-- SEPTEMBER 2004 --
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IMPORTANT NOTICE
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TO VAN KAMPEN HIGH YIELD FUND
SHAREHOLDERS
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QUESTIONS & ANSWERS
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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.
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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
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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
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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................................... 38
Other Matters to Come Before the Meeting.................. 38
VOTING INFORMATION AND MEETING REQUIREMENTS................. 39
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 33,198,164 Class A
Shares, 15,382,512 Class B and 4,166,381 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
----------------------- --------------- -----------------------
Edward Jones & Co. A 29.85%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
Morgan Stanley DW Inc. B 16.15%
2000 Westchester Avenue LD
Purchase, NY 10577
Edward Jones & Co. B 8.44%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
Morgan Stanley DW Inc. C 22.07%
2000 Westchester Avenue LD
Purchase, NY 10577
MLPF&S C 9.18%
4800 Deer Lake Dr E 2nd Fl
Jacksonville, FL 32246-6484
Edward Jones & Co. C 6.03%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
As of the Record Date, there were 103,551,563 Class A Shares, 44,120,693 Class
B Shares and 11,451,060 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,
36
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
----------------------- --------------- -----------------------
Edward Jones & Co. A 17.59%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
Morgan Stanley DW Inc. A 8.16%
2000 Westchester Avenue LD
Purchase, NY 10577
Morgan Stanley DW Inc. B 10.44%
2000 Westchester Avenue LD
Purchase, NY 10577
Edward Jones & Co. B 7.93%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
Citigroup Global Markets Inc. B 6.58%
333 W 34th St
New York, NY 10001-2402
Citigroup Global Markets Inc. C 14.15%
333 W 34th St
New York, NY 10001-2402
Edward Jones & Co. C 9.11%
201 Progress Pkwy
Maryland Heights, MO 63043-3009
Morgan Stanley DW Inc. C 8.41%
2000 Westchester Avenue LD
Purchase, NY 10577
MLPF&S C 6.81%
4800 Deer Lake Dr E 2nd Fl
Jacksonville, FL 32246-6484
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
37
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.
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
38
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.
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
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