dealers, banks or other institutional borrowers of
securities.
PRINCIPAL INVESTMENT RISKS
Because of the Funds' substantial similarity, the Funds are subject to similar
principal investment risks (which are described in more detail below). As the
Target Fund invests primarily in lower-grade securities and the Acquiring Fund
invests primarily in medium- and lower-grade securities, each is subject to
special risk considerations applicable thereto. Securities that are in the
medium- or lower-grade categories generally offer higher yields than are offered
by higher-grade securities of similar maturities, but they also generally
involve greater risks, such as
9
greater credit risk, greater market risk and volatility, greater liquidity
concerns and potentially greater manager risk. In addition, the Funds are each
subject to foreign securities risks, risks of using derivative instruments and
manager risk.
RISKS OF INVESTING IN MEDIUM- AND LOWER-GRADE SECURITIES. Medium- and
lower-grade securities are considered more susceptible to nonpayment of interest
and principal or default than higher-grade securities. Increases in interest
rates or changes in the economy may significantly affect the ability of issuers
of medium- or lower-grade income securities to pay interest and to repay
principal, to meet projected financial goals or to obtain additional financing.
In the event that an issuer of securities held by the Funds experiences
difficulties in the timely payment of principal and interest and such issuer
seeks to restructure the terms of its borrowings, the Funds may incur additional
expenses and may determine to invest additional assets with respect to such
issuer or the project or projects to which the Funds' securities relate.
Further, the Funds may incur additional expenses to the extent that they are
required to seek recovery upon a default in the payment of interest or the
repayment of principal on each of their portfolio holdings, and the Funds may be
unable to obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the income securities market and as a result of real or
perceived changes in credit risk. The value of the Funds' investments can be
expected to fluctuate over time. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Income securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than income securities with shorter maturities. While neither Fund
has limitations on the maturities of the debt securities in which it may invest,
the Acquiring Fund does seek to moderate risk by normally maintaining a
portfolio duration of two to six years. However, the secondary market prices of
medium- or lower-grade securities generally are less sensitive to changes in
interest rates and are more sensitive to general adverse economic changes or
specific developments with respect to the particular issuers than are the
secondary market prices of higher-grade securities. A significant increase in
interest rates or a general economic downturn could severely disrupt the market
for medium- or lower-grade securities and adversely affect the market value of
such securities. Such events also could lead to a higher incidence of default by
issuers of medium- or lower-grade securities as compared with higher-grade
securities. In addition, changes in credit risks, interest rates, the credit
markets or periods of general economic uncertainty can be expected to result in
increased volatility in the market price of the medium- or lower-grade
securities in the Funds and thus in the net asset value of each of the Funds.
Adverse publicity and investor perceptions, whether or not based on rational
10
analysis, may affect the value, volatility and liquidity of medium- or
lower-grade securities.
The markets for medium- or lower-grade securities may be less liquid than the
markets for higher-grade securities. Liquidity relates to the ability of a fund
to sell a security in a timely manner at a price which reflects the value of
that security. To the extent that there is no established retail market for some
of the medium- and/or lower-grade securities, in which the Funds may invest,
trading in such securities may be relatively inactive. Prices of medium- or
lower-grade securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer
of medium- or lower-grade securities generally could reduce market liquidity for
such securities and make their sale by the Funds more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such a
market does exist. An economic downturn or an increase in interest rates could
severely disrupt the market for such securities and adversely affect the value
of outstanding securities or the ability of the issuers to repay principal and
interest. Further, the Funds may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist.
In addition, during periods of reduced market liquidity or in the absence of
readily available market quotations for medium- or lower-grade securities held
in the Funds' portfolios, the ability of the Funds to value their securities
becomes more difficult and the judgment of the Funds may play a greater role in
the valuation of their securities due to the reduced availability of reliable
objective data.
The Funds may invest in securities not producing immediate cash income,
including securities in default, zero coupon securities or pay-in-kind
securities. Prices on non-cash-paying instruments may be more sensitive to
changes in the issuer's financial condition, fluctuation in interest rates and
market demand/supply imbalances than cash-paying securities with similar credit
ratings, and thus may be more speculative. Special tax considerations are
associated with investing in certain lower-grade securities, such as zero coupon
or pay-in-kind securities. The Funds' investment adviser will weigh these
concerns against the expected total returns from such instruments.
The Funds' investments may include securities with the lowest-grade assigned
by recognized rating organizations and unrated securities of comparable quality.
Securities assigned the lowest grade ratings include those of companies that are
in default or are in bankruptcy or reorganization. Securities of such companies
are regarded by the rating agencies as having extremely poor prospects of ever
attaining any real investment standing and are usually available at deep
discounts from the face values of the instruments. A security purchased at a
deep discount may
11
currently pay a very high effective yield. In addition, if the financial
condition of the issuer improves, the underlying value of the security may
increase, resulting in capital appreciation. If the company defaults on its
obligations or remains in default, or if the plan of reorganization does not
provide sufficient payments for debtholders, the deep discount securities may
stop generating income and lose value or become worthless. The Funds' investment
adviser will balance the benefits of deep discount securities with their risks.
While a diversified portfolio may reduce the overall impact of a deep discount
security that is in default or loses its value, the risk cannot be eliminated.
Many medium- and lower-grade income securities are not listed for trading on
any national securities exchange, and issuers of medium- and lower-grade income
securities may choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Funds'
portfolios may consist of a higher portion of unlisted or unrated securities as
compared with an investment company that invests primarily in higher-grade
securities. Unrated securities are usually not as attractive to as many buyers
as are rated securities, a factor which may make unrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Funds and may also limit the ability of the
Funds to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Further, to the extent the Funds own or may acquire illiquid or restricted
medium- or lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
The Funds will rely on the investment adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issuer. The amount of
available information about the financial condition of certain medium- or
lower-grade issuers may be less extensive than other issuers. In its analysis,
the Funds' investment adviser may consider the credit ratings of recognized
rating organizations in evaluating securities although the investment adviser
does not rely primarily on these ratings. Credit ratings of securities rating
organizations evaluate only the safety of principal and interest payments, not
the market risk. In addition, ratings are general and not absolute standards of
quality, and credit ratings are subject to the risk that the creditworthiness of
an issuer may change and the rating agencies may fail to change such ratings in
a timely fashion. A rating downgrade does not require the Funds to dispose of a
security. The Funds' investment adviser continuously monitors the issuers of
securities held in the Funds. Additionally, since most foreign income securities
are not rated, the Funds will invest in such securities based on the analysis of
the Funds' investment adviser without any guidance from published ratings.
Because of the number of investment considerations involved in investing in
medium- or lower-grade securities and foreign income securities, achievement of
the Funds' investment objectives maybe more dependent upon the
12
credit analysis of the Funds' investment adviser than is the case with investing
in higher-grade securities.
New or proposed laws may have an impact on the market for medium- or
lower-grade securities. The Funds' investment adviser is unable at this time to
predict what effect, if any, legislation may have on the market for medium- or
lower-grade securities.
Special tax considerations are associated with investing in certain medium- or
lower-grade securities, such as zero coupon or pay-in-kind securities. The Funds
accrue income on these securities prior to the receipt of cash payments. The
Funds must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under federal income tax law and therefore,
may have to dispose of their portfolio securities to satisfy the distribution
requirements.
FOREIGN SECURITIES RISKS. Each of the Funds may invest up to 35% of its total
assets in securities of foreign governments and other foreign issuers. Thus,
they may be subject to risks not usually associated with owning securities of
U.S. issuers. These risks can include fluctuations in currency exchange rates,
political, economic or legal developments (including war or other instability,
expropriation of assets, nationalization and confiscatory taxation), the
imposition of foreign exchange limitations (including currency blockage),
withholding taxes on income or capital transactions or other restrictions,
higher transaction costs (including higher brokerage, custodial and settlement
costs and currency conversion costs) and possible difficulty in enforcing
contractual obligations or taking judicial action. Securities of foreign issuers
may not be as liquid and may be more volatile than comparable securities of
domestic issuers.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of exchanges, brokers and listed companies abroad than in
the United States and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Funds may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact yields and result in temporary periods when assets of the Funds are
not fully invested or attractive investment opportunities are foregone.
The Funds may invest in securities of issuers determined by the investment
adviser to be in developing or emerging market countries. Investments in
securities
13
of issuers in developing or emerging market countries are subject to greater
risks than investments in securities of developed countries since emerging
market countries tend to have economic structures that are less diverse and
mature and political systems that are less stable than developed countries.
RISKS OF USING DERIVATIVE INSTRUMENTS. Each of the Funds may invest in various
derivative instruments and are subject to the risks of such investments. In
general terms, a derivative instrument is one whose value depends on (or is
derived from) the value of an underlying asset, interest rate or index. Options,
futures contracts and forward contracts are examples of derivative instruments.
Derivative instruments involve risks different from direct investments in
underlying securities. These risks include imperfect correlation between the
value of the instruments and the underlying assets, risks of default by the
other party to certain transactions, risk that the transactions may result in
losses that partially or completely offset gains in portfolio positions and
risks that the transactions may not be liquid.
MANAGER RISK. As with any managed fund, the Funds' investment adviser may not
be successful in selecting the best-performing securities or investment
techniques, and the Funds' performance may lag behind that of other similar
funds.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of Trustees of each Fund is each responsible for the
overall supervision of the operations of each of the Funds and performs the
various duties imposed on the trustees of investment companies by the 1940 Act
and under applicable state law.
THE ADVISER. Van Kampen Asset Management is each Fund's investment adviser
(the "Adviser"). The Adviser is a wholly owned subsidiary of Van Kampen
Investments Inc. ("Van Kampen Investments"). Van Kampen Investments is a
diversified asset management company that administers more than three million
retail investor accounts, has extensive capabilities for managing institutional
portfolios and had more than $88 billion under management or supervision as of
June 30, 2004. Van Kampen Investments has more than 40 open-end funds, more than
30 closed-end funds and more than 2,700 unit investment trusts that are
distributed by authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of each Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The Adviser, the
Distributor and Van Kampen Investments are each located at 1221 Avenue of the
Americas, New York, New York 10020.
14
PORTFOLIO MANAGEMENT. The Funds are managed by the Adviser's Taxable Fixed
Income team. The team is made up of established investment professionals.
Current members of the team include Gordon W. Loery, an Executive Director of
the Adviser, and Joshua Givelber and Chad Liu, Vice Presidents of the Adviser.
The composition of the team may change without notice from time to time.
LEGAL PROCEEDINGS. The Adviser, certain affiliates of the Adviser, and certain
investment companies advised by the Adviser or its affiliates, including each of
the Funds, 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 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, recission 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 the above 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 Funds' financial statements for the effect, if any, of these matters.
The Adviser and one of the investment companies advised by the Adviser are
named as defendants in a recently filed class action complaint generally
alleging that the defendants breached their duties of care to long-term
shareholders of the
15
investment company by valuing portfolio securities at the closing prices of the
foreign exchanges on which they trade without accounting for significant market
information that became available after the close of the foreign exchanges but
before calculation of net asset value. As a result, the complaint alleges,
short-term traders were able to exploit stale pricing information to capture
arbitrage profits that diluted the value of shares held by long-term investors.
The complaint seeks unspecified compensatory damages, punitive damages, fees and
costs. While the defendants believe that they have meritorious defenses, the
ultimate outcome of this matter is not presently determinable at this early
stage of litigation, and no provision has been made in the financial statements
for the effect, if any, of this matter.
ADVISORY AND OTHER FEES
Each of the Funds is obligated to pay the Adviser a monthly contractual
advisory fee based on its average daily net assets. The Target Fund pays the
Adviser an advisory fee based on the schedule set forth below:
% PER
AVERAGE DAILY NET ASSETS ANNUM
------------------------ -----
First $500 million.............................. 0.75%
Over $500 million............................... 0.65%
Applying this fee schedule, the contractual advisory fees for Target Fund were
0.75% of the Target Fund's average daily net assets of the Target Fund for the
twelve-month period ended March 31, 2004, but the Target Fund paid the Adviser
at an effective rate of 0.65% due to a voluntary fee waiver by the Adviser. Any
fee waivers by the Adviser may be terminated at any time.
The Acquiring Fund pays the Adviser an advisory fee based on the schedule set
forth below:
% PER
AVERAGE DAILY NET ASSETS ANNUM
------------------------ -----
First $150 million.............................. 0.625%
Next $150 million............................... 0.550%
Over $300 million............................... 0.500%
Applying this fee schedule, the contractual advisory fees for Acquiring Fund
were 0.54% of the Acquiring Fund's average daily net assets of the Acquiring
Fund for the twelve-month period ended March 31, 2004.
The Adviser retains the right from time to time to waive all or a portion of
its management fee or to reimburse the respective Fund for all or a portion of
its other expenses. For a complete description of each Fund's advisory services,
see the section of each Fund's Prospectus entitled "Investment Advisory
Services", the
16
section of the Acquiring Fund Statement of Additional Information entitled
"Investment Advisory Agreement" and the section of the Target Fund Statement of
Additional Information entitled "Investment Advisory Agreements."
The total operating expenses of the Target Fund for the twelve-month period
ended March 31, 2004 were 1.29% for Class A Shares, 2.04% for Class B Shares and
2.04% for Class C Shares. The Adviser is currently waiving or reimbursing a
portion of the Target Fund's management fees or other expenses such that the
actual total annual operating expenses paid for the Target Fund's twelve-month
period ended March 31, 2004 were 1.19% for Class A Shares, 1.94% for Class B
Shares and 1.94% for Class C Shares. The fee waivers or expense reimbursements
can be terminated at any time.
The total operating expenses of the Acquiring Fund for the twelve-month period
ended March 31, 2004 were 1.10% of the average daily net assets for Class A
Shares and 1.85% of the average daily net assets for Class B Shares and Class C
Shares.
The Target Fund and the Acquiring Fund have adopted substantially similar
distribution plans pursuant to Rule 12b-1 under the 1940 Act and substantially
similar service plans. The amount of distribution fees and service fees charged
under these plans varies among the classes offered by each Fund. With respect to
Class A Shares, each Fund can pay up to 0.25% of its average daily net assets
attributable to Class A Shares for distribution-related expenses and for the
provision of ongoing services to holders of Class A Shares and the maintenance
of shareholder accounts. With respect to Class B Shares and Class C Shares, each
Fund can pay up to 0.75% of its average daily net assets attributable to Class B
Shares and Class C Shares for reimbursement of certain distribution-related
expenses, and each Fund can pay up to 0.25% of its average daily net assets
attributable to Class B Shares and Class C Shares for the provision of ongoing
services to holders of Class B Shares and Class C Shares and the maintenance of
shareholder accounts. Because these fees are paid out of each Fund's assets on
an on-going basis, over time these fees will increase the cost of a
shareholder's investment and may cost a shareholder more than paying other types
of sales charges. For a complete description of these arrangements with respect
to each Fund, see the section of each Fund's Prospectus entitled "Purchase of
Shares" and the section of each Fund's Statement of Additional Information
entitled "Distribution and Service."
17
EXPENSES
The table below sets forth the fees and expenses that investors may pay to buy
and hold shares of each of the Target Fund and the Acquiring Fund, including (i)
the fees and expenses paid by the Acquiring Fund for the twelve-month period
ended March 31, 2004, (ii) the fees and expenses paid by the Target Fund for the
twelve-month period ended March 31, 2004 and (iii) pro forma fees and expenses
for the Acquiring Fund for the twelve-month period ended March 31, 2004 assuming
the Reorganization had been completed as of the beginning of such period.
CLASS A SHARES CLASS B SHARES
-------------------------------- --------------------------------
Actual Pro Forma Actual Pro Forma
------------------- --------- ------------------- ---------
ACQUIRING TARGET ACQUIRING ACQUIRING TARGET ACQUIRING
FUND FUND FUND FUND FUND FUND
--------- ------ --------- --------- ------ ---------
Shareholder Fees
(fees paid directly from your
investment)
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price)... 4.75%(1) 4.75%(1) 4.75%(1) None None None
Maximum deferred sales charge (as
a percentage of the lesser of
the original purchase price or
redemption proceeds)............ None(2) None(2) None(2) 4.00%(3) 4.00%(3) 4.00%(3)
Annual Fund Operating Expenses
(expenses that are deducted from
fund assets)
Management fees................... 0.54% 0.75% 0.53% 0.54% 0.75% 0.53%
Distribution and/or service (12b-1
fees)(6)........................ 0.25% 0.25% 0.25% 1.00%(7) 1.00%(7) 1.00%
Other expenses(5)................. 0.31% 0.29% 0.29% 0.31% 0.29% 0.29%
Total annual fund operating
expenses(5).................. 1.10% 1.29% 1.07% 1.85% 2.04% 1.82%
CLASS C SHARES
--------------------------------
Actual Pro Forma
------------------- ---------
ACQUIRING TARGET ACQUIRING
FUND FUND FUND
--------- ------ ---------
Shareholder Fees
(fees paid directly from your
investment)
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price)... None None None
Maximum deferred sales charge (as
a percentage of the lesser of
the original purchase price or
redemption proceeds)............ 1.00%(4) 1.00%(4) 1.00%(4)
Annual Fund Operating Expenses
(expenses that are deducted from
fund assets)
Management fees................... 0.54% 0.75% 0.53%
Distribution and/or service (12b-1
fees)(6)........................ 1.00%(7) 1.00%(7) 1.00%
Other expenses(5)................. 0.31% 0.29% 0.29%
Total annual fund operating
expenses(5).................. 1.85% 2.04% 1.82%
---------------
(1) Reduced for purchases of $100,000 and over. Class A Shares of the Acquiring
Fund received pursuant to the Reorganization will not be subject to a sales
charge.
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase.
(3) Class B Shares of each Fund are subject to a deferred sales charge equal to
4.00% of the lesser of the then current net asset value or the original
purchase price on Class B Shares redeemed during the first year after
purchase, which charge is reduced to zero after a five year period in the
case of the Acquiring Fund or a six year period in the case of the Target
Fund as follows:
Acquiring Fund: Year 1 -- 4.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year 4 --
2.50%; Year 5 -- 1.50%; Year 6 and after -- 0.00%
Target Fund: Year 1 -- 4.00%; Year 2 -- 3.75%; Year 3 -- 3.50%; Year 4 --
2.50%; Year 5 -- 1.50%; Year 6 -- 1.00%; Year 7 and after --
0.00%
Class B Shares of the Acquiring Fund received by shareholders in the
Reorganization will be subject to the deferred sales charge schedule of the
Acquiring Fund. The holding period for such shares will be measured from the
earlier of the time (i) the holder purchased such shares from the Target
Fund or (ii) the holder purchased shares of any other Van Kampen fund and
subsequently exchanged them for shares of the Target Fund.
(4) Class C Shares of each Fund are subject to a deferred sales charge equal to
1.00% of the lesser of the then current net asset value or the original
purchase price on Class C Shares redeemed during the first year after
purchase, which charge is reduced to 0.00% thereafter. The holding period of
Class C Shares received by shareholders in the Reorganization will be
measured from the earlier of the time (i) the holder purchased such shares
from the Target Fund or (ii) the holder purchased shares of any other Van
Kampen fund and subsequently exchanged them for shares of the Target Fund.
(5) Because of a fee waiver or expense reimbursements made by the Adviser, the
actual total annual fund operating expenses paid for the Target Fund's
twelve-month period ended March 31, 2004 were 1.19% for Class A Shares and
1.94% for Class B Shares and Class C Shares. The fee waivers or expense
reimbursements made by the Adviser can be terminated at any time.
(6) Class A Shares are subject to a combined annual distribution and service fee
of up to 0.25% of the average daily net assets attributable to such class of
shares. Class B Shares and Class C Shares are each subject to a combined
annual distribution and service fee of up to 1.00% of the average daily net
assets attributable to such class of shares.
(7) While Class B Shares and Class C Shares do not have any front-end sales
charges, their higher ongoing annual expenses (due to higher 12b-1 and
service fees) mean that over time you could end up paying more for these
shares than if you were to pay front-end sales charges for Class A Shares.
18
EXAMPLES. The following examples are intended to help you compare the costs of
investing in the Acquiring Fund, both before and pro forma after the
Reorganization, with the costs of investing in the Target Fund. The examples
assume that you invest $10,000 in each Fund for the time periods indicated and
contemplate two scenarios: (i) that you redeem all of your shares at the end of
those periods and (ii) that you do not redeem your shares at the end of those
periods. The examples also assume that your investments each have a 5% return
each year and that each Fund's operating expenses remain the same each year
(except the ten-year amounts for Class B Shares, which reflect the conversion to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased). Although your actual returns may be higher or lower,
based on these assumptions your costs would be:
CLASS A SHARES CLASS B SHARES
-------------------------------- --------------------------------
Actual Pro Forma Actual Pro Forma
------------------- --------- ------------------- ---------
ACQUIRING TARGET ACQUIRING ACQUIRING TARGET ACQUIRING
FUND FUND FUND FUND FUND FUND
--------- ------ --------- --------- ------ ---------
Total operating expenses assuming
redemption at the end of the period
One year.......................... $ 582 $ 600 $ 579 $ 588 $ 607 $ 585
Three years....................... $ 808 $ 865 $ 799 $ 882 $ 990 $ 873
Five years........................ $1,052 $1,149 $1,037 $1,151 $1,248 $1,135
Ten years......................... $1,752 $1,958 $1,719 $1,973* $2,176* $1,940*
Total operating expenses assuming
no redemption at the end of the
period
One year.......................... $ 582 $ 600 $ 579 $ 188 $ 207 $ 185
Three years....................... $ 808 $ 865 $ 799 $ 582 $ 640 $ 573
Five years........................ $1,052 $1,149 $1,037 $1,001 $1,098 $ 985
Ten years......................... $1,752 $1,958 $1,719 $1,973* $2,176* $1,940*
CLASS C SHARES
--------------------------------
Actual Pro Forma
------------------- ---------
ACQUIRING TARGET ACQUIRING
FUND FUND FUND
--------- ------ ---------
Total operating expenses assuming
redemption at the end of the period
One year.......................... $ 288 $ 307 $ 285
Three years....................... $ 582 $ 640 $ 573
Five years........................ $1,001 $1,098 $ 985
Ten years......................... $2,169 $2,369 $2,137
Total operating expenses assuming
no redemption at the end of the
period
One year.......................... $ 188 $ 207 $ 185
Three years....................... $ 582 $ 640 $ 573
Five years........................ $1,001 $1,098 $ 985
Ten years......................... $2,169 $2,369 $2,137
---------------
* Based on conversion to Class A Shares eight years after the end of the
calendar month in which the shares were purchased.
19
PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARES
Each Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. Other classes of shares of a Fund may be offered
through one or more separate prospectuses of such Fund. By offering multiple
classes of shares, each Fund permits an investor to choose the class of shares
that is most beneficial given the type of investor, the amount to be invested
and the length of time the investor expects to hold the shares.
Each class of shares of a Fund represents an interest in the same portfolio of
investments of such Fund and has the same rights except that (i) Class A Shares
generally bear the sales charge expenses at the time of purchase while Class B
Shares and Class C Shares generally bear the sales charge expenses at the time
of redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described above)
under which the class's distribution fee and/or service fee is paid, (iii) each
class of shares has different exchange privileges, (iv) certain classes of
shares are subject to a conversion feature and (v) certain classes of shares
have different shareholder service options available.
The offering price of each Fund's shares is based upon the Fund's net asset
value per share (plus sales charges, where applicable). The net asset values per
share of the Class A Shares, Class B Shares and Class C Shares are generally
expected to be substantially the same. The differences among the classes' per
share net asset values reflect the daily expense accruals of the higher
distribution fees and transfer agency costs applicable to the Class B Shares and
Class C Shares and the differential in the dividends that may be paid on each
class of shares.
The net asset value per share for each class of shares of each Fund is
determined once daily as of the close of trading on the New York Stock Exchange
(the "Exchange") (currently 4:00 p.m., New York time) each day when the Exchange
is open for trading except on any day on which no purchase or redemption orders
are received or there is not a sufficient degree of trading in that Fund's
portfolio securities such that the Fund's net asset value per share might be
materially affected. The Board of each Fund reserves the right to calculate the
net asset value per share and adjust the offering price more frequently than
once daily if deemed desirable. Net asset value per share for each class of a
Fund is determined by dividing the value of the Fund's portfolio securities,
cash and other assets (including accrued interest) attributable to such class,
less all liabilities (including accrued expenses) attributable to such class, by
the total number of shares of the class outstanding. Such computation is made by
using prices as of the close of trading on the Exchange and (i) valuing
securities listed or traded on a domestic securities exchange at the last
reported sale price or, if there has been no sale that day, at the
20
mean between the last reported bid and asked prices and valuing securities
listed or traded on a foreign securities exchange at the last reported sale
price or the latest bid price, (ii) valuing over-the-counter securities at the
NASDAQ Official Closing Price or, if there has been no sale that day, at the
mean between the last reported bid and asked prices, (iii) valuing unlisted
securities at the mean between the last reported bid and asked prices obtained
from reputable brokers and (iv) valuing any securities for which market
quotations are not readily available and any other assets at their fair value as
determined in good faith by the Adviser in accordance with procedures
established by each Fund's Board. In cases where a security is traded on more
than one exchange, the security is valued on the exchange designated as the
primary market. Securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value.
Class A Shares of each Fund are subject to an initial sales charge of up to
4.75%. The initial sales charge applicable to Class A Shares of the Acquiring
Fund will be waived for Class A Shares acquired in the Reorganization. Any
subsequent purchases of Class A Shares of the Acquiring Fund after the
Reorganization will be subject to an initial maximum sales charge of up to 4.75%
of the offering price, excluding Class A Shares purchased through the dividend
reinvestment plan. The initial sales charge on Class A Shares is reduced on
investments of $100,000 or more as follows:
INITIAL
SALES CHARGE
(AS % OF
OFFERING PRICE)
SIZE OF INVESTMENT ---------------
Less than $100,000................................. 4.75%
$100,000 but less than $250,000.................... 3.75%
$250,000 but less than $500,000.................... 2.75%
$500,000 but less than $1,000,000.................. 2.00%
$1,000,000 or more................................. 0.00%
Purchases of Class A Shares of each Fund in amounts of $1 million or more are
not subject to an initial sales charge, but a contingent deferred sales charge
of up to 1.00% may be imposed on certain redemptions made within the first year
of purchase. No contingent deferred sales charge will be imposed on Class A
Shares of the Target Fund in connection with the Reorganization.
Class B Shares of each Fund do not incur a sales charge when purchased, but
generally are subject to a contingent deferred sales charge of 4.00% of the
lesser of the then current net asset value or the original purchase price on
Class B Shares redeemed during the first year after purchase, which charge is
reduced to zero after
21
a six year period in the case of the Target Fund or a five year period in the
case of the Acquiring Fund as follows:
CONTINGENT DEFERRED
SALES CHARGE
(AS A % OF DOLLAR AMOUNT
SUBJECT TO CHARGE)
-----------------------------
YEAR SINCE PURCHASE TARGET FUND ACQUIRING FUND
------------------- ----------- --------------
First.................................. 4.00% 4.00%
Second................................. 3.75% 4.00%
Third.................................. 3.50% 3.00%
Fourth................................. 2.50% 2.50%
Fifth.................................. 1.50% 1.50%
Sixth.................................. 1.00% None
Seventh and After...................... None None
Class B Shares of the Acquiring Fund received by shareholders in the
Reorganization will be subject to the deferred sales charge schedule imposed by
the Target Fund, as described above.
Class C Shares of each Fund do not incur a sales charge when purchased, but
generally are subject to a contingent deferred sales charge of 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C shares redeemed during the first year after purchase, which sales charge
is reduced to zero thereafter. Neither Fund will accept a purchase order for
Class C Shares in the amount of $1 million or more.
No contingent deferred sales charge will be imposed on Class B Shares or Class
C Shares of the Target Fund in connection with the Reorganization. The holding
period and conversion schedule for Class B Shares or Class C Shares of the
Acquiring Fund received in connection with the Reorganization will be measured
from the earlier time (i) the holder purchased such shares from the Target Fund
or (ii) the holder purchased such shares from any other Van Kampen fund advised
by the Adviser or its affiliates and distributed by the Distributor and
subsequently exchanged them for shares of the Target Fund.
Shares of each Fund may be purchased by check, by electronic transfer, by bank
wire and by exchange from certain other Van Kampen funds advised by the Adviser
or its affiliates and distributed by the Distributor. For a complete description
regarding purchase of shares and exchange of shares of each Fund, see the
sections of each Fund's prospectus entitled "Purchase of Shares" and
"Shareholder Services -- Exchange Privilege."
Shares of each Fund properly presented for redemption may be redeemed or
exchanged at the next determined net asset value per share (other than any
applicable sales charge). Shares of each Fund may be redeemed or exchanged by
mail or by special redemption privileges (telephone exchange, telephone
22
redemption, by check or electronic transfer). If a shareholder of either Fund
attempts to redeem shares within a short time after they have been purchased by
check, the respective Fund may delay payment of the redemption proceeds until
such Fund can verify that payment for the purchase of the shares has been (or
will be) received, usually a period of up to 15 days.
The Target Fund has been closed to new investors since July 12, 2004. No
further purchase of shares by existing shareholders of the Target Fund may be
made by existing shareholders after the date on which the shareholders of the
Target Fund approve the Reorganization, and the share transfer books of the
Target Fund will be permanently closed as of the Closing Date. Only redemption
requests and transfer instructions received in proper form by the close of
business on the day prior to the Closing Date will be fulfilled by the Target
Fund. Redemption requests or transfer instructions received by the Target Fund
after that date will be treated as a request for the redemption or instructions
for the transfer of shares of the Acquiring Fund. Such requests will be
forwarded to the Acquiring Fund and credited to the respective shareholder
account resulting from the Reorganization. For a complete description of the
redemption arrangements for each Fund, see the section of each Fund's prospectus
entitled "Redemption of Shares".
23
CAPITALIZATION
The following table sets forth the capitalization of the Target Fund and the
Acquiring Fund as of March 31, 2004, and the pro forma capitalization of the
combined fund as if the Reorganization had occurred on that date. These numbers
may differ as of the Closing Date.
CAPITALIZATION AS OF MARCH 31, 2004 (UNAUDITED)
Actual Pro Forma
---------------------- ---------
TARGET ACQUIRING ACQUIRING
FUND FUND FUND
------ --------- ---------
Net assets (in thousands)
Class A Shares.................... $ 198,107 $ 389,196 $ 587,003
Class B Shares.................... 94,806 175,770 270,435
Class C Shares.................... 30,363 43,348 73,670
Total........................... 323,276 608,314 931,108
Net asset value per share
Class A Shares.................... $ 5.49 $ 3.62 $ 3.62
Class B Shares.................... 5.52 3.63 3.63
Class C Shares.................... 5.51 3.60 3.60
Shares outstanding (in thousands)
Class A Shares.................... 36,092 107,502 162,178
Class B Shares.................... 17,184 48,358 74,451
Class C Shares.................... 5,514 12,053 20,479
Total........................... 58,790 167,913 257,108
Shares authorized
Class A Shares.................... Unlimited Unlimited Unlimited
Class B Shares.................... Unlimited Unlimited Unlimited
Class C Shares.................... Unlimited Unlimited Unlimited
The pro forma net assets and net asset value per share reflect the payment of
reorganization expenses of approximately $296,000 by the Target Fund, allocated
among the classes as follows: $181,000 for Class A Shares, $87,000 for Class B
Shares and $28,000 for Class C Shares, and the payment of reorganization
expenses of approximately 186,000 by the Acquiring Fund, allocated among the
classes as follows: $119,000 for Class A Shares, $54,000 for Class B Shares and
$13,000 for Class C Shares. The pro forma shares outstanding reflect the
issuance by the Acquiring Fund of approximately 54,676,000 Class A Shares,
26,093,000 Class B Shares and 8,426,000 Class C Shares reflecting the exchange
of the assets and liabilities of the Target Fund for newly issued shares of the
Acquiring Fund at the pro forma net asset value per share. The aggregate value
of the shares of the Acquiring Fund that a Target Fund shareholder receives in
the Reorganization will equal the aggregate value of the Target Fund shares
owned immediately prior to the Reorganization. It is not anticipated that the
Acquiring Fund will sell assets of the Target Fund acquired in the
Reorganization other than in the ordinary course of business.
24
ANNUAL PERFORMANCE INFORMATION
The following chart shows the annual returns of each Fund's Class A Shares for
the calendar years indicated. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower.
[BAR GRAPH]
ACQUIRING FUND TARGET FUND
-------------- -----------
1994 -3.62 -3.34
1995 17.43 17.52
1996 13.65 12.48
1997 12.24 10.97
1998 0.46 -1.45
1999 3.90 6.29
2000 -8.22 -8.80
2001 -2.65 -5.22
2002 -9.42 -9.39
2003 24.17 24.55
The Target Fund's return for the six-month period ended June 30, 2004 for
Class A Shares was 1.51%. The Acquiring Fund's return for the six-month period
ended June 30, 2004 for Class A Shares was 1.59%. As a result of market
activity, current performance may vary from the figures shown.
During its ten-year period shown in the bar chart, the Target Fund's highest
quarterly return for Class A Shares was 7.95% (for the quarter ended June 30,
2003) and its lowest quarterly return for Class A Shares was -8.36% (for the
quarter ended September 30, 1998). During its ten-year period shown in the bar
chart, the Acquiring Fund's highest quarterly return for Class A Shares was
8.27% (for the quarter ended June 30, 2003) and its lowest quarterly return for
Class A Shares was -8.20% (for the quarter ended September 30, 1998).
The annual returns for each Fund's Class B Shares and Class C Shares would be
substantially similar to those shown for Class A Shares because all of each
Fund's shares are invested in the same respective portfolio of securities;
however, the actual annual returns for Class B Shares and Class C Shares would
be lower than the annual returns shown for each Fund's Class A Shares because of
differences in expenses borne by each class of shares.
25
COMPARATIVE PERFORMANCE INFORMATION
As a basis for evaluating each Fund's performance and risks, the tables below
show how each Fund's performance compares with a broad-based market index that
the Adviser believes is an appropriate benchmark for each Fund. The Target
Fund's performance is compared with the performance of the Credit Suisse First
Boston High Yield Index*, while the Acquiring Fund's performance is compared
with the performance of the Chase Global High Yield Index.** The Acquiring Fund
is also compared with the Lipper High Yield Bond Fund Index, an index of funds
with similar investment objectives as the Acquiring Fund. Each Fund's
performance figures listed below include the maximum sales charges paid by
investors. The indices' performance figures do not include any commissions,
sales charges or taxes that would be paid by investors purchasing the securities
represented by either index. An investment cannot be made directly in either
index. Average annual total returns are shown for the periods ended December 31,
2003. Remember that past performance of a Fund is not indicative of its future
performance.
In addition to before-tax returns for each class of shares of each Fund, the
tables also show after-tax returns for the Funds' Class A Shares in two ways:
(i) after taxes on distributions and (ii) after taxes on distributions and sale
of the Funds' shares. The after-tax returns for the Funds' Class B Shares and
Class C Shares will vary from the Class A Shares' returns. After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates during the periods shown and do not reflect the impact of state and local
taxes. Actual after-tax returns depend on an investor's tax situation and may
differ from those shown, and after-tax returns shown are not relevant to
investors who hold their Fund shares through tax-deferred arrangements, such as
401(k) plans or individual retirement accounts. An after-tax return may be
higher than the before-tax return due to an assumed benefit from any capital
loss that would have been realized had Fund shares been sold at the end of the
relevant period.
26
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2003
TARGET FUND ACQUIRING FUND
------------------------- -------------------------
PAST 1 PAST 5 PAST 10 PAST 1 PAST 5 PAST 10
YEAR YEARS YEARS YEAR YEARS YEARS
------ ------ ------- ------ ------ -------
CLASS A SHARES
Return Before Taxes.......... 18.60% -0.26% 3.27% 18.20% -0.12% 3.73%
Return After Taxes on
Distributions.............. 15.98% -3.96% -0.42% 15.72% -3.97% -0.19%
Return After Taxes on
Distributions and Sale of
Fund Shares................ 11.94% -2.48% 0.50% 11.70% -2.46% 0.73%
CLASS B SHARES
Return Before Taxes.......... 19.76% -0.20% 3.29%**** 19.17% -0.09% 3.75%****
CLASS C SHARES
Return Before Taxes.......... 22.81% -0.03% 2.97% 22.10% 0.06% 3.40%
CREDIT SUISSE FIRST BOSTON HIGH
YIELD INDEX*................. 27.94% 6.44% 7.30% N/A N/A N/A
CHASE GLOBAL HIGH YIELD
INDEX**...................... N/A N/A N/A 27.50% 5.99% 7.27%
LIPPER HIGH YIELD BOND FUND
INDEX***..................... N/A N/A N/A 26.36% 2.92% 5.25%
---------------
* The Credit Suisse First Boston High Yield Index is a broad-based, unmanaged
index that reflects the general performance of a wide range of selected
bonds within the public high yield debt market.
** The Chase Global High Yield Index is an unmanaged, broad-based index that
reflects the general performance of the global high yield corporate debt
market, including domestic and international issues.
*** The Lipper High Yield Bond Fund Index is an index of funds with investment
objectives similar to those of the Acquiring Fund.
**** The "Past 10 Years" performance for Class B Shares of each Fund reflects
the conversion of such shares into Class A Shares six years after the end
of the calendar month in which the shares were purchased. Class B Shares
purchased on or after June 1, 1996 will convert to Class A Shares eight
years after the end of the calendar month in which the shares were
purchased.
OTHER SERVICE PROVIDERS
The transfer agent for each Fund is Van Kampen Investor Services Inc., a
wholly owned subsidiary of Van Kampen Investments. The custodian for each Fund
is State Street Bank and Trust Company. The independent registered public
accounting firm for each Fund is Ernst & Young LLP.
GOVERNING LAW
The Target Fund is a series of the Van Kampen Trust, a statutory trust
organized under the laws of the State of Delaware. The Acquiring Fund is the
only series of a statutory trust organized under the laws of the State of
Delaware. Delaware
27
statutory trust law is specifically drafted to accommodate some of the unique
corporate governance needs of management investment companies. Each Fund is
subject to federal securities laws, including the 1940 Act and the rules and
regulations promulgated by SEC thereunder, and applicable state securities laws.
Consistent with Delaware law, each Fund has authorized the issuance of an
unlimited number of shares. The Target Fund's and the Acquiring Fund's
organizational documents allow each Fund's Board to create one or more separate
investment portfolios and to establish a separate series of shares for each
portfolio and to further subdivide the shares of a series into one or more
classes.
Neither Fund is required, and neither Fund anticipates, holding annual
meetings of its shareholders. Each Fund has certain mechanics whereby
shareholders can call a special meeting of their Fund. Shareholders generally
have the right to approve investment advisory agreements, elect
trustees/directors, change fundamental investment policies, ratify the selection
of independent auditors and vote on other matters required by law or deemed
desirable by their Boards.
The business of each of the Target Fund and the Acquiring Fund is supervised
by the respective Board of such Fund. Each Board consists of the same members.
For the Target Fund and the Acquiring Fund, trustee vacancies may be filled by
approval of a majority of the trustees then in office subject to provisions of
the 1940 Act. Trustees terms are until the later of the election of such
person's successor or resignation or removal. Each Fund has the same mandatory
retirement age provisions for trustees. Trustees of the Target Fund may be
removed with or without cause by vote of two-thirds of the shares then
outstanding or by vote of two-thirds of the number of trustees prior to such
removal. Trustees of the Acquiring Fund may be removed by vote of a majority of
the shares then outstanding or with cause at any time by vote of two-thirds of
the number of trustees prior to such removal.
Each Fund's organizational documents are filed as part of each Fund's
registration statements with the SEC, and shareholders may obtain copies of such
documents as described on page 2 of this Prospectus/Proxy Statement.
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement, the Target Fund will transfer all of its
assets and liabilities to the Acquiring Fund in exchange for Class A, B and C
Shares of the Acquiring Fund. The Class A, B and C Shares of the Acquiring Fund
issued to the Target Fund will have an aggregate value equal to the aggregate
value of the Target Fund shares immediately prior to the Reorganization less the
expenses of the Reorganization. Upon receipt by the Target Fund of the Class A,
B and C Shares of
28
the Acquiring Fund, the Target Fund will distribute the shares to Target Fund
shareholders. Then, as soon as practicable after the Closing Date, the Target
Fund will be dissolved under applicable state law.
The Target Fund will distribute the Class A, B and C Shares of the Acquiring
Fund received by it pro rata to Target Fund shareholders of record in exchange
for their shares in the Target Fund. This distribution will be accomplished by
opening new accounts on the books of the Acquiring Fund in the names of the
Target Fund shareholders and transferring to those shareholder accounts the
Class A, B and C Shares of the Acquiring Fund previously credited on those books
to the accounts of the Target Fund shareholders. Each newly-opened account on
the books of the Acquiring Fund for the previous Target Fund shareholders will
represent the respective pro rata number of Class A, B and C Shares of the
Acquiring Fund due such shareholder.
Accordingly, as a result of the Reorganization, each Target Fund shareholder
would own Class A, B and C Shares of the Acquiring Fund that would have an
aggregate value immediately after the Closing Date equal to the aggregate value
of that shareholder's Target Fund shares immediately prior to the Closing Date,
less the applicable pro rata share of the expenses of the Reorganization. The
Reorganization will not result in dilution of either Fund's shares. However, as
a result of the Reorganization, a shareholder of either of the Target Fund or
the Acquiring Fund will hold a reduced percentage of ownership in the larger
combined fund than the shareholder did in either of the separate Funds.
No sales charge or fee of any kind will be assessed to the Target Fund
shareholders in connection with their receipt of Class A, B and C Shares of the
Acquiring Fund in the Reorganization.
TERMS OF THE AGREEMENT
Pursuant to the Agreement, the Acquiring Fund will acquire all of the assets
and the liabilities of the Target Fund on the date of the Closing in
consideration for Class A, B and C Shares of the Acquiring Fund.
Subject to the Target Fund's shareholders approving the Reorganization, the
Closing Date will be within 15 business days after the later of the receipt of
all necessary regulatory approvals and the final adjournment of the Special
Meeting or such later date as soon as practicable thereafter as the Acquiring
Fund and the Target Fund may mutually agree.
On the Closing Date, the Target Fund will transfer to the Acquiring Fund all
of its assets and liabilities. The Acquiring Fund will in turn transfer to the
Target Fund a number of its Class A, B and C Shares equal in value to the value
of the net assets of the Target Fund transferred to the Acquiring Fund as of the
Closing Date, as determined in accordance with the valuation method described in
the Acquiring
29
Fund's then current prospectus, less the expenses of the Reorganization. In
order to minimize any potential for undesirable federal income and excise tax
consequences in connection with the Reorganization, the Target Fund will
distribute on or before the Closing Date all or substantially all of their
respective undistributed net investment income (including net capital gains) as
of such date.
The Target Fund expects to distribute the Class A, B and C Shares of the
Acquiring Fund to the shareholders of the Target Fund promptly after the Closing
Date and then terminate its registration under the 1940 Act and dissolve
pursuant to a plan of dissolution adopted by the Board.
The Acquiring Fund and the Target Fund have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
- the approval of the Reorganization by the Target Fund's shareholders;
- the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
- the receipt of all necessary approvals, registrations and exemptions under
federal and state laws;
- the truth in all material respects as of the Closing Date of the
representations and warranties of the parties and performance and
compliance in all material respects with the parties' agreements,
obligations and covenants required by the Agreement;
- the effectiveness under applicable law of the registration statement of
the Acquiring Fund of which this Prospectus/Proxy Statement forms a part
and the absence of any stop orders under the Securities Act of 1933, as
amended, pertaining thereto; and
- the receipt of opinions of counsel relating to, among other things, the
tax free nature of the Reorganization.
The Agreement may be terminated or amended by the mutual consent of the
parties either before or after approval thereof by the shareholders of the
Target Fund, provided that no such amendment after such approval shall be made
if it would have a material adverse affect on the interests of Target Fund
shareholders. The Agreement also may be terminated by the non-breaching party if
there has been a material misrepresentation, material breach of any
representation or warranty, material breach of contract or failure of any
condition to closing.
30
The Target Fund Board recommends that you vote to approve the Reorganization,
as it believes the Reorganization is in the best interests of the Target Fund's
shareholders (as described more fully in "Reasons for the Proposed
Reorganization" below) and that the interests of the Target Fund's existing
shareholders will not be diluted as a result of consummation of the proposed
Reorganization.
REASONS FOR THE PROPOSED REORGANIZATION
In determining whether to recommend approval of the proposed Reorganization to
shareholders of the Target Fund, the Target Fund Board considered a number of
factors, including, but not limited to: (i) the Adviser and the same portfolio
management personnel currently manage the assets of each of the Target Fund and
the Acquiring Fund; (ii) the expenses and advisory fees applicable to the Target
Fund and the Acquiring Fund before the Reorganization and the estimated expense
ratios of the combined fund after the Reorganization; (iii) the comparative
investment performance of the Target Fund and the Acquiring Fund; (iv) the
effective duration, average yield to maturity and average credit quality of the
Target Fund and the Acquiring Fund; (v) the future growth and performance
prospects of the Target Fund; (vi) the terms and conditions of the
Reorganization Agreement and whether the proposed Reorganization would result in
dilution of Target Fund shareholder interests; (vii) the advantages of
eliminating duplication of effort in marketing funds having similar investment
objectives, investment policies and practices and portfolio management personnel
in addition to the economies of scale potentially realized through the
combination of the two funds; (viii) the compatibility of the Funds' investment
objectives, policies, risks and restrictions; (ix) the compatibility of the
Funds' service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; (x) the costs estimated to
be incurred by the Funds as a result of the Reorganization; and (xi) the
anticipated tax consequences of the Reorganization.
Based upon its evaluation of all relevant information, the Target Fund Board
anticipates that the Reorganization would benefit Target Fund shareholders in
the following ways:
- Achievement of Economies of Scale and Reduced Per Share Expenses.
Combining the Target Fund with the Acquiring Fund should lead to reduced
total operating expenses for shareholders of the Target Fund, on a per
share basis, by allowing fixed and relatively fixed costs, such as
accounting, legal and printing expenses, to be spread over a larger asset
base. Any reductions in expenses on a per share basis should, in turn,
have a favorable effect on the relative total return to shareholders of
the Target Fund.
- Elimination of Separate Operations. Consolidating the Target Fund and the
Acquiring Fund should eliminate the duplication of services and expenses
31
that currently exists as a result of their separate operations. Consolidating
the separate operations of the Target Fund with those of the Acquiring Fund
should promote more efficient operations on a more cost-effective basis.
- Benefits to the Portfolio Management Process. The larger net asset size of
the combined fund should generally permit it to purchase larger individual
portfolio investments that may result in reduced transaction costs or more
favorable pricing.
The Target Fund Board has determined that the Reorganization is in the best
interests of shareholders of each class of the Target Fund and that the
interests of such shareholders will not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of the Acquiring Fund has
determined that the Reorganization is in the best interests of shareholders of
each class of the Acquiring Fund and that the interests of such shareholders
will not be diluted as a result of the Reorganization. As a result of the
Reorganization, however, a shareholder of either Fund will hold a reduced
percentage of ownership in the larger combined fund than he or she did in either
of the separate Funds.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
court decisions, published positions of the Internal Revenue Service ("IRS") and
other applicable authorities, all as in effect on the date hereof and all of
which are subject to change or differing interpretations (possibly with
retroactive effect). The discussion is limited to U.S. persons who hold shares
of the Target Fund as capital assets for federal income tax purposes. This
summary does not address all of the federal income tax consequences that may be
relevant to a particular shareholder or to shareholders who may be subject to
special treatment under federal income tax laws. No ruling has been or will be
obtained from the IRS regarding any matter relating to the Reorganization. No
assurance can be given that the IRS would not assert a position contrary to any
of the tax aspects described below. Shareholders must consult their own tax
advisers as to the federal income tax consequences of the Reorganization, as
well as the effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP, special counsel to each Fund ("Skadden Arps"), dated as of the Closing
Date, regarding the characterization of the Reorganization as a "reorganization"
within the meaning of Section 368(a) of the Code. As such a reorganiza-
32
tion, the federal income tax consequences of the Reorganization can be
summarized as follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer of the assets of the Target Fund to the Acquiring
Fund in exchange solely for the Class A, B or C Shares of the Acquiring
Fund and the assumption by the Acquiring Fund of the liabilities of the
Target Fund and the subsequent liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges all of his, her or its Class A, B or C Shares of the Target Fund
solely for, respectively, the Class A, B or C Shares of the Acquiring Fund
pursuant to the Reorganization.
- The aggregate tax basis of the Class A, B or C Shares of the Acquiring
Fund received by a shareholder of the Target Fund pursuant to the
Reorganization will be the same as the aggregate tax basis of the Class A,
B or C Shares of the Target Fund surrendered in exchange therefor.
- The holding period of the Class A, B or C Shares of the Acquiring Fund
received by a shareholder of the Target Fund pursuant to the
Reorganization will include the holding period of the Class A, B or C
Shares of the Target Fund surrendered in exchange therefor.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will, in each instance,
equal the tax basis of such assets in the hands of the Target Fund
immediately prior to the Reorganization, and the Acquiring Fund's holding
period of such assets will, in each instance, include the period during
which the assets were held by the Target Fund.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Acquiring Fund and the Target
Fund and assume, among other things, that the Reorganization will be consummated
in accordance with the operative documents. An opinion of counsel is not binding
on the IRS or any court.
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Code, which
are the same rules currently applicable to the Target Fund and its shareholders.
Shareholders of the Target Fund may redeem their shares or exchange their
shares for shares of certain other funds distributed by the Distributor at any
time prior to the closing of the Reorganization. See "Purchase, Valuation,
Redemption and Exchange of Shares" above. Redemptions of shares and such
exchanges of
33
shares into such other funds (other than the Acquiring Fund) generally are
taxable transactions. Shareholders should consult with their own tax advisers in
this regard.
The Target Fund has capital loss carryforwards that, in the absence of this
Reorganization, would generally be available to offset the Target Fund's capital
gains. As a result of this Reorganization, however, the Acquiring Fund believes
that the Target Fund will likely undergo an "ownership change" for tax purposes
and that, accordingly, the use of such capital loss carryforwards (and certain
"built-in losses") of the Target Fund will likely be limited by section 382 of
the Code. Section 382 generally limits the amount of pre-ownership change losses
that may be used to offset post-ownership change income to a specific annual
amount (generally the product of the fair market value of the stock of the
Target Fund (with certain adjustments) prior to the ownership change and the
long-term tax-exempt rate established by the IRS (4.62% for June, 2004)).
Subject to certain limitations, any unused portion of these losses may be
available in subsequent years. The Acquiring Fund's ability to utilize its own
capital losses and losses attributable to any future decreases in value should
not be affected. Capital loss carryovers adversely affect the Acquiring Fund's
ability to pay and designate capital gain dividends to its shareholders.
EXPENSES OF THE REORGANIZATION
The expenses of the Reorganization will be borne by the Target Fund and the
Acquiring Fund proportionately, based on the expected benefits to each as a
result of the Reorganization, in the event the Reorganization is completed.
Management believes that shareholders of the Target Fund and the Acquiring Fund
will benefit from the Reorganization due to anticipated decreases in operating
expenses of each Fund. See the "Fee and Expense Comparison Table" above.
Management of the Target Fund and the Acquiring Fund estimate total costs of the
Reorganization to be approximately $482,000. Of these expenses, approximately
$296,000 will be borne by the Target Fund and $186,000 will be borne by the
Acquiring Fund. In the event the Reorganization is not completed, the Adviser
will bear the costs associated with the Reorganization. The Target Fund Board
and Acquiring Fund Board have reviewed and approved the foregoing arrangements
with respect to expenses and other charges relating to the Reorganization.
Expenses incurred in connection with the Reorganization include, but are not
limited to: all costs related to the preparation and distribution of materials
distributed to each Fund's Board; all expenses incurred in connection with the
preparation of the Reorganization Agreement and a registration statement on Form
N-14; SEC and state securities commission filing fees and legal and audit fees
in connection with the Reorganization; the costs of printing and distributing
this Prospectus/Proxy Statement; legal fees incurred preparing materials for the
Board of each Fund, attending each Fund's Board meetings and preparing the
34
minutes; auditing fees associated with each Fund's financial statements;
portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. Neither the Funds nor the Adviser will pay
any expenses of shareholders arising out of or in connection with the
Reorganization.
CONTINUATION OF SHAREHOLDER ACCOUNTS AND PLANS; SHARE CERTIFICATES
If the Reorganization is approved, the Acquiring Fund will establish an
account for each Target Fund shareholder containing the appropriate number of
shares of the Acquiring Fund. The shareholder services and shareholder programs
of the Target Fund and the Acquiring Fund are substantially identical.
Shareholders of the Target Fund who are accumulating Target Fund shares under
the dividend reinvestment plan, or who are receiving payment under the
systematic withdrawal plan with respect to Target Fund shares, will retain the
same rights and privileges after the Reorganization in connection with the Class
A, B or C Shares of the Acquiring Fund received in the Reorganization through
substantially identical plans maintained by the Acquiring Fund. Target Fund
shareholders enrolled in the Target Fund's dividend reinvestment plan or
systematic withdrawal plan will be automatically enrolled in the Acquiring
Fund's corresponding plan after the Reorganization is completed.
It will not be necessary for shareholders of the Target Fund to whom
certificates have been issued to surrender their certificates. Upon dissolution
of the Target Fund, such certificates will become null and void. However, Target
Fund shareholders holding such certificates may want to present such
certificates to receive certificates of the Acquiring Fund (to simplify
substantiation of and to preserve the tax basis of separate lots of shares).
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and issuance of Class A, B and C Shares of the Acquiring Fund
will be passed on by Skadden Arps, 333 West Wacker Drive, Chicago, Illinois
60606, which serves as special counsel to the Target Fund and the Acquiring
Fund. Wayne W. Whalen, a partner of Skadden Arps, is a Trustee of each of the
Target Fund and the Acquiring Fund.
SHAREHOLDER APPROVAL
The Target Fund Board has unanimously approved the Reorganization, subject to
shareholder approval. Shareholder approval of the Reorganization requires the
affirmative vote of Target Fund shareholders representing a majority of the
outstanding shares of the Target Fund. The Target Fund Board recommends voting
"FOR" the proposed Reorganization.
35
OTHER INFORMATION
SHAREHOLDER INFORMATION
At the close of business on August 25, 2004, the record date (the "Record
Date") with respect to the Special Meeting, there were Class A Shares,
Class B and Class C Shares of the Target Fund outstanding. As
of the Record Date, the directors and officers of the Target Fund as a group
owned less than 1% of the shares of the Target Fund. As of the Record Date, no
person was known by the Target Fund to own beneficially or of record as much as
5% of the Class A, B or C Shares of the Target Fund except as follows:
APPROXIMATE
SHAREHOLDER AND ADDRESS CLASS OF SHARES PERCENTAGE OF OWNERSHIP
----------------------- --------------- -----------------------
As of the Record Date, there were Class A Shares, Class B
Shares and Class C Shares of the Acquiring Fund outstanding. As of the
Record Date, the trustees and officers of the Acquiring Fund as a group owned
less than 1% of the outstanding shares of the Fund. As of the Record Date, no
person was known by the Acquiring Fund to own beneficially or of record as much
as 5% of the Class A, B or C Shares of the Fund except as follows:
APPROXIMATE
SHAREHOLDER AND ADDRESS CLASS OF SHARES PERCENTAGE OF OWNERSHIP
----------------------- --------------- -----------------------
36
SHAREHOLDER PROPOSALS
The Funds do not hold regular annual meetings of shareholders. As a general
matter, the Acquiring Fund does not intend to hold future regular annual or
special meetings of its shareholders unless required by the 1940 Act. In the
event the Reorganization is not completed, the Target Fund does not intend to
hold future regular annual or special meetings of its shareholders unless
required by the 1940 Act. Any shareholder who wishes to submit proposals for
consideration at a meeting of shareholders of the Target Fund or the Acquiring
Fund should send such proposal to the respective Fund at 1 Parkview Plaza, PO
Box 5555, Oakbrook Terrace, Illinois 60181-5555. To be considered for
presentation at a shareholders' meeting, rules promulgated by the SEC require
that, among other things, a shareholder's proposal must be received at the
offices of the Fund a reasonable time before a solicitation is made. Timely
submission of a proposal does not necessarily mean that such proposal will be
included.
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this Notice
and Prospectus/Proxy Statement with its enclosures on or about September 8,
2004. Target Fund shareholders whose shares are held by nominees such as brokers
can vote their proxies by contacting their respective nominee. In addition to
the solicitation of proxies by mail, employees of the Adviser and its affiliates
as well as dealers or their representatives may, without additional
compensation, solicit proxies in person or by mail, telephone, telegraph,
facsimile or oral communication. The Target Fund has retained ALAMO Direct Mail
Services, Inc. ("ALAMO") to make telephone calls to Target Fund Shareholders to
remind them to vote. In addition, ALAMO and D.F. King & Co., Inc., ("D.F.
King"), each a professional proxy solicitation firm, may also be retained to
assist with any necessary solicitation of proxies. In the event of a
solicitation by ALAMO and/or D.F. King, the solicitor would be paid a project
management fee not to exceed $3,000 as well as fees charged on a per call basis
and certain other expenses. The Funds estimate that any such solicitation would
cost approximately $95,000. Proxy solicitation expenses are an expense of the
Reorganization which will be shared between shareholders of the Target Fund and
the Acquiring Fund if the Reorganization is approved and completed.
OTHER MATTERS TO COME BEFORE THE MEETING
The Target Fund Board knows of no business other than that described in the
Notice which will be presented for consideration at the Special Meeting. If any
other matters are properly presented, it is the intention of the persons named
on the enclosed proxy card to vote proxies in accordance with their best
judgment.
37
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve the proposed Reorganization are not received, proxies
(including abstentions and broker non-votes) will be voted in favor of one or
more adjournments of the Special Meeting to permit further solicitation of
proxies on the proposed Reorganization, provided that the Target Fund Board
determines that such an adjournment and additional solicitation is reasonable
and in the interest of shareholders based on a consideration of all relevant
factors, including the nature of the particular proposals, the percentage of
votes then cast, the percentage of negative votes cast, the nature of the
proposed solicitation activities and the nature of the reasons for such further
solicitation. Any such adjournment will require the affirmative vote of the
holders of a majority of the outstanding shares voted at the session of the
Special Meeting to be adjourned.
VOTING INFORMATION AND REQUIREMENTS
The affirmative vote of shareholders representing a majority of the
outstanding shares of the Target Fund is required to approve the proposed
Reorganization. The Target Fund Board has fixed the close of business on August
25, 2004 as the Record Date for the determination of shareholders entitled to
notice of, and to vote at, the Special Meeting. Target Fund shareholders on the
Record Date are entitled to one vote for each share held, with no shares having
cumulative voting rights.
Target Fund shareholders may vote by appearing in person at the Special
Meeting, by returning the enclosed proxy card or by casting their vote via
telephone or the internet using the instructions provided on the enclosed proxy
card. Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the secretary of the Target Fund or by voting in person at the Special Meeting.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" the approval of the proposed Reorganization. Abstentions and
broker non-votes (i.e., where a nominee such as a broker holding shares for
beneficial owners votes on certain matters pursuant to discretionary authority
or instructions from beneficial owners, but with respect to one or more
proposals does not receive instructions from beneficial owners or does not
exercise discretionary authority) have the same effect as votes "AGAINST" the
proposed Reorganization since approval of the proposed Reorganization is based
on the affirmative vote of a majority of the total shares outstanding. A
majority of the outstanding shares entitled to vote on a proposal must be
present in person or by proxy to have a quorum to conduct business at the
Special Meeting. Abstentions and broker non-votes will be deemed present for
quorum purposes.
38
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Target Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
If you cannot be present in person at the meeting, you are requested to fill
in, sign and return the enclosed proxy card promptly. No postage is necessary if
mailed in the United States.
Stefanie Chang Yu
Vice President and Secretary
September 1, 2004
39
[VAN KAMPEN INVESTMENTS LOGO]
Van Kampen High Income Corporate Bond Fund
-------------------------------------------------------------------------------
Van Kampen High Income Corporate Bond Fund's primary investment objective is to
seek to maximize current income. Capital appreciation is a secondary objective
which is sought only when consistent with the Fund's primary investment
objective. The Fund's investment adviser seeks to achieve the Fund's investment
objectives by investing primarily in a portfolio of high-yielding, high-risk
bonds and other income securities, such as convertible securities and preferred
stock.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
This Prospectus is dated DECEMBER 30, 2003
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
[VAN KAMPEN INVESTMENTS LOGO]
Table of Contents
Risk/Return Summary......................................... 3
Fees and Expenses of the Fund............................... 6
Investment Objectives, Strategies and Risks................. 7
Investment Advisory Services................................ 15
Purchase of Shares.......................................... 16
Redemption of Shares........................................ 23
Distributions from the Fund................................. 25
Shareholder Services........................................ 25
Federal Income Taxation..................................... 27
Financial Highlights........................................ 30
Appendix--Description of Securities Ratings................. A-1
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This Prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
Risk/Return Summary
-------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to seek to maximize current income.
Capital appreciation is a secondary objective which is sought only when
consistent with the Fund's primary investment objective.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objectives by investing primarily in a portfolio of
high-yielding, high-risk bonds and other income securities, such as convertible
securities and preferred stock. The Fund buys and sells medium- and lower-grade
securities with a view towards seeking a high level of current income and
capital appreciation over the long-term. Lower-grade securities are commonly
referred to as junk bonds. The Fund invests in a broad range of income
securities represented by various companies and industries and traded on various
markets. In selecting securities for investment, the Fund's investment adviser
seeks to identify securities which entail reasonable credit risk considered in
relation to the Fund's investment policies. The Fund's investment adviser uses
an investment strategy of fundamental credit analysis and emphasizes issuers
that it believes will remain financially sound and perform well in a range of
market conditions. Portfolio securities are typically sold when the fundamental
assessment of an issuer by the Fund's investment adviser materially changes.
Under normal market conditions, the Fund invests at least 65% of its total
assets in corporate bonds and other income securities with maturities greater
than one year. The Fund may invest up to 35% of its total assets in securities
of issued by foreign governments or foreign corporations. The Fund may purchase
and sell certain derivative instruments, such as options, futures contracts and
options on futures contracts, for various portfolio management purposes,
including to earn income, facilitate portfolio management and mitigate risks.
PRINCIPAL INVESTMENT RISKS
An investment in the Fund is subject to risks, and you could lose money on your
investment in the Fund. There can be no assurance that the Fund will achieve its
investment objectives.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Because the Fund invests primarily in medium- and
lower-grade securities, the Fund is subject to a higher level of credit risk
than a fund that invests only in investment grade securities. The credit quality
of noninvestment-grade securities is considered speculative by recognized rating
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower-grade securities may have less liquidity and a higher incidence
of default than higher-grade securities. The Fund may incur higher expenses to
protect the Fund's interests in such securities. The credit risks and market
prices of lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher-grade securities.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of income securities tend to fall as
interest rates rise, and such declines tend to be greater among income
securities with longer maturities. Although the Fund has no policy limiting the
maturities of its investments, the Fund's investment adviser seeks to maintain a
portfolio duration of two to six years. This means that the Fund is subject to
greater market risk than a fund investing solely in shorter-term securities (see
"Investment Objectives, Strategies and Risks" for an explanation of maturities
and durations). Medium- and lower-grade securities, especially those with longer
maturities or those that do not make regular interest payments, may be more
volatile and may decline more in price in response to negative issuer
developments or general economic news than higher-grade securities.
Market risk is often greater among certain types of income securities, such as
zero coupon bonds or pay-in-kind securities. As interest rates change, these
securities often fluctuate more in price than traditional income securities and
may subject the Fund to greater
3
market risk than a fund that does not own these types of securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates and credit risk, which can vary widely over the short- and long-term. If
interest rates drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of income
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates, resulting in a possible decline in the Fund's income and
distributions to shareholders.
FOREIGN RISKS. Because the Fund may own securities of foreign issuers, it may be
subject to risks not usually associated with owning securities of U.S. issuers.
These risks can include fluctuations in foreign currencies, foreign currency
exchange controls, political and economic instability, differences in financial
reporting, differences in securities regulation and trading and foreign taxation
issues.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures contracts and options on futures
contracts are examples of derivative instruments. Derivative instruments involve
risks different from direct investments in underlying securities. These risks
include imperfect correlation between the value of the instruments and the
underlying assets; risks of default by the other party to certain transactions;
risks that the transactions may result in losses that partially or completely
offset gains in portfolio positions; and risks that the transactions may not be
liquid.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objectives and strategies, the Fund may be
appropriate for investors who:
- Seek a high level of current income
- Are willing to take on the substantially increased risks of medium- and
lower-grade securities in exchange for potentially higher income
- Wish to add to their investment portfolio a fund that invests primarily in
medium- and lower-grade income securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-
term investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year to year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this Prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been
4
lower. Remember that past performance of the Fund is not indicative of its
future performance.
[BAR GRAPH]
ANNUAL RETURN
-------------
1993 19.13
1994 -3.62
1995 17.43
1996 13.65
1997 12.24
1998 0.46
1999 3.90
2000 -8.22
2001 -2.65
2002 -9.42
The Fund's return for the nine-month period ended September 30, 2003 for Class A
Shares was 17.53%. As a result of market activity, current performance may vary
from the figures shown.
The annual returns of the Fund's Class B Shares and Class C Shares would be
substantially similar to those shown for the Class A Shares because all of the
Fund's shares are invested in the same portfolio of securities; however, the
actual annual returns of the Class B Shares and Class C Shares would be lower
than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the ten-year period shown in the bar chart, the highest quarterly return
for Class A Shares was 6.54% (for the quarter ended March 31, 1993) and the
lowest quarterly return for Class A Shares was -8.20% (for the quarter ended
September 30, 1998).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Chase Global High Yield
Index*, a broad-based market index that the Fund's investment adviser believes
is an appropriate benchmark for the Fund, and the Lipper High Yield Bond Fund
Index, an index of funds with similar investment objectives. The Fund's
performance figures include the maximum sales charges paid by investors. The
indices' performance figures do not include any commissions, sales charges or
taxes that would be paid by investors purchasing the securities represented by
the indices. An investment cannot be made directly in the indices.
In addition to before tax returns for each class of shares, the table shows
after tax returns for the Fund's Class A Shares in two ways: (i) after taxes on
distributions and (ii) after taxes on distributions and sale of Fund shares. The
after tax returns for the Fund's Class B Shares and Class C Shares will vary
from the Class A Shares' returns. After tax returns are calculated using the
historical highest individual federal marginal income tax rates during the
periods shown and do not reflect the impact of state and local taxes. Actual
after tax returns depend on an investor's tax situation and may differ from
those shown, and after tax returns are not relevant to investors who hold their
Fund shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. An after tax return may be higher than the
before tax return due to an assumed benefit from any capital loss that would
have been realized had Fund shares been sold at the end of the relevant period.
Average annual total returns (before and after taxes) are shown for the periods
ended December 31, 2002 (the most recently completed calendar year prior to the
date of this Prospectus). Remember that past performance
5
(before and after taxes) of the Fund is not indicative of its future
performance.
AVERAGE ANNUAL
TOTAL RETURNS PAST
FOR THE 10 YEARS
PERIODS ENDED PAST PAST OR SINCE
DECEMBER 31, 2002 1 YEAR 5 YEARS INCEPTION
--------------------------------------------------------------------
Van Kampen High Income
Corporate Bond Fund --
Class A Shares
Return Before Taxes -13.81% -4.26% 3.30%(1)
Return After Taxes on
Distributions -17.26% -8.28% -0.81%(1)
Return After Taxes on
Distributions and Sale of
Fund Shares -8.45% -4.95% 0.81%(1)
Chase Global High Yield Index 2.14% 1.15% 5.23%(1)
Lipper High Yield Bond Fund
Index -2.41% -1.80% 4.69%(1)
.....................................................................
Van Kampen High Income
Corporate Bond Fund --
Class B Shares
Return Before Taxes -13.34% -4.25% 3.31%(1)**
Chase Global High Yield Index 2.14% 1.15% 5.23%(1)
Lipper High Yield Bond Fund
Index -2.41% -1.80% 4.69%(1)
.....................................................................
Van Kampen High Income
Corporate Bond Fund --
Class C Shares
Return Before Taxes -10.99% -4.10% 1.90%(2)
Chase Global High Yield Index 2.14% -1.15% N/A
Lipper High Yield Bond Fund
Index -2.41% -1.80% 3.69%(3)
.....................................................................
N/A -- Not applicable because class data pre-dates the inception date of the
index.
Return information is provided: (1) for past 10 years, (2) since 7/6/93 and (3)
since 6/30/93.
* Chase Global High Yield Index is an unmanaged, broad-based index that
reflects the general performance of the global high yield corporate debt
market, including domestic and international issues.
** The "Past 10 Years" performance for Class B Shares reflects the conversion of
such shares into Class A Shares six years after the end of the calendar month
in which the shares were purchased. Class B Shares purchased on or after June
1, 1996 will convert to Class A Shares eight years after the end of the
calendar month in which the shares were purchased. See "Purchase of Shares."
The current yield for the thirty-day period ended August 31, 2003 is 7.00% for
Class A Shares, 6.55% for Class B Shares and 6.64% for Class C Shares. Investors
can obtain the current yield of the Fund for each class of shares by calling
(800) 847-2424 or by visiting our web site at www.vankampen.com.
Fees and Expenses
of the Fund
-------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
----------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
----------------------------------------------------------------
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering
price) 4.75%(1) None None
.................................................................
Maximum deferred sales
charge (load)(as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
.................................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
.................................................................
Redemption fee None None None
.................................................................
Exchange fee None None None
.................................................................
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets and are based on
expenses incurred during the Fund's fiscal year ended August 31,
2003)
----------------------------------------------------------------
Management fees 0.55% 0.55% 0.55%
.................................................................
Distribution and/or
service (12b-1) fees(5) 0.24% 1.00%(6) 1.00%(6)
.................................................................
Other expenses 0.33% 0.34% 0.34%
.................................................................
Total annual fund
operating expenses 1.12% 1.89% 1.89%
.................................................................
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first and second year
after purchase and declines thereafter as follows:
Year 1-4.00%
Year 2-4.00%
Year 3-3.00%
Year 4-2.50%
Year 5-1.50%
After-None
See "Purchase of Shares -- Class B Shares."
6
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) Class A Shares are subject to a combined annual distribution and service fee
of up to 0.25% of the average daily net assets attributable to such class of
shares. Class B Shares and Class C Shares are each subject to a combined
annual distribution and service fee of up to 1.00% of the average daily net
assets attributable to such class of shares. See "Purchase of Shares."
(6) While Class B Shares and Class C Shares do not have any front-end sales
charges, their higher ongoing annual expenses (due to higher 12b-1 and
service fees) mean that over time you could end up paying more for these
shares than if you were to pay front-end sales charges for Class A Shares.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased). Although your actual costs may be higher or lower, based
on these assumptions your costs would be:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
--------------------------------------------------------------------
Class A Shares $584 $814 $1,063 $1,773
.....................................................................
Class B Shares $592 $894 $1,171 $2,011*
.....................................................................
Class C Shares $292 $594 $1,021 $2,212
.....................................................................
You would pay the following expenses if you did not redeem your shares:
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
--------------------------------------------------------------------
Class A Shares $584 $814 $1,063 $1,773
.....................................................................
Class B Shares $192 $594 $1,021 $2,011*
.....................................................................
Class C Shares $192 $594 $1,021 $2,212
.....................................................................
* Based on conversion to Class A Shares eight years after the end of the
calendar month in which the shares were purchased.
Investment Objectives,
Strategies and Risks
-------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The Fund's primary investment objective is to seek to maximize current income.
Capital appreciation is a secondary objective that the Fund will seek only when
consistent with the Fund's primary investment objective. The Fund's investment
objectives may be changed by the Fund's Board of Trustees without shareholder
approval, but no change is anticipated. If the Fund's investment objectives
change, the Fund will notify shareholders and shareholders should consider
whether the Fund remains an appropriate investment in light of their then
current financial position and needs. There are risks inherent in all
investments in securities; accordingly, there can be no assurance that the Fund
will achieve its investment objectives.
INVESTMENT STRATEGIES AND RISKS
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objectives by investing primarily in a portfolio of high-
yielding, high-risk bonds and other income securities, including convertible
securities and preferred stock. Under normal market conditions, the Fund invests
primarily in medium- and lower-grade income securities, which includes
securities rated at the time of purchase BBB or lower by Standard & Poor's
("S&P") or rated Baa or lower by Moody's Investors Service, Inc. ("Moody's") and
unrated securities determined by the Fund's investment adviser to be of
comparable quality at the time of purchase. With respect to such investments,
the Fund has not established any limit on the percentage of its portfolio which
may be invested in securities in any one rating category. Securities rated BB or
lower by S&P or rated Ba or lower by Moody's and unrated securities of
comparable quality are regarded as below investment grade and are commonly
referred to as junk bonds, and involve special risks as compared to investments
in higher-grade securities. Investors should carefully consider the section
below entitled "Risks of Investing in Medium- and Lower-Grade Securities."
Certain types of income securities are subject to additional risks, see
"Additional Information Regarding Certain Income Securities" below.
7
Under normal market conditions, the Fund invests at least 80% of its net assets
(plus any borrowings for investment purposes) in high yield, high risk corporate
bonds at the time of investment. The Fund's policy in the foregoing sentence may
be changed by the Fund's Board of Trustees, but no change is anticipated; if the
Fund's policy in the foregoing sentence changes, the Fund will notify
shareholders at least 60 days prior to implementation of the change and
shareholders should consider whether the Fund remains an appropriate investment
in light of the changes.
The Fund buys and sells securities with a view towards seeking a high level of
current income and capital appreciation over the long-term. The Fund invests in
a broad range of income securities represented by various companies and
industries and traded on various markets. The Fund's investment adviser uses an
investment strategy of in-depth, fundamental credit analysis and emphasizes
issuers that it believes will remain financially sound and perform well in a
range of market conditions. In its effort to enhance value and diversify the
Fund's portfolio, the Fund's investment adviser may seek investments in cyclical
issues or out-of-favor areas of the market to contribute to the Fund's
performance.
The higher income and potential for capital appreciation sought by the Fund are
generally obtainable from securities in the medium- and lower-credit quality
range. Such securities tend to offer higher yields than higher-grade securities
with the same maturities because the historical conditions of the issuers of
such securities may not have been as strong as those of other issuers. These
securities may be issued in connection with corporate restructurings such as
leveraged buyouts, mergers, acquisitions, debt recapitalization or similar
events. These securities are often issued by smaller, less creditworthy
companies or companies with substantial debt and may include financially
troubled companies or companies in default or in restructuring.
UNDERSTANDING
QUALITY RATINGS
Income securities ratings are based on the issuer's ability to pay
interest and repay the principal. Income securities with ratings above the
bold line in the table are considered "investment grade," while those with
ratings below the bold line are regarded as "noninvestment grade." A
detailed explanation of these and other ratings can be found in the
appendix to this Prospectus.
S&P MOODY'S MEANING
------------------------------------------------------
AAA Aaa Highest quality
.......................................................
AA Aa High quality
.......................................................
A A Above-average quality
.......................................................
BBB Baa Average quality
------------------------------------------------------
BB Ba Below-average quality
.......................................................
B B Marginal quality
.......................................................
CCC Caa Poor quality
.......................................................
CC Ca Highly speculative
.......................................................
C C Lowest quality
.......................................................
D -- In default
.......................................................
Such securities often are subordinated to the prior claims of banks and other
senior lenders. Lower-grade securities are regarded by the rating agencies as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The ratings of S&P and Moody's represent
their opinions of the quality of the income securities they undertake to rate,
but not the market risk of such securities. It should be emphasized however,
that ratings are general and are not absolute standards of quality.
The Fund's investment adviser seeks to minimize the risks involved in investing
in medium- and lower-grade securities through diversification and a focus on
in-depth research and fundamental credit analysis. In selecting securities for
investment, the Fund's investment adviser considers, among other things, the
security's current income potential, the rating assigned to the security, the
issuer's experience and managerial strength, the financial soundness of the
issuer and the outlook of its industry, changing financial condition, borrowing
requirements or debt maturity schedules,
8
regulatory concerns, and responsiveness to changes in business conditions and
interest rates. The Fund's investment adviser also may consider relative values
based on anticipated cash flow, interest or dividend coverage, balance sheet
analysis and earnings prospects. The investment adviser evaluates each
individual income security for credit quality and value and attempts to identify
higher-yielding securities of companies whose financial condition has improved
since the issuance of such securities or is anticipated to improve in the
future. Because of the number of investment considerations involved in investing
in medium- and lower-grade securities, achievement of the Fund's investment
objectives may be more dependent upon the investment adviser's credit analysis
than is the case with investing in higher-grade securities.
The value of income securities generally varies inversely with changes in
prevailing interest rates. If interest rates rise, income security prices
generally fall; if interest rates fall, income security prices generally rise.
Shorter-term securities are generally less sensitive to interest rate changes
than longer-term securities; thus, for a given change in interest rates, the
market prices of shorter-maturity securities generally fluctuate less than the
market prices of longer-maturity securities. Income securities with shorter
maturities generally offer lower yields than income securities with longer
maturities assuming all other factors, including credit quality, are equal.
Under normal market conditions, the Fund invests at least 65% of its total
assets in corporate bonds and other income securities with maturities greater
than one year and, while the Fund has no policy limiting the maturities of the
debt securities in which it may invest, the Fund's investment adviser seeks to
moderate risk by normally maintaining a portfolio duration of two to six years.
Duration is a measure of the expected life of a debt security that was developed
as a more precise alternative to the concept of "term to maturity." Duration
incorporates a debt security's yield, coupon interest payments, final maturity
and call features into one measurement. A duration calculation looks at the
present value of a security's entire payment stream, whereas term to maturity is
based solely on the date of a security's final principal repayment.
UNDERSTANDING
MATURITIES
An income security can be categorized according to its maturity, which is
the length of time before the issuer must repay the principal.
Term Maturity Level
---------------------------------------------------
1-3 years Short
....................................................
4-10 years Intermediate
....................................................
More than 10 years Long
....................................................
UNDERSTANDING
DURATION
Duration provides an alternative approach to assessing a security's market
risk. Duration measures the expected life of a security by incorporating
the security's yield, coupon interest payments, final maturity and call
features into one measure. Whereas maturity focuses only on the final
principal repayment date of a security, duration looks at the timing and
present value of all of a security's principal, interest or other
payments. Typically, a bond with interest payments due prior to maturity
has a duration less than maturity. A zero coupon bond, which does not make
interest payments prior to maturity, would have the same duration and
maturity.
RISK OF INVESTING IN
MEDIUM- AND LOWER-GRADE SECURITIES
Securities that are in the medium- or lower-grade categories generally offer
higher yields than are offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, greater liquidity concerns and potentially
greater manager risk. Investors should carefully consider the risks of owning
shares of a fund which invests in medium- or lower-grade securities before
investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Medium-and lower-grade securities are considered more
9
susceptible to nonpayment of interest and principal or default than higher-grade
securities. Increases in interest rates or changes in the economy may
significantly affect the ability of issuers of medium- or lower-grade income
securities to pay interest and to repay principal, to meet projected financial
goals or to obtain additional financing. In the event that an issuer of
securities held by the Fund experiences difficulties in the timely payment of
principal and interest and such issuer seeks to restructure the terms of its
borrowings, the Fund may incur additional expenses and may determine to invest
additional assets with respect to such issuer or the project or projects to
which the Fund's securities relate. Further, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio holdings,
and the Fund may be unable to obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the income securities market and as a result of real or
perceived changes in credit risk. The value of the Fund's investments can be
expected to fluctuate over time. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Income securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than income securities with shorter maturities. However, the
secondary market prices of medium- or lower-grade securities generally are less
sensitive to changes in interest rates and are more sensitive to general adverse
economic changes or specific developments with respect to the particular issuers
than are the secondary market prices of higher-grade securities. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for medium- or lower-grade securities and adversely affect the market
value of such securities. Such events also could lead to a higher incidence of
default by issuers of medium- or lower-grade securities as compared with
higher-grade securities. In addition, changes in credit risks, interest rates,
the credit markets or periods of general economic uncertainty can be expected to
result in increased volatility in the market price of the medium- or lower-grade
securities in the Fund and thus in the net asset value of the Fund. Adverse
publicity and investor perceptions, whether or not based on rational analysis,
may affect the value, volatility and liquidity of medium- or lower-grade
securities.
The markets for medium- or lower-grade securities may be less liquid than the
markets for higher-grade securities. Liquidity relates to the ability of a fund
to sell a security in a timely manner at a price which reflects the value of
that security. To the extent that there is no established retail market for some
of the medium- or lower-grade securities in which the Fund may invest, trading
in such securities may be relatively inactive. Prices of medium- or lower-grade
securities may decline rapidly in the event a significant number of holders
decide to sell. Changes in expectations regarding an individual issuer of
medium- or lower-grade securities generally could reduce market liquidity for
such securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such a
market does exist. An economic downturn or an increase in interest rates could
severely disrupt the market for such securities and adversely affect the value
of outstanding securities or the ability of the issuers to repay principal and
interest. Further, the Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist.
During periods of reduced market liquidity or in the absence of readily
available market quotations for medium- or lower-grade securities held in the
Fund's portfolio, the ability of the Fund to value the Fund's securities becomes
more difficult and the judgment of the Fund may play a greater role in the
valuation of the Fund's securities due to the reduced availability of reliable
objective data.
The Fund may invest in securities not producing immediate cash income, including
securities in default, zero coupon securities or pay-in-kind securities. Prices
on non-cash-paying instruments may be more sensitive to changes in the issuer's
financial condition,
10
fluctuation in interest rates and market demand/supply imbalances than
cash-paying securities with similar credit ratings, and thus may be more
speculative. Special tax considerations are associated with investing in certain
lower-grade securities, such as zero coupon or pay-in-kind securities. See
"Federal Income Taxation" below. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments. See
"Additional Information Regarding Certain Income Securities" below.
The Fund may invest in securities rated below B by both Moody's and S&P, common
stocks or other equity securities and income securities on which interest or
dividends are not being paid when such investments are consistent with the
Fund's investment objectives or are acquired as part of a unit consisting of a
combination of income or equity securities. Equity securities as referred to
herein do not include preferred stocks (which the Fund considers income
securities). The Fund will not purchase any such securities which will cause
more than 20% of its total assets to be so invested or which would cause more
than 10% of its total assets to be invested in common stocks, warrants and
options on equity securities at the time of investment.
The Fund's investments may include securities with the lowest-grade assigned by
recognized rating organizations and unrated securities of comparable quality.
Securities assigned the lowest grade ratings include those of companies that are
in default or are in bankruptcy or reorganization. Securities of such companies
are regarded by the rating agencies as having extremely poor prospects of ever
attaining any real investment standing and are usually available at deep
discounts from the face values of the instruments. A security purchased at a
deep discount may currently pay a very high effective yield. In addition, if the
financial condition of the issuer improves, the underlying value of the security
may increase, resulting in capital appreciation. If the company defaults on its
obligations or remains in default, or if the plan of reorganization does not
provide sufficient payments for debtholders, the deep discount securities may
stop generating income and lose value or become worthless. The Fund's investment
adviser will balance the benefits of deep discount securities with their risks.
While a diversified portfolio may reduce the overall impact of a deep discount
security that is in default or loses its value, the risk cannot be eliminated.
Many medium- and lower-grade income securities are not listed for trading on any
national securities exchange, and issuers of medium- and lower-grade income
securities may choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Fund's
portfolio may consist of a higher portion of unlisted or unrated securities as
compared with an investment company that invests primarily in higher-grade
securities. Unrated securities are usually not as attractive to as many buyers
as are rated securities, a factor which may make unrated securities less
marketable. These factors may have the effect of limiting the availability of
the securities for purchase by the Fund and may also limit the ability of the
Fund to sell such securities at their fair value either to meet redemption
requests or in response to changes in the economy or the financial markets.
Further, to the extent the Fund owns or may acquire illiquid or restricted
medium- or lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issuer. The amount of available
information about the financial condition of certain medium- or lower-grade
issuers may be less extensive than other issuers. In its analysis, the Fund's
investment adviser may consider the credit ratings of recognized rating
organizations in evaluating securities although the investment adviser does not
rely primarily on these ratings. Credit ratings of securities rating
organizations evaluate only the safety of principal and interest payments, not
the market risk. In addition, ratings are general and not absolute standards of
quality, and credit ratings are subject to the risk that the creditworthiness of
an issuer may change and the rating agencies may fail to change such ratings in
a timely fashion. A rating downgrade does not require the Fund to dispose of a
security. The Fund's investment adviser continuously monitors the issuers of
securities held in the Fund. Additionally, since most foreign income securities
are not rated, the Fund will invest in such securities based on the analysis of
the Fund's investment adviser without any guidance from published ratings.
Because of the number of investment considerations involved in investing in
medium- or lower-grade securities and foreign income securities, achievement of
the Fund's investment objectives may
11
be more dependent upon the credit analysis of the Fund's investment adviser than
is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for medium- or lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for medium- or lower-grade
securities.
Special tax considerations are associated with investing in certain medium- or
lower-grade securities, such as zero coupon or pay-in-kind securities. The Fund
accrues income on these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under federal income tax law and therefore,
may have to dispose of its portfolio securities to satisfy distribution
requirements.
The table below sets forth the percentages of the Fund's assets during the
fiscal year ended August 31, 2003 invested in the various rating categories
(based on the higher of the S&P or Moody's ratings) and in unrated debt
securities. The percentages are based on the dollar-weighted average of credit
ratings of all securities held by the Fund during the 2003 fiscal year computed
on a monthly basis.
FISCAL YEAR ENDED AUGUST 31, 2003
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING (AS A PERCENTAGE OF (AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE) PORTFOLIO VALUE)
-----------------------------------------------------------------------
AAA/Aaa 0.00% 0.00%
........................................................................
AA/Aa 0.00% 0.00%
........................................................................
A/A 0.27% 0.00%
........................................................................
BBB/Baa 10.66% 0.00%
........................................................................
BB/Ba 32.40% 0.00%
........................................................................
B/B 44.19% 0.49%
........................................................................
CCC/Caa 5.48% 0.44%
........................................................................
CC/Ca 0.84% 0.00%
........................................................................
C/C 0.39% 0.09%
........................................................................
D 0.11% 1.15%
........................................................................
Equities 3.49% 0.00%
........................................................................
Percentage of
Rated and Unrated
Debt Securities 97.83% 2.17%
........................................................................
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
ADDITIONAL INFORMATION REGARDING
CERTAIN INCOME SECURITIES
Zero coupon securities are income securities that do not entitle the holder to
any periodic payment of interest prior to maturity or a specified date when the
securities begin paying current interest. They are issued and traded at a
discount from their face amounts or par value, which discount varies depending
on the time remaining until cash payments begin, prevailing interest rates,
liquidity of the security and the perceived credit quality of the issuer.
Because such securities do not entitle the holder to any periodic payments of
interest prior to maturity, this prevents any reinvestment of interest payments
at prevailing interest rates if prevailing interest rates rise. On the other
hand, because there are no periodic interest payments to be reinvested prior to
maturity, zero coupon securities eliminate the reinvestment risk and may lock in
a favorable rate of return to maturity if interest rates drop.
Payment-in-kind securities are income securities that pay interest through the
issuance of additional securities. Prices on such non-cash-paying instruments
may be more sensitive to changes in the issuer's financial condition,
fluctuations in interest rates and market demand/supply imbalances than
cash-paying securities with similar credit ratings, and thus may be more
speculative than are securities that pay interest periodically in cash.
The amount of non-cash interest income earned on zero coupon securities and
payment-in-kind securities is included, for federal income tax purposes, in the
Fund's calculation of income that is required to be distributed to shareholders
for the Fund to maintain its desired federal income tax status (even though such
non-cash paying securities do not provide the Fund with the cash flow with which
to pay such distributions). Accordingly, the Fund may be required to borrow or
to liquidate portfolio securities at a time that it otherwise would not have
done so to make such distributions. The Fund's investment adviser will weigh
these concerns against the expected total returns from such instruments.
12
RISKS OF INVESTING IN
SECURITIES OF FOREIGN ISSUERS
The Fund may invest up to 35% of its total assets in securities issued by
foreign governments and other foreign issuers which are similar in quality to
the securities described above. Securities of foreign issuers may be denominated
in U.S. dollars or in currencies other than U.S. dollars. The Fund's investment
adviser believes that in certain instances such securities of foreign issuers
may provide higher yields than securities of domestic issuers which have similar
maturities.
Investments in securities of foreign issuers present certain risks not
ordinarily associated with investments in securities of U.S. issuers. These
risks include fluctuations in foreign currency exchange rates, political,
economic or legal developments (including war or other instability,
expropriation of assets, nationalization and confiscatory taxation), the
imposition of foreign exchange limitations (including currency blockage),
withholding taxes on income or capital transactions or other restrictions,
higher transaction costs (including higher brokerage, custodial and settlement
costs and currency conversion costs) and possible difficulty in enforcing
contractual obligations or taking judicial action. Securities of foreign issuers
may not be as liquid and may be more volatile than comparable securities of
domestic issuers.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of exchanges, brokers and listed companies abroad than in
the United States and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact yields and result in temporary periods when assets of the Fund are
not fully invested or attractive investment opportunities are foregone.
The Fund may invest in securities of issuers determined by the investment
adviser to be in developing or emerging market countries. Investments in
securities of issuers in developing or emerging market countries are subject to
greater risks than investments in securities of developed countries since
emerging market countries tend to have economic structures that are less diverse
and mature and political systems that are less stable than developed countries.
Since the Fund may invest in securities denominated or quoted in currencies
other than the U.S. dollar, the Fund will be affected by changes in foreign
currency exchange rates (and exchange control regulations) which affect the
value of investments in the Fund and the accrued income and appreciation or
depreciation of the investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of the Fund's
assets denominated in that currency and the Fund's return on such assets as well
as any temporary uninvested reserves in bank deposits in foreign currencies. In
addition, the Fund will incur costs in connection with conversions between
various currencies.
The Fund may invest in securities of foreign issuers in the form of depositary
receipts. Depositary receipts involve substantially identical risks to those
associated with direct investment in securities of foreign issuers. In addition,
the underlying issuers of certain depositary receipts, particularly unsponsored
or unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategic
transactions, including options, futures contracts and options on futures
contracts, in several different ways depending upon the status of the Fund's
investments and the expectations of the Fund's investment adviser concerning the
securities markets. Although the Fund's investment adviser seeks to use these
transactions to achieve the Fund's investment objectives, no assurance can be
given that the use of these transactions will achieve this result.
13
The Fund can engage in options transactions on securities, indices or on futures
contracts to attempt to manage the Fund's risk in advancing or declining
markets. For example, the value of a put option generally increases as the value
of the underlying security declines. Value is protected against a market decline
to the degree the performance of the put correlates with the performance of the
Fund's investment portfolio. If the market remains stable or advances, the Fund
can refrain from exercising the put and its portfolio will participate in the
advance, having incurred only the premium cost for the put.
The Fund is authorized to purchase and sell listed and over-the-counter options
("OTC Options"). OTC Options are subject to certain additional risks including
default by the other party to the transaction and the liquidity of the
transactions.
The Fund may enter into contracts for the purchase or sale for future delivery
of fixed-income securities or contracts based on financial indices including any
index of U.S. government securities or foreign government securities (futures
contracts) and may purchase and write put and call options to buy or sell
futures contracts (options on futures contracts). A sale of a futures contract
means the acquisition of a contractual obligation to deliver the securities
called for by the contract at a specified price on a specified date. A purchase
of a futures contract means the incurring of a contractual obligation to acquire
the securities called for by the contract at a specified price on a specified
date. The purchaser of a futures contract on an index agrees to take delivery of
an amount of cash equal to the difference between a specified multiple of the
value of the index on the expiration date of the contract and the price at which
the contract was originally struck. No physical delivery of the fixed-income
securities underlying the index is made. These investment techniques generally
are used to protect against anticipated future changes in interest or exchange
rates which otherwise might either adversely affect the value of the Fund's
portfolio securities or adversely affect the price of securities which the Fund
intends to purchase at a later date.
In certain cases, the options and futures contract markets provide investment or
risk management opportunities that are not available from direct investments in
underlying securities. In addition, some strategies can be performed with
greater ease and at lower cost by utilizing the options and futures contract
markets rather than purchasing or selling portfolio securities. However, such
transactions involve risks different from those involved with direct investments
in underlying securities. For example, there may be an imperfect correlation
between the value of the instruments and the underlying assets. In addition, the
use of these transactions includes the risks of default by the other party to
certain transactions. The Fund may incur losses in using these transactions that
partially or completely offset gains in portfolio positions. These transactions
may not be liquid and involve manager risk. In addition, such transactions may
involve commissions and other costs, which may increase the Fund's expenses and
reduce its return.
A more complete discussion of options, futures contracts and options on futures
contracts and their risks is contained in the Fund's Statement of Additional
Information. The Fund's Statement of Additional Information can be obtained by
investors free of charge as described on the back cover of this Prospectus.
OTHER INVESTMENTS AND RISK FACTORS
For cash management purposes, the Fund may engage in repurchase agreements with
broker-dealers, banks and other financial institutions to earn a return on
temporarily available cash. Such transactions are subject to the risk of default
by the other party.
The Fund may lend its portfolio securities in an amount up to 10% of its total
assets to broker-dealers, banks and other institutional borrowers of securities
to generate income on the loaned security and any collateral received. The Fund
may incur lending fees and other costs in connection with securities lending,
and securities lending is subject to the risk of default by the other party.
The Fund may invest up to 15% of its net assets in illiquid securities and
certain restricted securities. Such securities may be difficult or impossible to
sell at the time and the price that the Fund would like. Thus, the Fund may have
to sell such securities at a lower price, sell other securities instead to
obtain cash or forego other investment opportunities.
Further information about these types of investments and other investment
practices that may be used by the
14
Fund is contained in the Fund's Statement of Additional Information.
The Fund may sell securities without regard to the length of time they have been
held to take advantage of new investment opportunities, or yield differentials,
or for other reasons. The Fund's portfolio turnover rate may vary from year to
year. A high portfolio turnover rate (100% or more) increases a fund's
transaction costs (including brokerage commissions or dealer costs), which would
adversely impact a fund's performance. Higher portfolio turnover may result in
the realization of more short-term capital gains than if a fund had lower
portfolio turnover. The turnover rate will not be a limiting factor, however, if
the Fund's investment adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more defensive
investment strategy, the Fund may, on a temporary basis, hold cash or invest a
portion or all of its assets in securities issued or guaranteed by the U.S.
government, its agencies or instrumentalities, prime commercial paper,
certificates of deposit, bankers' acceptances and other obligations of domestic
banks having total assets of at least $500 million, repurchase agreements and
short-term money market instruments. Under normal market conditions, the yield
on these securities will tend to be lower than the yield on other securities
that may be owned by the Fund. In taking such a defensive position, the Fund
would temporarily not be pursuing and may not achieve its investment objectives.
Investment
Advisory Services
-------------------------------------------------------------------------------
THE ADVISER. Van Kampen Asset Management is the Fund's investment adviser (the
"Adviser" or "Asset Management"). The Adviser is a wholly owned subsidiary of
Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen Investments
is a diversified asset management company that administers more than three
million retail investor accounts, has extensive capabilities for managing
institutional portfolios and has more than $76 billion under management or
supervision as of September 30, 2003. Van Kampen Investments has more than 50
open-end funds, more than 30 closed-end funds and more than 2,700 unit
investment trusts that are distributed by authorized dealers nationwide. Van
Kampen Funds Inc., the distributor of the Fund (the "Distributor") and the
sponsor of the funds mentioned above, is also a wholly owned subsidiary of Van
Kampen Investments. Van Kampen Investments is an indirect wholly owned
subsidiary of Morgan Stanley, a preeminent global financial services firm that
maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services. Morgan Stanley is a full
service securities firm engaged in securities trading and brokerage activities,
investment banking, research and analysis, financing and financial advisory
services. The Adviser's principal office is located at 1221 Avenue of the
Americas, New York, New York 10020.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
AVERAGE DAILY NET ASSETS % PER ANNUM
--------------------------------------------------
First $150 million 0.625%
...................................................
Next $150 million 0.550%
...................................................
Over $300 million 0.500%
...................................................
Applying this fee schedule, the effective advisory fee rate was 0.55% of the
Fund's average daily net assets for the Fund's fiscal year ended August 31,
2003. The Fund's average daily net assets are determined by taking the average
of all of the determinations of the net assets during a given calendar month.
Such fee is payable for each calendar month as soon as practicable after the end
of that month.
The Adviser furnishes offices, necessary facilities and equipment, and provides
administrative services to the Fund. The Fund pays all charges and expenses of
its day-to-day operations, including service fees, distribution fees, custodian
fees, legal and independent accountant fees, the costs of reports and proxies to
shareholders, compensation of trustees of the Fund
15
(other than those who are affiliated persons of the Adviser, Distributor or Van
Kampen Investments) and all other ordinary business expenses not specifically
assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
PORTFOLIO MANAGEMENT. The Fund is managed by the Adviser's Taxable Fixed Income
team. The team is made up of established investment professionals. Current
members of the team include Gordon W. Loery, an Executive Director of the
Adviser, Joshua Givelber and Chad Liu, Vice Presidents of the Adviser. The
composition of the team may change without notice from time to time.
Purchase of Shares
-------------------------------------------------------------------------------
GENERAL
This Prospectus offers three classes of shares of the Fund, designated as Class
A Shares, Class B Shares and Class C Shares. Other classes of shares of the Fund
may be offered through one or more separate prospectuses of the Fund. By
offering multiple classes of shares, the Fund permits each investor to choose
the class of shares that is most beneficial given the type of investor, the
amount to be invested and the length of time the investor expects to hold the
shares. As described more fully below, each class of shares offers a distinct
structure of sales charges, distribution and service fees and other features
that are designed to address a variety of needs.
Each class of shares of the Fund represents an interest in the same portfolio of
investments of the Fund and has the same rights except that (i) Class A Shares
generally bear the sales charge expenses at the time of purchase while Class B
Shares and Class C Shares generally bear the sales charge expenses at the time
of redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described below)
under which the class's distribution fee and/or the service fee is paid, (iii)
each class of shares has different exchange privileges, (iv) certain classes of
shares are subject to a conversion feature and (v) certain classes of shares
have different shareholder service options available.
PRICING FUND SHARES
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. The differences among the classes' per share net
asset values reflect the daily expense accruals of the higher distribution fees
and transfer agency costs applicable to the Class B Shares and Class C Shares
and the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of the close of trading on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) each day the Exchange is open
for trading except on any day on which no purchase or redemption orders are
received or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund's Board of Trustees reserves the right to calculate the net
asset value per share and adjust the offering price more frequently than once
daily if deemed desirable. Net asset value per share for each class is
determined by dividing the value of the Fund's portfolio securities, cash and
other assets (including accrued interest) attributable to such class, less all
liabilities (including accrued expenses) attributable to such class, by the
total number of shares of the class outstanding.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities listed or traded on a domestic securities
exchange at the last reported sale price or, if there has been no sale that day,
at the mean between the last reported bid and asked prices and valuing
securities listed or traded on a foreign securities exchange at the last
reported sale price or the latest bid price, (ii) valuing over-the-counter
securities at the NASDAQ
16
Official Closing Price or, if there has been no sale that day, at the mean
between the last reported bid and asked prices, (iii) valuing unlisted
securities at the mean between the last reported bid and asked prices obtained
from reputable brokers and (iv) valuing any securities for which market
quotations are not readily available and any other assets at their fair value as
determined in good faith by the Adviser in accordance with procedures
established by the Fund's Board of Trustees. In cases where a security is traded
on more than one exchange, the security is valued on the exchange designated as
the primary market. Securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. See the financial
statements and notes thereto in the Fund's Statement of Additional Information.
DISTRIBUTION PLAN AND SERVICE PLAN
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each of its Class A Shares, Class B Shares and Class C Shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund also has adopted a service plan (the "Service Plan") with
respect to each such class of its shares. Under the Distribution Plan and the
Service Plan, the Fund pays distribution fees in connection with the sale and
distribution of its shares and service fees in connection with the provision of
ongoing services to shareholders of each such class and the maintenance of
shareholder accounts.
The amount of distribution fees and service fees varies among the classes
offered by the Fund. Because these fees are paid out of the Fund's assets on an
ongoing basis, these fees will increase the cost of your investment in the Fund.
By purchasing a class of shares subject to higher distribution fees and service
fees, you may pay more over time than on a class of shares with other types of
sales charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
NASD. The net income attributable to a class of shares will be reduced by the
amount of the distribution fees and service fees and other expenses of the Fund
associated with that class of shares. To assist investors in comparing classes
of shares, the tables under the Prospectus heading "Fees and Expenses of the
Fund" provide a summary of sales charges and expenses and an example of the
sales charges and expenses of the Fund applicable to each class of shares
offered herein.
HOW TO BUY SHARES
The shares are offered on a continuous basis through the Distributor as
principal underwriter, which is located at 1221 Avenue of the Americas, New
York, New York 10020. Shares may be purchased through members of the NASD who
are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
Dealers and brokers are sometimes referred to herein as authorized dealers.
Shares may be purchased on any business day by completing the account
application form and forwarding the account application form, directly or
through an authorized dealer, to the Fund's shareholder service agent, Van
Kampen Investor Services Inc. ("Investor Services"), a wholly owned subsidiary
of Van Kampen Investments. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A Shares, Class B Shares or Class C
Shares by selecting the correct Fund number on the account application form.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received timely by Investor Services. Purchases completed through an authorized
dealer, custodian, trustee or record keeper of a retirement plan account may
involve additional fees charged by the authorized dealer, custodian, trustee or
record keeper. Orders received by Investor Services prior to the close of the
Exchange, and orders received by authorized dealers prior to the close of the
Exchange that are properly transmitted to Investor Services by the time
designated by Investor Services, are priced based on the date of receipt. Orders
received by Investor Services after the close of the Exchange, and orders
received by authorized dealers after the close of the Exchange or orders
received by authorized dealers that are not transmitted to Investor Services
until after the time designated by Investor Services, are priced based on the
date of the next determined net asset value per share provided they are
17
received timely by Investor Services on such date. It is the responsibility of
authorized dealers to transmit orders received by them to Investor Services so
they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund by visiting our web
site at www.vankampen.com, by writing to the Fund, c/o Van Kampen Investor
Services Inc., PO Box 947, Jersey City, NJ 07303-0947 or by telephone at (800)
847-2424.
There is no minimum investment amount when establishing an account with the
Fund. However, the Fund may redeem any shareholder account (other than
retirement accounts and accounts established through a broker for which the
transfer agent does not have discretion to initiate transactions) that has been
open for one year or more and has a balance of less than $1,000. Shareholders
will receive written notice at least 60 days in advance of any involuntary
redemption and will be given the opportunity to purchase at net asset value
without sales charge the number of additional shares needed to bring the account
value to $1,000. There will be no involuntary redemption if the value of the
account is less than $1,000 due to market depreciation.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify,
and record information that identifies each person who opens an account. What
this means to you: when you open an account, you will be asked to provide your
name, address, date of birth, and other information that will allow us to
identify you. The Fund and the Distributor reserve the right to not open your
account if this information is not provided. If the Fund or the Distributor is
unable to verify your identity, the Fund and the Distributor reserve the right
to restrict additional transactions and/or liquidate your account at the next
calculated net asset value after the account is closed (minus any applicable
sales or other charges) or take other action required by law.
CLASS A SHARES
Class A Shares of the Fund are sold at the offering price, which is net asset
value plus an initial maximum sales charge of up to 4.75% (or 4.99% of the net
amount invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
AS % OF AS % OF
SIZE OF OFFERING NET AMOUNT
INVESTMENT PRICE INVESTED
----------------------------------------------------------------
Less than $100,000 4.75% 4.99%
.................................................................
$100,000 but less than
$250,000 3.75% 3.90%
.................................................................
$250,000 but less than
$500,000 2.75% 2.83%
.................................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
.................................................................
$1,000,000 or more * *
.................................................................
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and the Service Plan, the Fund may spend up to a
total of 0.25% per year of the Fund's average daily net assets with respect to
Class A Shares of the Fund.
18
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within five years of purchase as
shown in the following table:
CLASS B SHARES
SALES CHARGE SCHEDULE
CONTINGENT DEFERRED
SALES CHARGE
AS A PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
-----------------------------------------------------
First 4.00%
......................................................
Second 4.00%
......................................................
Third 3.00%
......................................................
Fourth 2.50%
......................................................
Fifth 1.50%
......................................................
Sixth and After None
......................................................
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. The
Fund will generally not accept a purchase order for Class B Shares in the amount
of $100,000 or more.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of each purchase of Class B Shares until the
time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to Class B Shares of the Fund. In
addition, under the Service Plan, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets with respect to Class B Shares of the Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. The
Fund will not accept a purchase order for Class C Shares in the amount of $1
million or more.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to Class C Shares of the Fund. In
addition, under the Service Plan, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets with respect to Class C Shares of the Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, including Class B Shares
received from reinvestment of distributions through the dividend reinvestment
plan on such shares, automatically convert to Class A Shares eight years after
the end of the calendar month in which the shares were purchased. Class B Shares
purchased before June 1, 1996, including Class B Shares received from
reinvestment of distributions through the dividend reinvestment plan on such
shares, automatically convert to Class A Shares six years after the end of the
calendar month in which the shares were purchased. Class C Shares purchased
before January 1, 1997, including Class C Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares ten years after the end of the calendar
19
month in which the shares were purchased. Such conversion will be on the basis
of the relative net asset values per share, without the imposition of any sales
load, fee or other charge. The conversion schedule applicable to a share of the
Fund acquired through the exchange privilege from another Van Kampen fund
participating in the exchange program is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid by the
Distributor to authorized dealers at the time of purchase of such shares or (v)
if made by the Fund's involuntary liquidation of a shareholder's account as
described herein. Subject to certain limitations, a shareholder who has redeemed
Class C Shares of the Fund may reinvest in Class C Shares at net asset value
with credit for any contingent deferred sales charge if the reinvestment is made
within 180 days after the redemption, provided that shares of the Fund are
available for sale at the time of reinvestment. For a more complete description
of contingent deferred sales charge waivers, please refer to the Statement of
Additional Information or contact your authorized dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds in Class A Shares over a
13-month period based on the
20
total amount of intended purchases plus the value of all shares of the
Participating Funds previously purchased and still owned. An investor may elect
to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The Letter of Intent does not preclude the Fund (or any other Participating
Fund) from discontinuing the sale of its shares. The initial purchase must be
for an amount equal to at least 5% of the minimum total purchase amount of the
level selected. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day backdating
provisions, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower sales charge. Such adjustment in sales charge will
be used to purchase additional shares. The Fund initially will escrow shares
totaling 5% of the dollar amount of the Letter of Intent to be held by Investor
Services in the name of the shareholder. In the event the Letter of Intent goal
is not achieved within the specified period, the investor must pay the
difference between the sales charge applicable to the purchases made and the
reduced sales charges previously paid. Such payments may be made directly to the
Distributor or, if not paid, the Distributor will liquidate sufficient escrowed
shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value without a sales charge if the administrator of an
investor's unit investment trust program meets certain uniform criteria relating
to cost savings by the Fund and the Distributor. The offering price for all
other investments made from unit investment trust distributions will be net
asset value plus an initial maximum sales charge of up to 1.00% (1.01% of the
net amount invested). Of this amount, the Distributor will pay to the authorized
dealer, if any, through which such participation in the qualifying program was
initiated 0.50% of the offering price as a dealer concession or agency
commission. Persons desiring more information with respect to this program,
including the terms and conditions that apply to the program, should contact
their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
To obtain these special benefits, all dividends and other distributions from the
Fund must be reinvested in additional shares and there cannot be any systematic
withdrawal program. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value without a sales charge, generally upon written assurance that
the purchase is made for investment purposes and that the shares will not be
resold except through redemption by the Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
and any of its subsidiaries and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley and
any of its subsidiaries; employees of an investment subadviser to any fund
described in (1) above or an affiliate of such subadviser; and such
persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement
21
with the Distributor and their spouses and children under 21 years of age
when purchasing for any accounts they beneficially own, or, in the case of
any such financial institution, when purchasing for retirement plans for
such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers or financial planners who charge a fee for
their services, trust companies and bank trust departments investing on
their own behalf or on behalf of their clients. The Distributor may pay
authorized dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor
and which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans, or custodial accounts held by a bank created pursuant to Section
403(b) of the Internal Revenue Code of 1986, as amended (the "Code") and
sponsored by nonprofit organizations defined under Section 501(c)(3) of the
Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code or in a
"rabbi trust" that meets certain uniform criteria established by the
Distributor from time to time. Such plans will qualify for purchases at net
asset value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (a) the
total plan assets are at least $1 million or (b) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund based on net
asset value purchase privileges previously in effect will be qualified to
purchase shares of the Participating Funds at net asset value. Retirement
plans distributed by the Distributor will not be eligible for net asset
value purchases based on the aggregate investment made by the plan or the
number of eligible employees, except under certain uniform criteria
established by the Distributor from time to time. A commission will be paid
to authorized dealers who initiate and are responsible for such purchases
within a rolling twelve-month period as follows: 1.00% on sales to $2
million, plus 0.80% on the next $1 million, plus 0.50% on the next $47
million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participants account in connection with this privilege will
be subject to a contingent deferred sales charge of 1.00% in the event of
redemption
22
within one year of purchase, and a commission will be paid to authorized
dealers who initiate and are responsible for such sales to each individual
as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million
and 0.50% on the excess over $3 million.
(10) Certain qualified state tuition plans qualifying pursuant to Section 529 of
the Code ("Section 529 Plans") that are approved by the Fund's Distributor.
There is no minimum investment amount for purchases made under this option
(10).
(11) Unit investment trusts sponsored by the Distributor or its affiliates.
The term "families" includes a person's spouse, children and grandchildren under
21 years of age, parents and the parents of the person's spouse.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, financial planner, trust company or bank trust department,
provided that Investor Services receives federal funds for the purchase by the
close of business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (10) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
Redemption of Shares
-------------------------------------------------------------------------------
Generally, shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than any applicable sales charge) at any time.
As described under the Prospectus heading "Purchase of Shares," redemptions of
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge. In addition, certain redemptions of Class A Shares for shareholder
accounts of $1 million or more may be subject to a contingent deferred sales
charge. Redemptions completed through an authorized dealer, custodian, trustee
or record keeper of a retirement plan account may involve additional fees
charged by the authorized dealer, custodian, trustee or record keeper.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the redemption request and any other necessary
documents in proper form as described below. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. Such
payment may, under certain circumstances, be paid wholly or in part by a
distribution-in-kind of portfolio securities. A distribution-in-kind may result
in recognition by the shareholder of a gain or loss for federal income tax
purposes when such securities are distributed, and the shareholder may have
brokerage costs and a gain or loss for federal income tax purposes upon the
shareholder's disposition of such securities. If the shares to be redeemed have
been recently purchased by check, Investor Services may delay the payment of
redemption proceeds until it confirms that the purchase check has cleared, which
may take up to 15 calendar days from the date of purchase. A taxable gain or
loss may be recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 947, Jersey City, NJ 07303-0947. The request for redemption should
indicate the number of shares or dollar amount to be redeemed, the Fund name and
class designation of such shares and the shareholder's account number. The
redemption request must be signed by all persons in whose names the shares are
registered. Signatures must conform exactly to the account registration. If the
proceeds of the redemption exceed $100,000, or if the proceeds are not to be
paid to the record owner at the record address, or if the record address has
changed within the previous 15 calendar days, signature(s) must be guaranteed by
one of the following: a bank or trust company; a broker-dealer; a credit union;
a national securities exchange, a registered securities association or a
23
clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. Certificated
shares may be redeemed only by written request. The certificates for the shares
being redeemed must be properly endorsed for transfer. Generally, in the event a
redemption is requested by and registered to a corporation, partnership, trust,
fiduciary, estate or other legal entity owning shares of the Fund, a copy of the
corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 calendar days must accompany the
redemption request. Retirement plan distribution requests should be sent to the
plan custodian/trustee to be forwarded to Investor Services. Contact the plan
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer following procedures specified by such
authorized dealer. The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer provided such order is transmitted timely to the Distributor
by the time designated by the Distributor. It is the responsibility of
authorized dealers to transmit redemption requests received by them to the
Distributor so they will be received prior to such time. Redemptions completed
through an authorized dealer may involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the account application
form. For accounts that are not established with telephone redemption
privileges, a shareholder may call the Fund at (800) 847-2424 to request that a
copy of the Telephone Redemption Authorization form be sent to the shareholder
for completion or visit our web site at www.vankampen.com to download this form.
Shares may be redeemed by calling (800) 847-2424, our automated telephone
system, which is generally accessible 24 hours a day, seven days a week. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedures previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account for this account. This privilege is not available if the address of
record has been changed within 15 calendar days prior to a telephone redemption
request. Proceeds from redemptions payable by wire transfer are expected to be
wired on the next business day following the date of redemption. The Fund
reserves the right at any time to terminate, limit or otherwise modify this
redemption privilege.
24
Distributions from the Fund
-------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest from investments is the Fund's main source of net investment
income. The Fund's present policy, which may be changed at any time by the
Fund's Board of Trustees, is to declare daily and to distribute monthly all, or
substantially all, of this net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any net capital gains
to shareholders as capital gain dividends at least annually. As in the case of
dividends, capital gain dividends are automatically reinvested in additional
shares of the Fund at the next determined net asset value unless the shareholder
instructs otherwise.
Shareholder Services
-------------------------------------------------------------------------------
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instructions regarding internet transactions. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated through the internet are genuine. Such procedures
include requiring use of a personal identification number prior to acting upon
internet instructions and providing written confirmation of instructions
communicated through the internet. If reasonable procedures are employed, none
of Van Kampen Investments, Investor Services or the Fund will be liable for
following instructions received through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without a sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by visiting our web site at www.vankampen.com, by
writing to Investor Services or by telephone by calling (800) 847-2424 ((800)
421-2833 for the hearing impaired). The investor may, on the account application
form or prior to any declaration, instruct that dividends and/or capital gain
dividends be paid in cash, be reinvested in the Fund at the next determined net
asset value or be reinvested in another Participating Fund at the next
determined net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
25
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may write
checks against such shareholder's account by completing the Checkwriting Form
and the appropriate section of the account application form and returning the
forms to Investor Services. Once the forms are properly completed, signed and
returned, a supply of checks (redemption drafts) will be sent to the Class A
shareholder. Checks can be written to the order of any person in any amount of
$100 or more.
When a check is presented to the custodian bank, State Street Bank and Trust
Company (the "Bank"), for payment, full and fractional Class A Shares required
to cover the amount of the check are redeemed from the shareholder's Class A
Shares account by Investor Services at the next determined net asset value per
share. Check writing redemptions represent the sale of Class A Shares. Any gain
or loss realized on the redemption of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Shares account, the
check will be returned and the shareholder may be subject to additional charges.
A shareholder may not liquidate the entire account by means of a check. The
check writing privilege may be terminated or suspended at any time by the Fund
or by the Bank and neither shall incur any liability for such amendment or
termination or for effecting redemptions to pay checks reasonably believed to be
genuine or for returning or not paying on checks which have not been accepted
for any reason. Retirement plans and accounts that are subject to backup
withholding are not eligible for the check writing privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next determined net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from an authorized dealer or the Distributor or by visiting our web
site at www.vankampen.com.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by calling (800) 847-2424, our automated telephone system,
which is generally accessible 24 hours a day, seven days a week, or by visiting
our web site at www.vankampen.com. A shareholder automatically has these
exchange privileges unless the shareholder indicates otherwise by checking the
applicable box on the account application form. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions,
26
tape-recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
none of Van Kampen Investments, Investor Services or the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine. If
the exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gain dividend options (except dividend diversification) and
authorized dealer of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must submit a
specific request.
The Fund reserves the right to reject any order to purchase its shares through
exchange or otherwise. Certain patterns of past exchanges and/or purchase or
sale transactions involving the Fund or other Participating Funds may result in
the Fund limiting or prohibiting, in the Fund's discretion, additional purchases
and/or exchanges. Determinations in this regard may be made based on the
frequency or dollar amount of the previous exchanges or purchases or sale
transactions. Generally, all shareholders are limited to a maximum of eight
exchanges per fund during a rolling 365-day period. Exchange privileges will be
suspended on a particular fund if more than eight exchanges out of that fund are
made by a shareholder during a rolling 365-day period. If exchange privileges
are suspended, subsequent exchange requests during the stated period will not be
processed. Exchange privileges will be restored when the account history shows
fewer than eight exchanges in the rolling 365-day period. This eight exchange
policy does not apply to systematic exchange plans or employer-sponsored
retirement plans. The Fund may modify, restrict or terminate the exchange
privilege at any time. Shareholders will receive 60 days' notice of any
termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged shares and on any shares
previously exchanged for such shares or for any of their predecessors shall be
included. If the exchanged shares were acquired through reinvestment, those
shares are deemed to have been sold with a sales charge rate equal to the rate
previously paid on the shares on which the dividend or distribution was paid. If
a shareholder exchanges less than all of such shareholder's shares, the shares
upon which the highest sales charge rate was previously paid are deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time that shares of the
funds involved in the request are priced will be processed on the next business
day in the manner described herein.
Federal Income Taxation
-------------------------------------------------------------------------------
Distributions of the Fund's investment company taxable income (generally
ordinary income and net short-term capital gain) are taxable to shareholders as
ordinary income to the extent of the Fund's earnings and profits, whether paid
in cash or reinvested in additional shares. Distributions of the Fund's net
capital gain (which is the excess of net long-term capital gain over net
short-term capital loss) designated as capital gain dividends, if any, are
taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in additional shares, and regardless of how long the shares of the
Fund have been held by such shareholders. The Fund expects that its
distributions will consist primarily of ordinary income and capital gain
dividends. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a shareholder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gains to such shareholder
(assuming such shares are held as a capital asset).
Although distributions generally are treated as taxable in the year they are
paid, distributions declared in
27
October, November or December, payable to shareholders of record on a specified
date in such month and paid during January of the following year will be treated
as having been distributed by the Fund and received by the shareholders on the
December 31st prior to the date of payment. The Fund will inform shareholders of
the source and tax status of all distributions promptly after the close of each
calendar year.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act")
contains provisions that reduce the U.S. federal income tax rates on (1) long-
term capital gains received by individuals and (2) "qualified dividend income"
received by individuals from certain domestic and foreign corporations. The
reduced rate for capital gains generally applies to long-term capital gains from
sales or exchanges recognized on or after May 6, 2003, and ceases to apply for
taxable years beginning after December 31, 2008. The reduced rate for dividends
generally applies to "qualified dividend income" received in taxable years
beginning after December 31, 2002, and ceases to apply for taxable years
beginning after December 31, 2008. Because the Fund intends to invest primarily
in debt securities, ordinary income dividends paid by the Fund generally will
not be eligible for the reduced rate applicable to "qualified dividend income."
Distributions from the Fund designated as capital gain dividends may be eligible
for the reduced rate applicable to long-term capital gains.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize a gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held by the
shareholder as a capital asset, the gain or loss will be a capital gain or loss.
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to net
capital gains recognized by individuals and other non-corporate taxpayers on the
sale or exchange of shares is (i) the same as the maximum ordinary income tax
rate for capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008).
Backup withholding rules require the Fund, in certain circumstances, to withhold
28% of dividends and certain other payments, including redemption proceeds, paid
to shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and make certain required certifications (including certifications as to foreign
status, if applicable) or who are otherwise subject to backup withholding.
Foreign shareholders, including shareholders who are non-resident aliens, may be
subject to U.S. withholding tax on certain distributions (whether received in
cash or in shares) at a rate of 30% or such lower rate as prescribed by an
applicable treaty. Dividends paid by the Fund will be subject to such U.S.
withholding tax, whereas interest income with respect to a direct investment in
the underlying assets of the Fund by a foreign shareholder generally would not
be subject to U.S. withholding tax. Prospective foreign investors should consult
their advisers concerning the tax consequences to them of an investment in
shares of the Fund.
The Fund has elected and qualified, and intends to continue to qualify, as a
regulated investment company under federal income tax law. If the Fund so
qualifies and distributes each year to its shareholders at least 90% of its
investment company taxable income, the Fund will not be required to pay federal
income taxes on any income it distributes to shareholders. If the Fund
distributes less than an amount equal to the sum of 98% of its ordinary income
and 98% of its capital gain net income, then the Fund will be subject to a 4%
excise tax on the undistributed amounts.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. To generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise taxes, the Fund may have to
28
dispose of securities that it would otherwise have continued to hold.
The federal income tax discussion set forth above is for general information
only. Shareholders and prospective investors should consult their own advisers
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares of the Fund, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
29
Financial Highlights
---------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods indicated. Certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all distributions and not
including payment of the maximum sales charge or taxes on Fund distributions
or redemptions). The information for the fiscal years ended August 31, 2003,
2002, 2001 and 2000 has been audited by Ernst & Young LLP, independent
auditors, whose report, along with the Fund's most recent financial
statements, is included in the Statement of Additional Information and may
be obtained without charge by calling the telephone number on the back cover
of this Prospectus. The information for the fiscal year ended August 31,
1999 has been audited by the Fund's former independent auditors. The
financial highlights table should be read in conjunction with the financial
statements and notes thereto included in the Statement of Additional
Information.
CLASS A SHARES
YEAR ENDED AUGUST 31,
2003 2002(a) 2001 2000 1999
----------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning of the Period..... $3.15 $4.23 $5.24 $5.68 $6.06
------ ------- ------ ------ ------
Net Investment Income....................... .29 .39 .51 .59 .63
Net Realized and Unrealized Gain/Loss....... .29 (1.01) (.96) (.43) (.37)
------ ------- ------ ------ ------
Total from Investment Operations............. .58 (.62) (.45) .16 .26
------ ------- ------ ------ ------
Less:
Distributions from Net Investment Income.... .24 .43 .55 .60 .64
Return of Capital Distributions............. .06 .03 .01 -0- -0-
------ ------- ------ ------ ------
Total Distributions.......................... .30 .46 .56 .60 .64
------ ------- ------ ------ ------
Net Asset Value, End of the Period........... $3.43 $3.15 $4.23 $5.24 $5.68
====== ======= ====== ====== ======
Total Return................................. 19.26%(d) -15.75%(d) -9.04%(d) 3.09%(d) 4.41%(d)
Net Assets at End of the Period (In
millions)................................... $408.7 $308.5 $394.4 $465.0 $492.4
Ratio of Expenses to Average Net Assets...... 1.12% 1.08% 1.05% 1.03% 1.03%
Ratio of Net Investment Income to Average Net
Assets...................................... 8.36% 10.39% 10.93% 10.90% 10.65%
Portfolio Turnover........................... 95% 83% 80% 68% 51%
CLASS B SHARES
YEAR ENDED AUGUST 31,
2003 2002(b) 2001 2000 1999
--------------------------------------------- -------------------------------------------------------
Net Asset Value, Beginning of the Period..... $3.16 $4.24 $5.25 $5.68 $6.06
------ ------- ------ ------ ------
Net Investment Income....................... .25 .35 .48 .55 .58
Net Realized and Unrealized Gain/Loss....... .30 (1.01) (.97) (.43) (.37)
------ ------- ------ ------ ------
Total from Investment Operations............. .55 (.66) (.49) .12 .21
------ ------- ------ ------ ------
Less:
Distributions from Net Investment Income.... .21 .39 .51 .55 .59
Return of Capital Distributions............. .06 .03 .01 -0- -0-
------ ------- ------ ------ ------
Total Distributions.......................... .27 .42 .52 .55 .59
------ ------- ------ ------ ------
Net Asset Value, End of the Period........... $3.44 $3.16 $4.24 $5.25 $5.68
====== ======= ====== ====== ======
Total Return................................. 18.27%(e) -16.12%(e) -9.80%(e) 2.43%(e) 3.57%(e)
Net Assets at End of the Period (In
millions)................................... $175.6 $168.8 $249.6 $268.7 $318.2
Ratio of Expenses to Average Net Assets...... 1.89% 1.84% 1.83% 1.78% 1.79%
Ratio of Net Investment Income to Average Net
Assets...................................... 7.68% 9.67% 10.13% 10.15% 9.88%
Portfolio Turnover........................... 95% 83% 80% 68% 51%
CLASS C SHARES
YEAR ENDED AUGUST 31,
2003 2002(c) 2001 2000 1999
--------------------------------------------- ----------------------------------------------------------
Net Asset Value, Beginning of the Period..... $3.13 $4.20 $5.22 $5.65 $6.04
------ ------- ------- ----- -----
Net Investment Income....................... .25 .35 .48 .55 .58
Net Realized and Unrealized Gain/Loss....... .30 (1.00) (.98) (.43) (.38)
------ ------- ------- ----- -----
Total from Investment Operations............. .55 (.65) (.50) .12 .20
------ ------- ------- ----- -----
Less:
Distributions from Net Investment Income.... .21 .39 .51 .55 .59
Return of Capital Distributions............. .06 .03 .01 -0- -0-
------ ------- ------- ----- -----
Total Distributions.......................... .27 .42 .52 .55 .59
------ ------- ------- ----- -----
Net Asset Value, End of the Period........... $3.41 $3.13 $4.20 $5.22 $5.65
====== ======= ======= ===== =====
Total Return................................. 18.14%(f)(g) -16.04%(f) -10.06%(f) 2.45%(f) 3.42%(f)
Net Assets at End of the Period (In
millions)................................... $41.5 $36.7 $58.7 $59.4 $67.3
Ratio of Expenses to Average Net Assets...... 1.86% 1.84% 1.82% 1.78% 1.79%
Ratio of Net Investment Income to Average Net
Assets...................................... 7.68%(g) 9.68% 10.12% 10.15% 9.87%
Portfolio Turnover........................... 95% 83% 80% 68% 51%
(a) As required, effective September 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment
Companies and began amortizing premium on fixed income securities and
presenting paydown gains and losses on mortgage- and asset-backed
securities as interest income. The effect of these changes for the
period ended August 31, 2002 was to decrease the ratio of net investment
income to average net assets from 10.49% to 10.39%. Net investment
income per share and net realized gains and losses per share were
unaffected by the adjustments. Per share, ratios and supplemental data
for periods prior to August 31, 2002 have not been restated to reflect
this change in presentation.
(b) As required, effective September 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment
Companies and began amortizing premium on fixed income securities and
presenting paydown gains and losses on mortgage- and asset-backed
securities as interest income. The effect of these changes for the
period ended August 31, 2002 was to decrease the ratio of net investment
income to average net assets from 9.77% to 9.67%. Net investment income
per share and net realized gains and losses per share were unaffected by
the adjustments. Per share, ratios and supplemental data for periods
prior to August 31, 2002 have not been restated to reflect this change
in presentation.
(c) As required, effective September 1, 2001, the Fund has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment
Companies and began amortizing premium on fixed income securities and
presenting paydown gains and losses on mortgage- and asset-backed
securities as interest income. The effect of these changes for the
period ended August 31, 2002 was to decrease the ratio of net investment
income to average net assets from 9.78% to 9.68%. Net investment income
per share and net realized gains and losses per share were unaffected by
the adjustments. Per share, ratios and supplemental data for periods
prior to August 31, 2002 have not been restated to reflect this change
in presentation.
(d) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% 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 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.
(e) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 4%, charged on certain
redemptions made within the first and second 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 redemption
of Fund shares.
(f) 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 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.
(g) Certain non-recurring payments were made to Class C Shares, resulting in
an increase to the Total Return and Ratio of Net Investment Income to
Average Net Assets of .01%.
30
Appendix -- Description of Securities Ratings
-------------------------------------------------------------------------------
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program. It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The issue credit rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term ratings
are generally assigned to those obligations considered short term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term ratings address the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only in
small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity of the obligor to meet its financial commitment on the
obligation.
A-1
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are regarded
as having significant speculative characteristics. "BB" indicates the least
degree of speculation and "C" the highest. While such obligations will likely
have some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-): The ratings from 'AA' to 'CCC' may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
c: The "c" subscript is used to provide additional information to investors that
the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable.
p: The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project financed by the debt being
rated and indicates that payment of debt service requirements is largely or
entirely dependent upon the successful, timely completion of the project. This
rating, however, while addressing credit quality subsequent to completion of the
project, makes no comment on the likelihood of or the risk of default upon
failure of such completion. The investor should exercise his own judgment with
respect to such likelihood and risk.
*: Continuance of the ratings is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments and
cash flows.
r: The "r" highlights derivative, hybrid, and certain other obligations that
S&P's believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples of such obligations are
securities with principal or interest return indexed to equities, commodities,
or currencies; certain swaps and options; and interest-only and principal-only
mortgage securities. The absence of an "r" symbol should not be taken as an
indication that an obligation will exhibit no volatility or variability in total
return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
A-2
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable Moody's
Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds and preferred stock which are rated Aaa are judged to be of the best
quality. They carry the smallest degree of investment risk and are generally
referred to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds and preferred stock which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than the Aaa securities.
A: Bonds and preferred stock which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment some time in the
future.
Baa: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds and preferred stock which are rated Ba are judged to have speculative
elements; their future cannot be considered as well-assured. Often the
protection of interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack characteristics of
the desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa: Bonds and preferred stock which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements of danger with respect
to principal or interest.
Ca: Bonds and preferred stock which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated class of
bonds, and issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
A-3
For More Information
-------------------------------------------------------------------------------
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
- Call your broker
- WEB SITE
www.vankampen.com
- FUNDINFO(R)
Automated Telephone System 800-847-2424
DEALERS
- WEB SITE
www.vankampen.com
- FUNDINFO(R)
Automated Telephone System 800-847-2424
- VAN KAMPEN INVESTMENTS 800-421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF (TDD)
- For Shareholder and dealer inquiries through TDD, call 800-421-2833
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
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
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 947
Jersey City, NJ 07303-0947
Attn: Van Kampen High Income Corporate Bond Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02110-1713
Attn: Van Kampen High Income Corporate Bond Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
Van Kampen
High Income
Corporate
Bond Fund
A Statement of Additional Information, which contains more details about the
Fund, is incorporated by reference in its entirety into this Prospectus.
You will find additional information about the Fund in its annual and semiannual
reports to shareholders. The annual report explains the market conditions and
investment strategies affecting the Fund's performance during its last fiscal
year.
You can ask questions or obtain a free copy of the Fund's reports or its
Statement of Additional Information by calling (800) 847-2424.
Telecommunications Device for the Deaf users may call (800) 421-2833. A free
copy of the Fund's reports can also be ordered from our web site at
www.vankampen.com.
Information about the Fund, including its reports and Statement of Additional
Information, has been filed with the Securities and Exchange Commission (SEC).
It can be reviewed and copied at the SEC's Public Reference Room in Washington,
DC or on the EDGAR database on the SEC's internet site (http://www.sec.gov).
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at 1-202-942-8090. You can also request copies of these
materials, upon payment of a duplicating fee, by electronic request at the SEC's
e-mail address (publicinfo@sec.gov) or by writing the Public Reference section
of the SEC, Washington, DC 20549-0102.
DECEMBER 30, 2003
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
[VAN KAMPEN INVESTMENTS LOGO]
The Fund's Investment Company HYI PRO 12/03
Act File No. is 811-2851. 65044PRO-00
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN HIGH YIELD FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
DATED SEPTEMBER 1, 2004
---------------------
This Statement of Additional Information is available to the shareholders
of Van Kampen High Yield Fund (the "Target Fund") in connection with a proposed
transaction whereby all of the assets and liabilities of the Target Fund would
be transferred to Van Kampen High Income Corporate Bond Fund (the "Acquiring
Fund") in exchange for Class A, B and C Shares of the Acquiring Fund. Unless
otherwise defined herein, capitalized terms have the meanings given to them in
the Prospectus/Proxy Statement.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus/Proxy Statement dated September 1, 2004
relating to the reorganization of the Target Fund. A copy of the
Prospectus/Proxy Statement may be obtained, without charge, by writing to the
Van Kampen Client Relations Department at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555 or by calling 1-800-231-2808 (TDD users
may call 1-800-421-2833).
TABLE OF CONTENTS
PAGE
----
Proposed Reorganization..................................... B-1
Additional Information about the Target Fund................ B-1
Additional Information about the Acquiring Fund............. B-1
Financial Statements........................................ B-2
Pro Forma Financial Statements.............................. B-2
The Acquiring Fund will provide, without charge, upon request of any person
to whom this Statement of Additional Information is delivered, a copy of any and
all documents that have been incorporated by reference in the registration
statement of which this Statement of Additional Information is a part.
PROPOSED REORGANIZATION
The shareholders of the Target Fund are being asked to approve an
acquisition by the Acquiring Fund of all the assets and liabilities of the
Target Fund solely in exchange for Class A, B and C Shares of the Acquiring Fund
(the "Reorganization") pursuant to an Agreement and Plan of Reorganization by
and between the Target Fund and the Acquiring Fund (the "Reorganization
Agreement"). A copy of a form of the Reorganization Agreement is attached hereto
as Appendix A.
ADDITIONAL INFORMATION ABOUT THE TARGET FUND
Included herein in its entirety is the Statement of Additional Information
for the Target Fund dated July 31, 2004, which has been filed with the
Securities and Exchange Commission (the "SEC") and is attached hereto as
Appendix B.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Included herein in its entirety is the Statement of Additional Information
of the Acquiring Fund, dated December 30, 2003, as supplemented, which has been
filed with the SEC and is attached hereto as Appendix C.
B-1
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited annual financial statements of the Target Fund, dated March 31, 2004,
included as part of the Van Kampen Trust Form N-CSR as filed with the SEC on May
27, 2004, (ii) the audited annual financial statements of the Acquiring Fund,
dated August 31, 2003, included as part of the Acquiring Fund's Form N-CSR as
filed with the SEC on October 29, 2003, (iii) the unaudited semi-annual
financial statements of the Acquiring Fund, dated February 29, 2004, included as
part of the Acquiring Fund's Form N-CSRS as filed with the SEC on April 28,
2004. Annual and semi-annual reports referenced as part of a Fund's filing on
Form N-CSR or Form N-CSRS may be obtained by following the instructions on the
cover of this Statement of Additional Information and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC or on the EDGAR database on
the SEC's internet site(http://www.sec.gov). Information on the operation of the
SEC's Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of these materials, upon payment of
a duplicating fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the SEC,
Washington, DC 20549-0102.
PRO FORMA FINANCIAL STATEMENTS
Attached hereto as Appendix D are unaudited pro forma financial statements
of the Acquiring Fund giving effect to the Reorganization as of March 31, 2004.
B-2
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
A-1
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 2004, by Van Kampen High Income Corporate Bond Fund (the "Acquiring
Fund"), a registered open-end investment company, SEC File No. 811-02851, and
Van Kampen Trust (the "Van Kampen Trust"), a registered open-end investment
company, SEC File No. 811-04629, on behalf of its series, Van Kampen High Yield
Fund (the "Target Fund").
W I T N E S S E T H:
WHEREAS, the Board of Trustees of the Van Kampen Trust, on behalf of the
Target Fund (the "Target Fund Board"), and the Board of Trustees of the
Acquiring Fund (the "Acquiring Fund Board" and, together with the Target Fund
Board, the "Boards"), have determined that this Agreement, whereby the Target
Fund would transfer all of its assets and liabilities to the Acquiring Fund in
exchange for shares of the Acquiring Fund, is in the best interests of the
shareholders of their respective funds; and
WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the Target Fund will convey, transfer and
deliver to the Acquiring Fund at the closing provided for in Section 2 hereof,
all of the existing assets of the Target Fund (including accrued interest to the
Closing Date (as defined below)), free and clear of all liens, encumbrances and
claims whatsoever (the assets so transferred collectively being referred to as
the "Assets").
B. CONSIDERATION. In consideration thereof, the Acquiring Fund agrees that
the Acquiring Fund at the closing will (i) deliver to the Target Fund full and
fractional Class A, Class B and Class C common shares of beneficial interest,
par value $0.01 per share, of the Acquiring Fund with an aggregate net asset
value equal to the aggregate dollar value of the Assets net of any liabilities
of the Target Fund described in Section 3.E. hereof (the "Liabilities")
determined pursuant to Section 3.A. of this Agreement (collectively, the
"Acquiring Fund Shares") and (ii) assume all of the Liabilities of the Target
Fund. The calculation of Acquiring Fund Shares to be exchanged shall be carried
out to no less than two (2) decimal places. All Acquiring Fund Shares delivered
to the Target Fund in exchange for such Assets shall be delivered at net asset
value without sales load, commission or other transactional fees being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the Target Fund at which
this Agreement will be considered and approved, or such later date as soon as
practicable thereafter as the parties may mutually agree (the "Closing Date").
On the Closing Date, the Acquiring Fund shall deliver to the Target Fund the
Acquiring Fund Shares in the amount determined pursuant to Section 1.B. hereof,
and the Target Fund thereafter shall, in order to effect the distribution of
such shares to Target Fund shareholders, instruct the Acquiring Fund to register
the pro rata interest in the Acquiring Fund Shares (in full and fractional
shares) of each of the holders of record of shares of the Target Fund in
accordance with their holdings of Class A, Class B or Class C shares of the
Target Fund and shall provide as part of such instruction a complete and updated
list of such holders (including addresses and taxpayer identification numbers),
and the Acquiring Fund agrees promptly to comply with said instruction. The
Acquiring Fund shall have no obligation to inquire as to the validity, propriety
or correctness of such instruction, but shall assume that such instruction is
valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the Target Fund to
be transferred and assumed, respectively, by the Acquiring Fund shall be
computed as of the Closing Date, in the manner set forth in the most recent
Prospectus and Statement of Additional Information of the Acquiring Fund
(collectively, the "Acquiring Fund Prospectus"), copies of which have been
delivered to the Target Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company or other custodian as designated by the Acquiring Fund
(collectively the "Custodian") for the benefit of the Acquiring Fund, duly
endorsed in proper form for transfer in such condition as to constitute a good
delivery thereof, free and clear of all liens, encumbrances and claims
whatsoever, in accordance with the custom of brokers, and shall be accompanied
by all necessary state stock transfer stamps, if any, the cost of which shall be
borne by the Target Fund.
C. FAILURE TO DELIVER SECURITIES. If the Target Fund is unable to make
delivery pursuant to Section 3.B. hereof to the Custodian of any of the
securities of the Target Fund, then, in lieu of such delivery, the Target Fund
shall deliver to the Custodian, with respect to said securities, executed copies
of an agreement of assignment and due bills, together with such other documents
as may be required by the Acquiring Fund or Custodian.
D. SHAREHOLDER ACCOUNTS. The Acquiring Fund, in order to assist the Target
Fund in the distribution of the Acquiring Fund Shares to Target Fund
shareholders after delivery of the Acquiring Fund Shares to the Target Fund,
will establish, pursuant to the request of the Target Fund, an open account with
the Acquiring Fund for each shareholder of the Target Fund and, upon request by
the Target Fund, shall transfer to such accounts the exact number of Acquiring
Fund Shares then held by the Target Fund specified in the instruction provided
pursuant to Section 2 hereof. The Acquiring Fund is not required to issue
certificates representing Acquiring Fund Shares unless requested to do so by a
shareholder. Upon liquidation or dissolution of the Target Fund, certificates
representing shares of the Target Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of the Target Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, the Target Fund will pay the expenses of the Reorganization,
including the costs of the special meeting of shareholders of the Target Fund.
In addition, as part of the Reorganization, the Target Fund will write off its
remaining unamortized organizational expenses, which shall be reimbursed by Van
Kampen Asset Management (or a subsidiary or affiliate thereof). In the event
that the transactions contemplated herein are not consummated for any reason,
then all reasonable outside expenses incurred to the date of termination of this
Agreement shall be borne by Van Kampen Asset Management (or a subsidiary or
affiliate thereof).
G. DISSOLUTION. As soon as practicable after the Closing Date, but in no
event later than one year after the Closing Date, the Target Fund shall
voluntarily dissolve and completely liquidate by taking, in accordance with the
law in the state of its organization and federal securities laws, all steps as
shall be necessary and proper to effect a complete liquidation and dissolution
of the Target Fund. Immediately after the Closing Date, the share transfer books
relating to the Target Fund shall be closed and no transfer of shares shall
thereafter be made on such books.
4. REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
The Target Fund hereby represents and warrants to the Acquiring Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Acquiring Fund that:
A. ORGANIZATION. The Target Fund is duly formed and in good standing under
the laws of the state of its organization and is duly authorized to transact
business in the state of its organization. The Target Fund is qualified to do
business in all jurisdictions in which it is required to be so qualified, except
jurisdictions
2
in which the failure to so qualify would not have a material adverse effect on
the Target Fund. The Target Fund has all material federal, state and local
authorizations necessary to own all of its properties and assets and to carry on
its business as now being conducted, except authorizations which the failure to
so obtain would not have a material adverse effect on the Target Fund.
B. REGISTRATION. The Van Kampen Trust is registered under the Investment
Company Act of 1940, as amended (the "1940 Act"), as an open-end management
investment company, and such registration has not been revoked or rescinded. The
Target Fund is in compliance in all material respects with the 1940 Act and the
rules and regulations thereunder with respect to its activities. All of the
outstanding shares of common stock of the Target Fund have been duly authorized
and are validly issued, fully paid and nonassessable and not subject to
pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Target Fund audited as of and for the year ended
March 31, 2003, true and complete copies of which have been heretofore furnished
to the Acquiring Fund, fairly represent the financial condition and the results
of operations of the Target Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Target Fund shall furnish to the Acquiring
Fund within five (5) business days after the Closing Date an unaudited statement
of assets and liabilities and the portfolio of investments and the related
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
the Target Fund's operations as of, and for the periods ending on, the dates of
such statements in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved and the results of its
operations and changes in financial position for the period then ended; and such
financial statements shall be certified by the Treasurer of the Target Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be,
no contingent Liabilities of the Target Fund not disclosed in the financial
statements delivered pursuant to Sections 4.C. and 4.D. which would materially
affect the Target Fund's financial condition, and there are no legal,
administrative or other proceedings pending or, to its knowledge, threatened
against the Target Fund which would, if adversely determined, materially affect
the Target Fund's financial condition. All Liabilities were incurred by the
Target Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Target Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and, except as referred to in the most
recent Prospectus and Statement of Additional Information of the Target Fund
(collectively, the "Target Fund Prospectus"), there are no material agreements
outstanding relating to the Target Fund to which the Target Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, the Target Fund shall
furnish the Acquiring Fund with a statement of the earnings and profits of the
Target Fund within the meaning of the Code as of the Closing Date.
H. TAX RETURNS. At the date hereof and on the Closing Date, all federal and
other material tax returns and reports of the Target Fund required by law to
have been filed by such dates shall have been filed, and all federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Target Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.
I. CORPORATE AUTHORITY. The Target Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Target
Fund Board, and except for obtaining approval of the Target Fund shareholders,
no other corporate acts or proceedings by the Target Fund are necessary to
authorize this Agreement and the
3
transactions contemplated herein. This Agreement has been duly executed and
delivered by the Target Fund and constitutes a valid and binding obligation of
the Target Fund enforceable in accordance with its terms, except as such
enforceability may be limited by bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium or similar laws affecting creditors' rights
generally, or by general principles of equity (regardless of whether enforcement
is sought in a proceeding at equity or law).
J. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Target Fund does not and will not (i)
result in a material violation of any provision of the Target Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Target Fund, (iii) result in a material violation or breach of or constitute
a default under any material contract, indenture, mortgage, loan agreement,
note, lease or other instrument or obligation to which the Target Fund is
subject or (iv) result in the creation or imposition of any lien, charge or
encumbrance upon any property or asset of the Target Fund. Except as have been
obtained, (i) no consent, approval, authorization, order or filing with or
notice to any court or governmental authority or agency is required for the
consummation by the Target Fund of the transactions contemplated by this
Agreement and (ii) no consent of or notice to any third party or entity is
required for the consummation by the Target Fund of the transactions
contemplated by this Agreement.
K. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, financial
condition or manner of conducting the business of the Target Fund, other than
changes in the ordinary course of its business, or any pending or threatened
litigation, which has had or may have a material adverse effect on such
business, results of operations, assets, financial condition or manner of
conducting business;
(2) issued by the Target Fund any option to purchase or other right to
acquire shares of the Target Fund to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Target Fund
Prospectus;
(3) any entering into, amendment or termination of any contract or
agreement by the Target Fund, except as otherwise contemplated by this
Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the Target Fund for borrowed money, or any commitment to borrow
money entered into by the Target Fund;
(5) any amendment of the Target Fund's organizational documents; or
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with respect
to covered options) upon any asset of the Target Fund other than a lien for
taxes not yet due and payable.
L. TITLE. On the Closing Date, the Target Fund will have good and
marketable title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the
Acquiring Fund will receive good and marketable title to such Assets, free and
clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities whatsoever, other than a lien for taxes not yet due and payable.
M. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein, as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform as they relate to the Target Fund, in all
material respects, to the applicable requirements of the applicable federal and
state securities laws and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, and do not and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading, except that no
representations or warranties in this Section 4.M. apply to statements or
omissions
4
made in reliance upon and in conformity with written information concerning the
Acquiring Fund furnished to the Target Fund by the Acquiring Fund.
N. TAX QUALIFICATION. The Target Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years and has satisfied the distribution requirements imposed by Section
852 of the Code for each of its taxable years.
O. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Acquiring Fund
and those to which the Assets are subject.
P. TARGET FUND LIABILITIES. Except as otherwise provided for herein, the
Target Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the Target Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The Acquiring Fund hereby represents and warrants to the Target Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Target Fund that:
A. ORGANIZATION. The Acquiring Fund is duly formed and in good standing
under the laws of the state of its organization and is duly authorized to
transact business in the state of its organization. The Acquiring Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Acquiring Fund. The Acquiring Fund has all
material federal, state and local authorizations necessary to own all of its
properties and assets and to carry on its business and the business thereof as
now being conducted, except authorizations which the failure to so obtain would
not have a material adverse effect on the Acquiring Fund.
B. REGISTRATION. The Acquiring Fund is registered under the 1940 Act as an
open-end management investment company and such registration has not been
revoked or rescinded. The Acquiring Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder with respect
to its activities. All of the outstanding common shares of beneficial interest
of the Acquiring Fund have been duly authorized and are validly issued, fully
paid and nonassessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Acquiring Fund audited as of and for the year ended
August 31, 2003, true and complete copies of which have been heretofore
furnished to the Target Fund, fairly represent the financial condition and the
results of operations of the Acquiring Fund as of and for their respective dates
and periods in conformity with generally accepted accounting principles applied
on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Acquiring Fund shall furnish to the Target
Fund within five (5) business days after the Closing Date an unaudited statement
of assets and liabilities and the portfolio of investments and the related
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
its operations as of, and for the period ending on, the dates of such statements
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such financial
statements shall be certified by the Treasurer of the Acquiring Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be,
no contingent Liabilities of the Acquiring Fund not disclosed in the financial
statements delivered pursuant to Sections 5.C. and 5.D. which would materially
affect the Acquiring Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Acquiring Fund
5
which would, if adversely determined, materially affect the Acquiring Fund's
financial condition. All Liabilities were incurred by the Acquiring Fund in the
ordinary course of its business.
F. MATERIAL AGREEMENTS. The Acquiring Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and, except as referred to in the
Acquiring Fund Prospectus, there are no material agreements outstanding relating
to the Acquiring Fund to which the Acquiring Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all federal and
other material tax returns and reports of the Acquiring Fund required by law to
have been filed by such dates shall have been filed, and all federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Acquiring Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.
H. CORPORATE AUTHORITY. The Acquiring Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Acquiring
Fund Board, no other corporate acts or proceedings by the Acquiring Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the Acquiring Fund and
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is sought in a proceeding at equity or
law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Acquiring Fund does not and will not (i)
result in a material violation of any provision of the Acquiring Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Acquiring Fund, (iii) result in a material violation or breach of or
constitute a default under any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the Acquiring
Fund is subject or (iv) result in the creation or imposition or any lien, charge
or encumbrance upon any property or asset of the Acquiring Fund. Except as have
been obtained, (i) no consent, approval, authorization, order or filing with or
notice to any court or governmental authority or agency is required for the
consummation by the Acquiring Fund of the transactions contemplated by this
Agreement and (ii) no consent of or notice to any third party or entity is
required for the consummation by the Acquiring Fund of the transactions
contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring Fund
which would materially affect its financial condition.
K. SHARES OF THE ACQUIRING FUND: REGISTRATION. The Acquiring Fund Shares to
be issued pursuant to Section 1 hereof will be duly registered under the
Securities Act of 1933, as amended (the "Securities Act"), and all applicable
state securities laws.
L. SHARES OF THE ACQUIRING FUND: AUTHORIZATION. The Acquiring Fund Shares
to be issued pursuant to Section 1 hereof have been duly authorized and, when
issued in accordance with this Agreement, will be validly issued, fully paid and
nonassessable, will not be subject to pre-emptive or dissenters' rights and will
conform in all material respects to the description thereof contained in the
Acquiring Fund Prospectus furnished to the Target Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there
shall not have been any change in the business, results of operations, assets,
financial condition or manner of conducting the business of the Acquiring Fund,
other than changes in the ordinary course of its business, which has had a
material adverse effect on such business, results of operations, assets,
financial condition or manner of conducting business.
6
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein, as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform, as they relate to the Acquiring
Fund, in all material respects, to the applicable requirements of the applicable
federal securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 5
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Target Fund furnished to the Acquiring Fund
by the Target Fund.
O. TAX QUALIFICATION. The Acquiring Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years and has satisfied the distribution requirements imposed by Section
852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date, the Target Fund and Acquiring Fund each agree as follows (except
as expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Target Fund and Acquiring Fund shall operate only in
the ordinary course of business consistent with prior practice. No party shall
take any action that would, or reasonably would be expected to, result in any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Target Fund and Acquiring Fund shall
file all reports required to be filed by the Target Fund and Acquiring Fund with
the SEC between the date of this Agreement and the Closing Date and shall
deliver to the other party copies of all such reports promptly after the same
are filed. Except where prohibited by applicable statutes and regulations, each
party shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local or federal government agency or
entity in connection with this Agreement or the transactions contemplated
hereby. Each of the Target Fund and the Acquiring Fund shall use all reasonable
efforts to obtain all consents, approvals and authorizations required in
connection with the consummation of the transactions contemplated by this
Agreement and to make all necessary filings with the appropriate federal and
state officials.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/ PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the Target Fund or Acquiring
Fund, as the case may be, required by the Securities Act or the Securities
Exchange Act of 1934 and the rules and regulations thereunder, as the case may
be, to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The Target Fund shall promptly prepare for filing
with the SEC the Prospectus/Proxy Statement and the Acquiring Fund shall
promptly prepare and file with the SEC the Registration Statement, in which the
Prospectus/Proxy Statement will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the Target Fund and its
affiliated persons, the Acquiring Fund shall only include such information as is
approved by the Target Fund for use in the Registration Statement. The Acquiring
Fund shall not amend or supplement any such information regarding the Target
Fund and such affiliates without the prior written consent of the Target Fund
which consent shall not be unreasonably withheld or delayed. The Acquiring Fund
shall promptly notify and provide the Target Fund with copies of all amendments
or supplements filed with respect to the Registration Statement. The Acquiring
Fund shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. The Acquiring Fund shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of the Acquiring Fund Shares in the transactions
contemplated by this Agreement, and the Target Fund shall furnish
7
all information concerning the Target Fund and the holders of the Target Fund's
shares as may be reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Target Fund shall make available to the Acquiring Fund a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of federal or
state securities laws or federal or state banking laws (other than Documents
which such party is not permitted to disclose under applicable law). During the
period prior to the Closing Date, the Acquiring Fund shall make available to the
Target Fund each Document pertaining to the transactions contemplated hereby
filed or received by it during such period pursuant to federal or state
securities laws or federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law).
E. SHAREHOLDERS MEETING. The Target Fund shall call a meeting of the Target
Fund shareholders to be held as promptly as practicable for the purpose of
voting upon the approval of this Agreement and the transactions contemplated
herein, and shall furnish a copy of the Prospectus/Proxy Statement and form of
proxy to each shareholder of the Target Fund as of the record date for such
meeting. The Target Fund Board shall recommend to the Target Fund shareholders
approval of this Agreement and the transactions contemplated herein, subject to
fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Target Fund and Acquiring Fund covenant
and agree to coordinate the respective portfolios of the Target Fund and
Acquiring Fund from the date of the Agreement up to and including the Closing
Date in order that at closing, when the Assets are added to the Acquiring Fund's
portfolio, the resulting portfolio will meet the Acquiring Fund's investment
objective, policies and restrictions as set forth in the Acquiring Fund
Prospectus, a copy of which has been delivered to the Target Fund.
G. DISTRIBUTION OF THE SHARES. At closing the Target Fund covenants that it
shall cause to be distributed the Acquiring Fund Shares in the proper pro rata
amount for the benefit of Target Fund shareholders and such that the Target Fund
shall not continue to hold amounts of said shares so as to cause a violation of
Section 12(d)(1) of the 1940 Act. The Target Fund covenants further that,
pursuant to Section 3.G., it shall liquidate and dissolve as promptly as
practicable after the Closing Date. The Target Fund covenants to use all
reasonable efforts to cooperate with the Acquiring Fund and the Acquiring Fund's
transfer agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the Target Fund and the Acquiring Fund
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any and all claims, liabilities or obligations with respect to
any such fees, commissions or expenses asserted by any person to be due or
payable in connection with any of the transactions contemplated by this
Agreement on the basis of any act or statement alleged to have been made by such
first party or its affiliate.
I. ADDITIONAL AGREEMENT. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement, the proper directors, trustees and officers of each party to
this Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Target Fund and the Acquiring Fund will
consult with each other before issuing any press releases or otherwise making
any public statements with respect to this Agreement or the transactions
contemplated herein and shall not issue any press release or make any public
statement prior to such consultation, except as may be required by law.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take
any action or cause any action to be taken (including, without limitation, the
filing of any tax return) that is inconsistent with such treatment or results in
the failure of the transaction to qualify
8
as a reorganization within the meaning of Section 368(a) of the Code. At or
prior to the Closing Date, the Acquiring Fund and the Target Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), counsel to the Acquiring
Fund and the Target Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the Target Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE TARGET FUND.
The obligations of the Target Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions, unless waived in writing by the Target Fund:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of the Target Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Acquiring Fund contained herein shall be true in all
material respects as of the Closing Date, and there shall have been no material
adverse change in the financial condition, results of operations, business
properties or assets of the Acquiring Fund as of the Closing Date, and the
Target Fund shall have received a certificate of the President or Vice President
of the Acquiring Fund satisfactory in form and substance to the Target Fund so
stating. The Acquiring Fund shall have performed and complied in all material
respects with all agreements, obligations and covenants required by this
Agreement to be so performed or complied with by it on or prior to the Closing
Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity seeking any of the foregoing be pending. There shall
not have been any action taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse effect on business
operations of the Acquiring Fund.
F. TAX OPINION. The Target Fund shall have obtained an opinion from
Skadden, counsel for the Target Fund, dated as of the Closing Date, addressed to
the Target Fund, that the consummation of the transactions set forth in this
Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code.
G. OPINION OF COUNSEL.
(1) The Target Fund shall have received the opinion of Skadden, counsel for
the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund
substantially in the form and to the effect that:
(a) The Acquiring Fund is registered as an open-end, management
investment company under the 1940 Act.
(b) The Acquiring Fund is validly existing in good standing under the
laws of the State of Delaware.
9
(c) The Acquiring Fund has the power and authority to execute, deliver
and perform all of its obligations under the Agreement under the laws of
the State of Delaware. The execution and delivery of the Agreement and the
consummation by the Acquiring Fund of the transactions contemplated thereby
have been duly authorized by all requisite statutory trust action on the
part of the Acquiring Fund under the laws of the State of Delaware. The
Agreement has been duly executed and delivered by the Acquiring Fund under
the laws of the State of Delaware.
(d) The Agreement constitutes the valid and binding obligation of the
Acquiring Fund, enforceable against the Acquiring Fund in accordance with
its terms under the applicable laws of the State of Delaware.
(e) The execution and delivery by the Acquiring Fund of the Agreement
and the performance by the Acquiring Fund of its obligations under the
Agreement do not conflict with the Agreement and Declaration of Trust or
By-laws of the Acquiring Fund.
(f) Neither the execution, delivery or performance by the Acquiring
Fund of the Agreement nor the compliance by the Acquiring Fund with the
terms and provisions thereof will contravene any provision of any
applicable law of the State of Illinois, the State of Delaware or the
United States of America.
(g) No approval by any court, regulatory body, administrative agency
or governmental body of the State of Illinois, the State of Delaware or the
United States of America, which has not been obtained or taken and is not
in full force and effect, is required to authorize, or is required in
connection with, the execution or delivery of the Agreement by the
Acquiring Fund or the enforceability of the Agreement against the Acquiring
Fund.
(h) The Acquiring Fund Shares have been duly authorized and, when
delivered to the Target Fund in accordance with the terms of the Agreement,
will be validly issued, fully paid and nonassessable and free and clear of
any preemptive rights or any similar rights arising under Delaware law or
the Acquiring Fund's Agreement and Declaration of Trust or its By-laws.
H. OFFICER CERTIFICATES. The Target Fund shall have received a certificate
of an authorized officer of the Acquiring Fund, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 5 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Acquiring Fund Board.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions, unless waived in writing by the Acquiring Fund:
A. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Target Fund contained herein shall be true in all material
respects as of the Closing Date, and there shall have been no material adverse
change in the financial condition, results of operations, business, properties
or assets of the Target Fund as of the Closing Date, and the Acquiring Fund
shall have received a certificate of an authorized officer of the Target Fund
satisfactory in form and substance to the Acquiring Fund so stating. The Target
Fund shall have performed and complied in all material respects with all
agreements, obligations and covenants required by this Agreement to be so
performed or complied with by them on or prior to the Closing Date.
B. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
C. REGULATORY APPROVAL. All necessary approvals, registrations and
exemptions under federal and state securities laws shall have been obtained.
D. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No Injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not
10
have been any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
E. TAX OPINION. The Acquiring Fund shall have obtained an opinion from
Skadden, counsel for the Acquiring Fund, dated as of the Closing Date, addressed
to the Acquiring Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code.
F. OPINION OF COUNSEL.
(1) The Acquiring Fund shall have received the opinion of Skadden, counsel
for the Target Fund, dated as of the Closing Date, addressed to the Acquiring
Fund, substantially in the form and to the effect that:
(a) The Van Kampen Trust is registered as an open-end, management
investment company under the 1940 Act.
(b) The Van Kampen Trust is validly existing in good standing under
the laws of the State of Delaware.
(c) The Target Fund has the corporate power and authority to execute,
deliver and perform all of its obligations under the Agreement under the
laws of the State of Delaware. The execution and delivery of the Agreement
and the consummation by the Target Fund of the transactions contemplated
thereby have been duly authorized by all requisite corporate action on the
part of the Target Fund under the laws of the State of Delaware. The
Agreement has been duly executed and delivered by the Target Fund under the
laws of the State of Delaware.
(d) The Agreement constitutes the valid and binding obligation of the
Target Fund, enforceable against the Target Fund in accordance with its
terms under the applicable laws of the State of Delaware.
(e) The execution and delivery by the Target Fund of the Agreement and
the performance by the Target Fund of its obligations under the Agreement
do not conflict with the Articles of Incorporation or By-laws of the Van
Kampen Trust.
(f) Neither the execution, delivery or performance by the Target Fund
of the Agreement nor the compliance by the Target Fund with the terms and
provisions thereof will contravene any provision of any applicable law of
the State of Illinois, the State of Delaware or the United States of
America.
(g) No approval by any court, regulatory body, administrative agency
or governmental body of the State of Illinois, the State of Delaware or the
United States of America, which has not been obtained or taken and is not
in full force and effect, is required to authorize, or is required in
connection with, the execution or delivery of the Agreement by the Target
Fund or the enforceability of the Agreement against the Target Fund.
G. SHAREHOLDER LIST. The Target Fund shall have delivered to the Acquiring
Fund an updated list of all shareholders of the Target Fund, as reported by the
Target Fund's transfer agent, as of one (1) business day prior to the Closing
Date, with each shareholder's respective holdings in the Target Fund, taxpayer
identification numbers, Form W9 and last known address.
H. OFFICER CERTIFICATES. The Acquiring Fund shall have received a
certificate of an authorized officer of the Target Fund, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 4
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Target Fund Board and Target Fund shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
A. The parties hereto may, by agreement in writing authorized by the their
respective Boards, amend this Agreement at any time before or after approval
thereof by the shareholders of the Target Fund; provided, however, that after
receipt of Target Fund shareholder approval, no amendment shall be made by the
parties
11
hereto which substantially changes the terms of Sections 1, 2 and 3 hereof
without obtaining Target Fund shareholder approval thereof.
B. At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
C. This Agreement may be terminated and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(1) by the consent of the Target Fund Board and the Acquiring Fund Board;
(2) by the Target Fund, if the Acquiring Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
(3) by the Acquiring Fund, if the Target Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
(4) by either the Target Fund or the Acquiring Fund, if the closing has not
occurred on or prior to January 14, 2005 (provided that the right to terminate
this Agreement pursuant to this subsection C.(4) shall not be available to any
party whose failure to fulfill any of its obligations under this Agreement has
been the cause of or resulted in the failure of the closing to occur on or
before such date);
(5) by the Acquiring Fund in the event that: (a) all the conditions
precedent to the Acquiring Fund's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at the
closing); (b) the Acquiring Fund gives the Target Fund written assurance of its
intent to close irrespective of the satisfaction or nonsatisfaction of all
conditions precedent to the Target Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the Target Fund then fails or refuses to
close within the earlier of five (5) business days or January 14, 2005; or
(6) by the Target Fund in the event that: (a) all the conditions precedent
to the Target Fund's obligation to close, as set forth in Section 7 of this
Agreement, have been fully satisfied (or can be fully satisfied at the closing);
(b) the Target Fund gives the Acquiring Fund written assurance of its intent to
close irrespective of the satisfaction or nonsatisfaction of all the conditions
precedent to the Acquiring Fund's obligation to close, as set forth in Section 8
of this Agreement; and (c) the Acquiring Fund then fails or refuses to close
within the earlier of five (5) business days or January 14, 2005.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Target Fund and Acquiring Fund pursuant to Section 9.C., written notice thereof
shall forthwith be given by the terminating party to the other party hereto, and
this Agreement shall therefore terminate and become void and have no effect, and
the transactions contemplated herein and thereby shall be abandoned without
further action by the parties hereto.
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided for
herein, or in the schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three (3) year period,
except that any representation or warranty with respect to taxes shall survive
for the expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the right of the Acquiring
12
Fund and the Target Fund to seek indemnity pursuant to this Agreement shall
survive for a period of ninety (90) days beyond the expiration of the Survival
Period of the representation, warranty, covenant or agreement upon which
indemnity is sought. In no event shall the Acquiring Fund or the Target Fund be
obligated to indemnify the other if indemnity is not sought within ninety (90)
days of the expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold
the other and its directors, trustees, officers, agents and persons controlled
by or controlling any of them (each an "Indemnified Party") harmless from and
against any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees), including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened (collectively, the "Losses") arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified Party's (i)
willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of such Indemnified Party's
position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to the Indemnitor
within the earlier of ten (10) days of receipt of written notice to the
Indemnified Party or thirty (30) days from discovery by the Indemnified Party of
any matters which may give rise to a claim for indemnification or reimbursement
under this Agreement. The failure to give such notice shall not affect the right
of the Indemnified Party to indemnity hereunder unless such failure has
materially and adversely affected the rights of the Indemnitor; provided that in
any event such notice shall have been given prior to the expiration of the
Survival Period. At any time after ten (10) days from the giving of such notice,
the Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from the
Indemnitor that the Indemnitor intends, at the Indemnitor's sole cost and
expense, to assume the defense of any such matter, in which case the Indemnified
Party shall have the right, at no cost or expense to the Indemnitor, to
participate in such defense. If the Indemnitor does not assume the defense of
such matter, and in any event until the Indemnitor states in writing that it
will assume the defense, the Indemnitor shall pay all costs of the Indemnified
Party arising out of the defense until the defense is assumed; provided,
however, that the Indemnified Party shall consult with the Indemnitor and obtain
the Indemnitor's prior written consent to any payment or settlement of any such
claim. The Indemnitor shall keep the Indemnified Party fully apprised at all
times as to the status of the defense. If the Indemnitor does not assume the
defense, the Indemnified Party shall keep the Indemnitor apprised at all times
as to the status of the defense. Following indemnification as provided for
hereunder, the Indemnitor shall be subrogated to all rights of the Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the Target Fund shall be addressed to
the Target Fund c/o Van Kampen Asset Management, 1221 Avenue of the Americas,
New York, New York 10020, Attention: General Counsel, or at such other address
as the Target Fund may
13
designate by written notice to the Acquiring Fund. Notice to the Acquiring Fund
shall be addressed to the Acquiring Fund c/o Van Kampen Asset Management, 1221
Avenue of the Americas, New York, New York 10020, Attention: General Counsel, or
at such other address and to the attention of such other person as the Acquiring
Fund may designate by written notice to the Target Fund. Any notice shall be
deemed to have been served or given as of the date such notice is delivered
personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other party
hereto.
15. BOOKS AND RECORDS.
The Target Fund and the Acquiring Fund agree that copies of the books and
records of the Target Fund relating to the Assets including, but not limited to,
all files, records, written materials (e.g., closing transcripts, surveillance
files and credit reports) shall be delivered by the Target Fund to the Acquiring
Fund on or prior to the Closing Date. In addition to, and without limiting the
foregoing, the Target Fund and the Acquiring Fund agree to take such action as
may be necessary in order that the Acquiring Fund shall have reasonable access
to such other books and records as may be reasonably requested, all for three
(3) complete fiscal and tax years after the Closing Date; namely, general
ledgers, journal entries, voucher registers, distribution journals, payroll
registers, monthly balance owing reports, income tax returns, tax depreciation
schedules and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Target Fund
and Acquiring Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties hereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois without
regard to principles of conflicts or choice of law.
14
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN HIGH INCOME CORPORATE BOND
FUND
--------------------------------------
James M. Dykas
Chief Financial Officer and Treasurer
Attest:
--------------------------------------
Stefanie Chang Yu,
Secretary
15
VAN KAMPEN TRUST
On Behalf of Its Series,
Van Kampen High Yield Fund
--------------------------------------
James M. Dykas
Chief Financial Officer and Treasurer
Attest:
---------------------------------------------------------
Stefanie Chang Yu
Secretary
16
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF VAN KAMPEN HIGH YIELD FUND
Dated July 30, 2004
B-1
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
HIGH YIELD FUND
Van Kampen High Yield Fund's (the "Fund") primary investment objective is
to seek to provide a high level of current income. As a secondary investment
objective, the Fund seeks capital appreciation. The Fund's investment adviser
seeks to achieve the Fund's investment objectives by investing primarily in a
portfolio of lower-grade domestic corporate debt securities.
The Fund is organized as the sole diversified series of the Van Kampen
Trust, an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus and the Fund's Annual and
Semiannual Reports may be obtained without charge from our web site at
www.vankampen.com or by writing or calling Van Kampen Funds Inc. at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 847-2424 (or
(800) 421-2833 for the hearing impaired).
TABLE OF CONTENTS
Page
----
General Information......................................... B-2
Investment Objectives, Strategies and Risks................. B-4
Strategic Transactions...................................... B-9
Investment Restrictions..................................... B-18
Trustees and Officers....................................... B-21
Investment Advisory Agreement............................... B-34
Other Agreements............................................ B-36
Distribution and Service.................................... B-37
Transfer Agent.............................................. B-42
Portfolio Transactions and Brokerage Allocation............. B-42
Shareholder Services........................................ B-44
Redemption of Shares........................................ B-47
Contingent Deferred Sales Charge-Class A.................... B-47
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-48
Taxation.................................................... B-49
Fund Performance............................................ B-55
Other Information........................................... B-59
Financial Statements........................................ B-60
Appendix A -- Proxy Voting Policy and Procedures............ A-1
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 30, 2004.
HYF SAI 7/04
GENERAL INFORMATION
The Trust is an unincorporated statutory trust organized under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Trust was originally organized in 1986 under
the name Van Kampen Merritt Trust as a Massachusetts business trust (the
"Massachusetts Trust"). The Massachusetts Trust was reorganized into the Trust
under the name Van Kampen American Capital Trust on July 31, 1995. The Trust was
created for facilitating the Massachusetts Trust reorganization into a Delaware
statutory trust. On July 14, 1998, the Trust adopted its current name.
The Fund was organized in 1986 under the name Van Kampen Merritt High Yield
Fund as a sub-trust of the Massachusetts Trust. The Fund was reorganized as a
series of the Trust under the name Van Kampen American Capital High Yield Fund
on July 31, 1995. On July 14, 1998, the Fund adopted its current name.
Van Kampen Asset Management (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor") and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley. The principal office of each of the Trust, the Fund, the
Adviser, the Distributor and Van Kampen Investments is located at 1221 Avenue of
the Americas, New York, New York 10020. The principal office of Investor
Services is located at 2800 Post Oak Boulevard, Houston, Texas 77056.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated as Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with the provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class of shares is subject to its own sales charge schedule and its own
distribution and service expenses. Each class of shares also has exclusive
voting rights with respect to its distribution and service fees.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution or service fee for a class of a
series would be voted upon by shareholders of only the class of such series
involved. Except as otherwise described in the Prospectus or herein, shares do
not have cumulative voting rights, preemptive rights or any conversion,
subscription or exchange rights.
B-2
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. The liquidation proceeds to holders of classes of shares
with higher distribution fees and transfer agency costs are likely to be less
than the liquidation proceeds to holders of classes of shares with lower
distribution fees and transfer agency costs.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
B-3
As of July 1, 2004, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
Approximate
Percentage of
Class Ownership on
Name and Address of Holder of Shares July 1, 2004
-------------------------- --------- -------------
MLPF&S................................................... C 9%
For the Sole Benefit of its Customers %
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & Co. ...................................... A 30%
Attn: Fund Administration B 8%
Shareholder Accounting C 6%
201 Progress Pkwy
Maryland Hts, MO 63043-3009
Citigroup Global Markets Inc. ........................... B 5%
333 W. 34th Street
New York, NY 10001-2402
Morgan Stanley Dean Witter............................... B 17%
Harborside Financial Center, Plaza 3 C 22%
Jersey City, New Jersey 07311
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other financial institutions to earn a return on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a security and the seller agrees to repurchase
the obligation at a future time and set price, thereby determining the yield
during the holding period. Repurchase agreements involve certain risks in the
event of default by the other party. The Fund may enter into repurchase
agreements with broker-dealers, banks and other financial institutions deemed to
be creditworthy by the Adviser under guidelines approved by the Fund's Board of
Trustees. The Fund will not invest in repurchase agreements maturing in more
than seven days if any such investment, together with any other illiquid
securities held by the Fund, would exceed the Fund's limitation on illiquid
securities described herein. The Fund does not bear the risk of a decline in the
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of the bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto;
B-4
(b) possible lack of access to income on the underlying security during this
period; and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund than would be available to the Fund investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may purchase and sell portfolio securities on a "when-issued" and
"delayed delivery" basis. No income accrues to the Fund on securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of the securities at delivery may be more or less than
their purchase price, and yields generally available on comparable securities
when delivery occurs may be higher or lower than yields on the securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will segregate cash and/or liquid
securities having an aggregate value equal to the amount of such purchase
commitments until payment is made. The Fund will make commitments to purchase
securities on such basis only with the intention of actually acquiring these
securities, but the Fund may sell such securities prior to the settlement date
if such sale is considered to be advisable. To the extent the Fund engages in
"when-issued" and "delayed delivery" transactions, it will do so for the purpose
of acquiring securities for the Fund's portfolio consistent with the Fund's
investment objectives and policies and not for the purpose of investment
leverage.
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to
securities which could otherwise be sold by the Fund. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase
B-5
the same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund will segregate cash and/or liquid securities equal in value to its
obligations in respect of reverse repurchase agreements and, accordingly, the
Fund will not treat such obligations as senior securities for purposes of the
1940 Act. Reverse repurchase agreements involve the risk that the market value
of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement files
for bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement may be restricted pending a determination by the other party, or its
trustee or receiver, whether to enforce the Fund's obligation to repurchase the
securities. No more than 5% of the Fund's total assets may be invested in bank
borrowings and reverse repurchase agreements.
LENDING OF SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend portfolio securities to broker-dealers, banks and other institutional
borrowers of securities provided such loans are callable at any time and are
continuously secured by collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest or dividends on the loaned
securities, while at the same time earning interest on the collateral which is
invested in short-term obligations or the Fund receives an agreed upon amount of
interest from the borrower of the security. The Fund may pay reasonable finders'
fees, administrative fees and custodial fees in connection with loans of its
securities. There is no assurance as to the extent to which securities loans can
be effected.
If the borrower fails to maintain the requisite amount of collateral or
return securities borrowed upon proper request, the loan automatically
terminates, and the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Adviser to be creditworthy
and when the consideration which can be earned from such loans is believed to
justify the attendant risks. On termination of the loan, the borrower is
required to return the securities to the Fund; any gain or loss in the market
price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933
B-6
Act"). The sale of such securities often requires more time and results in
higher brokerage charges or dealer discounts and other selling expenses than
does the sale of liquid securities trading on national securities exchanges or
in the over-the-counter markets. Restricted securities are often purchased at a
discount from the market price of unrestricted securities of the same issuer
reflecting the fact that such securities may not be readily marketable without
some time delay. Investments in securities for which market quotations are not
readily available are valued at their fair value as determined in good faith by
the Adviser in accordance with procedures approved by the Fund's Board of
Trustees. Ordinarily, the Fund would invest in restricted securities only when
it receives the issuer's commitment to register the securities without expense
to the Fund. However, registration and underwriting expenses (which typically
range from 7% to 15% of the gross proceeds of the securities sold) may be paid
by the Fund. Restricted securities which can be offered and sold to qualified
institutional buyers under Rule 144A under the 1933 Act ("144A Securities") and
are determined to be liquid under guidelines adopted by and subject to the
supervision of the Fund's Board of Trustees are not subject to the limitation on
illiquid securities. Such 144A Securities are subject to monitoring and may
become illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief (such as "no-action" letters issued by the staff of the SEC
interpreting or providing guidance on the 1940 Act or regulations thereunder)
from the provisions of the 1940 Act, as amended from time to time.
DISCOUNT, ZERO COUPON SECURITIES AND PAYMENT-IN-KIND SECURITIES
The Fund may invest in securities sold at a substantial discount from their
value at maturity. Such securities include "zero coupon" and payment-in-kind
securities of governmental or private issuers. Zero coupon securities generally
pay no cash interest (or dividends in the case of preferred stock) to their
holders prior to maturity. Payment-in-kind securities allow the issuer, at its
option, to make current interest payments on such securities either in cash or
additional securities. Accordingly, such securities usually are issued and
traded at a deep discount from their face or par value and generally are subject
to greater fluctuations of market value in response to changing interest rates
than securities of comparable maturities and credit quality that pay cash
interest (or dividends in the case of preferred stock) on a current basis.
Special tax considerations are associated with investing in certain
lower-grade securities, such as zero coupon or payment-in-kind securities. See
"Taxation" below.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock, warrant
or other security that may be converted into or exchanged for a prescribed
amount of common stock or other security of the same or a different issuer or
into cash within a particular
B-7
period of time and at a specified price or formula. A convertible security
generally entitles the holder to receive interest paid or accrued on debt
securities or the dividend paid on preferred stock until the convertible
security matures or is redeemed, converted or exchanged. Convertible securities
have unique investment characteristics in that they generally (i) have higher
yields than common stocks, but lower yields than comparable non-convertible
income securities, (ii) are less subject to fluctuation in value than the
underlying stock since they have fixed income characteristics, and (iii) provide
the potential for capital appreciation if the market price of the underlying
common stock increases.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying security). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying security. If the
conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying security approaches or exceeds
the conversion price, the price of the convertible security will be increasingly
influenced by its conversion value. A convertible security generally will sell
at a premium over its conversion value by the extent to which investors place
value on the right to acquire the underlying security while holding a fixed
income security.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities or commodities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments.
PREFERRED STOCK
Preferred stock generally has a preference as to dividends and upon
liquidation over an issuer's common stock but ranks junior to other income
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on income securities, preferred stock dividends
are payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions.
B-8
LOANS
The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer and one or more financial
institutions ("Lenders"). The Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Fund generally has no direct
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan ("Loan Agreement"), nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below ("Strategic Transactions") to earn income, to facilitate
portfolio management, and to mitigate risks. Techniques and instruments may
change over time as new instruments and strategies are developed or regulatory
changes occur. Although the Adviser seeks to use such transactions to further
the Fund's investment objectives, no assurance can be given that the use of
these transactions will achieve this result. The Fund's activities involving
Strategic Transactions may be limited by the requirements of the Internal
Revenue Code of 1986, as amended (the "Code"), for qualification as a regulated
investment company.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative securities such as exchange-listed and
over-the-counter put and call options on securities, financial futures
contracts, fixed-income and interest rate indices and other financial
instruments, purchase and sell financial futures contracts and options on
futures contracts, enter into various interest rate transactions such as swaps,
caps, floors or collars, and enter into various currency transactions such as
currency forward contracts, currency futures contracts, currency swaps or
options on currency or currency futures contracts. Among other things, Strategic
Transactions may be used to attempt to protect against possible changes in the
market value of securities held in or to be purchased for the Fund's portfolio
resulting from securities markets or currency exchange markets, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
B-9
The Fund may sell options on securities the Fund owns or has the right to
purchase without additional payments, up to 25% of the Fund's net assets, for
non-hedging purposes. When the Fund sells an option, if the underlying
securities do not increase (in the case of a call option) or decrease (in the
case of a put option) to a price level that would make the exercise of the
option profitable to the holder of the option, the option generally will expire
without being exercised and the Fund will realize as profit the premium received
for such option. When a call option of which the Fund is the writer is
exercised, the option holder purchases the underlying security at the strike
price and the Fund does not participate in any increase in the price of such
securities above the strike price. In addition, the Fund would need to replace
the underlying securities at prices which may not be advantageous to the Fund.
When a put option of which the Fund is the writer is exercised, the Fund will be
required to purchase the underlying securities at the strike price, which may be
in excess of the market value of such securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlement, or the inability to deliver or
receive a specified currency. The use of options and futures contracts
transactions entails certain other risks. In particular, the variable degree of
correlation between price movements of futures contracts and price movements in
the related portfolio position of the Fund creates the possibility that losses
on the hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures contracts and options markets may not be liquid
in all circumstances and certain over-the-counter options may have no markets.
As a result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures contracts and options transactions for hedging should tend to minimize
the risk of loss due to a decline in the value of the hedged position, at the
same time they tend to limit any potential gain which might result from an
increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. Income
earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable.
B-10
OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future contract, index, currency or other instrument might
be intended to protect the Fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase such instrument. An American style put or call
option may be exercised at any time during the option period while a European
style put or call option may be exercised only upon expiration or during a fixed
period prior thereto. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC options"). Exchange listed
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to such options. The discussion below uses the OCC as a paradigm, but is
also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding
B-11
options on that exchange would generally continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker-dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from Standard &
Poor's ("S&P") or "P-1" from Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO"). The staff of the SEC currently takes the position that,
in general, OTC options on securities (other than U.S. government securities)
purchased by the Fund, and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it (the cost of the
sell-back plus the in-the-money amount, if any) are illiquid, and are subject to
the Fund's limitation on illiquid securities described herein.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call or put options on securities, including
U.S. Treasury and agency securities, foreign sovereign debt, mortgage-backed
securities, corporate debt securities, Eurodollar instruments and foreign debt
securities that are traded on U.S. and foreign securities exchanges and in the
OTC markets and related futures contracts on such securities, indices,
currencies and futures contracts. All calls sold by the Fund must be "covered"
(i.e., the Fund must own the securities or futures contract subject to the call)
or must meet the asset segregation requirements described below as long as the
call is outstanding. Even though the Fund will receive the option premium to
B-12
help protect it against loss, a call sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold. In
selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
FUTURES CONTRACTS
The Fund may enter into financial futures contracts or purchase or sell put
and call options on futures contracts as a hedge against anticipated interest
rate or currency market changes, for duration management and for risk management
purposes. Futures contracts are generally bought and sold on the commodities
exchanges where they are listed with payment of initial and variation margin as
described below. The purchase of a futures contract creates a firm obligation by
the Fund, as purchaser, to take delivery from the seller the specific type of
financial instrument called for in the contract at a specific future time for a
specified price (or, with respect to index futures contracts and Eurodollar
instruments, the net cash amounts). The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to index futures contracts and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures contracts and options on futures
contracts will in all cases be consistent with applicable regulatory
requirements and in particular the rules and regulations of the Commodity
Futures Trading Commission and will be entered into only for bona fide hedging,
risk management (including duration management) or other portfolio management
purposes. Typically, maintaining a futures contract or selling an option on a
futures contract requires the Fund to deposit with a financial intermediary as
security for its obligations an amount of cash and/or other specified assets
(initial margin) which initially is typically 1% to 10% of the face amount of
the contract (but may be higher in some circumstances). Additional cash or
assets (variation margin) may be required to be deposited thereafter on a daily
basis as the mark to market value of the contract fluctuates. The purchase of
options on financial futures contracts involves payment of a premium for the
option without any further obligation on the part of the Fund. If the Fund
exercises an option on a futures contract it will be obligated to post initial
margin (and potential subsequent variation margin) for the resulting futures
contract position just as it would for any position. Futures contracts and
options on futures contracts are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or an option on a futures
contract (except for closing transactions) for other than bona fide hedging
purposes if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open futures contracts and options on futures contracts would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5%
B-13
limitation. The segregation requirements with respect to futures contracts and
options on futures contracts are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with counterparties to manage
the value of currencies against fluctuations in relative value. Currency
transactions include forward currency contracts, exchange listed currency
futures contracts, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into currency
transactions with counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures contracts, options, options on futures contracts
and swaps will be limited to hedging involving either specific transactions or
portfolio positions. Transaction hedging is entering into a currency transaction
with respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction)
B-14
of the securities held in its portfolio that are denominated or generally quoted
in or currently convertible into such currency other than with respect to
cross-hedging or proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. Currency hedging involves some of the same risks and considerations
as other transactions with similar instruments. Currency transactions can result
in losses to the Fund if the currency being hedged fluctuates in value to a
degree or in a direction that is not anticipated. Further, there is the risk
that the perceived linkage between various currencies may not be present or may
not be present during the particular time that the Fund is engaging in proxy
hedging. If the Fund enters into a currency hedging transaction, the Fund will
comply with the asset segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures contracts are subject
to the same risks that apply to the use of futures contracts generally. Further,
settlement of a currency futures contract for the purchase of most currencies
must occur at a bank based in the issuing nation. Trading options on currency
futures contracts is relatively new, and the ability to establish and close out
positions on such options is subject to the maintenance of a liquid market which
may not always be available. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
COMBINED TRANSACTIONS
The Fund may enter into multiple transactions, including multiple options
transactions, multiple futures contracts transactions, multiple currency
transactions (including forward currency contracts), multiple interest rate
transactions and any combination of futures contracts, options, currency and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based
B-15
on the Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such cap to the extent that a specified index exceeds a
predetermined interest rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund may enter into swaps, caps, floors and collars on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities and will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least
"A" by S&P or Moody's or has an equivalent rating from an NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. A large number of banks and investment banking firms
act both as principals and agents utilizing standardized swap documentation. As
a result, the swap market has become relatively liquid. Caps, floors and collars
are more recent innovations for which standardized documentation has not yet
been fully developed and, accordingly, they are less liquid than swaps.
B-16
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Strategic Transactions, in addition to other requirements, require
that the Fund segregate cash and/or liquid securities to the extent Fund
obligations are not otherwise "covered" through ownership of the underlying
security, financial instrument or currency. In general, either the full amount
of any obligation by the Fund to pay or deliver securities or assets must be
covered at all times by the securities, instruments or currency required to be
delivered, or, subject to any regulatory restrictions, the Fund must segregate
cash and/or liquid securities in an amount at least equal to the current amount
of the obligation. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate. For example, a call option written by the Fund will require the Fund
to hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash and/or
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
and/or liquid securities equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate cash and liquid securities equal to the exercise price. A
currency contract which obligates the Fund to buy and/or sell currency will
generally require the Fund to hold an amount of that currency and/or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate cash and/or liquid securities equal to the amount of the Fund's
obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, swaps, caps, floors and collars will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of cash and/or liquid securities equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash and/or liquid securities equal in value to such excess. OCC issued and
exchange listed options sold by the Fund other than those above generally settle
with physical delivery, and the Fund will segregate an
B-17
amount of cash and/or liquid securities equal to the full value of the option.
OTC options settling with physical delivery, or with an election of either
physical delivery or cash settlement, will be treated the same as other options
settling with physical delivery.
In the case of a futures contract or an option on a futures contract, the
Fund must deposit initial margin and possible daily variation margin in addition
to segregating cash and/or liquid securities sufficient to meet its obligation
to purchase or provide securities or currencies, or to pay the amount owed at
the expiration of an index-based futures contract.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash and/or liquid securities having
a value equal to the accrued excess. Caps, floors and collars require
segregation of cash and/or liquid securities with a value equal to the Fund's
net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund also may enter into offsetting
transactions so that its combined position, coupled with any segregated cash
and/or liquid securities, equals its net outstanding obligation in related
options and Strategic Transactions. For example, the Fund could purchase a put
option if the strike price of that option is the same or higher than the strike
price of a put option sold by the Fund. Moreover, instead of segregating cash
and/or liquid securities if the Fund held a futures contract or forward
contract, it could purchase a put option on the same futures contract or forward
contract with a strike price as high or higher than the price of the contract
held. Other Strategic Transactions also may be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
cash and/or liquid securities equal to any remaining obligation would need to be
segregated.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting,
if the holders of more than 50% of the Fund's outstanding voting securities are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. These
restrictions provide that the Fund shall not:
1. Purchase any securities (other than obligations issued or guaranteed
by the U.S. government or by its instrumentalities) if, as a result,
more than 5% of the Fund's total assets (taken at current value)
would then be invested in securities of a single issuer or, if, as a
result, the Fund would hold more than 10% of the outstanding voting
securities of an issuer; except that up to 25% of the Fund's total
assets may be invested without regard to such limitations, and except
that the Fund may purchase securities of other investment companies
without regard
B-18
to such limitations to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time or (iii)
an exemption or other relief from the provisions of the 1940 Act, as
amended from time to time.
2. Invest more than 25% of its assets in a single industry. (Neither the
U.S. government nor any of its agencies or instrumentalities will be
considered an industry for purposes of this restriction.)
3. Borrow money, except for temporary purposes from banks or in reverse
repurchase transactions as described in the Statement of Additional
Information and then in amounts not in excess of 5% of the total
asset value of the Fund, or mortgage, pledge, or hypothecate any
assets except in connection with a borrowing and in amounts not in
excess of 10% of the total asset value of the Fund. Borrowings may
not be made for investment leverage, but only to enable the Fund to
satisfy redemption requests where liquidation of portfolio securities
is considered disadvantageous or inconvenient. In this connection,
the Fund will not purchase portfolio securities during any period
that such borrowings exceed 5% of the total asset value of the Fund.
Notwithstanding this investment restriction, the Fund may enter into
"when-issued" and "delayed delivery" transactions as described in the
Prospectus or herein.
4. Make loans, except that the Fund may purchase or hold debt
obligations in accordance with the investment restrictions set forth
in paragraph 1 above, may enter into repurchase agreements, and may
lend its portfolio securities against collateral consisting of cash
or of securities issued or guaranteed by the U.S. government or its
agencies, which collateral is equal at all times to at least 100% of
the value of the securities loaned, including accrued interest.
5. Sell any securities "short", unless at all times when a short
position is open the Fund owns an equal amount of the securities or
of securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities
sold short.
6. Write, purchase, or sell puts, calls or combinations thereof, or
purchase or sell interest rate futures contracts or related options,
except that the Fund may write covered call options with respect to
its portfolio securities and enter into closing purchase transactions
with respect to such options, to a maximum of 25% of its net assets
and except that the Fund may invest in hedging instruments as
described in the Prospectus and the Statement of Additional
Information from time to time.
7. Act as an underwriter of securities, except to the extent the Fund
may be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
8. Make investments for the purpose of exercising control or management,
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended
from time to time, (ii) the rules and regulations promulgated by the
SEC under the 1940 Act, as amended
B-19
from time to time or (iii) an exemption or other relief from the
provisions of the 1940 Act, as amended from time to time.
9. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time or (iii) an exemption or other relief from
the provisions of the 1940 Act, as amended from time to time.
10. Invest in interests in oil, gas, or other mineral exploration or
development programs.
11. Purchase or sell real estate, commodities, or commodity contracts,
except for investments in hedging instruments as described in the
Prospectus and this Statement of Additional Information from time to
time.
B-20
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and 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 ("Asset Management"
or 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
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 (59) Trustee + Chairman and Chief Executive 88 Trustee/Director/
Blistex Inc. Officer of Blistex Inc., a Managing General
1800 Swift Drive consumer health care products Partner of funds in
Oak Brook, IL 60523 manufacturer. Director of the the Fund Complex.
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 Manufacturers'
Association.
J. Miles Branagan (72) Trustee + Private investor. Co-founder, 86 Trustee/Director/
1632 Morning Mountain Road and prior to August 1996, Managing General
Raleigh, NC 27614 Chairman, Chief Executive Partner of funds in
Officer and President, MDT the Fund Complex.
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.
Jerry D. Choate (65) Trustee + Prior to January 1999, 86 Trustee/Director/
33971 Selva Road Chairman and Chief Executive Managing General
Suite 130 Officer of the Allstate Partner of funds in
Dana Point, CA 92629 Corporation ("Allstate") and the Fund Complex.
Allstate Insurance Company. Director of Amgen
Prior to January 1995, Inc., a
President and Chief Executive biotechnological
Officer of Allstate. Prior to company, and Director
August 1994, various of Valero Energy
management positions at Corporation, an
Allstate. independent refining
company.
B-21
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
Rod Dammeyer (63) Trustee + President of CAC, L.L.C., a 88 Trustee/Director/
CAC, L.L.C. private company offering Managing General
4350 LaJolla Village Drive capital investment and Partner of funds in
Suite 980 management advisory services. the Fund Complex.
San Diego, CA 92122-6223 Prior to February 2001, Vice Director of
Chairman and Director of Stericycle, Inc.,
Anixter International, Inc., a Ventana Medical
global distributor of wire, Systems, Inc., GATX
cable and communications Corporation and
connectivity products, and IMC Trustee of The
Global Inc., an international Scripps Research
company that mines, Institute and the
manufactures and sells University of Chicago
essential crop nutrients and Hospitals and Health
feed ingredients to farmers. Systems. Prior to
Prior to July 2000, Managing April 2004, Director
Partner of Equity Group of TheraSense, Inc.
Corporate Investment (EGI), a Prior to January
company that makes private 2004, Director of
investments in other TeleTech Holdings
companies. Inc. and Arris Group,
Inc. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001, Vice
Chairman and Director
of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser Communications
Corp., Matria
Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety,
Corp. and Grupo
Azcarero Mexico
(GAM).
Linda Hutton Heagy (56) Trustee + Managing Partner of Heidrick & 86 Trustee/Director/
Heidrick & Struggles Struggles, an executive search Managing General
233 South Wacker Drive firm. Trustee on the Partner of funds in
Suite 7000 University of Chicago the Fund Complex.
Chicago, IL 60606 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.
B-22
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
R. Craig Kennedy (52) Trustee + Director and President of the 86 Trustee/Director/
1744 R Street, NW German Marshall Fund of the Managing General
Washington, DC 20009 United States, an independent Partner of funds in
U.S. foundation created to the Fund Complex.
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 + Prior to 1998, President and 88 Trustee/Director/
736 North Western Avenue Chief Executive Officer of Managing General
P.O. Box 317 Pocklington Corporation, Inc., Partner of funds in
Lake Forest, IL 60045 an investment holding company. the Fund Complex.
Director of the Lake
Forest Bank & Trust.
Director of the
Marrow Foundation.
Jack E. Nelson (68) Trustee + President of Nelson Investment 86 Trustee/Director/
423 Country Club Drive Planning Services, Inc., a Managing General
Winter Park, FL 32789 financial planning company and Partner of funds in
registered investment adviser the Fund Complex.
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 + President Emeritus and 88 Trustee/Director/
1126 E. 59th Street Honorary Trustee of the Managing General
Chicago, IL 60637 University of Chicago and the Partner of funds in
Adam Smith Distinguished the Fund Complex.
Service Professor in the Director of Winston
Department of Economics at the Laboratories, Inc.
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.
B-23
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
Suzanne H. Woolsey, Ph.D. (62) Trustee + Previously Chief 86 Trustee/Director/
815 Cumberstone Road Communications Officer of the Managing General
Harwood, MD 20776 National Academy of Partner of funds in
Sciences/National Research the Fund Complex.
Council, an independent, Director of Fluor
federally chartered policy Corp., an
institution, from 2001 to engineering,
November 2003 and Chief procurement and
Operating Officer from 1993 to construction
2001. Director of the organization, since
Institute for Defense January 2004 and
Analyses, a federally funded Director of Neurogen
research and development Corporation, a
center, Director of the German pharmaceutical
Marshall Fund of the United company, since
States, Director of the Rocky January 1998.
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.
B-24
INTERESTED TRUSTEES*
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* (50) Trustee, +; President and Chief Executive 86 Trustee/Director/
1221 Avenue of the President President Officer of funds in the Fund Managing General
Americas and Chief and Chief Complex. Chairman, President, Partner of funds in
New York, NY 10020 Executive Executive Chief Executive Officer and the Fund Complex.
Officer Officer Director of the Adviser and Van
since 2002 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.
Richard F. Powers, III* Trustee + Advisory Director of Morgan 88 Trustee/Director/
(58) Stanley. Prior to December 2002, Managing General
1 Parkview Plaza Chairman, Director, President, Partner of funds in
P.O. Box 5555 Chief Executive Officer and the Fund Complex.
Oakbrook Terrace, IL 60181 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.
B-25
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
Wayne W. Whalen* (64) Trustee + Partner in the law firm of 88 Trustee/Director/
333 West Wacker Drive Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 Flom LLP, legal counsel to funds Partner of funds in
in the Fund Complex. the Fund Complex.
------------------------------------
+ See Table D below.
* 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.
B-26
OFFICERS
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 ++ Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (61) Executive Vice ++ Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer 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.
Ronald E. Robison (65) Executive Vice ++ Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Administrative Officer and
Executive Managing Director of Morgan Stanley. Managing Director and
Officer Director of Morgan Stanley Investment Advisors Inc. and
Morgan Stanley Services Company Inc. Chief Executive Officer
and Director of Morgan Stanley Trust. Executive Vice
President and Principal Executive Officer of the 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 (48) Vice President, ++ Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial the Adviser, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. 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.
------------------------------------
++ See Table E below.
COMPENSATION
Each trustee/director who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to the funds in the Fund Complex. Each fund in the Fund Complex
(except Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides
B-27
Non-Affiliated Trustees with compensation after retirement, provided that
certain eligibility requirements are met. Under the retirement plan, a
Non-Affiliated Trustee who is receiving compensation from the Fund prior to such
Non-Affiliated Trustee's retirement, has at least 10 years of service (including
years of service prior to adoption of the retirement plan) and retires at or
after attaining the age of 60, is eligible to receive a retirement benefit per
year for each of the ten years following such retirement from the Fund.
Non-Affiliated Trustees retiring prior to the age of 60 or with fewer than 10
years but more than 5 years of service may receive reduced retirement benefits
from the Fund.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
---------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Complex Upon Fund
Name(1) Trust(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------- ------------- -------------
David C. Arch $ 993 $18,589 $147,500 $193,811
J. Miles Branagan 1,472 78,011 60,000 173,290
Jerry D. Choate 1,472 31,482 126,000 173,290
Rod Dammeyer 833 31,814 147,500 177,971
Linda Hutton Heagy 1,311 9,233 142,500 173,290
R. Craig Kennedy 1,472 6,424 142,500 173,290
Howard J Kerr 993 58,713 147,500 193,811
Jack E. Nelson 1,472 40,711 109,500 173,290
Hugo F. Sonnenschein 993 32,178 147,500 193,811
Wayne W. Whalen(1) 1,477 63,604 147,500 251,811
Suzanne H. Woolsey 1,472 20,086 142,500 173,290
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Whalen is an "interested person" (within the meaning of section
2(a)(19) of the 1940 Act) of the Fund and certain other funds in the Fund
Complex.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from all operating series of the Trust during the fiscal year ended
March 31, 2004. Messrs. Arch, Dammeyer, Kerr and Sonnenschein were appointed
to the Board of the Trust on July 23, 2003, and thus the amounts above
reflect compensation from the Trust for the period July 23, 2003 until the
fiscal year ended March 31, 2004. The details of aggregate compensation
before deferral for each operating series of the Trust during the fiscal
year ended March 31, 2004 are shown in Table A below. The details of
compensation deferred for each operating series of the Trust during the
fiscal year ended March 31, 2004 are shown in Table B below. The details of
cumulative deferred compensation (including interest) for each operating
series of the Trust as of March 31, 2004 are shown in Table C below. The
deferred compensation plan is described above the Compensation Table.
B-28
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2003. The
retirement plan is described above the Compensation Table. In 2003, the
boards of the various Van Kampen-related funds in the Fund Complex were
combined. Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other trustees/
directors/managing general partners are being elected or appointed, as
appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table. Each trustee has
served as a member of the Board of Trustees since the year set forth in
Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2003 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. In 2003, the boards
of the various Van Kampen-related funds in the Fund Complex were combined.
Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other trustees/
directors/managing general partners are being elected or appointed, as
appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
TABLE A
2004 AGGREGATE COMPENSATION FROM THE TRUST AND EACH SERIES
TRUSTEE
FISCAL --------------------------------------------
FUND NAME YEAR-END ARCH BRANAGAN CHOATE DAMMEYER HEAGY
--------- -------- ---- -------- ------ -------- -----
High Yield Fund...... 3/31 $993 $1,472 $1,472 $833 $1,311
Managed Short-Term
Income Fund*........ 3/31 0 0 0 0 0
---- ------ ------ ---- ------
Trust Total......... $993 $1,472 $1,472 $833 $1,311
TRUSTEE
---------------------------------------------------------
FUND NAME KENNEDY KERR NELSON SONNENSCHEIN WHALEN WOOLSEY
--------- ------- ---- ------ ------------ ------ -------
High Yield Fund...... $1,472 $933 $1,472 $933 $1,477 $1,472
Managed Short-Term
Income Fund*........ 0 0 0 0 0 0
------ ---- ------ ---- ------ ------
Trust Total......... $1,472 $933 $1,472 $933 $1,477 $1,472
------------------------------------
* The Managed Short-Term Income Fund had not commenced investment operations as
of March 31, 2004.
B-29
TABLE B
2004 AGGREGATE COMPENSATION DEFERRED FROM
THE TRUST AND EACH SERIES
TRUSTEE
FISCAL ------------------------------------------------------------------
FUND NAME YEAR-END CHOATE DAMMEYER HEAGY NELSON SOMMENSCHEIN WHALEN
--------- -------- ------ -------- ----- ------ ------------ ------
High Yield Fund............... 3/31 $1,472 $833 $1,311 $1,472 $993 $1,477
Managed Short-Term Income
Fund*....................... 3/31 0 0 0 0 0 0
------- -------- ------ ------- ------------ ------
Trust Total................. $1,472 $833 $1,311 $1,472 $993 $1,477
------------------------------------
* The Managed Short-Term Income Fund had not commenced investment operations as
of March 31, 2004.
TABLE C
2004 CUMULATIVE COMPENSATION DEFERRED
(PLUS INTEREST) FROM THE TRUST AND EACH SERIES
CURRENT TRUSTEES
FISCAL -------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY NELSON SONNENCHEIN WHALEN
--------- -------- -------- ------ -------- ----- ------- ------ ----------- ------
High Yield Fund...... 3/31 $15,681 $6,376 $948 $10,298 $16,364 $33,424 $1,068 $20,255
Managed Short-Term
Income Fund*........ 3/31 0 0 0 0 0 0 0 0
---- ------- ------ ---- ------- ------- ------- ------ -------
Trust Total......... $15,681 $6,376 $948 $10,298 $16,364 $33,424 $1,068 $20,255
FORMER TRUSTEES
--------------------------------------------
FUND NAME MILLER REES ROBINSON ROONEY SISTO
--------- ------ ---- -------- ------ -----
High Yield Fund...... $2,950 $2,478 $5,128 $4,077 $4,829
Managed Short-Term
Income Fund*........ 0 0 0 0 0
------ ------ ------ ------ ------
Trust Total......... $2,950 $2,478 $5,128 $4,077 $4,829
------------------------------------
* The Managed Short-Term Income Fund had not commenced investment operations as
of March 31, 2004.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
TRUSTEE
--------------------------------------------------------------------------------------
FUND NAME ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR MERIN NELSON POWERS
--------- ---- -------- ------ -------- ----- ------- ---- ----- ------ ------
High Yield Fund............... 2003 1996 1999 2003 1996 1996 2003 1999 1996 1999
Managed Short-Term Income
Fund......................... 2003 1995 1999 2003 1995 1995 2003 1999 1995 1999
TRUSTEE
-------------------------------
FUND NAME SONNENSCHEIN WHALEN WOOLSEY
--------- ------------ ------ -------
High Yield Fund............... 2003 1996 1999
Managed Short-Term Income
Fund......................... 2003 1995 1999
TABLE E
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
OFFICER
----------------------------------------------
FUND NAME CHANG MCALINDEN MERIN ROBISON SULLIVAN
--------- ----- --------- ----- ------- --------
High Yield Fund............................................. 2003 2002 2002 2003 1996
Managed Short-Term Income Fund.............................. 2003 2002 2002 2003 1996
BOARD COMMITTEES
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised solely of "Independent Trustees", which is defined for purposes herein
as trustees who: (1) are not "interested persons" of the Fund as defined by the
1940 Act and
B-30
(2) are "independent" of the Fund as defined by the New York Stock Exchange,
American Stock Exchange and Chicago Stock Exchange listing standards.
The Board's audit committee consists of J. Miles Branagan, Jerry D. Choate
and R. Craig Kennedy. In addition to being Independent Trustees as defined
above, each of these trustees also meets the additional independence
requirements for audit committee members as defined by the New York Stock
Exchange, American Stock Exchange and Chicago Stock Exchange listing standards.
The audit committee makes recommendations to the Board of Trustees concerning
the selection of the Fund's independent public auditors, reviews with such
auditors the scope and results of the Fund's annual audit and considers any
comments which the auditors may have regarding the Fund's financial statements,
books of account or internal controls. The Board of Trustees has adopted a
formal written charter for the audit committee which sets forth the audit
committee's responsibilities. The audit committee has reviewed and discussed the
financial statements of each Fund with management as well as with the
independent auditors of each Fund, and discussed with the independent auditors
the matters required to be discussed under the Statement of Auditing Standards
No. 61. The audit committee has received the written disclosures and the letter
from the independent auditors required under Independence Standards Board
Standard No. 1 and has discussed with the independent auditors their
independence. Based on this review, the audit committee recommended to the Board
of Trustees of each Fund that each Fund's audited financial statements be
included in each Fund's annual report to shareholders for the most recent fiscal
year for filing with the SEC.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Rod Dammeyer,
Howard J Kerr and Jack E. Nelson. In addition to being Independent Trustees as
defined above, each of these trustees also meets the additional independence
requirements for nominating committee members as defined by the New York Stock
Exchange, American Stock Exchange and Chicago Stock Exchange listing standards.
The governance committee identifies individuals qualified to serve as
Independent Trustees on the Board and on committees of the Board, advises the
Board with respect to Board composition, procedures and committees, develops and
recommends to the Board a set of corporate governance principles applicable to
the Fund, monitors corporate governance matters and makes recommendations to the
Board, and acts as the administrative committee with respect to Board policies
and procedures, committee policies and procedures and codes of ethics. The
Independent Trustees of the Fund select and nominate any other nominee
Independent Trustees for the Fund. While the Independent Trustees of the Fund
expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Board of Trustees as they deem
appropriate, they will consider nominations from shareholders to the Board.
Nominations from shareholders should be in writing and sent to the Independent
Trustees as described below.
During the Fund's last fiscal year, the Board of Trustees held 10 meetings.
During the Fund's last fiscal year, the audit committee of the Board held 5
meetings and the brokerage and services committee of the Board held 4 meetings.
The governance committee was recently organized and held 4 meetings during the
Fund's last fiscal year.
B-31
SHAREHOLDER COMMUNICATIONS
Shareholders may send communications to the Board of Trustees. Shareholders
should send communications intended for the Board by addressing the
communication directly to the Board (or individual Board members) and/or
otherwise clearly indicating in the salutation that the communication is for the
Board (or individual Board members) and by sending the communication to either
the Fund's office or directly to such Board member(s) at the address specified
for such trustee above. Other shareholder communications received by the Fund
not directly addressed and sent to the Board will be reviewed and generally
responded to by management, and will be forwarded to the Board only at
management's discretion based on the matters contained therein.
SHARE OWNERSHIP
Excluding deferred compensation balances as described in the Compensation
Table, as of December 31, 2003, the most recently completed calendar year prior
to the date of this Statement of Additional Information, each trustee of the
Trust beneficially owned equity securities of each series of the Trust and of
all of the funds in the Fund Complex overseen by the trustee in the dollar range
amounts specified below.
2003 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
TRUSTEE
-----------------------------------------------------------------------------------------
ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON
-------- -------- -------- -------- -------- -------- ---------- ----------
DOLLAR RANGE OF EQUITY
SECURITIES IN EACH SERIES
OF THE TRUST
High Yield Fund........... none $1- none none none none none none
$10,000
Managed Short-Term Income
Fund..................... none none none none none none none none
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
TRUSTEE IN THE FUND
COMPLEX.................. $50,001- over $50,001- over $10,001- over $1-$10,000 $1-$10,000
$100,000 $100,000 $100,000 $100,000 $50,000 $100,000
TRUSTEE
------------------------
SONNENSCHEIN WOOLSEY
------------ ----------
DOLLAR RANGE OF EQUITY
SECURITIES IN EACH SERIES
OF THE TRUST
High Yield Fund........... none none
Managed Short-Term Income
Fund..................... none none
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY
TRUSTEE IN THE FUND
COMPLEX.................. $10,001- $1-$10,000
$50,000
INTERESTED TRUSTEES
TRUSTEE
---------------------------------
MERIN POWERS WHALEN
-------- -------- ---------
DOLLAR RANGE OF EQUITY SECURITIES IN EACH SERIES OF THE
TRUST
High Yield Fund............................................. none none $10,001-
$50,000
Managed Short-Term Income Fund.............................. none none none
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN THE
FUND COMPLEX.............................................. over over over
$100,000 $100,000 $100,000
Including deferred compensation balances (which are amounts deferred and
thus retained by the Fund as described in the Compensation Table), as of
December 31, 2003, the most recently completed calendar year prior to the date
of this Statement of
B-32
Additional Information, each Trustee of the Trust had in the aggregate,
combining beneficially owned equity securities and deferred compensation of each
series of the Trust and of all of the funds in the Fund Complex overseen by the
Trustee, the dollar range of amounts specified below.
2003 TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
TRUSTEE
---------------------------------------------------------------------------------------------------
ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN
-------- -------- -------- -------- -------- -------- ------- -------- ------------
DOLLAR RANGE OF EQUITY
SECURITIES AND DEFERRED
COMPENSATION IN EACH SERIES
OF THE TRUST
High Yield Fund.............. none $10,001- $1- $1- $10,001- $10,001- none $10,001- $1-
$50,000 $10,000 $10,000 $50,000 $50,000 $50,000 $10,000
Managed Short-Term Income
Fund....................... none none none none none none none none none
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES AND
DEFERRED COMPENSATION IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE
IN FUND COMPLEX.............. $50,001- over over over over over $1- over over
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $10,000 $100,000 $100,000
TRUSTEE
----------
WOOLSEY
----------
DOLLAR RANGE OF EQUITY
SECURITIES AND DEFERRED
COMPENSATION IN EACH SERIES
OF THE TRUST
High Yield Fund.............. none
Managed Short-Term Income
Fund....................... none
AGGREGATE DOLLAR RANGE OF
EQUITY SECURITIES AND
DEFERRED COMPENSATION IN ALL
REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE
IN FUND COMPLEX.............. $1-$10,000
INTERESTED TRUSTEES
TRUSTEE
---------------------------------
MERIN POWERS WHALEN
-------- -------- ---------
DOLLAR RANGE OF EQUITY SECURITIES AND DEFERRED COMPENSATION
IN EACH SERIES OF THE TRUST
High Yield Fund........................................... none none $10,001-
$50,000
Managed Short-Term Income Fund............................ none none none
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES AND DEFERRED
COMPENSATION IN ALL REGISTERED INVESTMENT COMPANIES
OVERSEEN BY TRUSTEES IN THE FUND COMPLEX.................. over over over
$100,000 $100,000 $100,000
As of July 1, 2004, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
CODE OF ETHICS
The Fund, the Adviser and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other
B-33
reporting matters. All reportable securities transactions and other required
reports are to be reviewed by appropriate personnel for compliance with the Code
of Ethics. Additional restrictions apply to portfolio managers, traders,
research analysts and others who may have access to nonpublic information about
the trading activities of the Fund or other Van Kampen funds or who otherwise
are involved in the investment advisory process. Exceptions to these and other
provisions of the Code of Ethics may be granted in particular circumstances
after review by appropriate personnel.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund renders periodic reports to the Fund's Board of Trustees
and permits its officers and employees to serve without compensation as trustees
of the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the costs of its day-to-day operations, including service fees,
distribution fees, custodian fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Fund (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments), and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any error of judgement or of
law, or for any loss suffered by the Fund in connection with the matters to
which the Advisory Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the Advisory Agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction in which the Fund's shares are qualified for
offer and sale (excluding any expenses permitted to be excluded from the
computation under applicable law or regulation), the compensation due the
Adviser will be reduced by the amount of such excess and that, if a reduction in
and refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the fiscal year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving the Advisory Agreement, the Board of Trustees, including the
non-interested Trustees, considered the nature, quality and scope of the
services provided by
B-34
the Adviser, the performance, fees and expenses of the Fund compared to other
similar investment companies, the Adviser's expenses in providing the services
and the profitability of the Adviser and its affiliated companies. The Board of
Trustees also reviewed the benefit to the Adviser of receiving research paid for
by Fund assets and the propriety of such an arrangement and evaluated other
benefits the Adviser derives from its relationship with the Fund. The Board of
Trustees considered the extent to which any economies of scale experienced by
the Adviser are shared with the Fund's shareholders, and the propriety of
existing and alternative breakpoints in the Fund's advisory fee schedule. The
Board of Trustees considered comparative advisory fees of the Fund and other
investment companies at different asset levels, and considered the trends in the
industry versus historical and projected sales and redemptions of the Fund. The
Board of Trustees reviewed reports from third parties about the foregoing
factors and considered changes, if any, in such items since its previous
approval. The Board of Trustees discussed the financial strength of the Adviser
and its affiliated companies and the capability of the personnel of the Adviser.
The Board of Trustees reviewed the statutory and regulatory requirements for
approval of advisory agreements. The Board of Trustees, including the
non-interested Trustees, evaluated all of the foregoing and determined, in the
exercise of its business judgment, that approval of the Advisory Agreement was
in the best interests of the Fund and its shareholders.
LITIGATION INVOLVING THE ADVISER
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
preceding paragraph.
B-35
The Adviser and one of the investment companies advised by the Adviser are
named as defendants in a recently filed class action complaint generally
alleging that the defendants breached their duties of care to long-term
shareholders of the investment company by valuing portfolio securities at the
closing prices of the foreign exchanges on which they trade without accounting
for significant market information that became available after the close of the
foreign exchanges but before calculation of net asset value. As a result, the
complaint alleges, short-term traders were able to exploit stale pricing
information to capture arbitrage profits that diluted the value of shares held
by long-term investors. The complaint seeks unspecified compensatory damages,
punitive damages, fees and costs.
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.
ADVISORY FEES
FISCAL YEAR ENDED MARCH 31,
------------------------------------
2004 2003 2002
---- ---- ----
Adviser received the approximate advisory fees net
of fee waivers................................... $2,105,000 $1,913,000 $2,129,000
Adviser waived the approximate advisory fees from
the Fund......................................... $ 323,900 $ 255,100 $ 283,900
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT
The Fund has entered into an accounting services agreement pursuant to
which Asset Management provides accounting services to the Fund supplementary to
those provided by the custodian. Such services are expected to enable the Fund
to more closely monitor and maintain its accounts and records. The Fund pays all
costs and expenses related to such services, including all salary and related
benefits of accounting personnel, as well as the overhead and expenses of office
space and the equipment necessary to render such services. The Fund shares
together with the other Van Kampen funds in the cost of providing such services
with 25% of such costs shared proportionately based on the respective number of
classes of securities issued per fund and the remaining 75% of such costs based
proportionately on the respective net assets per fund.
ACCOUNTING SERVICES FEES
FISCAL YEAR ENDED MARCH 31,
---------------------------
2004 2003 2002
---- ---- ----
The Adviser received the approximate accounting services
fees of.................................................. $37,500 $36,900 $37,300
B-36
LEGAL SERVICES AGREEMENT
The Fund and certain other Van Kampen funds have entered into legal
services agreements pursuant to which Van Kampen Investments provides legal
services, including without limitation: accurate maintenance of each fund's
minute books and records, preparation and oversight of each fund's regulatory
reports and other information provided to shareholders, as well as responding to
day-to-day legal issues on behalf of the funds. Payment by the funds for such
services is made on a cost basis for the salary and salary-related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel. Other funds distributed by the Distributor also
receive legal services from Van Kampen Investments. Of the total costs for legal
services provided to funds distributed by the Distributor, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
LEGAL SERVICES FEES
FISCAL YEAR ENDED MARCH 31,
---------------------------
2004 2003 2002
---- ---- ----
Van Kampen Investments received the approximate legal
services fees of......................................... $19,400 $18,600 $37,800
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's Board
of Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by a vote of a majority of Trustees who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal years are shown in the chart below.
Total Amounts
Underwriting Retained by
Commissions Distributor
------------ -----------
Fiscal year ended March 31, 2004....................... $1,105,903 $108,058
Fiscal year ended March 31, 2003....................... 795,381 $ 40,921
Fiscal year ended March 31, 2002....................... $ 728,131 $ 75,366
B-37
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
Total Sales Charge
------------------------- Reallowed
As % of As % of Net To Dealers
Size of Offering Amount As a % of
Investment Price Invested Offering Price
------------------------------------------------------------------------------------------------
Less than $100,000.......................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............. 3.75% 3.90% 3.25%
$250,000 but less than $500,000............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........... 2.00% 2.04% 1.75%
$1,000,000 or more.......................... * * *
------------------------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase.
The one-year period ends on the first business day of the thirteenth month
after the purchase date. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed on a percentage of
the dollar value of such shares sold as follows: 1.00% on sales to $2 million,
plus 0.80% on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally receive from the Distributor the ongoing
distribution fees of up to 0.75% of the average daily net assets of the Fund's
Class C Shares annually, commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily
B-38
intended to result in sales of shares of the Fund or other Van Kampen funds.
Fees may include payment for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives for meetings
or seminars of a business nature. In some instances additional compensation or
promotional incentives may be offered to brokers, dealers or financial
intermediaries that have sold or may sell significant amounts of shares during
specified periods of time. The Distributor may provide additional compensation
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
quarterly sales of shares of the Fund and other Van Kampen funds and increases
in net assets of the Fund and other Van Kampen funds over specified thresholds.
All of the foregoing payments are made by the Distributor out of its own assets.
Such fees paid for such services and activities with respect to the Fund will
not exceed in the aggregate 1.25% of the average total daily net assets of the
Fund on an annual basis. These programs will not change the price an investor
will pay for shares or the amount that a Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each of its Class A Shares, Class B Shares and Class C Shares
pursuant to Rule 12b-1 under the 1940 Act. The Fund also adopted a service plan
(the "Service Plan") with respect to each of its Class A Shares, Class B Shares
and Class C Shares. The Distribution Plan and the Service Plan sometimes are
referred to herein as the "Plans". The Plans provide that the Fund may spend a
portion of the Fund's average daily net assets attributable to each class of
shares in connection with the distribution of the respective class of shares and
in connection with the provision of ongoing services to shareholders of such
class, respectively. The Distribution Plan and the Service Plan are being
implemented through the Distribution and Service Agreement with the Distributor
of each class of the Fund's shares, sub-agreements between the Distributor and
members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Fund's Board of
Trustees setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is
B-39
specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to any
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to any class of shares at any time by a
vote of a majority of the disinterested Trustees or by a vote of a majority of
the outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These unreimbursed actual net
expenses may or may not be recovered through plan fees or contingent deferred
sales charges in future years.
Because of fluctuations in net asset value, the plan fees with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class.
As of March 31, 2004, there were approximately $1,297,000 and $34,000 of
unreimbursed distribution-related expenses with respect to Class B Shares and
Class C Shares, respectively, representing approximately 2% and less than 1% of
the Fund's net assets attributable to Class B Shares and Class C Shares,
respectively. If the Plans are terminated or not continued, the Fund would not
be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.
B-40
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended March 31, 2004, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $494,411 or 0.25% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended March 31, 2004, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $931,196 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $701,343 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $229,853
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended March 31, 2004,
the Fund's aggregate expenses paid under the Plans for Class C Shares were
$270,085 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $133,208 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $136,877 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into agreements with the following firms
whereby certain shares of the Fund will be offered pursuant to such firm's
retirement plan alliance program(s): (i) Morgan Stanley DW Inc., (ii) Merrill
Lynch, Pierce, Fenner & Smith Inc., (iii) First Union National Bank, (iv)
Huntington Bank, (v) Invesco Retirement and Benefit Services, Inc., (vi) Lincoln
National Life Insurance Company, (vii) National Deferred Compensation, Inc.,
(viii) Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks, (ix)
The Prudential Insurance Company of America, (x) Charles Schwab & Co., Inc.,
(xi) Union Bank of California, N.A., (xii) Buck Consultants, Inc., (xiii)
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.) (xiv) American Century Retirement Plan Services Inc., (xv) Fidelity
Brokerage Services, Inc. & National Financial Services Corporation, (xvi)
Franklin Templeton Investor Services, Inc., (xvii) Smith Barney, Inc., (xviii)
SunGard Investment Products Inc. (xix) GoldK Investment Services, Inc., (xx) ABN
Amro Trust Services Co., (xxi) AMVESCAP Retirement, Inc. and (xxii) Northern
Trust Retirement Consulting, LLC. Trustees and other fiduciaries of retirement
plans seeking to invest in multiple fund families through a broker-dealer
retirement plan alliance program should contact the firms mentioned above for
further information concerning the program(s) including, but not limited to,
minimum size and operational requirements.
B-41
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency fees
are determined through negotiations with the Fund and are approved by the Fund's
Board of Trustees. The transfer agency fees are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard are subject to
review by the Fund's Board of Trustees.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities
B-42
transactions and performing functions incidental thereto (such as clearance,
settlement and custody). Research services furnished by firms through which the
Fund effects its securities transactions may be used by the Adviser in servicing
all of its advisory accounts; not all of such services may be used by the
Adviser in connection with the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which the Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Fund or
affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
B-43
Unless otherwise disclosed below, the Fund paid no commissions to
affiliated brokers during the last three fiscal years. The Fund paid the
following commissions to brokers during the fiscal years shown:
Commissions paid:
Affiliated
Brokers
-------------
Morgan
All Stanley & Co.
Brokers Incorporated
------- -------------
Fiscal year ended March 31, 2004........................ $13,419 $0
Fiscal year ended March 31, 2003........................ $ 22 $0
Fiscal year ended March 31, 2002........................ $ 688 $0
Fiscal year 2004 Percentages:
Commissions with affiliate to total commissions................ 0%
Value of brokerage transactions with affiliate to total
transactions................................................... 0%
During the fiscal year ended March 31, 2004, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the Van
Kampen funds will receive statements quarterly from Investor Services showing
any reinvestments of dividends and capital gain dividends and any other activity
in the account since the preceding statement. Such shareholders also will
receive separate confirmations for each purchase or sale transaction other than
reinvestment of dividends and capital gain dividends and systematic purchases or
redemptions. Additional shares may be purchased at any time through authorized
dealers or by mailing a check and detailed instructions directly to Investor
Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with
B-44
the exception of fractional shares) of the Fund. A shareholder will be required
to surrender such certificates upon an exchange or redemption of the shares
represented by the certificate. In addition, if such certificates are lost the
shareholder must write to Van Kampen Funds Inc., c/o Investor Services, PO Box
947, Jersey City, New Jersey 07303-0947, requesting an "Affidavit of Loss" and
obtain a Surety Bond in a form acceptable to Investor Services. On the date the
letter is received, Investor Services will calculate the fee for replacing the
lost certificate equal to no more than 1.50% of the net asset value of the
issued shares, and bill the party to whom the replacement certificate was
mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor.
AUTOMATED CLEARING HOUSE("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds up to $50,000
deposited electronically into their bank accounts. Redemption proceeds
transferred to a bank account via the ACH plan are available to be credited to
the account on the second business day following normal payment. To utilize this
option, the shareholder's bank must be a member of ACH. In addition, the
shareholder must fill out the appropriate section of the account application
form. The shareholder must also include a voided check or deposit slip from the
bank account into which redemption proceeds are to be deposited together with
the completed application. Once Investor Services has received the application
and the voided check or deposit slip, such shareholder's designated bank
account, following any redemption, will be credited with the proceeds of such
redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing Investor Services or by calling (800)
847-2424 ((800)421-2833 for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may elect, by completing the appropriate section of the
account application form or by calling (800) 847-2424 ((800) 421-2833 for the
hearing impaired), to have all dividends and capital gain dividends paid on a
class of shares of the Fund invested into shares of the same class of any of the
Participating Funds (as defined in the Prospectus) so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Money Purchase and Profit
Sharing Keogh plans) and for the benefit of the same individual. If a qualified,
pre-existing account does not exist, the shareholder must establish a new
account subject to any requirements of the Participating Fund into which
distributions will be invested. Distributions are invested into the selected
Participating Fund, provided that shares of such Participating Fund are
available for sale, at its net asset value per share as of the payable date of
the distribution from the Fund.
B-45
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for periodic checks in any
amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan and may be
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain dividends
on shares held in accounts with systematic withdrawal plans are reinvested in
additional shares at the next determined net asset value per share. If periodic
withdrawals continuously exceed reinvested dividends and capital gain dividends,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Redemptions made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any gain or loss realized by the
shareholder upon redemption of shares is a taxable event. The Fund reserves the
right to amend or terminate the systematic withdrawal program upon 30 days'
notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a fractional share to round
off his or her purchase to the next full share) in Class A Shares of the Fund. A
Class C Shareholder who has redeemed shares of the Fund may reinstate any
portion or all of the net proceeds of such redemption (and may include that
amount necessary to acquire a fractional share to round off his or her purchase
to the next full share) in Class C Shares of the Fund with credit given for any
contingent deferred sales charge paid upon such redemption, provided that such
shareholder has not previously exercised this reinstatement privilege with
respect to Class C Shares of the Fund. Shares acquired in this manner will be
deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC-Class C (defined below) to subsequent redemptions.
Reinstatements are made at the net asset value per share (without a sales
charge) next determined after the order is received, which must be made within
180 days after the date of the redemption, provided that shares of the Fund are
available for sale. Reinstatement at net asset value per share is also offered
to participants in eligible retirement plans for repayment of principal (and
B-46
interest) on their borrowings on such plans, provided that shares of the Fund
are available for sale.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
In addition, if the Fund's Board of Trustees determines that payment wholly
or partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. A
distribution-in-kind may result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the shareholder may have brokerage costs and a gain or loss for federal income
tax purposes upon the shareholder's disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Fund's Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of a
Participating Fund are exchanged for shares of another Participating Fund, the
purchase date for the shares acquired by exchange will be assumed to be the date
on which shares were purchased in the fund from which the exchange was made. If
the exchanged shares themselves are acquired through an exchange, the purchase
date is assumed to carry over from the date of the original election to purchase
shares subject to a CDSC-Class A rather than a front-end load sales charge. In
determining whether a CDSC-Class A is payable, it is assumed that shares being
redeemed first are any shares in the shareholder's account not subject to a
contingent deferred sales charge, followed by shares held the longest in the
shareholder's account. The contingent deferred sales charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no sales charge
is assessed on shares derived from reinvestment of dividends or capital gain
dividends.
B-47
WAIVER OF CLASS B AND CLASS C CONTINGENT
DEFERRED SALES CHARGES
As described in the Fund's Prospectus under "Redemption of Shares,"
redemptions of Class B Shares and Class C Shares will be subject to a contingent
deferred sales charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived
on redemptions of Class B Shares and Class C Shares in the circumstances
described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Code, which in pertinent part
defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution or other
contribution pursuant to Code Section 408(d)(4) or (5), the return of excess
contributions or excess deferral amounts pursuant to Code Section 401(k)(8) or
402(g)(2), the financial hardship of the employee pursuant to U.S. Treasury
regulation Section 1.401(k)-1(d)(2) or the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
B-48
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Trust and each of its series, including the Fund, are treated as
separate corporations for federal income tax purposes. The Fund has elected and
qualified, and intends to continue to qualify each year, to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the sources of its income and
diversification of its assets.
B-49
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including ordinary
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss), and
meets certain other requirements, it will not be required to pay federal income
taxes on any income it distributes to shareholders. The Fund intends to
distribute at least the minimum amount necessary to satisfy the 90% distribution
requirement. The Fund will not be subject to federal income tax on any net
capital gain distributed to shareholders and designated as capital gain
dividends.
To avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
for taxation as a regulated investment company.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, such
as zero coupon securities, the Fund will be required to accrue as income each
year a portion of the discount and to distribute such income each year to
maintain its qualification as a regulated investment company and to avoid income
and excise taxes. To generate sufficient cash to make distributions necessary to
satisfy the 90% distribution requirement and to avoid income and excise taxes,
the Fund may have to dispose of securities that it would otherwise have
continued to hold.
The Fund may invest in debt securities of companies that are in default or
are in bankruptcy or reorganization. Investments in debt securities that are at
risk of or in default present special tax issues for the Fund. Federal income
tax rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount or
B-50
market discount, when and to what extent deductions may be taken for bad debts
or worthless securities, how payments received on obligations in default should
be allocated between principal and income and whether exchanges of debt
obligations in a bankruptcy or workout context are taxable. These and other
issues will be addressed by the Fund, in the event it invests in such
securities, in order to seek to ensure that it distributes sufficient income to
preserve its status as a regulated investment company and does not become
subject to U.S. federal income or excise tax.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in non-U.S. corporations that could be classified as
"passive foreign investment companies" as defined for federal income tax
purposes. For federal income tax purposes, such an investment may, among other
things, cause the Fund to recognize income or gain without a corresponding
receipt of cash, to incur an interest charge on taxable income that is deemed to
have been deferred and/or to recognize ordinary income that would otherwise have
been treated as capital gain.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's investment company taxable income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains designated as capital gain dividends, if any,
are taxable to shareholders as long-term capital gains regardless of the length
of time shares of the Fund have been held by such shareholders. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund. Distributions in excess of the
Fund's earnings and profits will first reduce the adjusted tax basis of a
shareholder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such shareholder (assuming such shares are held as a
capital asset).
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax
Act") contains provisions that reduce the U.S. federal income tax rates on (1)
long-term capital gains received by individuals and (2) "qualified dividend
income" received by individuals from certain domestic and foreign corporations.
The reduced rate for capital gains generally applies to long-term capital gains
from sales or exchanges on or after May 6, 2003, and ceases to apply for taxable
years beginning after December 31, 2008. The reduced rate for dividends
generally applies to "qualified dividend income" received in taxable years
beginning after December 31, 2002, and ceases to apply for taxable years
beginning after December 31, 2008. Because the Fund intends to invest primarily
in debt securities, ordinary income dividends paid by the Fund generally will
not be eligible for the reduced rate applicable to "qualified dividend income."
To the extent that distributions from the Fund are designated as capital gain
dividends, such distributions will be eligible for the reduced rate applicable
to long-term capital gains. No assurance can be given that Congress will not
repeal the reduced U.S. federal income tax rate on long-term capital gains prior
to its scheduled expiration under the 2003 Tax Act. For a summary of the maximum
tax rates applicable to capital gain (including capital gain dividends), see
"Capital Gains Rates" below.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an
B-51
amount equal to the fair market value of the shares received, determined as of
the distribution date. The basis of such shares will equal their fair market
value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital, or in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize a gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares sold are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the maximum
tax rates applicable to capital gains, see "Capital Gains Rates" below. Any loss
recognized upon a taxable disposition of shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
B-52
CAPITAL GAINS RATES
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers
investing in the Fund is (i) the same as the maximum ordinary income tax rate
for capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008). No assurance can be given that Congress will not repeal the
reduced U.S. federal income tax rate on long-term capital gains prior to its
scheduled expiration under the 2003 Tax Act. The maximum long-term capital gains
rate for corporations is 35%.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
For purposes of this and the following paragraphs, a "Non-U.S. Shareholder"
shall include any shareholder who is not:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized under the laws of the
United States or any state or political subdivision thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court
and which has one or more U.S. fiduciaries who have the authority to
control all substantial decisions of the trust, or (ii) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A Non-U.S. Shareholder generally will be subject to withholding of U.S.
federal income tax at a 30% rate (or lower applicable treaty rate), rather than
backup withholding (discussed below), on dividends from the Fund (other than
capital gain dividends) that are not "effectively connected" with a U.S. trade
or business carried on by such shareholder, provided that the shareholder
furnishes to the Fund a properly completed Internal Revenue Service ("IRS") Form
W-8BEN certifying the shareholder's non-United States status.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to U.S. federal income tax in the case of
(i) a Non-U.S. Shareholder that is a corporation and (ii) an individual Non-U.S.
Shareholder who is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding and information reporting on capital gain dividends and redemption
proceeds paid to them upon the sale of their shares. See "Backup Withholding"
and "Information Reporting" below.
If income from the Fund or gains realized from the sale of shares are
effectively connected with a Non-U.S. Shareholder's U.S. trade or business, then
such amounts will not be subject to the 30% withholding described above but
rather will be subject to U.S. federal income tax on a net basis at the tax
rates applicable to U.S. citizens and residents or domestic corporations. To
establish that income from the Fund or gains realized from
B-53
the sale of shares are effectively connected with a U.S. trade or business, a
Non-U.S. Shareholder must provide the Fund with a properly completed IRS Form
W-8ECI certifying that such amounts are effectively connected with the Non-U.S.
Shareholder's U.S. trade or business. Non-U.S. Shareholders that are
corporations may also be subject to an additional "branch profits tax" with
respect to income from the Fund that is effectively connected with a U.S. trade
or business.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. To claim tax treaty benefits, Non-U.S. Shareholders will be
required to provide the Fund with a properly completed IRS Form W-8BEN
certifying their entitlement to the benefits. In addition, in certain cases
where payments are made to a Non-U.S. Shareholder that is a partnership or other
pass-through entity, both the entity and the persons holding an interest in the
entity will need to provide certification. For example, an individual Non-U.S.
Shareholder who holds shares in the Fund through a non-U.S. partnership must
provide an IRS Form W-8BEN to claim the benefits of an applicable tax treaty.
Non-U.S. Shareholders are advised to consult their advisers with respect to the
tax implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 28%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends paid to a
shareholder (other than a Non-U.S. Shareholder) if (i) the shareholder fails to
properly furnish the Fund with its correct taxpayer identification number, (ii)
the IRS notifies the Fund that the shareholder has failed to properly report
certain interest and dividend income to the IRS and to respond to notices to
that effect or (iii) when required to do so, the shareholder fails to certify
that the taxpayer identification number provided is correct, that the
shareholder is not subject to backup withholding and that the shareholder is a
U.S. person (as defined for U.S. federal income tax purposes). Redemption
proceeds may be subject to backup withholding under the circumstances described
in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to backup withholding. To
avoid backup withholding on capital gain dividends and redemption proceeds from
the sale of shares, Non-U.S. Shareholders must provide a properly completed IRS
Form W-8BEN certifying their non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends, capital gain dividends or
redemption proceeds paid to such shareholder and the amount, if any, of tax
withheld pursuant to
B-54
backup withholding rules with respect to such amounts. In the case of a Non-U.S.
Shareholder, the Fund must report to the IRS and such shareholder the amount of
dividends, capital gain dividends or redemption proceeds paid that are subject
to withholding (including backup withholding, if any) and the amount of tax
withheld with respect to such amounts. This information may also be made
available to the tax authorities in the Non-U.S. Shareholder's country of
residence.
GENERAL
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year, five-year and ten-year periods (or life of the
Fund, if shorter). Other total return quotations, aggregate or average, over
other time periods may also be included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge has been paid. The Fund's total return will vary depending
on market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends or capital gain dividends
paid by the Fund or to reflect that 12b-1 fees may have changed over time.
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing
B-55
the net change in the value of the investment as of the end of the period by the
amount of the initial investment and expressing the result as a percentage.
Non-standardized total return will be calculated separately for each class of
shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any contingent deferred sales charge
imposed at the time of redemption were reflected, it would reduce the
performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement) and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares of the Fund. Total return figures for Class A Shares
include the maximum sales charge. Total return figures for Class B Shares and
Class C Shares include any applicable contingent deferred sales charge. Because
of the differences in sales charges and distribution fees, the total returns for
each class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
B-56
From time to time, marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their fund shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based therein are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Fund may also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, the Dow
Jones Industrial Average, Standard & Poor's indices, NASDAQ Composite Index,
other appropriate indices of investment securities, or with investment or
savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking or rating services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce the Fund's performance. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge from our web site at www.vankampen.com or by calling or
writing the Fund at the telephone number and address printed on the cover of
this Statement of Additional Information.
B-57
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
March 31, 2004 was 12.71%, (ii) the five-year period ended March 31, 2004 was
-0.52%, (iii) the ten-year period ended March 31, 2004 was 3.51% and (iv) the
approximately seventeen-year, nine-month period since June 27, 1986
(commencement of distribution of Class A Shares of the Fund) through March 31,
2004 was 5.71%.
The Fund's yield with respect to the Class A Shares for the 30-day period
ending March 31, 2004 was 5.93%. The Fund's current distribution rate with
respect to Class A Shares for the month ending March 31, 2004 was 6.67%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from June 27, 1986
(commencement of distribution of Class A Shares of the Fund) to March 31, 2004
was 167.88%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from June 27, 1986
(commencement of distribution of Class A Shares of the Fund) to March 31, 2004
was 181.21%.
CLASS B SHARES
The Fund's average annual total return for Class B Shares listed below
reflects the conversion of such shares into Class A Shares. Class B Shares
purchased before June 1, 1996, including Class B Shares received from
reinvestment of distributions through the dividend reinvestment plan on such
shares, automatically convert to Class A Shares six years after the end of the
calendar month in which the shares were purchased. Class B Shares purchased on
or after June 1, 1996, including Class B Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares eight years after the end of the
calendar month in which the shares were purchased.
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended March 31, 2004 was 13.62%, (ii) the five-year period ended March
31, 2004 was -0.48%, (iii) the ten-year period ended March 31, 2004 was 3.53%
and (iv) the approximately ten-year, ten-month period since May 17, 1993
(commencement of distribution of Class B Shares of the Fund) through March 31,
2004 was 3.96%.
The Fund's yield with respect to the Class B Shares for the 30-day period
ending March 31, 2004 was 5.43%. The Fund's current distribution rate with
respect to Class B Shares for the month ending March 31, 2004 was 6.22%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 17, 1993 (commencement of distribution of Class B Shares of the Fund) to
March 31, 2004 was 52.48%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 17, 1993 (commencement of distribution of Class B Shares of the Fund) to
March 31, 2004 was 52.48%.
B-58
CLASS C SHARES
The Fund's average annual total return for Class C Shares listed below
reflects the conversion of such shares into Class A Shares. Class C Shares
purchased before January 1, 1997, including Class C Shares received reinvestment
of distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares ten years after the end of the calendar
month in which the shares were purchased. Class C Shares purchased on or after
January 1, 1997, including Class C Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares, do not
possess a conversion feature.
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended March 31, 2004 was 16.65%, (ii) the five-year, period ended March
31, 2004 was -0.30%, (iii) the ten-year period ended March 31, 2004 was 3.22%
and (iv) the approximately ten-year, seven-month period since August 13, 1993
(commencement of distribution of Class C Shares of the Fund) through March 31,
2004 was 3.35%.
The Fund's yield with respect to the Class C Shares for the 30-day period
ending March 31, 2004 was 5.44%. The Fund's current distribution rate with
respect to Class C Shares for the month ending March 31, 2004 was 6.23%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (commencement of distribution of Class C Shares of the Fund) to
March 31, 2004 was 41.89%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (commencement of distribution of Class C Shares of the Fund) to
March 31, 2004 was 41.89%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent auditors.
B-59
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
An independent registered public accounting firm for the Fund performs an
annual audit of the Fund's financial statements. The Fund's Board of Trustees
has engaged Ernst & Young LLP, located at 233 South Wacker Drive, Chicago,
Illinois 60606, to be the Fund's independent registered public accounting firm.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom LLP.
FINANCIAL STATEMENTS
The audited financial statements of the Fund are incorporated herein by
reference to the Annual Report to shareholders for the Fund dated March 31,
2004. The Annual Report may be obtained by following the instructions on the
cover of this Statement of Additional Information. The Annual Report is included
as part of the Trust's filing on Form N-CSR as filed with the SEC on May 27,
2004 and may be reviewed and copied at the SEC's Public Reference Room in
Washington, DC or on the EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the operation of the SEC's Public Reference
Room may be obtained by calling the SEC at 1-202-942-8090. You can also request
copies of these materials, upon payment of a duplicating fee, by electronic
request at the SEC's e-mail address (publicinfo@sec.gov) or by writing the
Public Reference section of the SEC, Washington, DC 20549-0102.
B-60
APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policies
and procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide discretionary
Investment Management services and for which a MSIM entity has the authority to
vote their proxies. The policies and procedures and general guidelines in this
section will be reviewed and, as necessary, updated periodically to address new
or revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van Kampen
Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and
collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee
A-1
(see Section IV.A. below) will carefully monitor and supervise the services
provided by the proxy research services.
Voting Proxies for certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, consistent with the Client Proxy
Standard. ISS has been retained to provide assistance to the MSIM Affiliates in
connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its Board's
members be comprised of independent and unaffiliated Directors.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
A-2
- Recommendations to set retirement ages or require specific levels of
stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i) a
clear and legitimate business purpose is stated; (ii) the number of
shares requested is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization does not
exceed 100% of shares currently authorized and at least 30% of the
new authorization will be outstanding.
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in the
corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
A-3
- Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
- Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and analysis
will be used along with MSIM Affiliates' research and analysis,
based on, among other things, MSIM internal company-specific
knowledge.
A-4
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option plans
should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
A-5
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Requiring shareholder approval for bylaw or charter amendments.
- Requiring shareholder approval for shareholder rights plan or poison
pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
- Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM will
vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines (as
expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other matters):
(1) address any outstanding issues relating to MSIM's Proxy Voting
Policy and Procedures; and (2) generally review proposals at
upcoming shareholder meetings of MSIM portfolio companies in
accordance with this Policy and Procedures including, as
appropriate, the voting results of prior shareholder
A-6
meetings of the same issuer where a similar proposal was presented
to shareholders. The Committee, or its designee, will timely
communicate to ISS MSIM's Proxy Voting Policy and Procedures (and
any amendments to them and/or any additional guidelines or
procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been provided
in Sections I, II and III above. Split votes will generally not be
approved within a single Global Investor Group team. The Committee
may take into account ISS recommendations and the research
provided by IRRC as well as any other relevant information they
may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee"). The Special
Committee may request the assistance of the Law and Compliance
Departments and will have sole discretion to cast a vote. In
addition to the research provided by ISS and IRRC, the Special
Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems
appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions, which
documentation will be maintained by the Committee and the Special
Committee, or their designee(s) for a period of at least 6 years.
To the extent these decisions relate to a security held by a MSIM
U.S. registered investment company, the Committee and Special
Committee, or their designee(s), will report their decisions to
each applicable Board of Trustees/Directors of those investment
companies at each Board's next regularly Scheduled Board meeting.
The report will contain information concerning decisions made by
the Committee and Special Committee during the most recently ended
calendar quarter immediately preceding the Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
A-7
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
Dated December 30, 2003
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
HIGH INCOME CORPORATE BOND FUND
Van Kampen High Income Corporate Bond Fund's (the "Fund") investment
objective is to seek to maximize current income. Capital appreciation is a
secondary objective which is sought only when consistent with the Fund's primary
investment objective. The Fund's investment adviser seeks to achieve the Fund's
investment objectives by investing primarily in a portfolio of high-yielding,
high-risk bonds and other income securities, such as convertible securities and
preferred stock.
The Fund is organized as a diversified series of the Van Kampen High Income
Corporate Bond Fund, an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge from our web site at www.vankampen.com or by writing or calling Van
Kampen Funds Inc. at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois
60181-5555 or (800) 847-2424 (or (800) 421-2833 for the hearing impaired).
TABLE OF CONTENTS
PAGE
----
General Information......................................... B-2
Investment Objectives, Strategies and Risks................. B-3
Strategic Transactions...................................... B-7
Investment Restrictions..................................... B-12
Trustees and Officers....................................... B-14
Investment Advisory Agreement............................... B-22
Other Agreements............................................ B-24
Distribution and Service.................................... B-24
Transfer Agent.............................................. B-27
Portfolio Transactions and Brokerage Allocation............. B-28
Shareholder Services........................................ B-29
Redemption of Shares........................................ B-31
Contingent Deferred Sales Charge-Class A.................... B-31
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-32
Taxation.................................................... B-33
Fund Performance............................................ B-37
Other Information........................................... B-40
Appendix A -- Proxy Voting Policy and Procedures............ B-41
Report of Independent Auditors.............................. F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-20
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED DECEMBER 30, 2003.
HYI SAI 12/03
GENERAL INFORMATION
The Fund was originally incorporated in Texas on July 11, 1978 organized
under the name American Capital High Yield Investments, Inc. The Fund was
reincorporated by merger into a Maryland corporation on July 2, 1992, under the
name American Capital High Income Corporate Bond Fund, Inc. As of August 5,
1995, the Fund was reorganized as a series of the Trust, under the name Van
Kampen American Capital High Income Corporate Bond Fund. The Trust is a
statutory trust organized under the laws of the State of Delaware. On July 14,
1998, the Fund and the Trust adopted their present names.
Van Kampen Asset Management (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley. The principal office of the Trust and the Fund is located at 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555. The principal office of
the Adviser, the Distributor and Van Kampen Investments is located at 1221
Avenue of the Americas, New York, New York 10020. The principal office of
Investor Services is located at Harborside Financial Center, Plaza 2, Jersey
City, New Jersey 07303-0947.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated as Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with the provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class of shares is subject to its own sales charge schedule and its own
distribution and service expenses. Each class of shares also has exclusive
voting rights with respect to its distribution and service fees.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution or service fee for a class of a
series would be voted upon by shareholders of only the class of such series
involved. Except as otherwise described in the Prospectus or herein, shares do
not have cumulative voting rights, preemptive rights or any conversion,
subscription or exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. The liquidation proceeds to holders of classes of shares
with higher distribution fees and transfer agency costs are likely to be less
than the liquidation proceeds to holders of classes of shares with lower
distribution fees and transfer agency costs.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on
B-2
shareholders, make any assessment on shares or impose liabilities on the
Trustees without approval from each affected shareholder or Trustee, as the case
may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of December 1, 2003, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
NAME AND ADDRESS CLASS PERCENTAGE
OF HOLDER OF SHARES OWNERSHIP
---------------- --------- ----------
Edward Jones & Co. ......................................... A 15.52%
Attn: Mutual Fund B 7.50%
Shareholder Accounting C 8.96%
201 Progress Pkwy
Maryland Hts, MO 63043-3009
Morgan Stanley DW Inc. ..................................... A 7.27%
825 3rd Avenue B 10.40%
New York, NY 10022 C 9.90%
Citigroup Global Markets Inc. .............................. B 7.73%
00109801250 C 13.32%
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
MLPF&S for the Sole Benefit of its Customers................ C 7.65%
Attn: Fund Administration 97BY5
4800 Dear Lake Dr. East, 2nd Floor
Jacksonville, FL 32246-6484
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock, warrant
or other security that may be converted into or exchanged for a prescribed
amount of common stock or other security of the same or a different issuer or
into cash within a particular period of time at a specified price or formula. A
convertible security generally entitles the holder to receive interest paid or
accrued on debt securities or the dividend paid on preferred stock until the
convertible security matures or is redeemed, converted or exchanged. Before
conversion, convertible securities generally have characteristics similar to
both debt and equity securities. The value of convertible securities tends to
decline as interest rates rise and, because of the conversion feature, tends to
vary with fluctuations in the market value of the underlying equity securities.
Convertible securities ordinarily provide a stream of income with generally
higher yields than those of common stock of the same or similar issuers.
Convertible securities generally rank senior to common stock in a corporation's
capital structure but are usually subordinated to comparable nonconvertible
securities. Convertible securities generally do not participate directly in any
dividend increases or decreases of the underlying securities although the market
prices of convertible securities may be affected by any such dividend changes or
other changes in the underlying securities.
B-3
Equity-linked securities are instruments whose value is based upon the
value of one or more underlying equity securities, a reference rate or an index.
Equity-linked securities come in many forms and may include features, among
others, such as the following: (i) may be issued by the issuer of the underlying
equity security or by a company other than the one to which the instrument is
linked (usually an investment bank), (ii) may convert into equity securities,
such as common stock, within a stated period from the issue date or may be
redeemed for cash or some combination of cash and the linked security at a value
based upon the value of the underlying equity security within a stated period
from the issue date, (iii) may have various conversion features prior to
maturity at the option of the holder or the issuer or both, (iv) may limit the
appreciation value with caps or collars of the value of the underlying equity
security and (v) may have fixed, variable or no interest payments during the
life of the security which reflect the actual or a structured return relative to
the underlying dividends of the linked equity security. Generally these
securities are designed to give investors enhanced yield opportunities to the
equity securities of an issuer, but these securities may involve a limited
appreciation potential, downside exposure, or a finite time in which to capture
the yield advantage. For example, certain securities may provide a higher
current dividend income than the dividend income on the underlying security
while capping participation in the capital appreciation of such security. Other
securities may involve arrangements with no interest or dividend payments made
until maturity of the security or an enhanced principal amount received at
maturity based on the yield and value of the underlying equity security during
the security's term or at maturity. Besides enhanced yield opportunities,
another advantage of using such securities is that they may be used for
portfolio management or hedging purposes to reduce the risk of investing in a
more volatile underlying equity security. There may be additional types of
convertible securities with features not specifically referred to herein in
which the Fund may invest consistent with its investment objective and policies.
Investments in equity-linked securities may subject the Fund to additional
risks not ordinarily associated with investments in other equity securities.
Because equity-linked securities are sometimes issued by a third party other
than the issuer of the linked security, the Fund is subject to risks if the
underlying stock underperforms and if the issuer defaults on the payment of the
dividend or the common stock at maturity. In addition, the trading market for
particular equity-linked securities may be less liquid, making it difficult for
the Fund to dispose of a particular security when necessary and reduced
liquidity in the secondary market for any such securities may make it more
difficult to obtain market quotations for valuing the Fund's portfolio.
PREFERRED STOCKS
Preferred stock generally has a preference as to dividends and upon
liquidation over an issuer's common stock but ranks junior to other income
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on other income securities, preferred stock
dividends are payable only if declared by the issuer's board of directors.
Dividends on preferred stock may be cumulative, meaning that, in the event the
issuer fails to make one or more dividend payments on the preferred stock, no
dividends may be paid on the issuer's common stock until all unpaid preferred
stock dividends have been paid. Preferred stock also may provide that, in the
event the issuer fails to make a specified number of dividend payments, the
holders of the preferred stock will have the right to elect a specified number
of directors to the issuer's board. Preferred stock also may be subject to
optional or mandatory redemption provisions.
DURATION
Duration is a measure of the expected life of an income security that was
developed as an alternative to the concept of "term to maturity." Duration
incorporates an income security's yield, coupon interest payments, final
maturity and call features into one measure. Traditionally an income security's
"term to maturity" has been used as a proxy for the sensitivity of the
security's price to changes in interest rates. However, "term to maturity"
measures only the time an income security provides its final payment taking no
account of the pattern of the security's payments of interest or principal prior
to maturity. Duration is a measure of the expected life of an income security on
a present value basis expressed in years. It measures the length of the time
interval between the present and the time when the interest and principal
payments are
B-4
scheduled (or in the case of a callable bond, expected to be received), weighing
them by the present value of the cash to be received at each future point in
time. For any debt security with interest payments occurring prior to the
payment of principal, duration is always less than maturity, and for zero coupon
issues, duration and term to maturity are equal. In general, the lower the
coupon rate of interest or the longer the maturity, or the lower the
yield-to-maturity of an income security, the longer its duration; conversely,
the higher the coupon rate of interest, the shorter the maturity or the higher
the yield-to-maturity of an income security, the shorter its duration. There are
some situations where even the standard duration calculation does not properly
reflect the interest rate exposure of a security. For example, floating and
variable rate securities often have final maturities of ten or more years;
however, their interest rate exposure corresponds to the frequency of the coupon
reset. Another example where the interest rate exposure is not properly captured
by the duration is the case of mortgage pass-through securities. The stated
final maturity of such securities is generally 30 years, but current prepayment
rates are more critical in determining the securities' interest rate exposure.
In these and other similar situations, the Adviser will use more sophisticated
analytical techniques that incorporate the economic life of a security into the
determination of its interest rate exposure.
SECURITIES OF FOREIGN ISSUERS
The Fund may purchase foreign securities in the form of American Depositary
Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other securities
representing underlying shares of foreign companies. These securities are not
necessarily denominated in the same currency as the underlying securities but
generally are denominated in the currency of the market in which they are
traded. ADRs are receipts typically issued by an American bank or trust company
which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information is
available in the United States about an unsponsored ADR than about a sponsored
ADR and financial information about a company may not be as reliable for an
unsponsored ADR as it is for a sponsored ADR. The Fund may invest in ADRs
through both sponsored and unsponsored arrangements. EDRs are receipts issued in
Europe by banks or depositories which evidence a similar ownership arrangement.
BRADY BONDS
Brady Bonds are created through the exchange of existing commercial bank
loans to foreign entities for new obligations in connection with debt
restructuring under a plan introduced by former U.S. Secretary of the Treasury
Nicholas F. Brady (the "Brady Plan"). Brady Bonds may be collateralized or
uncollateralized and issued in various currencies (although most are U.S.
dollar-denominated) and they are actively traded in the over-the-counter
secondary market. The Fund may purchase Brady Bonds either in the primary or
secondary markets. The price and yield of Brady Bonds purchased in the secondary
market will reflect the market conditions at the time of purchase, regardless of
the stated face amount and the stated interest rate. With respect to Brady Bonds
with no or limited collateralization, the Fund will rely for payment of interest
and principal primarily on the willingness and ability of the issuing government
to make payment in accordance with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment
B-5
of principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk"). In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held to
the scheduled maturity of the defaulted Brady Bonds by the collateral agent, at
which time the face amount of the collateral will equal the principal payments
which would have then been due on the Brady Bonds in the normal course. In
addition, in light of the residual risk of the Brady Bonds and, among other
factors, the history of defaults with respect to commercial bank loans by public
and private entities of countries issuing Brady Bonds, investments in Brady
Bonds should be viewed as speculative.
LENDING OF SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend its portfolio securities, in an amount up to 10% of the Fund's total
assets, to broker-dealers, banks and other institutional borrowers of securities
provided such loans are callable at any time and are continuously secured by
collateral that is at least equal to the market value, determined daily, of the
loaned securities. The advantage of such loans is that the Fund continues to
receive the interest or dividends on the loaned securities, while at the same
time earning interest on the collateral which is invested in short-term
obligations or the Fund receives an agreed upon amount of interest from the
borrower of the security. The Fund may pay reasonable finders, administrative
and custodial fees in connection with loans of its securities. There is no
assurance as to the extent to which securities loans can be effected.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of delay
in recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Adviser to be creditworthy
and when the consideration which can be earned from such loans is believed to
justify the attendant risks. On termination of the loan, the borrower is
required to return the securities to the Fund; any gain or loss in the market
price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan in whole or in
part as may be appropriate to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other financial institutions to earn a return on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a security and the seller agrees to repurchase
the obligation at a future time and set price, thereby determining the yield
during the holding period. Repurchase agreements involve certain risks in the
event of default by the other party. The Fund may enter into repurchase
agreements with broker-dealers, banks and other financial institutions deemed to
be creditworthy by the Adviser under guidelines approved by the Fund's Board of
Trustees. The Fund will not invest in repurchase agreements maturing in more
than seven days if any such investment, together with any other illiquid
securities held by the Fund, would exceed the Fund's limitation on illiquid
securities described herein. The Fund does not bear the risk of a decline in the
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of the bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto; (b) possible lack of access to income on the underlying security
during this period; and (c) expenses of enforcing its rights.
B-6
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund than would be available to the Fund investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). However, the Fund
shall not invest in such securities in excess of 10% of its net assets without
prior approval of the Fund's Board of Trustees. The sale of such securities
often requires more time and results in higher brokerage charges or dealer
discounts and other selling expenses than does the sale of liquid securities
trading on national securities exchanges or in the over-the-counter markets.
Restricted securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Fund's Board of Trustees. Ordinarily, the Fund would
invest in restricted securities only when it receives the issuer's commitment to
register the securities without expense to the Fund. However, registration and
underwriting expenses (which typically range from 7% to 15% of the gross
proceeds of the securities sold) may be paid by the Fund. Restricted securities
which can be offered and sold to qualified institutional buyers under Rule 144A
under the 1933 Act ("144A Securities") and are determined to be liquid under
guidelines adopted by and subject to the supervision of the Fund's Board of
Trustees are not subject to the limitation on illiquid securities. Such 144A
Securities are subject to monitoring and may become illiquid to the extent
qualified institutional buyers become, for a time, uninterested in purchasing
such securities. Factors used to determine whether 144A Securities are liquid
include, among other things, a security's trading history, the availability of
reliable pricing information, the number of dealers making quotes or making a
market in such security and the number of potential purchasers in the market for
such security. For purposes hereof, investments by the Fund in securities of
other investment companies will not be considered investments in restricted
securities to the extent permitted by (i) the 1940 Act, as amended from time to
time, (ii) the rules and regulations promulgated by the SEC under the 1940 Act,
as amended from time to time, or (iii) an exemption or other relief (such as "no
action" letters issued by the staff of the SEC interpreting or providing
guidance on the 1940 Act or regulations thereunder) from the provisions of the
1940 Act, as amended from time to time.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur. Although the Adviser seeks
to use such transactions to further the Fund's investment objectives, no
assurance can be given that the use of these transactions will achieve this
result.
B-7
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option selling program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Selling options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund would write call
options only on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund owns or has the
right to acquire securities of the type that it would be obligated to deliver if
any outstanding option were exercised. An option is for cross-hedging purposes
if it is not covered by the security subject to the option, but is designed to
provide a hedge against another security which the Fund owns or has the right to
acquire. In such circumstances, the Fund collateralizes the option by
segregating cash and/or liquid securities in an amount at least equal to the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would segregate cash and/or liquid securities in an amount at least equal
to the exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. To terminate its
position as a writer of a call or put option, the Fund could enter into a
"closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund would realize a gain
(loss) if the premium plus commission paid in the closing purchase transaction
is lesser (greater) than the premium it received on the sale of the option. The
Fund would also realize a gain if an option it has written lapses unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a seller, but would provide an asset of
equal value to its obligation under the option sold. If the Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires) even though it might not be advantageous to do so.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect against anticipated
increases in the prices of securities it wishes to acquire. Alternatively, call
options could be purchased for capital appreciation. Since the premium paid for
a call option is typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options covering a much
larger quantity of such security than could be purchased directly. By purchasing
call options, the Fund could benefit from any significant increase in the price
of the underlying security to a greater extent than had it invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the Fund would bear a significant risk of losing the
B-8
entire premium if the price of the underlying security did not rise
sufficiently, or if it did not do so before the option expired.
Put options may be purchased to protect against anticipated declines in the
market value of either specific portfolio securities or of the Fund's assets
generally. Alternatively, put options may be purchased for capital appreciation
in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OVER THE COUNTER OPTIONS
The Fund is authorized to purchase and sell over-the-counter options ("OTC
Options"). OTC Options are purchased from or sold to securities dealers,
financial institutions of other parties ("Counterparties") through direct
bilateral agreement with the Counterparty. The Fund will sell only OTC Options
(other than OTC currency options) that are subject to a buy-back provision
permitting the Fund to require to the Counterparty to sell the option back to
the Fund at a formula price within seven days. The staff of the SEC currently
takes the position that, in general, OTC Options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities covering
OTC Options sold by the Fund, are illiquid securities subject to the Fund's
limitation on illiquid securities.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and options
on futures contracts in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
An index futures contract is an agreement pursuant to which a party agrees
to take or make delivery of an amount of cash equal to a specified dollar amount
multiplied by the difference between the index value at a specified time and the
price at which the futures contract originally was struck. No physical delivery
of the underlying securities in the index is made.
Currently, securities index futures contracts can be purchased with respect
to several indices on various exchanges. Differences in the securities included
in the indices may result in differences in correlation of the futures contracts
with movements in the value of the securities being hedged.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes), or to take or make delivery of cash based upon the
change in value of a basket or index of securities at a specified future time
and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit an amount of cash and/or
liquid securities equal to a percentage (which will normally range between 1%
and 10%) of the contract amount with either a futures commission merchant
pursuant to rules and regulations promulgated under the 1940 Act or with its
custodian in an account in the broker's name. This amount is known as initial
margin. The nature of initial margin in futures contract transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the initial margin
account, called variation margin, are made on a daily basis as the price of the
underlying securities or index fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as marking to
market.
B-9
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives a variation margin payment equal to that increase in value.
Conversely, where the Fund purchases a futures contract and the value of the
underlying security or index declines, the position is less valuable, and the
Fund is required to make a variation margin payment.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Contract Strategies. When the Fund anticipates a significant
market or market sector advance, the purchase of a futures contract affords a
hedge against not participating in the advance at a time when the Fund is
otherwise fully invested ("anticipatory hedge"). Such purchase of a futures
contract would serve as a temporary substitute for the purchase of individual
securities, which may be purchased in an orderly fashion once the market has
stabilized. As individual securities are purchased, an equivalent amount of
futures contracts could be terminated by offsetting sales. The Fund may sell
futures contracts in anticipation of or in a general market or market sector
decline that may adversely affect the market value of the Fund's securities
("defensive hedge"). To the extent that the Fund's portfolio of securities
changes in value in correlation with the underlying security or index, the sale
of futures contracts would substantially reduce the risk to the Fund of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Fund. Ordinarily transaction costs associated with
futures contract transactions are lower than transaction costs that would be
incurred in the purchase and sale of the underlying securities.
Special Risks Associated with Futures Contract Transactions. There are
several risks connected with the use of futures contracts. These include the
risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities or index; the risk of market
distortion; the risk of illiquidity; and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures contract market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures contract market and
the securities or index underlying the futures contract. Second, from the point
of view of speculators, the deposit requirements in the futures contract market
are less onerous than margin requirements in the securities markets. Therefore,
increased participation by speculators in the futures contract markets may cause
temporary price distortions. Due to the possibility of price distortion in the
futures contract markets and because of the imperfect correlation between
movements in futures contracts and movements in the securities underlying them,
a correct forecast of general market trends by the Adviser may still not result
in a successful hedging transaction.
B-10
There is also the risk that futures contract markets may not be
sufficiently liquid. Futures contracts may be closed out only on an exchange or
board of trade that provides a market for such futures contracts. Although the
Fund intends to purchase or sell futures contract only on exchanges and boards
of trade where there appears to be an active secondary market, there can be no
assurance that an active secondary market will exist for any particular contract
or at any particular time. In the event of such illiquidity, it might not be
possible to close a futures contract position and, in the event of adverse price
movement, the Fund would continue to be required to make daily payments of
variation margin. Since the securities being hedged would not be sold until the
related futures contract is sold, an increase, if any, in the price of the
securities may to some extent offset losses on the related futures contract. In
such event, the Fund would lose the benefit of the appreciation in value of the
securities.
Successful use of futures contracts is also subject to the Adviser's
ability to correctly predict the direction of movements in the market. For
example, if the Fund hedges against a decline in the market, and market prices
instead advance, the Fund will lose part or all of the benefit of the increase
in value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Fund has insufficient cash, it may have
to sell portfolio securities at a time when it is disadvantageous to do so to
meet the daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures contract
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures contract positions and
subjecting some futures contract traders to substantial losses. In such event,
and in the event of adverse price movements, the Fund would be required to make
daily cash payments of variation margin. In such circumstances, an increase in
the value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. However, there is no guarantee
that the price of the securities being hedged will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on
the futures contract.
The Fund will not enter into futures contracts or options transactions
(except for closing transactions) other than for bona fide hedging purposes if,
immediately thereafter, the sum of its initial margin and premiums on open
futures contracts and options exceed 5% of the fair market value of the Fund's
assets; however, in the case of an option that is in-the-money at the time of
purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. To prevent leverage in connection with the purchase of futures
contracts by the Fund, the Fund will segregate cash and/or liquid securities in
an amount at least equal to the market value of the obligation under the futures
contracts (less any related margin deposits).
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures contract position is accompanied by cash representing the difference
between the current market price of the futures contract and the exercise price
of the option. The Fund could purchase put options on futures contracts in lieu
of, and for the same purposes as the sale of a futures contract; at the same
time, it could write put options at a lower strike price (a "put bear spread")
to offset part of the cost of the strategy to the Fund. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contracts.
B-11
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures contracts. The Adviser will not
purchase options on futures contracts on any exchange unless in the Adviser's
opinion, a liquid secondary exchange market for such options exists. Compared to
the use of futures contracts, the purchase of options on futures contracts
involves less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the price of the underlying
security or index, when the use of an option on a future contract would result
in a loss to the Fund when the use of a future contract would not.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures contracts or options on futures contracts,
the Fund could experience delays and/or losses in liquidating open positions
purchased or incur a loss of all or part of its margin deposits. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many derivative transactions, in addition to other requirements, require
that the Fund segregate cash and/or liquid securities to the extent the Fund's
obligations are not otherwise "covered" as described above. In general, either
the full amount of any obligation by the Fund to pay or deliver securities or
assets must be covered at all times by the securities, instruments or currency
required to be delivered (or securities convertible into the needed securities
without additional consideration), or, subject to applicable regulatory
restrictions, the Fund must segregate cash and/or liquid securities in an amount
at least equal to the current amount of the obligation. In the case of a futures
contract or an option on a futures contract, the Fund must deposit initial
margin and possible daily variation margin in addition to segregating cash
and/or liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. Derivative transactions may be covered by other
means when consistent with applicable regulatory policies. The Fund also may
enter into offsetting transactions so that its combined position, coupled with
any segregated cash and/or liquid securities, equals its net outstanding
obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities, which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting,
if the holders of more than 50% of the Fund's outstanding voting securities are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. These
restrictions provide that the Fund shall not:
1. Borrow money, except that the Fund may borrow for temporary purposes in
amounts not exceeding 5% of the market or other fair value (taken at
the lower of cost or current value) of its total assets (not including
the amount borrowed). Secured temporary borrowings may take the form of
reverse
B-12
repurchase agreements, pursuant to which the Fund would sell portfolio
securities for cash and simultaneously agree to repurchase such
securities at a specified date for the same amount of cash plus an
interest component. Pledge its assets or assign or otherwise encumber
them in excess of 3.25% of its net assets (taken at market value at the
time of pledging) and then only to secure borrowings effected within
the limitations set forth in the preceding sentence. Notwithstanding
the foregoing, the Fund may engage in transactions in options, futures
contracts and options on futures contracts and make margin deposits and
payments in connection therewith.
2. Engage in the underwriting of securities except insofar as the Fund may
be deemed an underwriter under the 1933 Act in disposing of a portfolio
security.
3. Make short sales of securities, but it may engage in transactions in
options, futures contracts, and options on futures contracts.
4. Purchase securities on margin, except for such short-term credits as
may be necessary for the clearance of purchases and sales of portfolio
securities, and it may engage in transactions in options, futures
contracts and options on futures contracts and make margin deposits and
payments in connection therewith.
5. Purchase or sell real estate, although it may purchase securities of
issuers which engage in real estate operations, securities which are
secured by interests in real estate, or securities representing
interests in real estate.
6. Purchase or sell commodities or commodity futures contracts, except
that the Fund may enter into transactions in futures contracts and
options on futures contracts.
7. Make loans of money or securities, except (a) by the purchase of debt
obligations in which the Fund may invest consistent with its investment
objectives and policies; (b) by investment in repurchase agreements or
(c) by lending its portfolio securities, subject to limitations
described elsewhere in this Statement of Additional Information.
8. Purchase oil, gas or other mineral leases, rights or royalty contracts
or exploration or development programs, except that the Fund may invest
in the securities of companies which invest in or sponsor such
programs.
9. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time,
(ii) the rules and regulations promulgated by the SEC under the 1940
Act, as amended from time to time, or (iii) an exemption or other
relief from the provisions of the 1940 Act, as amended from time to
time.
10. Invest for the purpose of exercising control or management of another
company, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act, as
amended from time to time.
11. Invest in securities of any company if, to the knowledge of the Fund,
any officer or director of the Fund or of the Adviser owns more than
1/2 of 1% of the outstanding securities of such company, and such
officers and directors who own more than 1/2 of 1% own in the aggregate
more than 5% of the outstanding securities of such company.
12. Invest more than 5% of the market or other fair value of its assets in
warrants, or more than 2% of such value in warrants which are not
listed on the New York or American Stock Exchanges. Warrants attached
to other securities are not subject to these limitations.
13. Invest more than 15% of its net assets (determined at the time of
investment) in illiquid securities and repurchase agreements which have
a maturity of longer than seven days.
B-13
14. With respect to 75% of its assets, invest more than 5% of its assets in
the securities of any one issuer (except the U.S. government) or
purchase more than 10% of the outstanding voting securities of any one
issuer, except that the Fund may purchase securities of other
investment companies to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii)
an exemption or other relief from the provisions of the 1940 Act, as
amended from time to time.
15. Invest more than 25% of the value of its total assets in securities of
issuers in any particular industry (except obligations of the U.S.
government).
16. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover."
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and 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 ("Asset Management"
or 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
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
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
David C. Arch (58) Trustee Trustee Chairman and Chief Executive Officer of Blistex 88
Blistex Inc. since 2003 Inc., a consumer health care products
1800 Swift Drive manufacturer. Former Director of the World
Oak Brook, IL 60523 Presidents Organization-Chicago Chapter.
Director of the Heartland Alliance, a nonprofit
organization serving human needs based in
Chicago.
J. Miles Branagan (71) Trustee Trustee Private investor. Co-founder, and prior to 86
1632 Morning Mountain Road since 1991 August 1996, Chairman, Chief Executive Officer
Raleigh, NC 27614 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.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee/Director/
Blistex Inc. Managing General
1800 Swift Drive Partner of funds in
Oak Brook, IL 60523 the Fund Complex.
J. Miles Branagan (71) Trustee/Director/
1632 Morning Mountain Road Managing General
Raleigh, NC 27614 Partner of funds in
the Fund Complex.
B-14
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
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Jerry D. Choate (65) Trustee Trustee Prior to January 1999, Chairman and Chief 86
33971 Selva Road since 1999 Executive Officer of the Allstate Corporation
Suite 130 ("Allstate") and Allstate Insurance Company.
Dana Point, CA 92629 Prior to January 1995, President and Chief
Executive Officer of Allstate. Prior to August
1994, various management positions at Allstate.
Rod Dammeyer (63) Trustee Trustee President of CAC, llc., a private company 88
CAC, llc. since 2003 offering capital investment and management
4350 LaJolla Village Drive advisory services. Prior to July 2000, Managing
Suite 980 Partner of Equity Group Corporate Investment
San Diego, CA 92122-6223 (EGI), a company that makes private investments
in other companies.
Linda Hutton Heagy (55) Trustee Trustee Managing Partner of Heidrick & Struggles, an 86
Heidrick & Struggles since 1995 executive search firm. Trustee on the
233 South Wacker Drive University of Chicago Hospitals Board, Vice
Suite 7000 Chair of the Board of the YMCA of Metropolitan
Chicago, IL 60606 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.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
Jerry D. Choate (65) Trustee/Director/
33971 Selva Road Managing General
Suite 130 Partner of funds in
Dana Point, CA 92629 the Fund Complex.
Director of Amgen
Inc., a
biotechnological
company, and Director
of Valero Energy
Corporation, an
independent refining
company.
Rod Dammeyer (63) Trustee/Director/
CAC, llc. Managing General
4350 LaJolla Village Drive Partner of funds in
Suite 980 the Fund Complex.
San Diego, CA 92122-6223 Director of TeleTech
Holdings Inc.,
Stericycle, Inc.,
TheraSense, Inc.,
GATX Corporation,
Arris Group, Inc. and
Trustee of the
University of Chicago
Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001, Vice
Chairman and Director
of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser Communications
Corp., Matria
Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety,
Corp. and Grupo
Azcarero Mexico
(GAM). Prior to April
1999, Director of
Metal Management,
Inc.
Linda Hutton Heagy (55) Trustee/Director/
Heidrick & Struggles Managing General
233 South Wacker Drive Partner of funds in
Suite 7000 the Fund Complex.
Chicago, IL 60606
B-15
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
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
R. Craig Kennedy (51) Trustee Trustee Director and President of the German Marshall 86
11 DuPont Circle, N.W. since 1995 Fund of the United States, an independent U.S.
Washington, D.C. 20016 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 and Chief Executive 88
736 North Western Avenue since 2003 Officer of Pocklington Corporation, Inc., an
P.O. Box 317 investment holding company. Director of the
Lake Forest, IL 60045 Marrow Foundation
Jack E. Nelson (67) Trustee Trustee President of Nelson Investment Planning 86
423 Country Club Drive since 1995 Services, Inc., a financial planning company
Winter Park, FL 32789 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 Honorary Trustee of the 88
1126 E. 59th Street since 2003 University of Chicago and the Adam Smith
Chicago, IL 60637 Distinguished Service 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, P.H.D. Trustee Trustee Currently with Paladin Capital Group-Paladin 86
(62) since 1999 Homeland Security Fund since November 2003.
2001 Pennsylvania Avenue Previously, Chief Communications Officer of the
Suite 400 National Academy of Sciences/National Research
Washington, D.C. 20006 Council, an independent, federally chartered
policy institution, since 2001 and Chief
Operating Officer from 1993 to 2001. Director
of the Institute for Defense Analyses, a
federally funded research and development
center, Director of the German Marshall Fund of
the United States, 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.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (51) Trustee/Director/
11 DuPont Circle, N.W. Managing General
Washington, D.C. 20016 Partner of funds in
the Fund Complex.
Howard J Kerr (68) Trustee/Director/
736 North Western Avenue Managing General
P.O. Box 317 Partner of funds in
Lake Forest, IL 60045 the Fund Complex.
Director of the Lake
Forest Bank & Trust.
Jack E. Nelson (67) Trustee/Director/
423 Country Club Drive Managing General
Winter Park, FL 32789 Partner of funds in
the Fund Complex.
Hugo F. Sonnenschein (63) Trustee/Director/
1126 E. 59th Street Managing General
Chicago, IL 60637 Partner of funds in
the Fund Complex.
Director of Winston
Laboratories, Inc.
Suzanne H. Woolsey, P.H.D. Trustee/Director/
(62) Managing General
2001 Pennsylvania Avenue Partner of funds in
Suite 400 the Fund Complex.
Washington, D.C. 20006 Director of Neurogen
Corporation, a
pharmaceutical
company, since
January 1998.
B-16
INTERESTED TRUSTEES*
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
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE
Mitchell M. Merin* (50) Trustee; Trustee President and Chief Executive Officer of funds 86
1221 Avenue of the President since in the Fund Complex. Chairman, President, Chief
Americas and Chief 1999; Executive Officer and Director of the Adviser
New York, NY 10020 Executive President and Van Kampen Advisors Inc. since December
Officer and Chief 2002. Chairman, President and Chief Executive
Executive Officer of Van Kampen Investments since
Officer December 2002. Director of Van Kampen
since 2002 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.
Richard F. Powers, III* Trustee Trustee Advisory Director of Morgan Stanley. Prior to 88
(57) since 1999 December 2002, Chairman, Director, President,
1 Parkview Plaza Chief Executive Officer and Managing Director
P.O. Box 5555 of Van Kampen Investments and its investment
Oakbrook Terrace, IL 60181 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* (64) Trustee Trustee Partner in the law firm of Skadden, Arps, 88
333 West Wacker Drive since 1995 Slate, Meagher & Flom (Illinois), legal counsel
Chicago, IL 60606 to funds in the Fund Complex.
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee/Director/
1221 Avenue of the Managing General
Americas Partner of funds in
New York, NY 10020 the Fund Complex.
Richard F. Powers, III* Trustee/Director/
(57) Managing General
1 Parkview Plaza Partner of funds in
P.O. Box 5555 the Fund Complex.
Oakbrook Terrace, IL 60181
Wayne W. Whalen* (64) Trustee/Director/
333 West Wacker Drive Managing General
Chicago, IL 60606 Partner of funds in
the Fund Complex.
------------------------------------
* 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.
B-17
OFFICERS
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
Stephen L. Boyd (63) Vice President Officer Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. since 1998 Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Adviser and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Adviser and Van Kampen Advisors Inc. Prior to December 2000,
Executive Vice President and Chief Investment Officer of Van
Kampen Investments, and President and Chief Operating
Officer of the Adviser. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Adviser. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (37) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer 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.
John R. Reynoldson (50) Vice President Officer Executive Director and Portfolio Specialist of the Adviser
1 Parkview Plaza since 2000 and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Adviser and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Adviser and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Adviser. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
Ronald E. Robison (64) Executive Vice Officer Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and since 2003 Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive and Managing Director of Morgan Stanley Investment
Officer Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (47) Vice President and Officer Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary since 1999 Director of Van Kampen Investments, Director of the Adviser,
New York, NY 10020 Van Kampen Advisors Inc., the Distributor, Investor Services
and certain other subsidiaries of Van Kampen Investments.
Managing Director and General Counsel-Mutual Funds of Morgan
Stanley Investment Advisors, Inc. Vice President and
Secretary of funds in the Fund Complex. Prior to July 2001,
Managing Director, General Counsel, Secretary and Director
of Van Kampen Investments, the Adviser, the Distributor,
Investor Services, and certain other subsidiaries of Van
Kampen Investments. Prior to December 2000, Executive Vice
President, General Counsel, Secretary and Director of Van
Kampen Investments, the Adviser, Van Kampen Advisors Inc.,
the Distributor, Investor Services and certain other
subsidiaries of Van Kampen Investments. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
B-18
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
John L. Sullivan (48) Vice President, Officer Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial since 1996 the Adviser, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. 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.
------------------------------------
Each trustee/director who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Fund prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the retirement plan) and retires at or after attaining the age of
60, is eligible to receive a retirement benefit per year for each of the ten
years following such retirement from the Fund. Non-Affiliated Trustees retiring
prior to the age of 60 or with fewer than 10 years but more than 5 years of
service may receive reduced retirement benefits from the Fund.
B-19
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
---------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Complex Upon Fund
Name(1) Fund(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------- ------------- -------------
David C. Arch $ 289 $14,694 $147,500 $138,750
J. Miles Branagan 1,764 64,907 60,000 107,000
Jerry D. Choate 1,764 24,774 130,000 107,000
Rod Dammeyer 289 26,231 147,500 138,750
Linda Hutton Heagy 1,764 6,858 147,500 107,000
R. Craig Kennedy 1,764 4,617 147,500 107,000
Howard J Kerr 289 50,408 147,500 138,750
Jack E. Nelson 1,764 33,020 112,500 107,000
Hugo F. Sonnenschein 289 26,282 147,500 138,750
Wayne W. Whalen 1,766 51,855 147,500 245,750
Suzanne H. Woolsey 1,764 15,533 147,500 107,000
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to the Fund's fiscal year ended August 31, 2003.
Messrs. Arch, Dammeyer, Kerr and Sonnenschein were appointed to the Board of
the Fund on July 23, 2003, and thus the amounts above reflect compensation
from the Fund for the period July 23, 2003 until the end of the fiscal year
ended August 31, 2003. The following Trustees deferred compensation from the
Fund during the fiscal year ended August 31, 2003: Mr. Branagan, $548; Mr.
Choate, $1,764; Mr. Dammeyer, $289; Ms. Heagy, $1,764; Mr. Nelson, $1,764;
Mr. Sonnenschein, $289; and Mr. Whalen, $1,766. The cumulative deferred
compensation (including interest) accrued with respect to each trustee,
including former trustees, from the Fund as of the Fund's fiscal year ended
August 31, 2003 is as follows: Mr. Branagan, $17,304; Mr. Choate, $7,427;
Mr. Dammeyer, $289; Ms. Heagy, $10,109; Mr. Kennedy, $7,975; Mr. Nelson,
$19,259; Mr. Sonnenschein, $289; Mr. Miller, $973; Mr. Rees, $23,467; Mr.
Robinson, $1,937; Mr. Rooney, $5,760; Mr. Sisto, $32,622 and Mr. Whalen,
$14,793. The deferred compensation plan is described above the Compensation
Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2002. The
retirement plan is described above the Compensation Table. In 2003, efforts
have been under way to combine the trustees/directors/managing general
partners of the boards of the various Van Kampen-related funds in the Fund
Complex. Prior to 2003, only Messrs. Whalen and Powers served as trustees/
directors/managing general partners of all of the various Van Kampen-related
funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners are being elected or appointed,
as appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
B-20
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2002 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. In 2003, efforts have
been under way to combine the trustees/directors/managing general partners
of the boards of the various Van Kampen-related funds in the Fund Complex.
Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners are being elected or appointed,
as appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised of trustees who are not "interested persons" of the Fund (as defined
by the 1940 Act) (referred to herein as "Independent Trustees" or
"non-interested trustees").
The Board's audit committee consists of J. Miles Branagan, Jerry D. Choate
and R. Craig Kennedy. The audit committee makes recommendations to the Board of
Trustees concerning the selection of the Fund's independent public auditors,
reviews with such auditors the scope and results of the Fund's annual audit and
considers any comments which the auditors may have regarding the Fund's
financial statements, books of account or internal controls.
The Board's brokerage and services committee consists of Linda Hutton Heagy,
Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Rod Dammeyer,
Howard J Kerr and Jack E. Nelson. The governance committee identifies
individuals qualified to serve on the Board that are independent as defined in
the 1940 Act and on committees of the Board, advises the Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to the Fund, monitors
corporate governance matters and makes recommendations to the Board, and acts as
the administrative committee with respect to Board policies and procedures,
committee policies and procedures and codes of ethics.
During the Fund's last fiscal year, the audit committee of the Board held 5
meetings and the brokerage and services committee of the Board held 5 meetings.
The governance committee was recently organized and had only 1 meeting during
the Fund's last fiscal year.
The non-interested trustees of the Fund select and nominate any other
non-interested trustees of the Fund. While the non-interested trustees of the
Fund expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Board of Trustees as they deem
appropriate, they will review nominations from shareholders to fill any
vacancies. Nominations from shareholders should be in writing and addressed to
the non-interested trustees at the Fund's office.
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2002, the most recently completed
calendar year prior to the date of this Statement of Additional
B-21
Information, each trustee of the Fund beneficially owned equity securities of
the Fund and of all of the funds in the Fund Complex overseen by the trustee in
the dollar range amounts specified below.
2002 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR
-------- ---------- -------- -------- -------- --------- ----------
DOLLAR RANGE OF EQUITY SECURITIES IN THE
FUND none $50,001- none none $1- $1- none
$100,000 $10,000 $10,000
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE IN THE FUND
COMPLEX $50,001- over $10,001- over $10,001- over $1-$10,000
$100,000 $100,000 $50,000 $100,000 $50,000 $100,000
NELSON SONNENSCHEIN WOOLSEY
--------- ------------ ----------
DOLLAR RANGE OF EQUITY SECURITIES IN THE
FUND none none none
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
COMPANIES OVERSEEN BY TRUSTEE IN THE FUND
COMPLEX none over $10,001-
$100,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
-----------------------------------
MERIN POWERS WHALEN
--------- --------- ---------
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUND none none $1-
$10,000
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN THE
FUND COMPLEX over over over
$100,000 $100,000 $100,000
As of December 1, 2003, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
The Fund, the Adviser and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of the Fund or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Fund's Board of Trustees,
and permits its officers and employees to serve without compensation as trustees
of the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the costs of its day-to-day operations, including service fees,
distribution fees, custodian fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Fund (other than those who are affiliated persons of the Adviser, Distributor or
Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any
B-22
actions or omissions if it acted without willful misfeasance, bad faith,
negligence or reckless disregard of its obligations under the Advisory
Agreement.
The fee payable to the Adviser is reduced by any commissions, tender
solicitation and other fees, brokerage or similar payments received by the
Adviser or any other direct or indirect majority owned subsidiary of Van Kampen
Investments in connection with the purchase and sale of portfolio investments
less any direct expenses incurred by such subsidiary of Van Kampen Investments,
in connection with obtaining such commissions, fees, brokerage or similar
payments. The Adviser agrees to use its best efforts to recapture tender
solicitation fees and exchange offer fees for the Fund's benefit and to advise
the Trustees of the Fund of any other commissions, fees, brokerage or similar
payments which may be possible for the Adviser or any other direct or indirect
majority owned subsidiary of Van Kampen Investments to receive in connection
with the Fund's portfolio transactions or other arrangements which may benefit
the Fund.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Fund for any fiscal year exceed the most restrictive
expense limitation applicable in the states where the Fund's shares are
qualified for sale, the compensation due the Adviser will be reduced by the
amount of such excess and that, if a reduction in and refund of the advisory fee
is insufficient, the Adviser will pay the Fund monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses include the investment advisory fee and other operating costs
paid by the Fund except (1) interest and taxes, (2) brokerage commissions, (3)
certain litigation and indemnification expenses as described in the Advisory
Agreement and (4) payments made by the Fund pursuant to the distribution plans.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving the Advisory Agreement, the Board of Trustees, including the
non-interested Trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of the Fund
compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving third party research paid for by Fund assets and the propriety of such
an arrangement and evaluated other benefits the Adviser derives from its
relationship with the Fund. The Board of Trustees considered the extent to which
any economies of scale experienced by the Adviser are shared with the Fund's
shareholders, and the propriety of existing and alternative breakpoints in the
Fund's advisory fee schedule. The Board of Trustees considered comparative
advisory fees of the Fund and other investment companies at different asset
levels, and considered the trends in the industry versus historical and
projected sales and redemptions of the Fund. The Board of Trustees reviewed
reports from third parties about the foregoing factors and considered changes,
if any, in such items since its previous approval. The Board of Trustees
discussed the financial strength of the Adviser and its affiliated companies and
the capability of the personnel of the Adviser. The Board of Trustees reviewed
the statutory and regulatory requirements for approval of advisory agreements.
The Board of Trustees, including the non-interested Trustees, evaluated all of
the foregoing and determined, in the exercise of its business judgment, that
approval of the Advisory Agreement was in the best interests of the Fund and its
shareholders.
ADVISORY FEES
FISCAL YEAR ENDED AUGUST 31,
------------------------------------
2003 2002 2001
---------- ---------- ----------
The Adviser received the approximate advisory fee of..... $3,091,000 $3,304,200 $3,871,800
---------- ---------- ----------
B-23
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund supplementary to those provided by the custodian. Such
services are expected to enable the Fund to more closely monitor and maintain
its accounts and records. The Fund pays all costs and expenses related to such
services, including all salary and related benefits of accounting personnel, as
well as the overhead and expenses of office space and the equipment necessary to
render such services. The Fund shares together with the other Van Kampen funds
in the cost of providing such services with 25% of such costs shared
proportionately based on the respective number of classes of securities issued
per fund and the remaining 75% of such costs based proportionately on the
respective net assets per fund.
ACCOUNTING SERVICES FEES
FISCAL YEAR ENDED AUGUST 31,
------------------------------
2003 2002 2001
-------- -------- --------
Asset Management received the approximate accounting
services fee of........................................... $47,100 $48,300 $47,200
------- ------- -------
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's Board
of Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by a vote of a majority of Trustees who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal years are shown in the chart below.
AMOUNTS
TOTAL UNDERWRITING RETAINED
COMMISSIONS BY DISTRIBUTOR
------------------ --------------
Fiscal year ended August 31, 2003........................... $1,596,882 $142,200
Fiscal year ended August 31, 2002........................... $1,024,923 $102,879
Fiscal year ended August 31, 2001........................... $1,352,973 $154,571
B-24
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
TOTAL SALES CHARGE
--------------------------- REALLOWED
AS % OF AS % OF TO DEALERS
OFFERING NET AMOUNT AS A % OF
SIZE OF INVESTMENT PRICE INVESTED OFFERING PRICE)
------------------ -------- ---------- ---------------
Less than $100,000................................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000...................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000...................... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000.................... 2.00% 2.04% 1.75%
$1,000,000 or more................................... * * *
------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase.
The one-year period ends on the first business day of the thirteenth month
after the purchase date. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed on a percentage of
the dollar value of such shares sold as follows: 1.00% on sales to $2 million,
plus 0.80% on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally receive from the Distributor the ongoing
distribution fees of up to 0.75% of the average daily net assets of the Fund's
Class C Shares annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily intended to result in sales of shares of the Fund
or other Van Kampen funds. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. The Distributor may provide
additional compensation to Edward D. Jones & Co. or an affiliate thereof based
on a combination of its quarterly sales of shares of the Fund and other Van
Kampen funds and increases in net assets of the Fund and other Van Kampen funds
over specified thresholds. All of the foregoing payments are made by the
Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
B-25
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each of its Class A Shares, Class B Shares and Class C Shares
pursuant to Rule 12b-1 under the 1940 Act. The Fund also adopted a service plan
(the "Service Plan") with respect to each of its Class A Shares, Class B Shares
and Class C Shares. The Distribution Plan and the Service Plan sometimes are
referred to herein as the "Plans." The Plans provide that the Fund may spend a
portion of the Fund's average daily net assets attributable to each class of
shares in connection with the distribution of the respective class of shares and
in connection with the provision of ongoing services to shareholders of such
class, respectively. The Distribution Plan and the Service Plan are being
implemented through the Distribution and Service Agreement with the Distributor
of each such class of the Fund's shares, sub-agreements between the Distributor
and members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Fund's Board of
Trustees setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is specifically
approved by a vote of the Trustees, and also by a vote of the disinterested
Trustees, cast in person at a meeting called for the purpose of voting on the
Plans. Each of the Plans may not be amended to increase materially the amount to
be spent for the services described therein with respect to any class of shares
without approval by a vote of a majority of the outstanding voting shares of
such class, and all material amendments to either of the Plans must be approved
by the Trustees and also by the disinterested Trustees. Each of the Plans may be
terminated with respect to any class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These
B-26
unreimbursed actual net expenses may or may not be recovered through plan fees
or contingent deferred sales charges in future years.
Because of fluctuations in net asset value, the plan fees with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class.
As of August 31, 2003, there were approximately $5,475,100 and $1,800 of
unreimbursed distribution-related expenses with respect to Class B Shares and
Class C Shares, respectively, representing approximately 3% and less than 1% of
the Fund's net assets attributable to Class B Shares and Class C Shares,
respectively. If the Plans are terminated or not continued, the Fund would not
be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.
For the fiscal year ended August 31, 2003, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $854,823 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended August 31, 2003, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $1,717,739 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $1,286,305 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $431,434
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended August 31,
2003, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$403,248 or 0.97% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $88,609 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $314,639 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into agreements with the following firms
whereby certain shares of the Fund will be offered pursuant to such firm's
retirement plan alliance program(s): (i) The Prudential Insurance Company of
America, (ii) Merrill Lynch Pierce, Fenner & Smith, Incorporated, (iii) Buck
Consultants, Inc., (iv) Vanguard Marketing Corporation (a wholly-owned
subsidiary of The Vanguard Group, Inc.), (v) American Century Retirement Plan
Services Inc., (vi) Fidelity Brokerage Services, Inc. & National Financial
Services Corporation, (vii) First Union National Bank, (viii) Franklin
Templeton, (ix) Great West Life & Annuity Insurance Company/Benefits Corp
Equities, Inc., (x) GoldK Investment Services, Inc., (xi) Huntington Bank, (xii)
AMVESCAP Retirement, Inc. (formerly Invesco Retirement and Benefit Services,
Inc.), (xiii) Lincoln National Life Insurance Company, (xiv) Morgan Stanley DW
Inc., (xv) National Deferred Compensation, (xvi) Wells Fargo, N.A. on behalf of
itself and its Affiliated Banks, (xvii) Smith Barney, Inc., (xviii) SunGard
Institutional Brokerage Inc., (xix) Union Bank of California, N.A., (xx) ABN
AMRO Trust Services Company, (xxi) ING Financial Advisers, LLC and (xxxii)
Northern Trust Retirement Consulting, LLC. Trustees and other fiduciaries of
retirement plans seeking to invest in multiple fund families through a
broker-dealer retirement plan alliance program should contact the firms
mentioned above for further information concerning the program(s) including, but
not limited to, minimum size and operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency fees
are determined through negotiations with the Fund and are approved by the Fund's
Board of Trustees. The transfer agency fees are based on competitive benchmarks.
B-27
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard are subject to
review by the Fund's Board of Trustees.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
B-28
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which the Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Fund or
affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
Unless otherwise disclosed below, the Fund paid no commissions to
affiliated brokers during the last three fiscal years. The Fund paid the
following commissions to brokers during the fiscal years shown:
AFFILIATED
BROKERS
--------------
ALL MORGAN STANLEY
BROKERS DW INC.
------- --------------
Commissions paid:
Fiscal year ended August 31, 2003......................... $ 155 $0
Fiscal year ended August 31, 2002......................... $ 0 $0
Fiscal year ended August 31, 2001......................... $ 1,606 $0
Fiscal year 2003 Percentages:
Commissions with affiliate to total commissions........... 0%
Value of brokerage transactions with affiliate to total
transactions........................................... 0%
During the fiscal year ended August 31, 2003, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the Van
Kampen funds will receive statements quarterly from Investor Services showing
any reinvestments of dividends and capital gain dividends and any other activity
in the account since the preceding statement. Such shareholders also will
receive separate confirmations for each purchase or sale transaction other than
reinvestment of dividends and capital gain dividends and systematic purchases or
redemptions. Additional shares may be purchased at any time through authorized
dealers or by mailing a check and detailed instructions directly to Investor
Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the
B-29
Fund. A shareholder will be required to surrender such certificates upon an
exchange or redemption of the shares represented by the certificate. In
addition, if such certificates are lost the shareholder must write to Van Kampen
Funds Inc., c/o Investor Services, PO Box 947, Jersey City, NJ 07303-0947,
requesting an "Affidavit of Loss" and obtain a Surety Bond in a form acceptable
to Investor Services. On the date the letter is received, Investor Services will
calculate the fee for replacing the lost certificate equal to no more than 1.50%
of the net asset value of the issued shares, and bill the party to whom the
replacement certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. To utilize this option, the
shareholder's bank must be a member of ACH. In addition, the shareholder must
fill out the appropriate section of the account application form. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemption proceeds are to be deposited together with the
completed application. Once Investor Services has received the application and
the voided check or deposit slip, such shareholder's designated bank account,
following any redemption, will be credited with the proceeds of such redemption.
Once enrolled in the ACH plan, a shareholder may terminate participation at any
time by writing Investor Services or by calling (800) 847-2424 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may elect, by completing the appropriate section of the
account application form or by calling (800) 847-2424 ((800) 421-2833 for the
hearing impaired), to have all dividends and capital gain dividends paid on a
class of shares of the Fund invested into shares of the same class of any of the
Participating Funds (as defined in the Prospectus) so long as the investor has a
pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Money Purchase and Profit
Sharing Keogh plans) and for the benefit of the same individual. If a qualified,
pre-existing account does not exist, the shareholder must establish a new
account subject to any requirements of the Participating Fund into which
distributions will be invested. Distributions are invested into the selected
Participating Fund, provided that shares of such Participating Fund are
available for sale, at its net asset value per share as of the payable date of
the distribution from the Fund.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for periodic checks in any
amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan and may be
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
B-30
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain dividends
on shares held in accounts with systematic withdrawal plans are reinvested in
additional shares at the next determined net asset value per share. If periodic
withdrawals continuously exceed reinvested dividends and capital gain dividends,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Redemptions made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any gain or loss realized by the
shareholder upon redemption of shares is a taxable event. The Fund reserves the
right to amend or terminate the systematic withdrawal program upon 30 days'
notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a fractional share to round
off his or her purchase to the next full share) in Class A Shares of the Fund. A
Class C Shareholder who has redeemed shares of the Fund may reinstate any
portion or all of the net proceeds of such redemption (and may include that
amount necessary to acquire a fractional share to round off his or her purchase
to the next full share) in Class C Shares of the Fund with credit given for any
contingent deferred sales charge paid upon such redemption, provided that such
shareholder has not previously exercised this reinstatement privilege with
respect to Class C Shares of the Fund. Shares acquired in this manner will be
deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC-Class C (defined below) to subsequent redemptions.
Reinstatements are made at the net asset value per share (without a sales
charge) next determined after the order is received, which must be made within
180 days after the date of the redemption provided that shares of the Fund are
available for sale. Reinstatement at net asset value per share is also offered
to participants in eligible retirement plans for repayment of principal (and
interest) on their borrowings on such plans, provided that shares of the Fund
are available for sale.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
In addition, if the Fund's Board of Trustees determines that payment wholly
or partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. A
distribution-in-kind may result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the shareholder may have brokerage costs and a gain or loss for federal income
tax purposes upon the shareholder's disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Fund's Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a
B-31
contingent deferred sales charge ("CDSC-Class A") may be imposed on certain
redemptions made within one year of purchase. For purposes of the CDSC-Class A,
when shares of a Participating Fund are exchanged for shares of another
Participating Fund, the purchase date for the shares acquired by exchange will
be assumed to be the date on which shares were purchased in the fund from which
the exchange was made. If the exchanged shares themselves are acquired through
an exchange, the purchase date is assumed to carry over from the date of the
original election to purchase shares subject to a CDSC-Class A rather than a
front-end load sales charge. In determining whether a CDSC-Class A is payable,
it is assumed that shares being redeemed first are any shares in the
shareholder's account not subject to a contingent deferred sales charge followed
by shares held the longest in the shareholder's account. The contingent deferred
sales charge is assessed on an amount equal to the lesser of the then current
market value or the cost of the shares being redeemed. Accordingly, no sales
charge is imposed on increases in net asset value above the initial purchase
price. In addition, no sales charge is assessed on shares derived from
reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Fund's Prospectus under "Redemption of Shares,"
redemptions of Class B Shares and Class C Shares will be subject to a contingent
deferred sales charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived
on redemptions of Class B Shares and Class C Shares in the circumstances
described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code (the
"Code"), which in pertinent part defines a person as disabled if such person "is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration." While the Fund does
not specifically adopt the balance of the Code's definition which pertains to
furnishing the Secretary of Treasury with such proof as he or she may require,
the Distributor will require satisfactory proof of death or disability before it
determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution or other
contribution pursuant to Code Section 408(d)(4) or (5), the return of excess
contributions or excess deferral amounts pursuant to Code Section 401(k)(8) or
402(g)(2), the financial hardship of the employee pursuant to U.S. Treasury
regulation Section 1.401(k)-1(d)(2) or the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
B-32
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances
of less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class
B and C upon such involuntary redemption.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Fund has elected and qualified, and intends to continue to qualify each
year, to be treated as a regulated investment company under Subchapter M of the
Code. To qualify as a regulated investment company, the Fund must comply with
certain requirements of the Code relating to, among other things, the sources of
its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including ordinary
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss) and meets
certain other requirements, it will not be required to pay federal income taxes
on any income it distributes to shareholders. The Fund intends to distribute at
least the minimum amount necessary to satisfy the 90% distribution requirement.
The Fund will not be subject to federal income tax on any net capital gain
distributed to shareholders and designated as capital gain dividends.
To avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net
B-33
income (the latter of which generally is computed on the basis of the one-year
period ending on October 31st of such year), plus any amounts that were not
distributed in previous taxable years. For purposes of the excise tax, any
ordinary income or capital gain net income retained by, and subject to federal
income tax in the hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
for taxation as a regulated investment company.
Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. To generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise taxes, the Fund may have to dispose
of securities that it would otherwise have continued to hold.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's investment company taxable income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains designated as capital gain dividends, if any,
are taxable to shareholders as long-term capital gains regardless of the length
of time shares of the Fund have been held by such shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a shareholder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such shareholder (assuming such shares
are held as a capital asset). The Jobs and Growth Tax Relief Reconciliation Act
of 2003 (the "2003 Tax Act") contains provisions that reduce the U.S. federal
income tax rates on (1) long-term capital gains received by individuals and (2)
"qualified dividend income" received by individuals from certain domestic and
foreign corporations. The reduced rate for capital gains generally applies to
long-term capital gains from sales or exchanges recognized on or after May 6,
2003, and ceases to apply for taxable years beginning after December 31, 2008.
The reduced rate for dividends generally applies to "qualified dividend income"
received in taxable years beginning after December 31, 2002, and ceases to apply
for taxable years beginning after December 31, 2008. Because the Fund intends to
invest primarily in debt securities, ordinary income dividends paid by the Fund
generally will not be eligible for the reduced rate applicable to "qualified
dividend income." Distributions from the Fund designated as capital gain
dividends will be eligible for the reduced rate applicable to long-term capital
gains. For a summary of the maximum tax rates applicable to capital gains
(including capital gain dividends), see "Capital Gains Rates" below. Tax-exempt
shareholders not subject to federal income tax on their income generally will
not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the
B-34
shares received, determined as of the distribution date. The basis of such
shares will equal their fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize a gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the maximum tax
rates applicable to capital gains, see "Capital Gains Rates" below. Any loss
recognized upon a taxable disposition of shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
CAPITAL GAINS RATES
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers
investing in the Fund is (i) the same as the maximum ordinary income tax rate
for capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008). The maximum long-term capital gains rate for corporations is
35%.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
For purposes of this and the following paragraphs, a "Non-U.S. Shareholder"
shall include any shareholder who is not:
- an individual who is a citizen or resident of the United States;
B-35
- a corporation or partnership created or organized under the laws of the
United States or any state or political subdivision thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court
and which has one or more U.S. fiduciaries who have the authority to
control all substantial decisions of the trust, or (ii) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A Non-U.S. Shareholder generally will be subject to withholding of U.S.
federal income tax at a 30% rate (or lower applicable treaty rate), rather than
backup withholding (discussed below), on dividends from the Fund (other than
capital gain dividends) that are not "effectively connected" with a U.S. trade
or business carried on by such shareholder, provided that the shareholder
furnishes to the Fund a properly completed Internal Revenue Service ("IRS") Form
W-8BEN certifying the shareholder's non-United States status.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to U.S. federal income tax in the case of
(i) a Non-U.S. Shareholder that is a corporation and (ii) an individual Non-U.S.
Shareholder who is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding and information reporting on capital gain dividends and redemption
proceeds paid to them upon the sale of their shares. See "Backup Withholding"
and "Information Reporting" below.
If income from the Fund or gains realized from the sale of shares are
effectively connected with a Non-U.S. Shareholder's U.S. trade or business, then
such amounts will not be subject to the 30% withholding described above, but
rather will be subject to U.S. federal income tax on a net basis at the tax
rates applicable to U.S. citizens and residents or domestic corporations. To
establish that income from the Fund or gains realized from the sale of shares
are effectively connected with a U.S. trade or business, a Non-U.S. Shareholder
must provide the Fund with a properly completed IRS Form W-8ECI certifying that
such amounts are effectively connected with the Non-U.S. Shareholder's U.S.
trade or business. Non-U.S. Shareholders that are corporations may also be
subject to an additional "branch profits tax" with respect to income from the
Fund that is effectively connected with a U.S. trade or business.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. To claim tax treaty benefits Non-U.S. Shareholders will be
required to provide the Fund with a properly completed IRS Form W-8BEN
certifying their entitlement to the benefits. In addition, in certain cases
where payments are made to a Non-U.S. Shareholder that is a partnership or other
pass-through entity, both the entity and the persons holding an interest in the
entity will need to provide certification. For example, an individual Non-U.S.
Shareholder who holds shares in the Fund through a non-U.S. partnership must
provide an IRS Form W-8BEN to claim the benefits of an applicable tax treaty.
Non-U.S. Shareholders are advised to consult their advisers with respect to the
tax implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax ("backup
withholding") at a rate of 28% from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends paid to a
shareholder (other than a Non-U.S. Shareholder) if (i) the shareholder fails to
properly furnish the Fund with its correct taxpayer identification number, (ii)
the IRS notifies the Fund that the shareholder has failed to properly report
certain interest and dividend income to the IRS and to respond to notices to
that effect or (iii) when required to do so, the shareholder fails to certify
that the taxpayer identification number provided is correct, that the
shareholder is not subject to backup withholding and that the shareholder is a
U.S. person (as defined for U.S. federal income tax purposes). Redemption
proceeds may be subject to backup withholding under the circumstances described
in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to
B-36
backup withholding. To avoid backup withholding on capital gain dividends and
redemption proceeds from the sale of shares, Non-U.S. Shareholders must provide
a properly completed IRS Form W-8BEN certifying their non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends, capital gain dividends or
redemption proceeds paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such amounts. In
the case of a Non-U.S. Shareholder, the Fund must report to the IRS and such
shareholder the amount of dividends, capital gain dividends or redemption
proceeds paid that are subject to withholding (including backup withholding, if
any) and the amount of tax withheld with respect to such amounts. This
information may also be made available to the tax authorities in the Non-U.S.
Shareholder's country of residence.
GENERAL
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year, five-year and ten-year periods (or life of the
Fund, if shorter). Other total return quotations, aggregate or average, over
other time periods may also be included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge has been paid. The Fund's total return will vary depending
on market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Since Class A Shares of the Fund were offered at a maximum sales charge of 6.75%
prior to June 12, 1989, actual Fund total return would have been somewhat less
than that computed on the basis of the current maximum sales charge. Total
return is based on historical earnings and asset value fluctuations and is not
intended to indicate future performance. No adjustments are made to reflect any
income taxes payable by shareholders on dividends or capital gain dividends paid
by the Fund or to reflect that 12b-1 fees may have changed over time.
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a
B-37
subsequent given date. Cumulative non-standardized total return is calculated by
measuring the value of an initial investment in a given class of shares of the
Fund at a given time, deducting the maximum initial sales charge, if any,
determining the value of all subsequent reinvested distributions, and dividing
the net change in the value of the investment as of the end of the period by the
amount of the initial investment and expressing the result as a percentage.
Non-standardized total return will be calculated separately for each class of
shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any contingent deferred sales charge
imposed at the time of redemption were reflected, it would reduce the
performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares of the Fund. Total return figures for Class A Shares
include the maximum sales charge. Total return figures for Class B Shares and
Class C Shares include any applicable contingent deferred sales charge. Because
of the differences in sales charges and distribution fees, the total returns for
each class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time, marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their fund shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study
B-38
and the conclusions based thereon are not necessarily indicative of future
performance of such funds or conclusions that may result from similar studies in
the future. The Fund may also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, Salomon
Brothers Corporate Bond Index, Shearson Lehman Corporate Bond Index, Merrill
Lynch Corporate Master Index, Merrill Lynch Corporate and Government Index,
Bloomberg Financial Markets Indices, other appropriate indices of investment
securities, or with investment or savings vehicles. The performance information
may also include evaluations of the Fund published by nationally recognized
ranking or rating services and by nationally recognized financial publications.
Such comparative performance information will be stated in the same terms in
which the comparative data or indices are stated. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. For these purposes, the performance of the
Fund, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce the Fund's
performance. The Fund will include performance data for each class of shares of
the Fund in any advertisement or information including performance data of the
Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
August 31, 2003 was 13.49%, (ii) the five-year period ended August 31, 2003 was
-1.29% and (iii) the ten-year period ended August 31, 2003 was 3.34%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from October 2,
1978 (commencement of distribution of Class A Shares of the Fund) to August 31,
2003 was 441.21%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from October 2,
1978 (commencement of distribution of Class A Shares of the Fund) to August 31,
2003 was 468.39%.
CLASS B SHARES
The Fund's average annual total return for Class B Shares listed below
reflects the conversion of such shares into Class A Shares. Class B Shares
purchased before June 1, 1996, including Class B Shares received from
reinvestment of distributions through the dividend reinvestment plan on such
shares, automatically convert to Class A Shares six years after the end of the
calendar month in which the shares were purchased. Class B Shares purchased on
or after June 1, 1996, including Class B Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares, convert to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased.
B-39
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended August 31, 2003 was 14.27%, (ii) the five-year period ended August
31, 2003 was -1.21% and (iii) the ten-year period ended August 31, 2003 was
3.33%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
July 2, 1992 (commencement of distribution of Class B Shares of the Fund) to
August 31, 2003 was 65.26%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
July 2, 1992 (commencement of distribution of Class B Shares of the Fund) to
August 31, 2003 was 65.26%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended August 31, 2003 was 17.14%, (ii) the five-year period ended August
31, 2003 was -1.12% and (iii) ten-year period ended August 31, 2003 was 3.02%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
July 6, 1993 (commencement of distribution of Class C Shares of the Fund) to
August 31, 2003 was 36.30%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
July 6, 1993 (commencement of distribution of Class C Shares of the Fund) to
August 31, 2003 was 36.30%.
The annualized current yield for Class A Shares, Class B Shares and Class C
Shares of the Fund for the 30-day period ending August 31, 2003 was 7.40%, 6.96%
and 7.07%, respectively. The yield for Class A Shares, Class B Shares and Class
C Shares is not fixed and will fluctuate in response to prevailing interest
rates and the market value of portfolio securities, and as a function of the
type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent auditors.
INDEPENDENT AUDITORS
Independent auditors for the Fund perform an annual audit of the Fund's
financial statements. The Fund's Board of Trustees has engaged Ernst & Young
LLP, located at 233 South Wacker Drive, Chicago, Illinois 60606, to be the
Fund's independent auditors.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-40
APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policies
and procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide discretionary
Investment Management services and for which a MSIM entity has the authority to
vote their proxies. The policies and procedures and general guidelines in this
section will be reviewed and, as necessary, updated periodically to address new
or revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van Kampen
Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and
collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxyrelated services to institutional
investment managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
Voting Proxies for certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
B-41
will be voted on a best efforts basis only, consistent with the Client Proxy
Standard. ISS has been retained to provide assistance to the MSIM Affiliates in
connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, antitakeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its
Board's members be comprised of independent and unaffiliated
Directors.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Recommendations to set retirement ages or require specific levels
of stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i)
a clear and legitimate business purpose is stated; (ii) the number
of shares requested is reasonable in relation to the purpose for
which authorization is requested; and (iii) the authorization does
not exceed 100% of shares currently authorized and at least 30% of
the new authorization will be outstanding.
B-42
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in
the corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
- Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of
shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
- Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting
rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
B-43
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and
analysis will be used along with MSIM Affiliates' research and
analysis, based on, among other things, MSIM internal
company-specific knowledge.
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option
plans should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the issued
capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or
effectively deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
B-44
- Proposals that limit retirement benefits or executive compensation.
- Requiring shareholder approval for bylaw or charter amendments.
- Requiring shareholder approval for shareholder rights plan or
poison pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
- Restrictions related to social, political or special interest
issues that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM
will vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines
(as expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been
provided in Sections I, II and III above. Split votes will
generally not be approved within a single Global Investor Group
team. The Committee may take into account ISS recommendations and
the research provided by IRRC as well as any other relevant
information they may request or receive.
B-45
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with
respect to, the conflict(s) in question ("Special Committee").
The Special Committee may request the assistance of the Law and
Compliance Departments and will have sole discretion to cast a
vote. In addition to the research provided by ISS and IRRC, the
Special Committee may request analysis from MSIM Affiliate
investment professionals and outside sources to the extent it
deems appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions,
which documentation will be maintained by the Committee and the
Special Committee, or their designee(s) for a period of at least
6 years. To the extent these decisions relate to a security held
by a MSIM U.S. registered investment company, the Committee and
Special Committee, or their designee(s), will report their
decisions to each applicable Board of Trustees/Directors of those
investment companies at each Board's next regularly Scheduled
Board meeting. The report will contain information concerning
decisions made by the Committee and Special Committee during the
most recently ended calendar quarter immediately preceding the
Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
B-46
APPENDIX D
PRO FORMA FINANCIAL STATEMENTS
D-1
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the combination of
Van Kampen High Income Corporate Bond Fund and Van Kampen High Yield Fund. The
statements are presented as of March 31, 2004, the most recent interim period
for which financial information is currently available.
The unaudited Pro Forma Portfolio of Investments and Pro Forma Condensed
Statement of Assets and Liabilities reflect the financial position as if the
transaction occurred on March 31, 2004. The Pro Forma Condensed Statement of
Operations reflects the expenses for the twelve months ended March 31, 2004. The
pro forma statements give effect to the proposed exchange of Van Kampen High
Income Corporate Bond Fund shares for the assets and liabilities of the Van
Kampen High Yield Fund, with Van Kampen High Income Corporate Bond Fund being
the surviving entity. The proposed transaction will be accounted for as a
tax-free reorganization in accordance with accounting principles generally
accepted in the United States. The historical cost basis of the investments is
carried over to the surviving entity. It is not anticipated that Van Kampen High
Income Corporate Bond Fund will sell any securities of Van Kampen High Yield
Fund acquired in the reorganization other than in the ordinary course of
business.
D-2
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
VAN KAMPEN HIGH YIELD FUND
PROFORMA PORTFOLIO OF INVESTMENTS
MARCH 31, 2004
(UNAUDITED)
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
---------------------------- ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
CORPORATE BONDS 93.1%
AEROSPACE 0.3%
Dunlop Stand Aero Holdings,
144A - Private Placement
(United Kingdom) (a) 11.875% 05/15/09 $ 1,765 $ 960 $ 2,725 $ 1,888,550 $ 1,027,200 $ 2,915,750
------------------------------------------
BROADCASTING 1.7%
Granite Broadcasting Corp.,
144A - Private
Placement (a) 9.750 12/01/10 1,950 1,070 3,020 1,891,500 1,037,900 2,929,400
Interep National Radio Sales,
Inc., Ser B 10.000 07/01/08 2,755 1,462 4,217 2,496,719 1,324,937 3,821,656
TV Azteca SA, Ser B (Mexico) 10.500 02/15/07 5,674 3,068 8,742 5,872,590 3,175,380 9,047,970
------------------------------------------
10,260,809 5,538,217 15,799,026
------------------------------------------
BUILDING MATERIALS 0.2%
Koppers, Inc.,144A - Private
Placement (a) 9.875 10/15/13 1,000 530 1,530 1,105,000 585,650 1,690,650
------------------------------------------
CABLE 5.5%
Avalon Cable, LLC 11.875 12/01/08 756 400 1,156 801,627 424,194 1,225,821
Charter Communications
Holdings 10.750 10/01/09 1,145 1,145 1,007,600 1,007,600
Charter Communications
Holdings 9.625 11/15/09 5,765 1,775 7,540 4,900,250 1,508,750 6,409,000
Charter Communications
Holdings (b) 0/11.750 01/15/10 1,100 2,275 3,375 891,000 1,842,750 2,733,750
CSC Holdings, Inc. 8.125 07/15/09 1,935 1,040 2,975 2,089,800 1,123,200 3,213,000
CSC Holdings, Inc. 10.500 05/15/16 830 395 1,225 962,800 458,200 1,421,000
DirecTV Holdings, LLC 8.375 03/15/13 4,140 2,195 6,335 4,740,300 2,513,275 7,253,575
Echostar DBS Corp. 9.125 01/15/09 5,098 1,616 6,714 5,786,230 1,834,160 7,620,390
Echostar DBS Corp.,
144A-Private
Placement (a) 6.375 10/01/11 1,585 1,585 1,691,987 1,691,987
Multicanal Participacoes,
Ser B (Brazil) (e) 12.625 06/18/04 3,425 775 4,200 2,243,375 507,625 2,751,000
Pegasus Communications
Corp., Ser B 9.750 12/01/06 645 1,036 1,681 571,631 918,155 1,489,786
Pegasus Communications
Corp., Ser B 12.500 08/01/07 1,735 430 2,165 1,535,475 380,550 1,916,025
Pegasus Satellite
Communications 13.500 03/01/07 465 120 585 346,425 89,400 435,825
Renaissance Media Group 10.000 04/15/08 1,570 790 2,360 1,624,950 817,650 2,442,600
Satelites Mexicanos SA,
Ser B (Mexico) (e) 10.125 11/01/04 5,895 3,283 9,178 2,210,625 1,231,125 3,441,750
Telenet Communications
(Belgium) (EUR) 9.000 12/15/13 2,075 1,135 3,210 2,604,564 1,424,665 4,029,229
Telenet Group Holding NV,
144A - Private Placement
(Belgium) (a) (b) 0/11.500 06/15/14 2,515 1,340 3,855 1,546,725 824,100 2,370,825
------------------------------------------
33,863,377 17,589,786 51,453,163
------------------------------------------
CHEMICALS 6.7%
Avecia Group PLC (United
Kingdom) 11.000 07/01/09 3,047 1,615 4,662 2,605,185 1,380,825 3,986,010
Equistar Chemicals LP 10.125 09/01/08 3,343 1,747 5,090 3,610,440 1,886,760 5,497,200
Equistar Chemicals LP 10.625 05/01/11 1,245 620 1,865 1,347,712 671,150 2,018,862
FMC Corp. 10.250 11/01/09 1,564 722 2,286 1,845,520 851,960 2,697,480
Huntsman Advanced
Materials, LLC, 144A -
Private Placement (a) 11.000 07/15/10 1,475 755 2,230 1,674,125 856,925 2,531,050
Huntsman ICI Chemicals, LLC 10.125 07/01/09 1,519 1,235 2,754 1,553,177 1,262,787 2,815,964
Huntsman International, LLC
(EUR) (c) 10.125 07/01/09 2,800 1,200 4,000 3,316,466 1,421,343 4,737,809
ISP Chemco, Inc., Ser B 10.250 07/01/11 1,280 1,280 1,456,000 1,456,000
ISP Holdings, Inc. 10.625 12/15/09 3,930 2,980 6,910 4,381,950 3,322,700 7,704,650
Millennium America, Inc. 7.000 11/15/06 3,680 1,045 4,725 3,762,800 1,068,512 4,831,312
Millennium America, Inc. 9.250 06/15/08 775 1,210 1,985 831,188 1,297,725 2,128,913
Nalco Co., 144A - Private
Placement (a) 7.750 11/15/11 3,730 2,025 5,755 3,916,500 2,126,250 6,042,750
Nalco Financial Holdings,
Inc., 144A - Private
Placement (a) (b) 0/9.000 02/01/14 3,330 1,815 5,145 1,998,000 1,089,000 3,087,000
PCI Chemicals Canada,
Inc. (Canada) 10.000 12/31/08 1,105 1,105 1,049,480 1,049,480
Pioneer Cos., Inc.
(Variable Rate Coupon) 4.610 12/31/06 350 350 337,583 337,583
Rhodia SA, 144A -
Private Placement
(France) (a) 8.875 06/01/11 3,705 1,905 5,610 3,112,200 1,600,200 4,712,400
Rockwood Specialties
Group, Inc. 10.625 05/15/11 2,410 1,250 3,660 2,675,100 1,387,500 4,062,600
Westlake Chemical Corp. 8.750 07/15/11 1,485 810 2,295 1,648,350 899,100 2,547,450
------------------------------------------
41,121,776 21,122,737 62,244,513
------------------------------------------
CONSUMER PRODUCTS 2.1%
Oxford Industrials, Inc.,
144A - Private
Placement (a) 8.875 06/01/11 1,555 805 2,360 1,679,400 869,400 2,548,800
Prestige Brands, Inc.,
144A - Private
Placement (a) (d) 9.250 04/15/12 2,625 1,395 4,020 2,598,750 1,381,050 3,979,800
D-3
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
--------------------------------- ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
Rayovac Corp. 8.500% 10/01/13 $ 2,220 $ 1,165 $ 3,385 $ 2,403,150 $1,261,112 $3,664,262
Safilo Capital International
SA, 144A - Private Placement
(Luxembourg) (EUR) (a) 9.625 05/15/13 3,560 1,840 5,400 3,767,604 1,947,301 5,714,905
Sleepmaster, LLC (e) (f) (g) 11.000 05/15/09 4,000 1,800 5,800 880,000 396,000 1,276,000
Tempur Pedic, Inc.,
144A - Private Placement (a) 10.250 08/15/10 1,082 585 1,667 1,249,710 675,675 1,925,385
-------------------------------------
12,578,614 6,530,538 19,109,152
-------------------------------------
DIVERSIFIED MEDIA 7.3%
Advanstar Communications, Inc. 10.750 08/15/10 820 365 1,185 905,075 402,869 1,307,944
Advanstar Communications, Inc. 12.000 02/15/11 255 255 271,894 271,894
Advanstar Communications,
Inc. (Variable Rate Coupon) 8.620 08/15/08 4,831 2,567 7,398 5,102,453 2,711,499 7,813,952
Alliance Atlantis
Communications,
Inc. (Canada) 13.000 12/15/09 3,250 1,730 4,980 3,656,250 1,946,250 5,602,500
Cinemark, Inc., 144A -
Private Placement (a) (b) 0/9.750 03/15/14 4,185 2,230 6,415 2,615,625 1,393,750 4,009,375
Dex Media East Finance Corp. 12.125 11/15/12 2,335 1,275 3,610 2,737,787 1,494,937 4,232,724
Dex Media West Finance Corp.,
144A - Private Placement (a) 9.875 08/15/13 2,475 1,305 3,780 2,759,625 1,455,075 4,214,700
Dex Media, Inc., 144A -
Private Placement (a) (b) 0/9.000 11/15/13 4,500 2,450 6,950 2,902,500 1,580,250 4,482,750
Hollinger Participation,
144A - Private Placement
(a) (h) 12.125 11/15/10 4,452 2,553 7,005 5,159,025 2,957,930 8,116,955
Muzak, Inc. 10.000 02/15/09 1,695 1,015 2,710 1,764,919 1,056,869 2,821,788
Muzak, Inc. 9.875 03/15/09 3,102 1,586 4,688 3,005,062 1,536,437 4,541,499
Nebraska Book Co., Inc.,
144A - Private Placement (a) 8.625 03/15/12 2,725 1,480 4,205 2,820,375 1,531,800 4,352,175
PEI Holdings, Inc. 11.000 03/15/10 1,475 715 2,190 1,711,000 829,400 2,540,400
Primedia, Inc. 8.875 05/15/11 3,705 2,000 5,705 3,816,150 2,060,000 5,876,150
Salem Communications Corp. 7.750 12/15/10 1,165 20 1,185 1,236,356 21,225 1,257,581
Vivendi Universal SA (France) 6.250 07/15/08 1,160 685 1,845 1,258,600 743,225 2,001,825
Vivendi Universal SA (France) 9.250 04/15/10 2,570 1,235 3,805 3,084,000 1,482,000 4,566,000
-------------------------------------
44,534,802 23,475,410 68,010,212
-------------------------------------
ENERGY 8.9%
BRL Universal Equipment 8.875 02/15/08 3,876 2,213 6,089 4,205,460 2,401,105 6,606,565
Chesapeake Energy Corp. 7.500 09/15/13 2,875 2,265 5,140 3,191,250 2,514,150 5,705,400
Citgo Petroleum Corp. 11.375 02/01/11 1,635 840 2,475 1,917,037 984,900 2,901,937
DI Industries, Inc. 8.875 07/01/07 1,428 617 2,045 1,472,625 636,281 2,108,906
El Paso Production Holding Co. 7.750 06/01/13 6,170 3,345 9,515 5,753,525 3,119,212 8,872,737
Frontier Oil Corp. 11.750 11/15/09 4,385 1,915 6,300 4,889,275 2,135,225 7,024,500
Gulfterra Energy Partners
LP, Ser B 8.500 06/01/10 723 374 1,097 838,680 433,840 1,272,520
Gulfterra Energy Partners
LP, Ser B 10.625 12/01/12 1,929 1,302 3,231 2,430,540 1,640,520 4,071,060
Hanover Compressor Co. 8.625 12/15/10 2,465 1,160 3,625 2,662,200 1,252,800 3,915,000
Hanover Equipment Trust 8.500 09/01/08 245 245 263,375 263,375
Hanover Equipment Trust 8.750 09/01/11 2,004 1,038 3,042 2,174,340 1,126,230 3,300,570
Hilcorp Energy Finance Corp.,
144A - Private Placement (a) 10.500 09/01/10 3,890 2,120 6,010 4,337,350 2,363,800 6,701,150
Husky Oil Ltd. (Canada) 8.900 08/15/28 2,370 1,200 3,570 2,804,267 1,419,882 4,224,149
Magnum Hunter Resources, Inc. 9.600 03/15/12 1,994 957 2,951 2,238,265 1,074,232 3,312,497
MSW Energy Holdings Finance Corp. 8.500 09/01/10 650 335 985 715,000 368,500 1,083,500
MSW Energy Holdings Finance II,
144A - Private Placement (a) 7.375 09/01/10 2,735 1,510 4,245 2,899,100 1,600,600 4,499,700
Port Arthur Finance Corp., Ser A 12.500 01/15/09 2,550 1,299 3,849 3,022,153 1,539,884 4,562,037
Tesoro Petroleum Corp. 9.000 07/01/08 1,810 895 2,705 1,898,238 938,631 2,836,869
Tesoro Petroleum Corp. 9.625 04/01/12 1,954 1,030 2,984 2,188,480 1,153,600 3,342,080
Vintage Petroleum, Inc. 7.875 05/15/11 3,792 2,055 5,847 4,095,360 2,219,400 6,314,760
-------------------------------------
53,733,145 29,186,167 82,919,312
-------------------------------------
FOOD & DRUG 1.0%
Delhaize America, Inc. 8.125 04/15/11 2,605 1,405 4,010 3,008,775 1,622,775 4,631,550
Jitney-Jungle Stores America,
Inc. (e) (f) (g) 12.000 03/01/06 1,200 500 1,700 0 0 0
Kroger Co., 144A -
Private Placement (a) 8.500 07/15/17 3,098 1,422 4,520 3,556,003 1,632,056 5,188,059
-------------------------------------
6,564,778 3,254,831 9,819,609
-------------------------------------
FOOD & TOBACCO 2.9%
Michael Foods, Inc., Ser B,
144A - Private Placement (a) 8.000 11/15/13 2,360 1,285 3,645 2,513,400 1,368,525 3,881,925
Pilgrim's Pride Corp. 9.625 09/15/11 5,400 2,700 8,100 5,845,500 2,922,750 8,768,250
PPC Escrow Corp., 144A -
Private Placement (a) 9.250 11/15/13 1,390 870 2,260 1,459,500 913,500 2,373,000
Smithfield Foods, Inc. 7.625 02/15/08 4,750 1,850 6,600 5,153,750 2,007,250 7,161,000
Smithfield Foods, Inc. 8.000 10/15/09 600 515 1,115 673,500 578,087 1,251,587
Smithfield Foods, Inc. 7.750 05/15/13 450 450 497,250 497,250
Standard Commercial Corp.,
144A - Private Placement
(a) (d) 8.000 04/15/12 1,825 970 2,795 1,902,563 1,011,225 2,913,788
D-4
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
------------------------------ ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
-----------------------------------------
$17,548,213 $9,298,587 $26,846,800
-----------------------------------------
FOREST PRODUCTS 6.2%
Abitibi-Consolidated,
Inc. (Canada) 6.000% 06/20/13 $3,050 $1,590 $4,640 2,863,032 1,492,531 4,355,563
Georgia-Pacific Corp. 8.875 02/01/10 5,025 2,925 7,950 5,891,812 3,429,562 9,321,374
Graphic Packaging
International, Inc. 9.500 08/15/13 2,615 1,345 3,960 2,968,025 1,526,575 4,494,600
JSG Funding PLC
(United Kingdom) (EUR) 10.125 10/01/12 3,525 1,910 5,435 4,901,786 2,656,003 7,557,789
Norampac, Inc. (Canada) 6.750 06/01/13 1,785 915 2,700 1,901,025 974,475 2,875,500
Owens-Brockway Glass
Containers, Inc. 8.875 02/15/09 130 130 141,050 141,050
Owens-Brockway Glass
Containers, Inc. 7.750 05/15/11 245 150 395 257,250 157,500 414,750
Owens-Brockway Glass
Containers, Inc. 8.750 11/15/12 1,000 1,270 2,270 1,092,500 1,387,475 2,479,975
Owens-Illinois, Inc. 7.350 05/15/08 1,000 1,000 990,000 990,000
Owens-Illinois, Inc. 7.500 05/15/10 4,390 1,730 6,120 4,225,375 1,665,125 5,890,500
Pliant Corp. 13.000 06/01/10 1,585 890 2,475 1,378,950 774,300 2,153,250
Pliant Corp. 13.000 06/01/10 2,419 1,266 3,685 2,104,530 1,101,420 3,205,950
Tekni-Plex, Inc.,
144A - Private
Placement (a) 8.750 11/15/13 740 490 1,230 740,000 490,000 1,230,000
Tekni-Plex, Inc., Ser B 12.750 06/15/10 3,355 1,747 5,102 3,531,138 1,838,717 5,369,855
Tembec Industries,
Inc. (Canada) 8.500 02/01/11 500 500 502,500 502,500
Tembec Industries,
Inc. (Canada) 7.750 03/15/12 4,800 2,165 6,965 4,656,000 2,100,050 6,756,050
-----------------------------------------
GAMING & LEISURE 4.7% 37,501,423 20,237,283 57,738,706
Global Cash Access, LLC, -----------------------------------------
144A - Private Placement (a) 8.750 03/15/12 690 375 1,065 721,050 391,875 1,112,925
Hilton Hotels Corp. 7.950 04/15/07 241 432 673 268,715 481,680 750,395
Hilton Hotels Corp. 7.625 12/01/12 2,925 1,215 4,140 3,374,719 1,401,806 4,776,525
HMH Properties, Inc. 7.875 08/01/08 1,368 886 2,254 1,427,850 924,762 2,352,612
Horseshoe Gaming, LLC, Ser B 8.625 05/15/09 3,271 2,006 5,277 3,442,727 2,111,315 5,554,042
LodgeNet Entertainment Corp. 9.500 06/15/13 1,510 800 2,310 1,683,650 892,000 2,575,650
MGM Mirage, Inc. 6.000 10/01/09 2,885 2,510 5,395 3,043,675 2,648,050 5,691,725
Park Place Entertainment Corp. 7.875 12/15/05 1,660 2,050 3,710 1,772,050 2,188,375 3,960,425
Park Place Entertainment Corp. 8.875 09/15/08 993 993 1,136,985 1,136,985
Park Place Entertainment Corp. 7.000 04/15/13 475 475 520,125 520,125
Starwood Hotels & Resorts
Worldwide, Inc. 7.375 05/01/07 884 386 1,270 965,770 421,705 1,387,475
Starwood Hotels & Resorts
Worldwide, Inc. 7.875 05/01/12 2,576 1,361 3,937 2,923,760 1,544,735 4,468,495
Station Casinos, Inc.,
144A - Private Placement (a) 6.000 04/01/12 285 930 1,215 296,400 967,200 1,263,600
Station Casinos, Inc.,
144A - Private Placement (a) 6.500 02/01/14 2,500 1,350 3,850 2,534,375 1,368,562 3,902,937
Venetian Casino Resort, LLC 11.000 06/15/10 2,280 1,174 3,454 2,633,400 1,355,970 3,989,370
-----------------------------------------
26,225,126 17,218,160 43,443,286
-----------------------------------------
HEALTHCARE 3.8%
AmerisourceBergen Corp. 8.125 09/01/08 418 420 838 468,160 470,400 938,560
AmerisourceBergen Corp. 7.250 11/15/12 3,775 1,825 5,600 4,124,187 1,993,812 6,117,999
Fisher Scientific
International, Inc. 8.125 05/01/12 1,507 869 2,376 1,680,305 968,935 2,649,240
Fisher Scientific
International, Inc.,
144A - Private Placement (a) 8.000 09/01/13 965 475 1,440 1,088,037 535,562 1,623,599
Fresenius Medical Care
Capital Trust II 7.875 02/01/08 300 300 327,750 327,750
Fresenius Medical Care
Capital Trust IV 7.875 06/15/11 4,790 2,210 7,000 5,316,900 2,453,100 7,770,000
HCA, Inc. 8.750 09/01/10 510 303 813 611,570 363,344 974,914
HCA, Inc. 6.950 05/01/12 1,100 1,100 1,201,663 1,201,663
HCA, Inc. 7.190 11/15/15 475 115 590 524,467 126,976 651,443
Manor Care, Inc. 7.500 06/15/06 350 210 560 385,000 231,000 616,000
Manor Care, Inc. 8.000 03/01/08 1,008 478 1,486 1,157,940 549,102 1,707,042
National Nephrology
Associates, Inc.,
144A - Private Placement (a) 9.000 11/01/11 565 310 875 658,225 361,150 1,019,375
Team Health, Inc.
144A - Private Placement (a) 9.000 04/01/12 2,015 1,075 3,090 1,969,663 1,050,812 3,020,475
Tenet Healthcare Corp. 5.375 11/15/06 1,805 970 2,775 1,705,725 916,650 2,622,375
Tenet Healthcare Corp. 6.500 06/01/12 720 360 1,080 624,600 312,300 936,900
Tenet Healthcare Corp. 7.375 02/01/13 2,525 1,355 3,880 2,291,438 1,229,663 3,521,101
-----------------------------------------
22,606,217 13,092,219 35,698,436
HOUSING 6.4% -----------------------------------------
Associated Materials, Inc.,
144A - Private
Placement (a) (b) 0/11.250 03/01/14 6,950 3,755 10,705 4,256,875 2,299,938 6,556,813
CB Richard Ellis Service, Inc. 9.750 05/15/10 1,400 735 2,135 1,578,500 828,713 2,407,213
CB Richard Ellis Service, Inc. 11.250 06/15/11 3,622 1,869 5,491 4,110,970 2,121,315 6,232,285
D.R. Horton, Inc. 6.875 05/01/13 1,405 1,405 1,566,575 1,566,575
Interface, Inc. 7.300 04/01/08 765 415 1,180 761,175 412,925 1,174,100
Interface, Inc. 10.375 02/01/10 955 520 1,475 1,083,925 590,200 1,674,125
Interface, Inc.,
144A - Private Placement (a) 9.500 02/01/14 2,910 1,585 4,495 2,895,450 1,577,075 4,472,525
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
----------------------------- ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
Istar Financial, Inc. 8.750% 08/15/08 $1,697 $ 774 $2,471 $1,977,005 $ 901,710 $ 2,878,715
Jacuzzi Brands, Inc. 9.625 07/01/10 4,005 2,105 6,110 4,445,550 2,336,550 6,782,100
LNR Property Corp. 7.625 07/15/13 2,440 1,575 4,015 2,598,600 1,677,375 4,275,975
Nortek Holdings, Inc.,
144A - Private Placement
(a) (b) 0/10.000 05/15/11 6,000 3,410 9,410 4,590,000 2,608,650 7,198,650
Schuler Homes, Inc. 9.375 07/15/09 3,898 3,898 4,385,250 4,385,250
Tech Olympic USA, Inc. 9.000 07/01/10 1,186 599 1,785 1,295,705 654,408 1,950,113
Tech Olympic USA, Inc. 9.000 07/01/10 1,600 725 2,325 1,748,000 792,063 2,540,063
Tech Olympic USA, Inc. 10.375 07/01/12 1,811 1,044 2,855 2,050,958 1,182,330 3,233,288
WII Components, Inc., 144A -
Private Placement (a) 10.000 02/15/12 1,610 875 2,485 1,666,350 905,625 2,571,975
----------------------------------------
39,444,313 20,455,452 59,899,765
----------------------------------------
INFORMATION TECHNOLOGY 2.4%
Avaya, Inc. 11.125 04/01/09 2,958 1,605 4,563 3,542,205 1,921,988 5,464,193
Iron Mountain, Inc. 8.625 04/01/13 2,785 1,255 4,040 3,049,575 1,374,225 4,423,800
Iron Mountain, Inc. 7.750 01/15/15 2,340 1,325 3,665 2,468,700 1,397,875 3,866,575
Iron Mountain, Inc. 6.625 01/01/16 525 525 511,875 511,875
Xerox Capital Europe PLC
(United Kingdom) 5.875 05/15/04 925 525 1,450 927,313 526,312 1,453,625
Xerox Corp. 7.125 06/15/10 3,400 2,515 5,915 3,621,000 2,678,475 6,299,475
----------------------------------------
13,608,793 8,410,750 22,019,543
----------------------------------------
MANUFACTURING 3.9%
ABB Finance, Inc. 6.750 06/03/04 590 295 885 593,657 296,828 890,485
ABB International Finance
Ltd. (Guernsey)(EUR) 11.000 01/15/08 1,695 885 2,580 2,457,424 1,283,080 3,740,504
Brand Services, Inc. 12.000 10/15/12 1,490 691 2,181 1,743,300 808,470 2,551,770
Flowserve Corp. 12.250 08/15/10 990 480 1,470 1,145,925 555,600 1,701,525
Johnsondiversey, Inc.
(EUR) (c) 9.625 05/15/12 1,377 637 2,014 1,830,098 846,603 2,676,701
Johnsondiversey, Inc.,
Ser B 9.625 05/15/12 3,021 1,567 4,588 3,307,995 1,715,865 5,023,860
Manitowoc, Inc. 10.500 08/01/12 2,615 1,345 3,960 3,007,250 1,546,750 4,554,000
Manitowoc, Inc. (EUR)
(c) 10.375 05/15/11 55 55 75,805 75,805
MDP Acquisitions PLC
(Ireland) 9.625 10/01/12 270 270 306,450 306,450
NMHG Holdings Co. 10.000 05/15/09 1,959 961 2,920 2,164,695 1,061,905 3,226,600
Outsourcing Services
Group, Inc. 10.875 03/01/06 4,980 4,980 2,564,700 2,564,700
Reunion Industries,
Inc. (e) 13.000 05/01/03 1,417 1,417 680,160 680,160
Trimas Corp. 9.875 06/15/12 4,814 2,768 7,582 5,271,330 3,030,960 8,302,290
----------------------------------------
24,766,534 11,528,316 36,294,850
----------------------------------------
METALS 2.9%
Doe Run Resources Corp.,
144A - Private Placement
(a) (h) 11.750 11/01/08 6,058 2,596 8,654 3,362,359 1,441,011 4,803,370
General Cable Corp., 144A
- Private Placement (a) 9.500 11/15/10 1,460 790 2,250 1,613,300 872,950 2,486,250
GS Technologies Operating,
Inc. (e) (f) (g) 12.000 09/01/04 6,655 1,600 8,255 666 160 826
GS Technologies Operating,
Inc. (e) (f) (g) 12.250 10/01/05 2,450 1,050 3,500 0 0 0
Intermet Corp. 9.750 06/15/09 2,720 1,444 4,164 2,597,600 1,379,020 3,976,620
Republic Engineered Products,
LLC (e) (f) 10.000 08/16/09 1,416 805 2,221 998,611 567,318 1,565,929
SGL Carbon Luxembourg SA,
144A - Private Placement
(Luxembourg)
(EUR) (a) 8.500 02/01/12 1,635 880 2,515 2,052,271 1,104,586 3,156,857
UCAR Finance, Inc. 10.250 02/15/12 3,422 1,730 5,152 4,003,740 2,024,100 6,027,840
United States Steel Corp. 9.750 05/15/10 2,523 1,754 4,277 2,888,835 2,008,330 4,897,165
----------------------------------------
17,517,382 9,397,475 26,914,857
----------------------------------------
RETAIL 2.3%
AutoNation, Inc. 9.000 08/01/08 3,260 1,660 4,920 3,830,500 1,950,500 5,781,000
Big 5 Corp., Ser B 10.875 11/15/07 1,197 355 1,552 1,246,675 369,733 1,616,408
General Nutrition Center, Inc.,
144A - Private Placement (a) 8.500 12/01/10 2,015 1,100 3,115 2,125,825 1,160,500 3,286,325
Payless Shoesource, Inc. 8.250 08/01/13 4,515 2,535 7,050 4,413,412 2,477,963 6,891,375
Petro Stopping Center Financial,
144A - Private Placement (a) 9.000 02/15/12 2,620 1,390 4,010 2,711,700 1,438,650 4,150,350
----------------------------------------
14,328,112 7,397,346 21,725,458
----------------------------------------
SERVICES 2.6%
Allied Waste North America, Inc. 9.250 09/01/12 1,645 510 2,155 1,879,412 582,675 2,462,087
Allied Waste North America, Inc. 7.875 04/15/13 1,750 1,305 3,055 1,920,625 1,432,238 3,352,863
Allied Waste North America, Inc.,
Ser B 10.000 08/01/09 1,455 1,455 1,567,762 1,567,762
Encompass Services Corp. (e) (f)
(g) 10.500 05/01/09 1,500 900 2,400 0 0 0
Hydrochem Industrial Services,
Inc., Ser B 10.375 08/01/07 6,250 1,500 7,750 6,281,250 1,507,500 7,788,750
United Rentals North America,
Inc., 144A - Private Placement
(a) 6.500 02/15/12 2,875 1,560 4,435 2,875,000 1,560,000 4,435,000
D-6
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
----------------------------------- ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
United Rentals North America, Inc.,
144A - Private Placement (a) 7.750% 11/15/13 $2,900 $1,580 $4,480 $ 2,842,000 $ 1,548,400 $ 4,390,400
---------------------------------------
17,366,049 6,630,813 23,996,862
---------------------------------------
TELECOMMUNICATIONS 4.1%
Axtel SA, 144A - Private Placement
(Mexico) (a) 11.000 12/15/13 4,290 2,335 6,625 4,375,800 2,381,700 6,757,500
Exodus Communications, Inc. (e)
(f) (g) 11.250 07/01/08 4,210 1,820 6,030 0 0 0
Exodus Communications, Inc. (e)
(f) (g) 11.625 07/15/10 330 440 770 0 0 0
Exodus Communications, Inc.
(EUR) (c) (e) (f) (g) 11.375 07/15/08 2,750 1,250 4,000 0 0 0
GST Network Funding, Inc.
(e) (f) (g) 10.500 05/01/08 5,305 2,945 8,250 531 295 826
Knology, Inc., 144A -
Private Placement (a) (h) 12.000 11/30/09 4,021 1,985 6,006 4,045,724 1,996,965 6,042,689
Nortel Networks 6.125 02/15/06 2,235 1,190 3,425 2,302,050 1,225,700 3,527,750
Park N View, Inc., Ser B (e)
(f) (g) 13.000 05/15/08 3,000 1,000 4,000 0 0 0
Primus Telecom Group, 144A -
Private Placement (a) 8.000 01/15/14 6,075 3,315 9,390 5,832,000 3,182,400 9,014,400
Qwest Communications International,
Inc., 144A - Private Placement
(Variable Rate Coupon) (a) 4.630 02/15/09 2,955 1,575 4,530 2,777,700 1,480,500 4,258,200
Qwest Services Corp., 144A -
Private Placement (a) 13.000 12/15/07 4,295 2,295 6,590 4,960,725 2,650,725 7,611,450
US West Communications, Inc. 5.625 11/15/08 665 355 1,020 666,663 355,888 1,022,551
Worldwide Fiber, Inc. (Canada)
(e) (f) (g) 12.000 08/01/09 5,800 2,750 8,550 580 275 855
---------------------------------------
24,961,773 13,274,448 38,236,221
---------------------------------------
TRANSPORTATION 3.3%
Amsted Industries, Inc., 144A -
Private Placement (a) 10.250 10/15/11 2,815 1,495 4,310 3,195,025 1,696,825 4,891,850
Laidlaw International, Inc.,
144A - Private Placement (a) 10.750 06/15/11 4,040 2,185 6,225 4,545,000 2,458,125 7,003,125
Sonic Automotive, Inc. 8.625 08/15/13 4,025 2,155 6,180 4,387,250 2,348,950 6,736,200
Tenneco Automotive, Inc., Ser B 11.625 10/15/09 2,695 2,115 4,810 2,930,813 2,300,063 5,230,876
TRW Automotive, Inc. 9.375 02/15/13 3,667 1,959 5,626 4,235,385 2,262,645 6,498,030
---------------------------------------
19,293,473 11,066,608 30,360,081
---------------------------------------
UTILITY 8.4%
AES Corp. 9.375 09/15/10 508 252 760 556,260 275,940 832,200
AES Corp. 8.875 02/15/11 360 183 543 386,100 196,268 582,368
AES Corp. 7.750 03/01/14 1,295 1,105 2,400 1,303,094 1,111,906 2,415,000
AES Corp., 144A - Private
Placement (a) 9.000 05/15/15 2,925 1,585 4,510 3,243,094 1,757,369 5,000,463
Allegheny Energy, Inc. 7.750 08/01/05 1,695 965 2,660 1,767,038 1,006,013 2,773,051
Calpine Corp. 8.625 08/15/10 3,050 1,625 4,675 2,257,000 1,202,500 3,459,500
Calpine Corp., 144A -
Private Placement (a) 8.500 07/15/10 2,305 1,265 3,570 2,132,125 1,170,125 3,302,250
CMS Energy Corp. 7.500 01/15/09 775 425 1,200 800,187 438,813 1,239,000
CMS Energy Corp. 8.500 04/15/11 2,780 1,350 4,130 2,981,550 1,447,875 4,429,425
Dynegy Holdings, Inc. 6.875 04/01/11 4,232 1,990 6,222 3,703,000 1,741,250 5,444,250
Dynegy Holdings, Inc., 144A -
Private Placement (a) 9.875 07/15/10 2,460 1,480 3,940 2,687,550 1,616,900 4,304,450
IPALCO Enterprises, Inc. 8.625 11/14/11 925 470 1,395 1,045,250 531,100 1,576,350
Monongahela Power Co. 5.000 10/01/06 3,220 1,555 4,775 3,300,500 1,593,875 4,894,375
Nevada Power Co., 144A -
Private Placement (a) 9.000 08/15/13 4,520 2,410 6,930 5,096,300 2,717,275 7,813,575
Northwest Pipeline Corp. 8.125 03/01/10 695 330 1,025 771,450 366,300 1,137,750
Ormat Funding Corp., 144A -
Private Placement (a) 8.250 12/30/20 5,140 2,735 7,875 5,165,700 2,748,675 7,914,375
PG & E Corp., 144A -
Private Placement (a) 6.875 07/15/08 1,625 1,040 2,665 1,781,406 1,140,100 2,921,506
PSEG Energy Holdings, Inc. 7.750 04/16/07 840 470 1,310 892,500 499,375 1,391,875
PSEG Energy Holdings, Inc. 8.625 02/15/08 1,949 1,016 2,965 2,114,665 1,102,360 3,217,025
Southern Natural Gas Co. 8.875 03/15/10 1,345 665 2,010 1,499,675 741,475 2,241,150
TNP Enterprises, Inc. 10.250 04/01/10 875 875 958,125 958,125
Transcontinental Gas Pipe
Line Corp., Ser B 8.875 07/15/12 1,225 575 1,800 1,457,750 684,250 2,142,000
Williams Cos., Inc. 7.875 09/01/21 3,080 1,900 4,980 3,133,900 1,933,250 5,067,150
Williams Cos., Inc., Ser A
(Variable Rate Coupon) 6.750 01/15/06 2,025 1,000 3,025 2,121,188 1,047,500 3,168,688
---------------------------------------
50,197,282 28,028,619 78,225,901
---------------------------------------
WIRELESS COMMUNICATIONS 5.5%
American Tower Corp. 9.375 02/01/09 3,300 1,815 5,115 3,498,000 1,923,900 5,421,900
American Tower Corp., 144A -
Private Placement (a) 7.500 05/01/12 2,110 1,135 3,245 2,025,600 1,089,600 3,115,200
Centennial Communications, 144A -
Private Placement (a) 8.125 02/01/14 4,115 2,235 6,350 3,816,662 2,072,963 5,889,625
Metro PCS, Inc. 10.750 10/01/11 3,355 1,835 5,190 3,573,075 1,954,275 5,527,350
Nextel Communications, Inc. 9.375 11/15/09 5,815 3,955 9,770 6,352,888 4,320,838 10,673,726
Nextel Communications, Inc. 7.375 08/01/15 385 385 418,688 418,688
Nextel Partners, Inc. 11.000 03/15/10 2,825 1,585 4,410 3,149,875 1,767,275 4,917,150
Rural Cellular Corp., 144A -
Private Placement (a) 5.610 03/15/10 1,720 920 2,640 1,750,100 936,100 2,686,200
SBA Communications Corp. 10.250 02/01/09 3,858 2,102 5,960 3,819,420 2,080,980 5,900,400
SBA Communications Corp., 144A -
Private Placement (a) (b) 0/14.000 12/15/11 2,015 1,025 3,040 1,425,612 725,188 2,150,800
D-7
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
------------------------------------ ------ -------- ----------- ---------- ---------- ------------- ----------- ------------
Ubiquitel Operating Co. (b) 0/14.000% 04/15/10 $ 1,030 $ 560 $ 1,590 $ 973,350 $ 529,200 $ 1,502,550
Ubiquitel Operating Co., 144A -
Private Placement (a) 9.875 03/01/11 2,230 1,205 3,435 2,185,400 1,180,900 3,366,300
---------------------------------------
32,569,982 18,999,907 51,569,889
---------------------------------------
TOTAL CORPORATE BONDS 93.1% 563,585,523 303,346,519 866,932,042
---------------------------------------
FOREIGN GOVERNMENT OBLIGATION 0.3%
Republic of Columbia (Columbia) 9.750 04/09/11 1,496 727 2,223 1,754,770 853,013 2,607,783
---------------------------------------
HIGH INCOME HIGH INCOME
CORPORATE CORPORATE BOND HIGH YIELD
BOND FUND HIGH YIELD PROFORMA FUND MARKET FUND MARKET PROFORMA
DESCRIPTION SHARES FUND SHARES SHARES VALUE VALUE MARKET VALUE
EQUITIES 1.9%
Decisionone Corp. (common shares)
(g) (i) 14,661 5,234 19,895 0 0 0
Decisionone Corp. (common stock
warrants Class A) (g) (i) 8,219 2,671 10,890 0 0 0
Decisionone Corp. (common stock
warrants Class B) (g) (i) 14,162 4,603 18,765 0 0 0
Decisionone Corp. (common stock
warrants Class C) (g) (i) 8,400 2,730 11,130 0 0 0
Doe Run Resources Corp.
(common stock warrants) (g) 21 9 30 0 0 0
HCI Direct, Inc. (common shares)
(g) (i) 106,250 106,250 828,750 828,750
HF Holdings, Inc. (common stock
warrants) (g) (i) 36,820 36,820 0 0
Hosiery Corp. of America, Inc.
(common shares) (g) 1,000 1,000 0 0
Jazztel PLC (United Kingdom) (EUR)
(common stock warrants) (g) (i) 3,450 1,550 5,000 0 0 0
Mediq, Inc. (common shares) (g) (i) 5,526 3,684 9,210 22,159 14,773 36,932
Microcell Telecommunications
(Canada) (common shares Class A) 220 94 314 4,224 1,805 6,029
Microcell Telecommunications
(Canada) (common shares Class B) 26,249 11,249 37,498 500,038 214,291 714,329
Microcell Telecommunications
(Canada) (common stock warrants) 9,750 4,178 13,928 44,502 19,070 63,572
Microcell Telecommunications
(Canada) (common stock warrants) 16,250 6,964 23,214 86,677 37,146 123,823
Microcell Telecommunications
(Canada) (convertible preferred shares) 26,407 11,317 37,724 507,575 217,527 725,102
OpTel, Inc. (common shares) (g) (i) 3,275 3,275 0 0
Park N View, Inc., (common stock
warrants) 144A - Private Placement
(a) (f) (g) (i) 3,000 1,000 4,000 0 0 0
Paxson Communications Corp.
(preferred shares) (h) 50,400 25,900 76,300 4,548,600 2,337,475 6,886,075
Pioneer Cos., Inc. (common shares) (i) 71,438 71,438 389,337 389,337
Republic Technologies International, Inc.,
(common stock warrants Class D) 144A -
Private Placement (a) (f) (g) (i) 7,525 4,275 11,800 0 0 0
Startec Global Communications,
(common stock warrants) 144A -
Private Placement (a) (g) (i) 8,100 3,000 11,100 0 0 0
TNP Enterprises, Inc. (preferred
shares) (h) 49,528 19,101 68,629 5,658,580 2,182,315 7,840,895
UIH Australia/Pacific, Inc. (common
stock warrants) (g) (i) 5,000 5,000 0 0
Ventelo (United Kingdom) (EUR)
(common shares) 144A - Private Placement
(a) (g) (i) 73,021 73,021 0 0
VS Holdings, Inc. (common shares)
(g) (i) 568,177 378,785 946,962 106,079 70,719 176,798
----------- ----------------------------
TOTAL EQUITIES 11,867,771 5,923,871 17,791,642
----------- ----------------------------
TOTAL LONG-TERM INVESTMENTS 95.3%
(Cost $925,721,526) 577,208,064 310,123,403 887,331,467
REPURCHASE AGREEMENTS 2.9%
Bank of America Securities LLC
($19,589,000 par collateralized
by U.S. Government obligations
in a pooled cash account, interest
rate of 0.98%, dated 3/31/04, to
be sold on 04/01/04 at $19,589,533) 19,589,000 19,589,000
D-8
HIGH INCOME
CORPORATE HIGH YIELD HIGH INCOME
BOND FUND FUND PROFORMA CORPORATE BOND HIGH YIELD
PAR AMOUNT PAR AMOUNT PAR AMOUNT FUND FUND MARKET PROFORMA
DESCRIPTION COUPON MATURITY (000) (000) (000) MARKET VALUE VALUE MARKET VALUE
---------------------------- ------ -------- ----------- ---------- ---------- -------------- ----------- ------------
State Street Bank &
Trust Co. ($7,473,000
par collateralized
by U.S. Government
obligations in a
pooled cash account,
interest rate of
1.00%, dated 03/31/04,
to be sold on
04/01/04 at
$7,473,208) $ 7,473,000 $ 7,473,000
--------------------------------------------
TOTAL SHORT-TERM
INVESTMENTS 2.9%
(Cost $27,062,000) $ 19,589,000 7,473,000 27,062,000
--------------------------------------------
596,797,064 317,596,403 914,393,467
TOTAL INVESTMENTS 98.2%
(Cost $952,049,754) 11,516,497 5,679,920 17,196,417
--------------------------------------------
OTHER ASSETS IN EXCESS OF
LIABILITIES 1.8% $608,313,561 $323,276,323 $931,589,884
============================================
NET ASSETS 100.0%
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(b) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(c) This security is a United States company denominated in a foreign currency.
(d) Securities purchased on a when-issued or delayed delivery basis.
(e) Non-income producing as security is in default.
(f) This borrower has filed for protection in federal bankruptcy court.
(g) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(h) Payment-in-kind security.
(i) Non-income producing security.
EUR - Eurodollar
D-9
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND - VAN KAMPEN HIGH YIELD FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
March 31, 2004
(Unaudited)
Amounts in Thousands
High Income
Corporate Bond High Yield
Fund Fund Adjustments Pro Forma
-------------- ----------- ----------- -----------
Total Investments (Cost of $627,504, $324,546 and $952,050,
respectively) $ 596,797 $ 317,596 $ 914,393
Other Assets Less Liabilities 11,517 5,680 (482) 16,715
-------------- ----------- ----------- -----------
NET ASSETS $ 608,314 $ 323,276 $ (482) $ 931,108
============== =========== =========== ===========
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share) $ 1,033,932 $ 495,456 $ 1,529,388
Accumulated Undistributed Net Investment Income (7,060) (2,740) (482) (10,282)
Net Unrealized Appreciation/Depreciation (30,045) (6,612) (36,657)
Accumulated Net Realized Loss (388,513) (162,828) (551,341)
-------------- ----------- ----------- -----------
NET ASSETS $ 608,314 $ 323,276 $ (482) $ 931,108
============== =========== =========== ===========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE:
CLASS A
Net Assets $ 389,196 $ 198,107 $ (300) $ 587,003
Shares Outstanding 107,502 36,092 18,584 162,178
-------------- ----------- -----------
Net Asset Value and Redemption Price Per Share 3.62 5.49 3.62
Maximum Sales Charge (4.75%* of offering price) 0.18 0.27 0.18
-------------- ----------- -----------
Maximum Offering Price to Public $ 3.80 $ 5.76 $ 3.80
============== =========== ===========
CLASS B
Net Assets $ 175,770 $ 94,806 $ (141) $ 270,435
Shares Outstanding 48,358 17,184 8,909 74,451
-------------- ----------- -----------
Net Asset Value and Offering Price Per Share $ 3.63 $ 5.52 $ 3.63
============== =========== ===========
CLASS C
Net Assets $ 43,348 $ 30,363 $ (41) $ 73,670
Shares Outstanding 12,053 5,514 2,912 20,479
-------------- ----------- -----------
Net Asset Value and Offering Price Per Share $ 3.60 $ 5.51 $ 3.60
============== =========== ===========
* ON SALES OF $100,000 OR MORE, THE SALES CHARGE WILL BE REDUCED.
(1) A non-recurring cost associated with this transaction of approximately
$482,000 will be incurred. 61% and 39% of this cost will be borne by the
Van Kampen High Yield Fund, and Van Kampen High Income Corporate Bond
Fund, respectively.
(2) The pro forma statements presume the issuance by Van Kampen High Income
Corporate Bond Fund of approximately 54,676 Class A Shares, 26,093 Class B
Shares, and 8,426 Class C Shares in exchange for the assets and
liabilities of the Van Kampen High Yield Fund.
D-10
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND - VAN KAMPEN HIGH YIELD FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Twelve Months Ended March 31, 2004
(Unaudited)
Amounts in Thousands
High Income
Corporate Bond High Yield
Fund Fund Adjustments Pro Forma
-------------- ---------- ----------- ---------
INVESTMENT INCOME:
Interest $ 50,869 $ 26,219 $ $ 77,088
Dividends 2,353 949 3,302
Other 309 164 473
-------------- ---------- ----------- ---------
Total Income 53,531 27,332 80,863
-------------- ---------- ----------- ---------
EXPENSES:
Investment Advisory Fee 3,330 2,429 (809) 4,950
Distribution (12b-1) and Service Fees 3,173 1,710 4,883
All Other Expenses (1) 1,942 949 (207) 2,684
-------------- ---------- ----------- ---------
Total Expense 8,445 5,088 (1,016) 12,517
Investment Advisory Fee Reduction 0 324 (324) 0
Less Credits Earned on Cash Balances 9 3 12
-------------- ---------- ----------- ---------
Net Expenses 8,436 4,761 (692) 12,505
-------------- ---------- ----------- ---------
NET INVESTMENT INCOME $ 45,095 $ 22,571 $ 692 $ 68,358
============== ========== =========== =========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain/Loss (63,925) $ (23,573) $ (87,498)
Net Unrealized Appreciation
During the Period 124,858 54,475 179,333
-------------- ---------- ----------- ---------
NET REALIZED AND UNREALIZED GAIN $ 60,933 $ 30,902 $ 91,835
============== ========== =========== =========
NET INCREASE IN NET ASSETS FROM OPERATIONS $ 106,028 $ 53,473 $ 692 $ 160,193
============== ========== =========== =========
(1) Reflects the reduction in other operating expenses as a result of the
elimination of certain duplicative expenses and the result of operating a
larger, more efficient fund.
D-11
PART C:
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Pursuant to Del. Code Ann. Title 12 Section 3817, a Delaware statutory
trust may provide in its governing instrument for the indemnification of its
officers and trustees from and against any and all claims and demands
whatsoever.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust. Article 8, Section 8.4 of the Agreement and
Declaration of Trust provides that each officer and trustee of the Registrant
shall be indemnified by the Registrant against all liabilities incurred in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which the officer or trustee may be or
may have been involved by reason of being or having been an officer or trustee,
except that such indemnity shall not protect any such person against a liability
to the Registrant or any shareholder thereof to which such person would
otherwise be subject by reason of (i) not acting in good faith in the reasonable
belief that such person's actions were not in the best interests of the Fund,
(ii) having acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
(iii) for a criminal proceeding had reasonable cause to believe the conduct was
unlawful (collectively, "Disabling Conduct"). Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchase insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Pursuant to Section 7 of the Distribution and Service Agreement, the
Registrant agrees to indemnify and hold harmless Van Kampen Funds Inc. (the
"Distributor") and each of its trustees and officers and each person if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim damages or expense (including the reasonable
cost of investing or defending any alleged loss, liability, claim, damages, or
expense and reasonable counsel fees) arising by reason of any person acquiring
C-1
any shares, based upon the ground that the Registration Statement, prospectus,
shareholder reports or other information filed or made public by the Registrant
(as from time to time amended) included an untrue statement of a material fact
or omitted to state a material fact required to be stated or necessary in order
to make the statements not misleading under the 1933 Act, or any other statute
or the common law. The Registrant does not agree to indemnify the Distributor or
hold it harmless to the extent that the statement or omission was made in
reliance upon, and in conformity with, information furnished to the Registrant
by or on behalf of the Distributor. In no case is the indemnity of the
Registrant in favor of the Distributor or any person indemnified to be deemed to
protect the Distributor or any person against any liability to the Fund or its
security holders to which the Distributor or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses,
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided
that Investor Services acted in good faith with due diligence and without
negligence or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information, records and documents which have been prepared on
behalf of, or have been furnished by, the Fund, or the carrying out by
Investor Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal
or state law or regulation or ruling by any federal agency unless such
violation results from any failure by Investor Services to comply with
written instructions from the Fund that such offers or sales were not
permitted under such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement, or
the Fund's lack of good faith, negligence or willful misconduct or breach
of any representation or warranty made by the Fund under the agreement
provided that if the reason for such failure is attributable to any action
of the Fund's investment adviser or distributor or any person providing
accounting or legal services to the Fund, Investor Services only will be
entitled to indemnification if such entity is otherwise entitled to the
indemnification from the Fund.
ITEM 16. EXHIBITS
(1) (a) First Amended and Restated Agreement and Declaration of
Trust(1)
(b) Second Certificate of Amendment(4)
(c) Second Amended and Restated Certificate of Designation(4)
(2) (a) Amended and Restated Bylaws(1)
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization (included as
Appendix A to the Reorganization SAI)+
(5) (a) Specimen Class A Shares Certificate(3)
(b) Specimen Class B Shares Certificate(3)
(c) Specimen Class C Shares Certificate(3)
(6) Investment Advisory Agreement(3)
(7) (a) Distribution and Service Agreement(3)
(b) Form of Dealer Agreement(8)
(c) Form of Broker Fully Disclosed Selling Agreement(2)
(d) Form of Bank Fully Disclosed Selling Agreement(2)
C-2
(8) (a) Form of Trustee Deferred Compensation Plan(5)
(b) Form of the Trustee Retirement Plan(5)
(9) (a)(i) Custodian Contract(3)
(a)(ii) Amendment to Custodian Contract(7)
(b) Transfer Agency and Service Agreement(3)
(c) Data Access Services Agreement(2)
(10) (a) Plan of Distribution pursuant to Rule 12b-1(2)
(b) Form of Shareholder Assistance Agreement(2)
(c) Form of Administrative Services Agreement(2)
(d) Form of Shareholder Servicing Agreement(7)
(e) Amended and Restated Service Plan(7)
(f) Amended and Restated Multi-Class Plan(8)
(11) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP+
(12) Tax Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
relating to the Reorganization++
(13) (a)(i) Fund Accounting Agreement(3)
(a)(ii) Amendment to Fund Accounting Agreement(8)
(14) Consent of Ernst & Young LLP+
(15) Not Applicable
(16) Power of Attorney+
(17) (a) Form of Proxy Card(9)
(b) Prospectus of Van Kampen High Yield Fund+
---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 22, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 38 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 26, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 24, 1997.
(4) Incorporated herein by reference to Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
October 22, 1998.
(5) Incorporated herein by reference to Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 23, 1999.
(6) Incorporated herein by reference to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 22, 2000.
(7) Incorporated herein by reference to Post-Effective Amendment No. 46 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 20, 2002.
(8) Incorporated herein by reference to Post-Effective Amendment No. 47 to
Registrant's Registration Statement on Form N-1A, File No. 2-62115, filed
December 19, 2003.
(9) Incorporated herein by reference to Registrant's Registration Statement on
Form N-14, filed June 30, 2004.
+ Filed herewith.
++ To be filed by further amendment.
C-3
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the Registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-4
SIGNATURES
As required by the Securities Act of 1933, as amended, this Registration
Statement has been signed on behalf of the Registrant in the City of New York
and State of New York, on the 12th day of August, 2004.
VAN KAMPEN HIGH INCOME CORPORATE BOND
FUND
By: /s/ STEFANIE CHANG YU
------------------------------------
Stefanie Chang Yu
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on August 12, 2004.
SIGNATURE TITLE
--------- -----
Principal Executive Officer:
/s/ RONALD E. ROBISON* Executive Vice President and Principal
------------------------------------------------------- Executive Officer
Ronald E. Robison
Principal Financial Officer:
/s/ JAMES M. DYKAS Chief Financial Officer and Treasurer
-------------------------------------------------------
James M. Dykas
Trustees:
/s/ DAVID C. ARCH* Trustee
-------------------------------------------------------
David C. Arch
/s/ J. MILES BRANAGAN* Trustee
-------------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
-------------------------------------------------------
Jerry D. Choate
/s/ ROD DAMMEYER* Trustee
-------------------------------------------------------
Rod Dammeyer
/s/ LINDA HUTTON HEAGY* Trustee
-------------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
-------------------------------------------------------
R. Craig Kennedy
/s/ HOWARD J KERR* Trustee
-------------------------------------------------------
Howard J Kerr
/s/ MITCHELL M. MERIN* Trustee and President
-------------------------------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
-------------------------------------------------------
Jack E. Nelson
C-5
SIGNATURE TITLE
--------- -----
/s/ RICHARD F. POWERS, III* Trustee
-------------------------------------------------------
Richard F. Powers, III
/s/ HUGO F. SONNENSCHEIN* Trustee
-------------------------------------------------------
Hugo F. Sonnenschein
/s/ WAYNE W. WHALEN* Trustee and Chairman
-------------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE W. WOOLSEY* Trustee
-------------------------------------------------------
Suzanne W. Woolsey
---------------
* Signed by Stefanie Chang Yu pursuant to a Power of Attorney, filed herewith.
/s/ STEFANIE CHANG YU
-------------------------------------------------------
Stefanie Chang Yu August 12, 2004
Attorney-in-Fact
C-6
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN HIGH INCOME CORPORATE BOND FUND
EXHIBIT
-------
(11) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP
(14) Consent of Ernst & Young LLP
(16) Power of Attorney
(17)(b) Prospectus of Van Kampen High Yield Fund