AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 30, 2004
SECURITIES ACT FILE NO. 333-
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-14
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
<Table>
[ ] Pre-Effective Amendment No. ____
[ ] Post-Effective Amendment No. ____
</Table>
(Check appropriate box or boxes)
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VAN KAMPEN EQUITY TRUST II
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 PARKVIEW PLAZA, PO BOX 5555, OAKBROOK TERRACE, ILLINOIS 60181-5555
(Address of Principal Executive Offices)
TELEPHONE NUMBER: (630) 684-6000
(Area Code and Telephone Number)
BARRY FINK, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(212) 762-7975
(Name and Address of Agent for Service)
---------------------
COPIES TO:
WAYNE W. WHALEN, ESQ.
CHARLES B. TAYLOR, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
Approximate date of proposed public offering: As soon as practicable after
this registration statement becomes effective. It is proposed that this filing
become effective on August 13, 2004 pursuant to Rule 488.
Title of securities being registered: common shares of beneficial interest,
par value $0.01 per share. The Registrant has registered an indefinite number of
its common shares of beneficial interest based on Section 24(f) of the
Investment Company Act of 1940, as amended, and is in a continuous offering of
such shares under an effective registration statement (File Nos. 33-75493 and
811-9279). No filing fee is due herewith because of reliance on Section 24(f) of
the Investment Company Act of 1940, as amended.
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EXPLANATORY NOTE
This Registration Statement is organized as follows:
-- Questions and Answers to Shareholders of Van Kampen International Magnum
Fund
-- Notice of Special Meeting of Shareholders of Van Kampen International
Magnum Fund
-- Prospectus/Proxy Statement regarding the proposed Reorganization of Van
Kampen International Magnum Fund into Van Kampen International Advantage
Fund
-- Prospectus of Van Kampen International Advantage Fund
-- Statement of Additional Information regarding the proposed
Reorganization of Van Kampen International Magnum Fund into Van Kampen
International Advantage Fund
-- Part C Information
-- Exhibits
-- SEPTEMBER 2004 --
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IMPORTANT NOTICE
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TO VAN KAMPEN INTERNATIONAL MAGNUM 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 International
Magnum Fund (the "Target Fund") into Van Kampen International Advantage Fund
(the "Acquiring Fund"), a fund with the same investment objective and similar
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 DIRECTORS SUGGEST THAT I VOTE?
A After careful consideration, the
Board of Directors of the Target Fund 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) the elimination of the
duplication of services and expenses that currently exists as a result of the
separate operations of the funds and (ii) potentially greater portfolio
diversity and potentially lower portfolio transaction costs.
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.
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 The Target Fund and the
Acquiring Fund are both advised by Van Kampen Asset Management. The advisory fee
rate of the Acquiring Fund is higher than that of the Target Fund. The other
operating expenses of the Acquiring Fund are also currently higher than the
those of the Target Fund, but it is anticipated that these other operating
expenses would decline if the reorganization is completed because of economies
of scale that are achieved based on the larger assets of the surviving combined
fund. Because of the relatively small size of each Fund, the adviser is
currently voluntarily waiving a portion of its fee on each Fund. If the
reorganization is completed, it is anticipated that the adviser voluntarily
would continue to waive a portion of its fee for the surviving combined fund as
necessary so that the net operating expenses (after waiver) are not higher than
the current net operating expenses of the Target Fund. Management periodically
reviews voluntary fee waivers for funds it advises and there can be no assurance
such waivers will continue indefinitely.
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. 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 INTERNATIONAL MAGNUM FUND
SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
<Table>
<Caption>
FOR AGAINST ABSTAIN
1. The proposal to approve the Agreement and Plan of [ ] [ ] [ ]
Reorganization.
</Table>
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN INTERNATIONAL MAGNUM FUND
1 PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181-5555
(800) 231-2808
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON NOVEMBER 17, 2004
A special meeting of shareholders of Van Kampen International Magnum Fund, a
series of Van Kampen Series Fund, Inc., will be held at the offices of Van
Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555, on November 17, 2004 at 3:30 p.m. (the "Special Meeting"), for the
following purposes:
1. To approve an Agreement and Plan of Reorganization pursuant to which Van
Kampen International Magnum Fund would (i) transfer all of its assets and
liabilities to Van Kampen International Advantage Fund in exchange solely
for Class A, B and C Shares of Van Kampen International Advantage 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 DIRECTORS OF VAN KAMPEN INTERNATIONAL MAGNUM 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 DIRECTORS OF VAN KAMPEN INTERNATIONAL MAGNUM 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 Directors,
Stefanie V. Chang Yu
Vice President and Secretary
September 1, 2004
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD NO MATTER HOW MANY SHARES YOU OWN.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT
AN OFFER TO SELL SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JUNE 30, 2004
PROSPECTUS/PROXY STATEMENT
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN INTERNATIONAL MAGNUM FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
1 PARKVIEW PLAZA
OAKBROOK TERRACE, ILLINOIS 60181-5555
(800) 231-2808
This Prospectus/Proxy Statement is furnished to you as a shareholder of Van
Kampen International Magnum Fund (the "Target Fund"), a series of Van Kampen
Series Fund, Inc. 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
3:30 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 Directors
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 International Advantage Fund (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 Directors 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 the same investment objective and similar investment policies and
practices. 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. 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. After the Reorganization, the Acquiring Fund will continue to
operate as a registered open-end investment company with the investment
objective and investment policies and practices described in this
Prospectus/Proxy Statement.
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 October 31, 2003 (and
as currently supplemented), 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, annual
report and semi-annual report can 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 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
2
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 and Information Services, of the SEC, Washington, DC,
20549-0102.
The Board of Directors 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
<Table>
<Caption>
PAGE
----
SUMMARY..................................................... 5
The Proposed Reorganization............................... 5
Background and Reasons for the Proposed Reorganization.... 5
COMPARISON OF THE TARGET FUND AND THE ACQUIRING FUND........ 6
Investment Objectives and Principal Investment
Strategies.............................................. 6
Principal Investment Risks................................ 8
Management of the Funds................................... 9
Advisory and Other Fees................................... 10
Expenses.................................................. 13
Purchase, Valuation, Redemption and Exchange of Shares.... 15
Capitalization............................................ 18
Annual Performance Information............................ 20
Comparative Performance Information....................... 21
Other Service Providers................................... 22
Governing Law............................................. 22
INFORMATION ABOUT THE REORGANIZATION........................ 24
General................................................... 24
Terms of the Agreement.................................... 25
Reasons for the Reorganization............................ 26
Material Federal Income Tax Consequences of the
Reorganization.......................................... 28
Expenses of the Reorganization............................ 29
Continuation of Shareholder Accounts and Plans; Share
Certificates............................................ 30
Legal Matters............................................. 31
Shareholder Approval...................................... 31
OTHER INFORMATION........................................... 31
Shareholder Information................................... 31
Shareholder Proposals..................................... 32
Solicitation of Proxies................................... 32
VOTING INFORMATION AND MEETING REQUIREMENTS................. 33
</Table>
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 Directors of the Target Fund (the "Target Fund Board"), including
the directors 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.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION
The Reorganization seeks to combine two similar funds to achieve certain
economies of scale and other operational efficiencies. The investment objective
of each Fund is to seek to achieve long-term capital appreciation. Each Fund's
investment adviser seeks to achieve this investment objective by investing
primarily in a diversified portfolio of equity securities of foreign issuers.
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) eliminating the
duplication of services and expenses that currently exists as a result of the
separate operations of the Funds and (ii) obtaining potentially greater
portfolio diversity and 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 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,
5
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.
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
currently manages 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 future growth
and performance prospects of the Target Fund; (v) the terms and conditions of
the Reorganization Agreement and whether the proposed Reorganization would
result in dilution of Target Fund shareholder interests; (vi) the advantages of
eliminating duplication of effort in marketing Funds having similar investment
objectives and investment policies and practices in addition to the economies of
scale potentially realized through the combination of the two Funds; (vii) the
compatibility of the Funds' investment objectives, policies, risks and
restrictions; (viii) the compatibility of the Funds' service features available
to shareholders, including the retention of applicable holding periods and
exchange privileges; and (ix) 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. Each Fund's investment objective is to seek to achieve
long-term capital appreciation. The Target Fund's investment objective is a
fundamental policy 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 objective may be changed by its Board
without shareholder approval, but no change is anticipated. If the Acquiring
Fund's investment objective does 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
6
inherent in all investments in securities; accordingly, there can be no
assurance that either Fund will achieve its investment objective.
PRINCIPAL INVESTMENT STRATEGIES. Under normal market conditions, the Target
Fund's portfolio management team seeks to achieve the Fund's investment
objective by investing primarily in a portfolio of what it believes are
attractively valued equity securities of non-U.S. issuers using a combination of
strategic geographic asset allocation and fundamental stock selection. The
Target Fund's portfolio management team makes regional allocation, purchase and
sale decisions considering factors such as relative valuations, earnings
expectations and macroeconomic factors. The Target Fund focuses primarily on
issuers from countries comprising the Morgan Stanley Capital International
("MSCI") Europe, Australasia and Far East ("EAFE") Index. The Fund may, however,
invest up to 5% of its total assets in countries not included in the MSCI EAFE
Index, including emerging market countries. Under normal market conditions, the
Target Fund invests at least 65% of its total assets in securities of issuers
located in at least three foreign countries. Equity securities include common
and preferred stocks, convertible securities, rights and warrants to purchase
common stock and depositary receipts.
Under normal market conditions, the Acquiring Fund's portfolio management team
seeks to achieve the Fund's investment objective by investing primarily in a
diversified portfolio of equity securities of foreign issuers. The Acquiring
Fund's portfolio management team uses a bottom-up investment approach to the
stock selection process that utilizes the fundamental research performed by the
portfolio management team's buy-side analysts from around the world in
conjunction with screening models that are customized to evaluate different
sectors on what the portfolio management team believes to be the most
appropriate growth and value measures. Portfolio securities may be sold when,
among other things, earnings estimates deteriorate, earnings or valuation
measures become unfavorable or the Acquiring Fund's portfolio management team
otherwise believes the security no longer has adequate capital appreciation
potential. Under normal market conditions, the Acquiring Fund invests at least
80% of its total assets in securities of foreign issuers. The Fund focuses
primarily on issuers from countries comprising the Morgan Stanley Capital
International All Country World Index Free ex-USA ("MSCI AC World Index Free
ex-USA"). The Acquiring Fund generally may invest more of its portfolio in
securities of issuers determined by the portfolio management team to be in
developing or emerging market countries than the Target Fund. Equity securities
include common and preferred stocks, convertible securities, rights and warrants
to purchase common stock and depositary receipts.
OTHER INVESTMENT POLICIES, PRACTICES AND RESTRICTIONS. The Target Fund may
invest up to 35% of its total assets in debt securities. The Acquiring Fund may
invest up to 20% of its total assets in debt securities. Each Fund may purchase
and sell certain derivative instruments, such as options, futures contracts,
options on
7
futures contracts, and currency-related transactions involving options, futures
contracts, forward contracts and swaps, for various portfolio management
purposes, including to facilitate portfolio management and to mitigate risks.
PRINCIPAL INVESTMENT RISKS
Because of their similarity, the Funds are subject to similar principal
investment risks, including market risk, foreign securities risks, risks of
using derivative instruments and manager risk. The Target Fund is classified as
a non-diversified fund and is subject to risks associated therewith as described
below.
MARKET RISK. Market risk is the possibility that the market values of
securities owned by a fund will decline. Market risk may affect a single issuer,
industry, sector of the economy or the market as a whole. Investments in common
stocks and other equity securities generally are affected by changes in the
stock markets, which fluctuate substantially over time, sometimes suddenly and
sharply. In general, the market values of equity securities (in which both Funds
primarily invest) are more volatile than those of debt securities. Foreign
markets may, but often do not, move in tandem with U.S. markets, and foreign
markets, especially developing or emerging market countries, may be more
volatile than U.S. markets. Additionally, stock prices of small- and
medium-sized companies (in which both Funds may invest) often fluctuate more and
may fall more than the stock prices of the larger companies during an overall
stock market decline.
FOREIGN SECURITIES RISKS. Because the Funds own securities of foreign issuers,
they may be subject to risks not usually associated with owning securities of
U.S. issuers. These risks can include fluctuations in foreign currencies,
foreign currency exchange controls, political and economic instability,
differences in financial reporting, differences in securities regulation and
trading and foreign taxation issues. The Funds may invest in securities of
issuers determined by their investment adviser to be in developing or emerging
market countries. The risks of investing in developing or emerging market
countries are greater than the risks generally associated with foreign
investments, including investment and trading limitations, greater credit and
liquidity concerns, greater political uncertainties, an economy's dependence on
international trade or development assistance, greater foreign currency exchange
risk and currency transfer restrictions and greater delays and disruptions in
settlement transactions. The Acquiring Fund generally may invest more of its
portfolio in securities of issuers determined by the portfolio management team
to be in developing or emerging market countries than the Target Fund.
RISKS OF USING DERIVATIVE INSTRUMENTS. The Funds may invest in 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
8
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.
NON-DIVERSIFICATION RISKS. The Target Fund is classified as a non-diversified
fund, which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a diversified fund. As a result, the Target Fund
may be subject to greater risk than a diversified fund because changes in the
financial condition or market assessment of a single issuer may cause greater
fluctuations in the value of the Fund's shares. The Acquiring Fund is classified
as a diversified fund and so is not subject to this risk to the same extent as
the Target Fund.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board 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 directors/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 $ 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, Distributor
and Van Kampen Investments are each located at 1221 Avenue of the Americas, New
York, New York 10020.
9
PORTFOLIO MANAGEMENT. The Target Fund's portfolio is managed within the
Adviser's International Magnum Team. The team is made up of established
investment professionals. Francine J. Bovich is a current member of the team.
The composition of the team may change without notice from time to time.
The Acquiring Fund's portfolio is managed by the Global Core Team. The team is
made up of established investment professionals. Current members of the Global
Core Team include Sandra Yeager, Kate Cornish-Bowden, Simon Carter, Michael
Allison, Mark Laskin and Jamie Wood. The composition of the team may change
without notice from time to time.
LEGAL PROCEEDINGS. The Adviser, certain affiliates of the Adviser, certain
investment companies advised by the Adviser or its affiliates, including each of
the Funds, and certain trustees/directors are named as defendants in a number of
recently filed, similar class action complaints. These complaints generally
allege that defendants, including each of the Funds, 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 each of the Funds, allegedly paid excessive commissions to brokers in
return for their alleged efforts to steer investors to these funds. The
complaints seek, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants intend to move to dismiss
these actions and otherwise vigorously to defend them. 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 either Fund's financial statements for the effect, if
any, of these matters.
The Adviser and the Target Fund are named as defendants in a recently filed
class action complaint in Madison County, Illinois. The complaint alleges that
the defendants breached their duties of care to long-term shareholders of the
Target Fund by valuing the Target Fund's 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 the Target Fund's 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
Target Fund shares held by long-term investors. The complaint seeks unspecified
compensatory damages, punitive damages, fees and costs on behalf of all
shareholders who held shares in the Target Fund for more than 14 days. The
defendants have filed a motion to dismiss the complaint, which is pending, and
they intend to continue defending the case vigorously. While the defendants
believe that they have meritorious defenses, the
10
ultimate outcome of this litigation is not presently determinable at this early
stage of litigation, and no provision has been made in the Target Fund's
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's advisory
fee schedule is as follows:
<Table>
<Caption>
% PER
AVERAGE DAILY NET ASSETS ANNUM
- ------------------------ -----
First $500 million.............................. 0.80%
Next $500 million............................... 0.75%
Over $1 billion................................. 0.70%
</Table>
Applying this fee schedule, the Target Fund paid the Adviser an advisory fee
at the effective rate of 0.80% (before voluntary fee waivers, and 0.65% after
voluntary fee waivers) of the Fund's average daily net assets for the twelve
months ended March 31, 2004.
The Acquiring Fund's advisory fee schedule is as follows:
<Table>
<Caption>
% PER
AVERAGE DAILY NET ASSETS ANNUM
- ------------------------ -----
First $500 million............................. 0.90%
Next $500 million.............................. 0.85%
Over $1 billion................................ 0.80%
</Table>
Applying this fee schedule, the Acquiring Fund paid the Adviser an advisory
fee at the effective rate of 0.90% (before voluntary fee waivers, and 0.00%
after voluntary fee waivers) of the Fund's average daily net assets for the
twelve months 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 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 months ended
March 31, 2004 were 2.05% for Class A Shares and 2.80% for Class B Shares and
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
11
operating expenses paid by the Target Fund for the twelve months ended March 31,
2004 were 1.65% for Class A Shares, and 2.40% for Class B Shares and 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 months ended
March 31, 2004 were 3.22% of the average daily net assets for Class A Shares and
3.97% of the average daily net assets for Class B Shares and Class C Shares. The
Adviser is currently waiving or reimbursing a portion of the Acquiring Fund's
management fees or other expenses and the Distributor made certain non-recurring
payments to the Acquiring Fund such that the actual total annual operating
expenses paid by the Acquiring Fund for the twelve months ended March 31, 2004
were 1.75% for Class A Shares and 2.50% for Class B Shares and Class C Shares.
The fee waivers or expense reimbursements can be terminated at any time.
The total operating expenses of the combined fund after the Reorganization are
expected to exceed the total operating expenses of the Target Fund on a gross
basis due to the higher advisory fees of the Acquiring Fund. However, on a net
basis, the total operating expenses of the combined fund are not expected to
exceed the total operating expenses of the Target Fund due to an expected
reduction in other expenses resulting from efficiencies realized in combining
the Funds' separate operations as well as continued fee waivers or expense
reimbursements. Target Fund shareholders should note that these fee waivers or
expense reimbursements can be terminated at any time.
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."
12
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 12-month period ended
March 31, 2004, (ii) the fees and expenses paid by the Target Fund for the
12-month period ended March 31, 2004 and (iii) pro forma fees and expenses for
the Acquiring Fund for the 12-month period ended March 31, 2004 assuming the
Reorganization had been completed as of the beginning of such period.
<Table>
<Caption>
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 Transaction Expenses
(fees paid directly from your
investment)
Maximum sales charge (load)
imposed on purchases (as a
percentage of offering price)... 5.75%(1) 5.75%(1) 5.75%(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) 5.00%(3) 5.00%(3) 5.00%(3)
Redemption fee.................... 2.00%(5) 2.00%(5) 2.00%(5) None None None
Exchange fee...................... 2.00%(5) 2.00%(5) 2.00%(5) None None None
Annual Fund Operating Expenses
(expenses that are deducted from
fund assets)
Management fees(6)................ 0.90% 0.80% 0.90% 0.90% 0.80% 0.90%
Distribution and/or service (12b-1
fees)(6,7)...................... 0.25% 0.25% 0.25% 1.00%(8) 1.00%(8) 1.00%(8)
Other expenses(6)................. 2.07% 1.00% 0.98% 2.07% 1.00% 0.98%
Total annual fund operating
expenses(6).................. 3.22% 2.05% 2.13% 3.97% 2.80% 2.88%
<Caption>
CLASS C SHARES
--------------------------------
Actual Pro Forma
------------------- ---------
ACQUIRING TARGET ACQUIRING
FUND FUND FUND
--------- ------ ---------
Shareholder Transaction Expenses
(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)
Redemption fee.................... None None None
Exchange fee...................... None None None
Annual Fund Operating Expenses
(expenses that are deducted from
fund assets)
Management fees(6)................ 0.90% 0.80% 0.90%
Distribution and/or service (12b-1
fees)(6,7)...................... 1.00%(8) 1.00%(8) 1.00%(8)
Other expenses(6)................. 2.07% 1.00% 0.98%
Total annual fund operating
expenses(6).................. 3.97% 2.80% 2.88%
</Table>
- ---------------
(1) Reduced for purchases of $50,000 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
5.00% 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 as
follows: Year 1 -- 5.00%; Year 2 -- 4.00%; Year 3 -- 3.00%; Year 4 -- 2.50%;
Year 5 -- 1.50%; Year 6 and after -- 0.00%.
(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.
(5) The redemption fee and the exchange fee apply to the proceeds of Class A
Shares of the Fund that are redeemed or exchanged within 60 days of
purchase.
(6) Because of fee waivers or expense reimbursements made by the Adviser, the
actual total annual fund operating expenses paid by the Target Fund for the
twelve months ended March 31, 2004 were 1.65% for Class A Shares and 2.40%
for Class B Shares and Class C Shares. Because of fee waivers or expense
reimbursements made by the Adviser and certain non-recurring payments made
by the Distributor, the actual total annual fund operating expenses paid by
the Acquiring Fund for the twelve months ended March 31, 2004 were 1.75% for
Class A Shares and 2.50% for Class B Shares and Class C Shares. The Adviser
has agreed to waive a portion of its advisory fees and/or to reimburse a
portion of expenses if the Reorganization is completed so that net operating
expenses do not exceed the current net operating expenses of the Target Fund
prior to the Reorganization. The Adviser in its discretion may terminate
voluntary fee waivers and/or reimbursements at any time after the Acquiring
Fund's current fiscal year. The fee waivers or expense reimbursements made
by the Adviser can be terminated at any time.
(7) 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.
(8) 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.
13
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
then redeem all of 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:
<Table>
<Caption>
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.......................... $ 881 $ 771 $ 779 $ 899 $ 783 $ 791
Three years....................... $1,510 $1,181 $1,204 $1,510 $1,168 $1,192
Five years........................ $2,161 $1,615 $1,653 $2,187 $1,629 $1,668
Ten years......................... $3,894 $2,817 $2,895 $4,021* $2,949* $3,027*
Total operating expenses assuming
no redemption at the end of the
period
One year.......................... $ 881 $ 771 $ 779 $ 399 $ 283 $ 291
Three years....................... $1,510 $1,181 $1,204 $1,210 $ 686 $ 892
Five years........................ $2,161 $1,615 $1,653 $2,037 $1,479 $1,518
Ten years......................... $3,894 $2,817 $2,895 $4,021* $2,949* $3,027*
<Caption>
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.......................... $ 499 $ 383 $ 391
Three years....................... $1,210 $ 686 $ 892
Five years........................ $2,037 $1,479 $1,518
Ten years......................... $4,181 $3,128 $3,204
Total operating expenses assuming
no redemption at the end of the
period
One year.......................... $ 399 $ 283 $ 291
Three years....................... $1,210 $ 868 $ 892
Five years........................ $2,037 $1,479 $1,518
Ten years......................... $4,181 $3,128 $3,204
</Table>
- ---------------
* Based on conversion to Class A Shares eight years after the end of the
calendar month in which the shares were purchased.
14
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
15
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.
Trading in securities on many foreign securities exchanges (including European
and Far Eastern securities exchanges) and over-the-counter markets is normally
completed before the close of business on each U.S. business day. In addition,
securities trading in a particular country or countries may not take place on
all U.S. business days or may take place on days which are not U.S. business
days. Changes in valuations on certain securities may occur at times or on days
on which each Fund's net asset value is not calculated and on which neither Fund
effects sales, redemptions and exchanges of its shares.
Each Fund calculates net asset value per share, and therefore effects sales,
redemptions and exchanges of its shares, as of the close of trading on the
Exchange each day the Exchange is open for trading. Such calculation does not
take place contemporaneously with the determination of the prices of certain
foreign portfolio securities used in such calculation.
If events materially affecting the value of foreign portfolio securities or
other portfolio securities occur between the time when their price is determined
and the time when each Fund's net asset value is calculated, such securities may
be valued at their fair value as determined in good faith by the Adviser based
in accordance with procedures established by each Fund's Board.
Class A Shares of each Fund are subject to an initial sales charge of up to
5.75%. 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 5.75%
of the offering price, excluding Class A Shares purchased through the dividend
reinvestment plan. The
16
initial sales charge on Class A Shares is reduced on investments of $50,000 or
more as follows:
<Table>
<Caption>
INITIAL
SALES CHARGE
SIZE OF INVESTMENT ------------
Less than $50,000................................... 5.75%
$50,000 but 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%
</Table>
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 5.00% 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 as follows: Year 2 -- 4.00%; Year
3 -- 3.00%; Year 4 -- 2.50%; Year 5 -- 1.50%; Year 6 and After -- 0.00%. Neither
Fund will generally accept a purchase order for Class B Shares in the amount of
$100,000 or more.
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
17
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 and any redemption fee or exchange fee). No redemption
fee or exchange fee will be imposed on Class A Shares of the Target Fund in
connection with the Reorganization. Shares of each Fund may be redeemed or
exchanged by mail or by special redemption privileges (telephone exchange,
telephone redemption, by check or electronic transfer). If a shareholder of
either Fund attempts to redeem shares within a short time after they have been
purchased by check, the respective Fund may delay payment of the redemption
proceeds until such Fund can verify that payment for the purchase of the shares
has been (or will be) received, usually a period of up to 15 days.
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".
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
18
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)
<Table>
<Caption>
Actual Pro Forma
--------------------- ---------
TARGET ACQUIRING ACQUIRING
FUND FUND FUND
------ --------- ---------
Net assets (in thousands)
Class A Shares..................... $ 42,681 $ 11,746 $ 54,404
Class B Shares..................... 25,443 2,525 27,963
Class C Shares..................... 6,796 1,467 8,260
Total............................ 74,920 15,738 90,627
Net asset value per share
Class A Shares..................... $ 12.23 $ 11.77 $ 11.77
Class B Shares..................... 11.88 11.65 11.65
Class C Shares..................... 11.94 11.74 11.74
Shares outstanding (in thousands)
Class A Shares..................... 3,491 998 4,624
Class B Shares..................... 2,141 217 2,401
Class C Shares..................... 569 125 704
Shares authorized (in thousands)
Class A Shares..................... 375,000 Unlimited Unlimited
Class B Shares..................... 375,000 Unlimited Unlimited
Class C Shares..................... 375,000 Unlimited Unlimited
</Table>
The pro forma net assets and net asset value per share reflect the payment of
approximately $31,000 by the Acquiring Fund for its share of the Reorganization
expenses, allocated among the classes as follows: $23,000 for Class A Shares,
$5,000 for Class B Shares and $3,000 for Class C Shares. The remaining
Reorganization expenses are being paid by the Adviser. The pro forma shares
outstanding reflect the issuance by the Acquiring Fund of approximately
3,626,000 Class A Shares, 2,184,000 Class B Shares and 579,000 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.
19
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]
<Table>
<Caption>
TARGET FUND ACQUIRING FUND
----------- --------------
1997 6.1 0
1998 5.6 0
1999 23.1 0
2000 -10.8 0
2001 -21.2 0
2002 -17.6 -15.8
2003 30.6 35.2
</Table>
The Target Fund's return for the six-month period ended June 30, 2004 for
Class A Shares was %. The Acquiring Fund's return for the six-month period
ended June 30, 2004 for Class A Shares was %. As a result of market
activity, current performance may vary from the figures shown.
During its seven-year period shown in the bar chart, the Target Fund's highest
quarterly return for Class A Shares was 18.40% (for the quarter ended June 30,
2003) and its lowest quarterly return for Class A Shares was -21.24% (for the
quarter ended September 30, 2002). During its two-year period shown in the bar
chart, the Acquiring Fund's highest quarterly return for Class A Shares was
21.10% (for the quarter ended June 30, 2003) and its lowest quarterly return for
Class A Shares was -20.47% (for the quarter ended September 30, 2002).
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.
20
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. 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.
21
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2003
<Table>
<Caption>
TARGET FUND ACQUIRING FUND
--------------------------- ------------------
PAST 1 PAST 5 SINCE PAST 1 SINCE
YEAR YEARS INCEPTION YEAR INCEPTION
------ ------ --------- ------ ---------
CLASS A SHARES
Return Before Taxes............... 23.01% -2.57% 0.07%(1) 27.50% 7.58%(3)
Return After Taxes on
Distributions................... 23.07% -2.61% -0.23%(1) 27.50% 5.83%(3)
Return After Taxes on
Distributions and Sale of Fund
Shares.......................... 15.45% -2.13% -0.07%(1) 17.87% 5.31%(3)
CLASS B SHARES
Return Before Taxes............... 24.65% -2.35% 0.16%(1)*** 29.21% 8.37%(3)
CLASS C SHARES
Return Before Taxes............... 28.62% -2.07% 0.16%(1) 33.21% 9.56%(3)
MSCI AC WORLD INDEX FREE EX-USA*.... 39.42% 0.45% 3.21%(2) 39.42% 12.02%(3)
MSCI EAFE INDEX**................... 38.59% -0.05% 2.86%(2) 38.59% 11.57%(3)
</Table>
- ---------------
Inception dates: (1) 7/1/96, (2) 6/30/96, (3) 9/26/01
* The MSCI AC World Index Free ex-USA is representative of world stock markets
excluding the United States.
** The MSCI EAFE Index is an unmanaged index of common stocks and includes
Europe, Australasia and the Far East (assumes dividends are reinvested net
of withholding taxes).
*** The "Since Inception" performance for Class B Shares of the Target Fund
reflects the conversion of such shares into 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 auditors for the Target
Fund are . The independent auditors for the Acquiring Fund are
.
GOVERNING LAW
The Target Fund is a series of the Van Kampen Series Fund, Inc., a corporation
organized under the laws of the State of Maryland. The Acquiring Fund is a
series of the Van Kampen Equity Trust II, a statutory trust organized under the
laws of the State of Delaware. While Maryland corporate law contains many
provisions specifically applicable to management investment companies and
Delaware statutory trust law is specifically drafted to accommodate some of the
unique corporate governance needs of management investment companies, certain
statutory differences do exist and the Funds' organizational documents contain
certain differences summarized below. Each Fund is subject to federal securities
laws, including the 1940 Act and the rules and regulations promulgated by SEC
thereunder, and applicable state securities laws.
22
Consistent with Maryland law, the Target Fund has authorized a specific number
of shares, although the Target Fund organizational documents authorize the
Target Fund Board to increase or decrease the authorized number of shares, from
time to time, as it considers necessary. Consistent with Delaware law, the
Acquiring 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.
In general, the rights associated with common shares of beneficial interest of
the Acquiring Fund are similar to the rights associated with shares of common
stock of the Target Fund. An area of potential difference is that, although
shareholders of a Delaware statutory trust generally are not personally liable
for obligations of the trust under Delaware law (Delaware law provides that
shareholders of a Delaware statutory trust should be entitled to the same
limitation of liability as shareholders of private, for-profit corporations),
similar statutory or other authority limiting statutory trust shareholder
liability does not apply in many other states, and a shareholder subject to
proceedings in courts in other states, which may not apply Delaware law, may be
subject to liability. To guard against this risk, the Acquiring Fund's
organizational documents (i) contain an express disclaimer of shareholder
liability for acts or obligations of the Fund and require notice of such
disclaimer in each agreement, obligation or instrument entered into by the trust
and (ii) provide for shareholder indemnification out of the series or Fund if
any shareholder is held personally liable for the obligations of the Fund.
Management of the Acquiring Fund believes the risk of liability to a shareholder
beyond his or her investment is remote.
Shareholders of a Maryland corporation currently have no personal liability
for the corporation's acts or obligations, except that a shareholder may be
liable to the extent that (i) the dividends a shareholder receives exceed the
amount which properly could have been paid under Maryland law, (ii) the
consideration paid to a shareholder by the Maryland corporation for stock was
paid in violation of Maryland law or (iii) a shareholder otherwise receives any
distribution, payment or release which exceeds the amount which a shareholder
could properly receive under Maryland law.
Neither Fund is required, and neither Fund anticipates, 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.
The responsibilities, powers and fiduciary duties of directors under Maryland
law are substantially the same as those for trustees under Delaware law. For the
Target
23
Fund and the Acquiring Fund, director/trustee vacancies may be filled by
approval of a majority of the directors/trustees then in office subject to
provisions of the 1940 Act. Directors/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 directors/trustees. Directors of
the Target Fund may be removed with or without cause by vote of a majority of
the shares present or in person at a meeting. Trustees of the Acquiring Fund may
be removed with or without cause by vote of two-thirds of the shares then
outstanding or by vote of two-third's of the number of trustees prior to such
removal.
The foregoing is only a summary of certain differences between the Target Fund
under Maryland law and the Acquiring Fund under Delaware law. It is not intended
to be a complete list of differences and shareholders should refer to the
provisions of each Fund's applicable organizational documents for a more
thorough comparison. Such documents are filed as part of each Fund's
registration statements with the SEC, and shareholders may obtain copies of such
documents as described on page 2 of this Prospectus/Proxy Statement.
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. Upon
receipt by the Target Fund of the Class A, B and C Shares of 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
24
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.
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 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.
25
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.
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 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 currently manages 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
26
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 future growth and performance prospects of the Target
Fund; (v) the terms and conditions of the Reorganization Agreement and whether
the proposed Reorganization would result in dilution of Target Fund shareholder
interests; (vi) the advantages of eliminating duplication of effort in marketing
funds having similar investment objectives and investment policies and practices
in addition to the economies of scale potentially realized through the
combination of the two funds; (vii) the compatibility of the funds' investment
objectives, policies, risks and restrictions; (viii) the compatibility of the
funds' service features available to shareholders, including the retention of
applicable holding periods and exchange privileges; and (ix) 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:
- Elimination of Separate Operations. Consolidating the Target Fund and the
Acquiring Fund should eliminate the duplication of services and expenses
that currently exists as a result of their separate operations.
Consolidating the separate operations of the 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 and provide the opportunity for greater portfolio
diversity.
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
27
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 reorganization, 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.
28
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 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 a 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 carryforwards 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 shared by the Adviser and the
Acquiring Fund in the event the Reorganization is completed. Management believes
that shareholders of the Acquiring Fund will benefit from the Reorganization due
to anticipated decreases in operating expenses of such Fund and the Adviser will
benefit from operational efficiencies of the combined fund. See the "Fee and
Expense Comparison Table" above. Management of the Funds estimates total costs
of the Reorganization to be approximately $360,000. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
the Reorganization. The Target Fund Board has reviewed and approved the
foregoing
29
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
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, Slate, Meagher & Flom LLP, 333 West Wacker
Drive, Chicago, Illinois 60606, which serves as counsel to the Target Fund and
the
30
Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps, is a Director of the
Target Fund and a Trustee of 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.
OTHER INFORMATION
SHAREHOLDER INFORMATION
At the close of business on August 25, 2004, the record date (the "Record
Date") with respect to the Special Meeting, there were Class A Shares,
Class B and Class C Shares of the Target Fund outstanding. As
of the Record Date, the directors and officers of the Target Fund as a group
owned less than 1% of the shares of the Target Fund. As of the Record Date, no
person was known by the Target Fund to own beneficially or of record as much as
5% of the Class A, B or C Shares of the Target Fund except as follows:
<Table>
<Caption>
APPROXIMATE
SHAREHOLDER AND ADDRESS CLASS OF SHARES PERCENTAGE OF OWNERSHIP
- ----------------------- --------------- -----------------------
</Table>
As of the Record Date, there were Class A Shares, Class B
Shares and Class C Shares of the Acquiring Fund outstanding. As of the
Record Date, the trustees and officers of the Acquiring Fund as a group owned
less than 1% of the outstanding shares of the Fund. As of the Record Date, no
person was known by the Acquiring Fund to own beneficially or of record as much
as 5% of the Class A, B or C Shares of the Fund except as follows:
<Table>
<Caption>
APPROXIMATE
SHAREHOLDER AND ADDRESS CLASS OF SHARES PERCENTAGE OF OWNERSHIP
- ----------------------- --------------- -----------------------
</Table>
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
31
meetings of its shareholders unless required by the 1940 Act. In the event the
Reorganization is not completed, the Target Fund does not intend to hold future
regular annual or special meetings of its shareholders unless required by the
1940 Act. Any shareholder who wishes to submit proposals for consideration at a
meeting of shareholders of the Target Fund or the Acquiring Fund should send
such proposal to the respective Fund at 1 Parkview Plaza, PO Box 5555, Oakbrook
Terrace, Illinois 60181-5555. To be considered for presentation at a
shareholders' meeting, rules promulgated by the SEC require that, among other
things, a shareholder's proposal must be received at the offices of the Fund a
reasonable time before a solicitation is made. Timely submission of a proposal
does not necessarily mean that such proposal will be included.
SOLICITATION OF PROXIES
Solicitation of proxies is being made primarily by the mailing of this Notice
and Prospectus/Proxy Statement with its enclosures on or about September 1,
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. Management estimates that any such solicitation
would cost approximately $ . Proxy solicitation expenses are an expense
of the Reorganization which will be borne by the Adviser and Acquiring Fund
shareholders if the Reorganization is approved and completed.
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
32
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. One-third
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.
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 affirmative vote of the
holders of a majority of the outstanding shares voted at the session of the
Special Meeting to be adjourned.
33
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 V. Chang Yu
Vice President and Secretary
September 1, 2004
34
[VAN KAMPEN INVESTMENTS LOGO]
VAN KAMPEN EQUITY TRUST II,
ON BEHALF OF ITS SERIES,
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
SUPPLEMENT DATED JUNE 28, 2004 TO THE
CLASS A SHARES, CLASS B SHARES AND CLASS C SHARES
PROSPECTUS DATED DECEMBER 30, 2003
The Prospectus is hereby supplemented as follows:
The section entitled "INVESTMENT ADVISORY SERVICES--GENERAL--PORTFOLIO
MANAGEMENT" is hereby deleted in its entirety and replaced with the following:
PORTFOLIO MANAGEMENT. The Fund's portfolio is managed by the Global Core
Team. The team is made up of established investment professionals. Current
members of the team include Sandra Yeager, Kate Cornish-Bowden, Simon Carter,
Michael Allison, Mark Laskin and Jamie Wood. The composition of the team may
change without notice from time to time.
RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
IA SPT 6/04
65207 SPT-01
Van Kampen International Advantage Fund
-------------------------------------------------------------------------------
Van Kampen International Advantage Fund's investment objective is to seek
long-term capital appreciation. The Fund's portfolio management team seeks to
achieve the Fund's investment objective by investing primarily in a diversified
portfolio of equity securities of foreign issuers.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
This Prospectus is dated DECEMBER 30, 2003
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
[VAN KAMPEN INVESTMENTS LOGO]
Table of Contents
<Table>
Risk/Return Summary......................................... 3
Fees and Expenses of the Fund............................... 6
Investment Objective, Strategies and Risks.................. 7
Investment Advisory Services................................ 12
Purchase of Shares.......................................... 13
Redemption of Shares........................................ 20
Distributions from the Fund................................. 22
Shareholder Services........................................ 23
Federal Income Taxation..................................... 25
Financial Highlights........................................ 27
</Table>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
Prospectus, in connection with the offer contained in this Prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser, the Fund's
investment subadviser or the Fund's distributor. This Prospectus does not
constitute an offer by the Fund or by the Fund's distributor to sell or a
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful for the Fund to make such an
offer in such jurisdiction.
Risk/Return Summary
-------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term capital appreciation.
PRINCIPAL INVESTMENT STRATEGIES
Under normal market conditions, the Fund's portfolio management team seeks to
achieve the Fund's investment objective by investing primarily in a diversified
portfolio of equity securities of foreign issuers. The Fund's portfolio
management team uses a bottom-up investment approach to the stock selection
process that utilizes the fundamental research performed by the portfolio
management team's buy-side analysts from around the world in conjunction with
screening models that are customized to evaluate different sectors on what the
portfolio management team believes to be the most appropriate growth and value
measures. Portfolio securities may be sold when, among other things, earnings
estimates deteriorate, earnings or valuation measures become unfavorable or the
Fund's portfolio management team otherwise believes the security no longer has
adequate capital appreciation potential. Under normal market conditions, the
Fund invests at least 80% of its total assets in securities of foreign issuers.
The Fund may invest in securities of issuers determined by the portfolio
management team to be in developing or emerging market countries. The Fund
focuses primarily on issuers from countries comprising the Morgan Stanley
Capital International All Country World Index Free ex-USA ("MSCI AC World
Index"). Equity securities include common and preferred stocks, convertible
securities, rights and warrants to purchase common stock and depositary
receipts. The Fund may purchase and sell certain derivative instruments, such as
options, futures contracts, options on futures contracts and currency-related
transactions involving options, futures contracts, forward contracts and swaps,
for various portfolio management purposes, including to earn income, facilitate
portfolio management and mitigate risks.
PRINCIPAL INVESTMENT RISKS
An investment in the Fund is subject to risks, and you could lose money on your
investment in the Fund. There can be no assurance that the Fund will achieve its
investment objective.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. Market risk may affect a single issuer,
industry, sector of the economy or the market as a whole. Investments in common
stocks and other equity securities generally are affected by changes in the
stock markets which fluctuate substantially over time, sometimes suddenly and
sharply. Foreign markets may, but often do not, move in tandem with U.S.
markets, and foreign markets, especially developing or emerging market
countries, may be more volatile than U.S. markets.
The Fund's investments may include securities in both growth and value style
investing. The market prices of growth securities may be more volatile than
other types of investments. The returns on such securities may or may not move
in tandem with the returns on other styles of investing or the overall
securities markets. The value style of investing is subject to the risk that the
valuations never improve or that the returns on value securities are less than
returns on other styles of investing or the overall securities market. Different
types of securities tend to shift in and out of favor depending on market and
economic conditions.
The Fund may invest in companies of any size. Securities prices of small- and
medium-sized companies (in which the Fund may invest) often fluctuate more and
may fall more than the securities prices of the larger-sized, more established
companies during an overall securities market decline.
FOREIGN RISKS. Because the Fund owns securities of foreign issuers, it is
subject to risks not usually associated with owning securities of U.S. issuers.
These risks include fluctuations in foreign currencies, foreign currency
exchange controls, political and economic instability, differences in financial
reporting, differences in securities regulation and trading and foreign taxation
issues. The Fund may invest in securities of issuers determined by the portfolio
management team to be in developing or emerging market countries. The risks of
investing in developing or emerging market countries are greater than the risks
generally associated with foreign investments, including investment and trading
limitations, greater credit and liquidity concerns, greater
3
political uncertainties, an economy's dependence on international trade or
development assistance, greater foreign currency exchange risk and currency
transfer restrictions and greater delays and disruptions in settlement
transactions.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures contracts, options on futures
contracts and currency-related transactions involving options, futures
contracts, forward contracts and swaps are examples of derivative instruments.
Derivative instruments involve risks different from direct investments in
underlying securities. These risks include imperfect correlation between the
value of the instruments and the underlying assets; risks of default by the
other party to certain transactions; risks that the transactions may result in
losses that partially or completely offset gains in portfolio positions; and
risks that the transactions may not be liquid.
MANAGER RISK. As with any managed fund, the Fund's portfolio management team may
not be successful in selecting the best-performing securities or investment
techniques, and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objective and strategies, the Fund may be
appropriate for investors who:
- - Seek capital appreciation over the long-term
- - Do not seek current income from their investment
- - Are willing to take on the increased risks associated with investing in
foreign securities
- - Can withstand volatility in the value of their Fund shares
An investment in the Fund is not a deposit of any bank or other insured
depository institution. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-
term investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year to year. The following chart shows the annual
return of the Fund's Class A Shares over the one calendar year prior to the date
of this Prospectus. Sales loads are not reflected in this chart. If these sales
loads had been included, the return shown below would have been lower. Remember
that past performance of the Fund is not indicative of its future performance.
[BAR GRAPH]
<Table>
<Caption>
ANNUAL RETURN
-------------
2002 -15.77
</Table>
The Fund's return for the nine-month period ended September 30, 2003 for Class A
Shares was 18.21%. As a result of market activity, current performance may vary
from the figures shown.
The annual returns of the Fund's Class B Shares and Class C Shares would be
substantially similar to that shown for the Class A Shares because all of the
Fund's shares are invested in the same portfolio of securities; however, the
actual annual returns of the Class B Shares and Class C Shares would be lower
than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
4
During the one-year period shown in the bar chart, the highest quarterly return
for Class A Shares was 6.41% (for the quarter ended December 31, 2002) and the
lowest quarterly return for Class A Shares was -20.47% (for the quarter ended
September 30, 2002).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Morgan Stanley Capital
International ("MSCI") All Country World Free Index ex-USA*, a broad-based
market index that the Fund's investment adviser believes is an appropriate
benchmark for the Fund. The Fund's performance figures include the maximum sales
charges paid by investors. The index's performance figures do not include any
commissions, sales charges or taxes that would be paid by investors purchasing
the securities represented by the index. An investment cannot be made directly
in the index.
In addition to before tax returns for each class of shares, the table shows
after tax returns for the Fund's Class A Shares in two ways: (i) after taxes on
distributions and (ii) after taxes on distributions and sale of Fund shares. The
after tax returns for the Fund's Class B Shares and Class C Shares will vary
from the Class A Shares' returns. After tax returns are calculated using the
historical highest individual federal marginal income tax rates during the
periods shown and do not reflect the impact of state and local taxes. Actual
after tax returns depend on an investor's tax situation and may differ from
those shown, and after tax returns are not relevant to investors who hold their
Fund shares through tax-deferred arrangements, such as 401(k) plans or
individual retirement accounts. An after tax return may be higher than the
before tax return due to an assumed benefit from any capital loss that would
have been realized had Fund shares been sold at the end of the relevant period.
Average annual total returns (before and after taxes) are shown for the periods
ended December 31, 2002 (the most recently completed calendar year prior to the
date of this Prospectus). Remember that past performance (before and after
taxes) of the Fund is not indicative of its future performance.
<Table>
<Caption>
AVERAGE ANNUAL
TOTAL RETURNS
FOR THE
PERIODS ENDED PAST SINCE
DECEMBER 31, 2002 1 YEAR INCEPTION
- ---------------------------------------------------------------
Van Kampen International Advantage
Fund -- Class A Shares
Return Before Taxes -20.62% -12.77%(1)
Return After Taxes on
Distributions -22.56% -12.84%(1)
Return After Taxes on
Distributions and Sale of Fund
Shares -12.67% -9.38%(1)
MSCI All Country World Free Index
ex-USA -14.95% -3.92%(1)
................................................................
Van Kampen International Advantage
Fund -- Class B Shares
Return Before Taxes -20.37% -11.75%(1)
MSCI All Country World Free Index
ex-USA -14.95% -3.92%(1)
................................................................
Van Kampen International Advantage
Fund -- Class C Shares
Return Before Taxes -17.21% -8.39%(1)
MSCI All Country World Free Index
ex-USA -14.95% -3.92%(1)
................................................................
</Table>
Inception date: (1) 9/26/01.
* MSCI All Country World Free Index ex-USA is representative of world stock
markets excluding the United States.
5
Fees and Expenses
of the Fund
-------------------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<Table>
<Caption>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
- ----------------------------------------------------------------
SHAREHOLDER FEES
(fees paid directly from your investment)
- ----------------------------------------------------------------
Maximum sales charge
(load) imposed on
purchases (as a
percentage of offering
price) 5.75%(1) None None
.................................................................
Maximum deferred sales
charge (load) (as a
percentage of the lesser
of original purchase
price or redemption
proceeds) None(2) 5.00%(3) 1.00%(4)
.................................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
.................................................................
Redemption fee 2.00%(5) None None
.................................................................
Exchange fee 2.00%(5) None None
.................................................................
</Table>
<Table>
<Caption>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
- ----------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets and are based on
expenses incurred during the Fund's fiscal year ended August 31,
2003)
- ----------------------------------------------------------------
Management fees(6) 0.90% 0.90% 0.90%
.................................................................
Distribution and/or
service (12b-1) fees(7) 0.25% 1.00%(8) 1.00%(8)
.................................................................
Other expenses(6) 3.70% 3.70% 3.70%
.................................................................
Total annual fund
operating expenses(6) 4.85% 5.60% 5.60%
.................................................................
</Table>
(1) Reduced for purchases of $50,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 5.00% in the first year after purchase
and declines thereafter as follows:
Year 1-5.00%
Year 2-4.00%
Year 3-3.00%
Year 4-2.50%
Year 5-1.50%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) The redemption fee and the exchange fee apply to the proceeds of Class A
Shares of the Fund that are redeemed or exchanged within 60 days of
purchase. See "Redemption of Shares."
(6) The Fund's investment adviser is currently waiving or reimbursing a portion
of the Fund's management fees or other expenses such that the actual total
annual fund operating expenses paid for the Fund's fiscal year ended August
31, 2003 were 1.75% for Class A Shares, 2.50% for Class B Shares and 2.50%
for Class C Shares. The fee waivers or expense reimbursements can be
terminated at any time.
(7) Class A Shares are subject to a combined annual distribution and service fee
of up to 0.25% of the average daily net assets attributable to such class of
shares. Class B Shares and Class C Shares are each subject to a combined
annual distribution and service fee of up to 1.00% of the average daily net
assets attributable to such class of shares. See "Purchase of Shares."
(8) While Class B Shares and Class C Shares do not have any front-end sales
charges, their higher ongoing annual expenses (due to higher 12b-1 and
service fees) mean that over time you could end up paying more for these
shares than if you were to pay front-end sales charges for Class A Shares.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares eight years after the end of the calendar month in which the
shares were purchased). Although your actual costs may be higher
6
or lower, based on these assumptions your costs would be:
<Table>
<Caption>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------
Class A Shares $1,032 $1,949 $2,869 $5,181
..................................................................
Class B Shares $1,058 $1,965 $2,908 $5,300*
..................................................................
Class C Shares $ 658 $1,665 $2,758 $5,435
..................................................................
</Table>
You would pay the following expenses if you did not redeem your shares:
<Table>
<Caption>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
- -----------------------------------------------------------------
Class A Shares $1,032 $1,949 $2,869 $5,181
..................................................................
Class B Shares $ 558 $1,665 $2,758 $5,300*
..................................................................
Class C Shares $ 558 $1,665 $2,758 $5,435
..................................................................
</Table>
* Based on conversion to Class A Shares eight years after the end of the
calendar month in which the shares were purchased.
Investment Objective,
Strategies and Risks
-------------------------------------------------------------------------------
INVESTMENT OBJECTIVE
The Fund's investment objective is to seek long-term capital appreciation. The
Fund's investment objective may be changed by the Fund's Board of Trustees
without shareholder approval, but no change is anticipated. If the Fund's
investment objective changes, the Fund will notify shareholders and shareholders
should consider whether the Fund remains an appropriate investment in light of
the changes. There are risks inherent in all investments in securities;
accordingly, there can be no assurance that the Fund will achieve its investment
objective.
INVESTMENT STRATEGIES AND RISKS
Under normal market conditions, the Fund's portfolio management team seeks to
achieve the Fund's investment objective by investing primarily in a diversified
portfolio of equity securities of foreign issuers. The Fund's portfolio
management team uses a bottom-up investment approach to the stock selection
process that utilizes the fundamental research performed by the portfolio
management team's buy-side analysts from around the world in conjunction with
screening models that are customized to evaluate different sectors on what the
portfolio management team believes to be the most appropriate growth and value
measures.
Under normal market conditions, the Fund invests at least 80% of its total
assets in securities of foreign issuers. The Fund focuses primarily on issuers
from countries comprising the MSCI AC World Index. As of December 1, 2003, the
MSCI AC World Index was comprised of securities from 49 developed and emerging
market countries. Investments in foreign issuers may offer greater opportunities
for capital appreciation than investments in domestic issuers, but also are
subject to special risks not typically associated with investing in domestic
issuers. As a result, the Fund's portfolio may experience greater price
volatility than a fund investing in securities of domestic issuers.
The Fund employs an investment process in which the portfolio managers identify
potential investments through the use of screening models and fundamental
research, construct a conviction-weighted portfolio with input from global
investment analysts and adjust holdings for sector and risk considerations to
arrive at a final portfolio.
An important goal of the screening models and fundamental research is to
facilitate accurate comparisons between companies domiciled in different
countries and to evaluate companies in various sectors using appropriate
measures. Companies in aggressive and stable growth sectors generally are
evaluated on earnings growth measures, while companies in cyclical value sectors
generally are evaluated on valuation measures and companies in defensive value
and financial sectors are evaluated on a combination of both growth and value
criteria.
Upon completing the initial stock screens, the portfolio management team works
in an integrated manner with the portfolio management team's buy-side investment
analysts from around the world. Potential investments identified through the
screening process or through the analysts' fundamental research are evaluated to
determine which securities are believed by the portfolio management team to
provide the most attractive opportunities.
7
The belief of the Fund's portfolio management team that sector trends rather
than geographic trends drive global equity markets is central to the Fund's
philosophy. Sectors are analyzed based on their sensitivity to macro-economic
factors including the stage of the business cycle and interest rate analysis. An
assessment of the sector's present valuation relative to its historical
valuation and relative to the broad market's valuation is also performed. Based
on the results of this analysis, the Fund's portfolio may be tilted towards
sectors that exhibit favorable characteristics. A dedicated risk analysis team
reviews the Fund's portfolio to seek to achieve an acceptable risk profile.
The Fund's portfolio is regularly re-evaluated to determine candidates for sale.
Growth companies may become candidates for sale when earnings estimates
deteriorate. Stable growth, financial and defensive value companies may become
candidates for sale when a combination of earnings and valuation measures become
unfavorable. Cyclical value companies may become candidates for sale when
valuations increase to levels at which the Fund's portfolio management team no
longer believes that the securities offer adequate capital appreciation
potential. In addition to earnings and valuation measures, companies may become
candidates for sale for reasons that are uncovered through fundamental research
such as, among other things, mergers and acquisitions, capital restructuring and
strategic or management changes.
COMMON STOCKS. The Fund invests primarily in common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro rata
share of the profits of the corporation, if any, without preference over any
other class of securities, including such entity's debt securities, preferred
stock and other senior equity securities. Common stock usually carries with it
the right to vote and frequently an exclusive right to do so.
While the Fund invests primarily in common stocks, the Fund also may invest in
other equity securities including preferred stocks, convertible securities,
warrants or rights to purchase common stock and depositary receipts.
PREFERRED STOCK. Preferred stock generally has a preference as to dividends and
liquidation over an issuer's common stock but ranks junior to debt securities in
an issuer's capital structure. Unlike interest payments on debt securities,
preferred stock dividends are payable only if declared by the issuer's board of
directors. Preferred stock also may be subject to optional or mandatory
redemption provisions.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock, or other security that may be converted into or exchanged for a
prescribed amount of common stock or other security of the same or a different
issuer or into cash within a particular period of time at a specified price or
formula. A convertible security generally entitles the holder to receive
interest paid or accrued on debt securities or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities generally have
characteristics similar to both debt and equity securities. The value of
convertible securities tends to decline as interest rates rise and, because of
the conversion feature, tends to vary with fluctuations in the market value of
the underlying securities. Convertible securities generally rank senior to
common stock in a corporation's capital structure but are usually subordinated
to comparable nonconvertible securities. Convertible securities generally do not
participate directly in any dividend increases or decreases of the underlying
securities although the market prices of convertible securities may be affected
by any dividend changes or other changes in the underlying securities.
Rights and warrants entitle the holder to buy equity securities at a specific
price for a specific period of time. Rights typically have a substantially
shorter term than do warrants. Rights and warrants may be considered more
speculative and less liquid than certain other types of investments in that they
do not entitle a holder to dividends or voting rights with respect to the
underlying securities nor do they represent any rights in the assets of the
issuing company. Rights and warrants may lack a secondary market.
DEBT SECURITIES. Under normal market conditions, the Fund may invest up to 20%
of its total assets in debt securities including certain short- and medium-term
debt securities as well as money-market instruments. Money-market instruments
include obligations of the United States or foreign governments, high-quality
short-term debt securities (including Eurodollar certificates of deposit), prime
commercial paper, certificates
8
of deposit, bankers' acceptances and other obligations of banks and repurchase
agreements. The market prices of debt securities generally fluctuate inversely
with changes in interest rates so that the value of investments in such
securities can be expected to decrease as interest rates rise and increase as
interest rates fall. Debt securities with longer maturities may increase or
decrease in value more than debt securities of shorter maturities. The credit
risks and market prices of lower-grade securities generally are more sensitive
to negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are
higher-grade securities.
INVESTMENT COMPANIES. The Fund may invest in securities of certain issuers
indirectly through investments in other investment companies. Such investments
are commonly used when direct investments in certain countries are not permitted
by foreign investors. Investments in other investment companies may involve
duplication of management fees and certain other expenses.
SMALL, MEDIUM AND LARGE-SIZED COMPANIES. The Fund may invest in companies of any
size. The securities of smaller or medium-sized companies may be subject to more
abrupt or erratic market movements than securities of larger-sized companies or
the market averages in general. In addition, such companies typically are
subject to a greater degree of change in earnings and business prospects than
are larger companies. Thus, to the extent the Fund invests in smaller or
medium-sized companies, the Fund may be subject to greater investment risk than
that assumed through investment in the equity securities of larger-sized
companies.
RISKS OF INVESTING IN SECURITIES
OF FOREIGN ISSUERS
The Fund invests in securities of foreign issuers. Securities of foreign issuers
may be denominated in U.S. dollars or in currencies other than U.S. dollars. The
percentage of assets invested in securities of a particular country or
denominated in a particular currency will vary in accordance with the portfolio
management team's assessment of the relative yield, appreciation potential and
the relationship of a country's currency to the U.S. dollar, which is based upon
such factors as fundamental economic strength, credit quality and interest rate
trends. Investments in foreign securities present certain risks not ordinarily
associated with investments in securities of U.S. issuers. These risks include
fluctuations in foreign currency exchange rates, political, economic or legal
developments (including war or other instability, expropriation of assets,
nationalization and confiscatory taxation), the imposition of foreign exchange
limitations (including currency blockage), withholding taxes on income or
capital transactions or other restrictions, higher transaction costs (including
higher brokerage, custodial and settlement costs and currency conversion costs)
and possible difficulty in enforcing contractual obligations or taking judicial
action. Securities of foreign issuers may not be as liquid and may be more
volatile than comparable securities of domestic issuers.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact returns and result in temporary periods when assets of the Fund are
not fully invested or attractive investment opportunities are foregone.
The Fund may invest in securities of issuers determined by the portfolio
management team to be in developing or emerging market countries. Investments in
securities of issuers in developing or emerging market countries are subject to
greater risks than investments in securities of developed countries since
emerging market countries tend to have economic structures that are less diverse
and mature and political systems that are less stable than developed countries.
9
The Fund may invest in securities of foreign issuers in the form of depositary
receipts. Depositary receipts involve substantially identical risks to those
associated with direct investment in securities of foreign issuers. In addition,
the underlying issuers of certain depositary receipts, particularly unsponsored
or unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities.
Since the Fund invests in securities denominated or quoted in currencies other
than the U.S. dollar, the Fund will be affected by changes in foreign currency
exchange rates (and exchange control regulations) which affect the value of
investments in the Fund and the accrued income and appreciation or depreciation
of the investments. Changes in foreign currency exchange rates relative to the
U.S. dollar will affect the U.S. dollar value of the Fund's assets denominated
in that currency and the Fund's return on such assets as well as any temporary
uninvested reserves in bank deposits in foreign currencies. In addition, the
Fund will incur costs in connection with conversions between various currencies.
The Fund may purchase and sell foreign currency on a spot (i.e., cash) basis in
connection with the settlement of transactions in securities traded in such
foreign currency. The Fund also may enter into contracts with banks, brokers or
dealers to purchase or sell securities or foreign currencies at a future date
("forward contracts"). A foreign currency forward contract is a negotiated
agreement between the contracting parties to exchange a specified amount of
currency at a specified future time at a specified rate. The rate can be higher
or lower than the spot rate between the currencies that are the subject of the
contract.
The Fund may attempt to protect against adverse changes in the value of the U.S.
dollar in relation to a foreign currency by entering into a forward contract for
the purchase or sale of the amount of foreign currency invested or to be
invested, or by buying or selling a foreign currency option or futures contract
for such amount. Such strategies may be employed before the Fund purchases a
foreign security traded in the currency which the Fund anticipates acquiring or
between the date the foreign security is purchased or sold and the date on which
payment therefor is made or received. Seeking to protect against a change in the
value of a foreign currency in the foregoing manner does not eliminate
fluctuations in the prices of portfolio securities or prevent losses if the
prices of such securities decline. Furthermore, such transactions reduce or
preclude the opportunity for gain if the value of the currency should move in
the direction opposite to the position taken. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had not
entered into such contracts.
Investors should consider carefully the risks of foreign investments before
investing in the Fund.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategic
transactions described below to earn income, to facilitate portfolio management
and to seek to mitigate risks. Although the Fund's portfolio management team
seeks to use these transactions to achieve the Fund's investment objective, no
assurance can be given that the use of these transactions will achieve this
result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
equity, fixed-income and other interest rate indices, and other financial
instruments, futures contracts and options on futures contracts (including but
not limited to securities index futures contracts, foreign currency exchange
futures contracts, interest rate futures contracts and other financial futures
contracts), structured notes, swaps, caps, floors or collars and enter into
various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currencies or currency futures
contracts. In addition, the Fund may invest in other derivative instruments that
are developed over time if their use would be consistent with the objective of
the Fund. Collectively, all of the above are referred to as "Strategic
Transactions."
The Fund generally seeks to use Strategic Transactions as a portfolio management
or hedging technique to seek to protect against possible adverse changes in the
market value of securities held in or to be purchased for the Fund's portfolio,
protect the Fund's unrealized gains, facilitate the sale of securities for
investment
10
purposes, protect against changes in currency exchange rates or adjust the
exposure to a particular currency, manage the effective maturity of the Fund's
portfolio, or establish positions in the derivatives markets as a temporary
substitute for purchasing or selling particular securities. The Fund may use
Strategic Transactions when the Fund seeks to adjust its exposure to a market in
response to changes in investment strategy, when doing so provides more
liquidity than the direct purchase of the securities underlying such
derivatives, when the Fund is restricted from directly owning the underlying
securities due to foreign investment restrictions or other reasons, or when
doing so provides a price advantage over purchasing the underlying securities
directly, either because of a pricing differential between the derivatives and
securities markets or because of lower transaction costs associated with the
derivatives transaction.
Strategic Transactions have risks including the imperfect correlation between
the value of such instruments and the underlying assets, the possible default of
the other party to the transaction or illiquidity of the derivative instruments.
Furthermore, the ability to successfully use Strategic Transactions depends on
the ability of the Fund's portfolio management team to predict pertinent market
movements, which cannot be assured. Thus, the use of Strategic Transactions may
result in losses greater than if they had not been used, may require the Fund to
sell or purchase portfolio securities at inopportune times or for prices other
than current market values, may limit the amount of appreciation the Fund can
otherwise realize on an investment, or may cause the Fund to hold a security
that it might otherwise sell. The use of currency transactions can result in the
Fund incurring losses because of the imposition of exchange controls, suspension
of settlements or the inability of the Fund to deliver or receive a specified
currency. In addition, amounts paid as premiums and cash or other assets held in
margin accounts with respect to Strategic Transactions are not otherwise
available to the Fund for investment purposes.
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States and (v) lower
trading volume and liquidity.
A more complete discussion of Strategic Transactions and their risks is
contained in the Fund's Statement of Additional Information. The Fund's
Statement of Additional Information can be obtained by investors free of charge
as described on the back cover of this Prospectus.
OTHER INVESTMENTS AND RISK FACTORS
For cash management purposes, the Fund may engage in repurchase agreements with
broker-dealers, banks and other financial institutions to earn a return on
temporarily available cash. Such transactions are subject to the risk of default
by the other party.
The Fund may invest up to 15% of its net assets in illiquid securities and
certain restricted securities. Such securities may be difficult or impossible to
sell at the time and the price that the Fund would like. Thus, the Fund may have
to sell such securities at a lower price, sell other securities instead to
obtain cash or forego other investment opportunities.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held to take advantage of new investment opportunities, or when the Fund's
portfolio management team believes the potential for capital appreciation has
lessened, or for other reasons. The Fund's portfolio turnover rate may vary from
year to year. A high portfolio turnover rate (100% or more) increases a fund's
transaction costs (including brokerage commissions or dealer costs) which would
adversely impact a fund's performance. Higher portfolio turnover may result in
the realization of more
11
short-term capital gains than if a fund had lower portfolio turnover. The
turnover rate will not be a limiting factor, however, if the Fund's portfolio
management team considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more defensive
investment strategy, the Fund may, on a temporary basis, hold cash or invest a
portion or all of its assets in money-market instruments including obligations
of the U.S. government, its agencies or instrumentalities, obligations of
foreign sovereignties, other high-quality debt securities, including prime
commercial paper, repurchase agreements and bank obligations, such as bankers'
acceptances and certificates of deposit (including Eurodollar certificates of
deposit). Under normal market conditions, the potential for capital appreciation
on these securities will tend to be lower than the potential for capital
appreciation on other securities that may be owned by the Fund. In taking such a
defensive position, the Fund would temporarily not be pursuing and may not
achieve its investment objective.
Investment
Advisory Services
-------------------------------------------------------------------------------
INVESTMENT ADVISER
Van Kampen Asset Management is the Fund's investment adviser (the "Adviser" or
"Asset Management"). The Adviser is a wholly owned subsidiary of Van Kampen
Investments Inc. ("Van Kampen Investments"). Van Kampen Investments is a
diversified asset management company that administers more than three million
retail investor accounts, has extensive capabilities for managing institutional
portfolios and has more than $76 billion under management or supervision as of
September 30, 2003. Van Kampen Investments has more than 50 open-end funds, more
than 30 closed-end funds and more than 2,700 unit investment trusts that are
distributed by authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley,
a preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The Adviser's principal
office is located at 1221 Avenue of the Americas, New York, NY 10020.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<Table>
<Caption>
AVERAGE DAILY NET ASSETS % PER ANNUM
- --------------------------------------------------
First $500 million 0.90%
...................................................
Next $500 million 0.85%
...................................................
Over $1 billion 0.80%
...................................................
</Table>
Applying this fee schedule, the effective advisory fee rate was 0.90% (before
waivers and 0.00% after waivers) of the Fund's average daily net assets for the
Fund's fiscal year ended August 31, 2003. The Fund's average daily net assets
are determined by taking the average of all of the determinations of the net
assets during a given calendar month. Such fee is payable for each calendar
month as soon as practicable after the end of that month.
The Adviser furnishes offices, necessary facilities and equipment, and provides
administrative services to the Fund. The Fund pays all charges and expenses of
its day-to-day operations, including service fees, distribution fees, custodian
fees, legal and independent accountant fees, the costs of reports and proxies to
shareholders, compensation of trustees of the Fund (other than those who are
affiliated persons of the Adviser, Distributor or Van Kampen Investments) and
all other ordinary business expenses not specifically assumed by the Adviser.
12
INVESTMENT SUBADVISER
Morgan Stanley Investment Management Limited is the Fund's investment subadviser
(the "Subadviser"). The Subadviser, together with its investment management
affiliates, managed assets of approximately $394 billion as of September 30,
2003. The Subadviser, a wholly owned subsidiary of Morgan Stanley, provides a
broad range of portfolio management services to its clients. Its main office is
located at 25 Cabot Square, Canary Wharf, London, United Kingdom E14 4QA.
SUBADVISORY AGREEMENT. The Adviser has entered into a subadvisory agreement with
the Subadviser to assist the Adviser in performing its investment advisory
functions. The Adviser pays the Subadviser on a monthly basis a portion of the
net advisory fees the Adviser receives from the Fund.
GENERAL
From time to time, the Adviser, the Subadviser or the Distributor may
voluntarily undertake to reduce the Fund's expenses by reducing the fees payable
to them or by reducing other expenses of the Fund in accordance with such
limitations as the Adviser, Subadviser or Distributor may establish.
PORTFOLIO MANAGEMENT. The Fund's portfolio is managed by the Global Core Team.
The team is made up of established investment professionals. Current members of
the Global Core Team include Kate Cornish-Bowden, Simon Carter, Michael Allison,
Mark Laskin and Jamie Wood. The composition of the team may change without
notice from time to time.
Purchase of Shares
-------------------------------------------------------------------------------
GENERAL
This Prospectus offers three classes of shares of the Fund designated as Class A
Shares, Class B Shares and Class C Shares. Other classes of shares of the Fund
may be offered through one or more separate prospectuses of the Fund. By
offering multiple classes of shares, the Fund permits each investor to choose
the class of shares that is most beneficial given the type of investor, the
amount to be invested and the length of time the investor expects to hold the
shares. As described more fully below, each class of shares offers a distinct
structure of sales charges, distribution and service fees and other features
that are designed to address a variety of needs.
Each class of shares of the Fund represents an interest in the same portfolio of
investments of the Fund and has the same rights except that (i) Class A Shares
generally bear the sales charge expenses at the time of purchase while Class B
Shares and Class C Shares generally bear the sales charge expenses at the time
of redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described below)
under which the class's distribution fee and/or the service fee is paid, (iii)
each class of shares has different exchange privileges, (iv) certain classes of
shares are subject to a conversion feature and (v) certain classes of shares
have different shareholder service options available.
PRICING FUND SHARES
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. The differences among the classes' per share net
asset values reflect the daily expense accruals of the higher distribution fees
and transfer agency costs applicable to the Class B Shares and Class C Shares
and the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of the close of trading on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) each day the Exchange is open
for trading except on any day on which no purchase or redemption orders are
received or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund's Board of Trustees reserves the right to calculate the net
asset value per share and adjust the offering price more frequently than once
daily if deemed desirable. Net asset value per share for each class is
determined by dividing the value of the Fund's
13
portfolio securities, cash and other assets (including accrued interest)
attributable to such class, less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding.
Such computation is made by using prices as of the close of trading on the
Exchange and (i) valuing securities listed or traded on a domestic securities
exchange at the last reported sale price or, if there has been no sale that day,
at the mean between the last reported bid and asked prices and valuing
securities listed or traded on a foreign securities exchange at the last
reported sale price or the latest bid price, (ii) valuing over-the-counter
securities at the NASDAQ Official Closing Price or, if there has been no sale
that day, at the mean between the last reported bid and asked prices, (iii)
valuing unlisted securities at the mean between the last reported bid and asked
prices obtained from reputable brokers and (iv) valuing any securities for which
market quotations are not readily available and any other assets at their fair
value as determined in good faith by the Adviser in accordance with procedures
established by the Fund's Board of Trustees. In cases where a security is traded
on more than one exchange, the security is valued on the exchange designated as
the primary market. Securities with remaining maturities of 60 days or less are
valued at amortized cost, which approximates market value. See the financial
statements and notes thereto in the Fund's Statement of Additional Information.
Trading in securities on many foreign securities exchanges (including European
and Far Eastern securities exchanges) and over-the-counter markets is normally
completed before the close of business on each U.S. business day. In addition,
securities trading in a particular country or countries may not take place on
all U.S. business days or may take place on days which are not U.S. business
days. Changes in valuations on certain securities may occur at times or on days
on which the Fund's net asset value is not calculated and on which the Fund does
not effect sales, redemptions and exchanges of its shares.
The Fund calculates net asset value per share, and therefore effects sales,
redemptions and exchanges of its shares, as of the close of trading on the
Exchange each day the Exchange is open for trading. Such calculation does not
take place contemporaneously with the determination of the prices of certain
foreign portfolio securities used in such calculation.
If events materially affecting the value of foreign portfolio securities or
other portfolio securities occur between the time when their price is determined
and the time when the Fund's net asset value is calculated, such securities may
be valued at their fair value as determined in good faith by the Adviser based
in accordance with procedures established by the Fund's Board of Trustees.
DISTRIBUTION PLAN AND SERVICE PLAN
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each of its Class A Shares, Class B Shares and Class C Shares pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940
Act"). The Fund also has adopted a service plan (the "Service Plan") with
respect to each such class of its shares. Under the Distribution Plan and the
Service Plan, the Fund pays distribution fees in connection with the sale and
distribution of its shares and service fees in connection with the provision of
ongoing services to shareholders of each such class and the maintenance of
shareholder accounts.
The amount of distribution fees and service fees varies among the classes
offered by the Fund. Because these fees are paid out of the Fund's assets on an
ongoing basis, these fees will increase the cost of your investment in the Fund.
By purchasing a class of shares subject to higher distribution fees and service
fees, you may pay more over time than on a class of shares with other types of
sales charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
NASD. The net income attributable to a class of shares will be reduced by the
amount of the distribution fees and service fees and other expenses of the Fund
associated with that class of shares. To assist investors in comparing classes
of shares, the tables under the Prospectus heading "Fees and Expenses of the
Fund" provide a summary of sales charges and expenses and an example of the
sales charges and expenses of the Fund applicable to each class of shares
offered herein.
HOW TO BUY SHARES
The shares are offered on a continuous basis through the Distributor as
principal underwriter, which is
14
located at 1221 Avenue of the Americas, New York, NY 10020. Shares may be
purchased through members of the NASD who are acting as securities dealers
("dealers") and NASD members or eligible non-NASD members who are acting as
brokers or agents for investors ("brokers"). Dealers and brokers are sometimes
referred to herein as authorized dealers.
Shares may be purchased on any business day by completing the account
application form and forwarding the account application form, directly or
through an authorized dealer, to the Fund's shareholder service agent, Van
Kampen Investor Services Inc. ("Investor Services"), a wholly owned subsidiary
of Van Kampen Investments. When purchasing shares of the Fund, investors must
specify whether the purchase is for Class A Shares, Class B Shares or Class C
Shares by selecting the correct Fund number on the account application form.
Sales personnel of authorized dealers distributing the Fund's shares are
entitled to receive compensation for selling such shares and may receive
differing compensation for selling Class A Shares, Class B Shares or Class C
Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received timely by Investor Services. Purchases completed through an authorized
dealer, a custodian, trustee or record keeper of a retirement plan account may
involve additional fees charged by the authorized dealer, custodian, trustee or
record keeper. Orders received by Investor Services prior to the close of the
Exchange, and orders received by authorized dealers prior to the close of the
Exchange that are properly transmitted to Investor Services by the time
designated by Investor Services, are priced based on the date of receipt. Orders
received by Investor Services after the close of the Exchange, and orders
received by authorized dealers after the close of the Exchange or orders
received by authorized dealers that are not transmitted to Investor Services
until after the time designated by Investor Services, are priced based on the
date of the next determined net asset value per share provided they are received
timely by Investor Services on such date. It is the responsibility of authorized
dealers to transmit orders received by them to Investor Services so they will be
received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund by visiting our web
site at www.vankampen.com, by writing to the Fund, c/o Van Kampen Investor
Services Inc., PO Box 947, Jersey City, NJ 07303-0947 or by telephone at (800)
847-2424.
There is no minimum investment amount when establishing an account with the
Fund. However, the Fund may redeem any shareholder account (other than
retirement accounts and accounts established through a broker for which the
transfer agent does not have discretion to initiate transactions) that has been
open for one year or more and has a balance of less than $1,000. Shareholders
will receive written notice at least 60 days in advance of any involuntary
redemption and will be given the opportunity to purchase at net asset value
without sales charge the number of additional shares needed to bring the account
value to $1,000. There will be no involuntary redemption if the value of the
account is less than $1,000 due to market depreciation.
To help the government fight the funding of terrorism and money laundering
activities, federal law requires all financial institutions to obtain, verify,
and record information that identifies each person who opens an account. What
this means to you: when you open an account, you will be asked to provide your
name, address, date of birth, and other information that will allow us to
identify you. The Fund and the Distributor reserve the right to not open your
account if this information is not provided. If the Fund or the Distributor is
unable to verify your identity, the Fund and the Distributor reserve the right
to restrict additional transactions and/or liquidate your account at the next
calculated net asset value after the account is closed (minus any applicable
sales or other charges) or take any other action required by law.
15
CLASS A SHARES
Class A Shares of the Fund are sold at the offering price, which is net asset
value plus an initial maximum sales charge of up to 5.75% (or 6.10% of the net
amount invested), reduced on investments of $50,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<Table>
<Caption>
AS % OF AS % OF
SIZE OF OFFERING NET AMOUNT
INVESTMENT PRICE INVESTED
- ----------------------------------------------------------------
Less than $50,000 5.75% 6.10%
.................................................................
$50,000 but less than
$100,000 4.75% 4.99%
.................................................................
$100,000 but less than
$250,000 3.75% 3.90%
.................................................................
$250,000 but less than
$500,000 2.75% 2.83%
.................................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
.................................................................
$1,000,000 or more * *
.................................................................
</Table>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and the Service Plan, the Fund may spend up to a
total of 0.25% per year of the Fund's average daily net assets with respect to
Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within five years of purchase as
shown in the following table:
CLASS B SHARES
SALES CHARGE SCHEDULE
<Table>
<Caption>
DEFERRED
SALES CHARGE
AS A PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
- ----------------------------------------------------
First 5.00%
.....................................................
Second 4.00%
.....................................................
Third 3.00%
.....................................................
Fourth 2.50%
.....................................................
Fifth 1.50%
.....................................................
Sixth and After None
.....................................................
</Table>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. The
Fund will generally not accept a purchase order for Class B Shares in the amount
of $100,000 or more.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of each purchase of Class B Shares until the
time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to Class B Shares of the Fund. In
addition, under the Service Plan, the Fund may spend up to
16
0.25% per year of the Fund's average daily net assets with respect to Class B
Shares of the Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. The
Fund will not accept a purchase order for Class C Shares in the amount of $1
million or more.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to Class C Shares of the Fund. In
addition, under the Service Plan, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets with respect to Class C Shares of the Fund.
CONVERSION FEATURE
Class B Shares, including Class B Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares eight years after the end of the
calendar month in which the shares were purchased. Such conversion will be on
the basis of the relative net asset values per share, without the imposition of
any sales load, fee or other charge. The conversion schedule applicable to a
share of the Fund acquired through the exchange privilege from another Van
Kampen fund participating in the exchange program is determined by reference to
the Van Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT
DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid by the
Distributor to authorized dealers at the time of purchase of such shares or (v)
if made by the Fund's involuntary liquidation of a shareholder's account as
described herein. Subject to certain limitations, a shareholder who has redeemed
Class C Shares of the Fund may reinvest in Class C Shares at net asset value
with credit for any contingent deferred sales charge if the reinvestment is made
within 180 days after the redemption, provided that shares of the Fund are
available for sale at the time of reinvestment. For a more complete description
of contingent deferred sales charge waivers, please refer to the Statement of
Additional Information or contact your authorized dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
17
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management and distributed by the Distributor as
determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds in Class A Shares over a
13-month period based on the total amount of intended purchases plus the value
of all shares of the Participating Funds previously purchased and still owned.
An investor may elect to compute the 13-month period starting up to 90 days
before the date of execution of a Letter of Intent. Each investment made during
the period receives the reduced sales charge applicable to the total amount of
the investment goal. The Letter of Intent does not preclude the Fund (or any
other Participating Fund) from discontinuing the sale of its shares. The initial
purchase must be for an amount equal to at least 5% of the minimum total
purchase amount of the level selected. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares. The Fund initially
will escrow shares totaling 5% of the dollar amount of the Letter of Intent to
be held by Investor Services in the name of the shareholder. In the event the
Letter of Intent goal is not achieved within the specified period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the reduced sales charges previously paid. Such payments may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value without a sales charge if the administrator of an
investor's unit investment trust program meets certain uniform criteria relating
to cost savings by the Fund and the Distributor. The offering price for all
other investments made from unit investment trust distributions will be net
asset value plus an initial maximum sales charge of up to 1.00% (1.01% of the
net amount invested). Of this amount, the Distributor will pay to the authorized
dealer, if any, through which such participation in the qualifying program was
initiated 0.50% of the offering price as a dealer concession or agency
commission. Persons desiring more information with respect to this program,
including the terms and conditions that apply to the program, should contact
their authorized dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to
18
which the administrator will (1) submit a single bulk order and make payment
with a single remittance for all investments in the Fund during each
distribution period by all investors who choose to invest in the Fund through
the program and (2) provide Investor Services with appropriate backup data for
each investor participating in the program in a computerized format fully
compatible with Investor Services' processing system.
To obtain these special benefits, all dividends and other distributions from the
Fund must be reinvested in additional shares and there cannot be any systematic
withdrawal program. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value without a sales charge, generally upon written assurance that
the purchase is made for investment purposes and that the shares will not be
resold except through redemption by the Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
and any of its subsidiaries and such persons' families and their beneficial
accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley and
any of its subsidiaries; employees of an investment subadviser to any fund
described in (1) above or an affiliate of such subadviser; and such
persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21
years of age when purchasing for any accounts they beneficially own, or, in
the case of any such financial institution, when purchasing for retirement
plans for such institution's employees; provided that such purchases are
otherwise permitted by such institutions.
(4) Registered investment advisers or financial planners who charge a fee for
their services, trust companies and bank trust departments investing on
their own behalf or on behalf of their clients. The Distributor may pay
authorized dealers through which purchases are made an amount up to 0.50%
of the amount invested, over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor
and which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Statement of Additional
Information for further details with respect to such alliance programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement
plan or held in a tax-advantaged retirement account who purchase shares of
the Fund with proceeds from distributions from such a plan or retirement
account other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit
plans, or custodial accounts held by a bank created pursuant to Section
403(b) of the Internal Revenue Code of 1986, as amended (the "Code"), and
sponsored by nonprofit organizations defined under Section 501(c)(3) of the
Code and assets held by an employer or trustee in connection with an
eligible deferred compensation plan under Section 457 of the Code or in a
"rabbi trust" that meets certain uniform criteria established by the
Distributor from time to time. Such plans will qualify for purchases at net
asset value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (a) the
total plan assets are at least $1 million or (b) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been
19
established with a Participating Fund based on net asset value purchase
privileges previously in effect will be qualified to purchase shares of the
Participating Funds at net asset value. Retirement plans distributed by the
Distributor will not be eligible for net asset value purchases based on the
aggregate investment made by the plan or the number of eligible employees,
except under certain uniform criteria established by the Distributor from
time to time. A commission will be paid to authorized dealers who initiate
and are responsible for such purchases within a rolling twelve-month period
as follows: 1.00% on sales to $2 million, plus 0.80% on the next $1
million, plus 0.50% on the next $47 million, plus 0.25% on the excess over
$50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the
Fund and Participating Funds, (iv) has a membership that the authorized
dealer can certify as to the group's members and (v) satisfies other
uniform criteria established by the Distributor for the purpose of
realizing economies of scale in distributing such shares. A qualified group
does not include one whose sole organizational nexus, for example, is that
its participants are credit card holders of the same institution, policy
holders of an insurance company, customers of a bank or broker-dealer,
clients of an investment adviser or other similar groups. Shares purchased
in each group's participants account in connection with this privilege will
be subject to a contingent deferred sales charge of 1.00% in the event of
redemption within one year of purchase, and a commission will be paid to
authorized dealers who initiate and are responsible for such sales to each
individual as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million.
(10) Certain qualified state tuition plans qualifying pursuant to Section 529 of
the Code ("Section 529 Plans") that are approved by the Fund's Distributor.
There is no minimum investment amount for purchases made under this option
(10).
(11) Unit investment trusts sponsored by the Distributor or its affiliates.
The term "families" includes a person's spouse, children and grandchildren under
21 years of age, parents, and the parents of the person's spouse.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, financial planner, trust company or bank trust department,
provided that Investor Services receives federal funds for the purchase by the
close of business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (10) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
Redemption of Shares
-------------------------------------------------------------------------------
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than any applicable sales charge and any redemption
fee or exchange fee) at any time.
As described under the Prospectus heading "Purchase of Shares," redemptions of
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge. In addition, certain redemptions of Class A Shares for shareholder
accounts of $1 million or more may be subject to a contingent deferred sales
charge. Redemptions completed through an authorized dealer, custodian, trustee
or record keeper of a retirement plan account may involve additional fees
charged by the authorized dealer, custodian, trustee or record keeper.
20
The Fund will assess a 2% redemption fee on the proceeds of Class A Shares of
the Fund that are redeemed (either by sale or exchange) within 60 days of
purchase. The redemption fee is paid directly to the Fund. For purposes of
determining whether the redemption fee applies, the Class A Shares that were
held the longest will be redeemed first. For Class A Shares of the Fund acquired
by exchange, the holding period prior to the exchange is not considered in
determining whether the redemption fee is applied. The redemption fee is not
imposed on the following transaction and/or account types: redemptions due to
the death or disability of the shareholder, redemptions to fulfill a required
mandatory distribution under Internal Revenue Service ("IRS") guidelines,
redemptions made through systematic withdrawal plans, exchanges made through
systematic exchange plans, redemptions and exchanges for shares held in certain
omnibus accounts, or redemptions and exchanges by participants in (i) employer
sponsored defined contribution programs and (ii) certain approved asset
allocation programs. No redemption fee is imposed on Class A Shares received
from reinvestment of dividends or capital gain dividends.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the redemption request and any other necessary
documents in proper form as described below. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. Such
payment may, under certain circumstances, be paid wholly or in part by a
distribution-in-kind of portfolio securities. A distribution-in-kind may result
in recognition by the shareholder of a gain or loss for federal income tax
purposes when such securities are distributed and the shareholder may have
brokerage costs and a gain or loss for federal income tax purposes upon the
shareholder's disposition of such securities. If the shares to be redeemed have
been recently purchased by check, Investor Services may delay the payment of
redemption proceeds until it confirms that the purchase check has cleared, which
may take up to 15 calendar days from the date of purchase. A taxable gain or
loss may be recognized by the shareholder upon redemption of shares.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 947, Jersey City, NJ 07303-0947. The request for redemption should
indicate the number of shares or dollar amount to be redeemed, the Fund name and
class designation of such shares and the shareholder's account number. The
redemption request must be signed by all persons in whose names the shares are
registered. Signatures must conform exactly to the account registration. If the
proceeds of the redemption exceed $100,000, or if the proceeds are not to be
paid to the record owner at the record address, or if the record address has
changed within the previous 15 calendar days, signature(s) must be guaranteed by
one of the following: a bank or trust company; a broker-dealer; a credit union;
a national securities exchange, a registered securities association or a
clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. Certificated
shares may be redeemed only by written request. The certificates for the shares
being redeemed must be properly endorsed for transfer. Generally, in the event a
redemption is requested by and registered to a corporation, partnership, trust,
fiduciary, estate or other legal entity owning shares of the Fund, a copy of the
corporate resolution or other legal documentation appointing the authorized
signer and certified within the prior 120 calendar days must accompany the
redemption request. Retirement plan distribution requests should be sent to the
plan custodian/trustee to be forwarded to Investor Services. Contact the plan
custodian/trustee for further information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer following procedures specified by such
authorized dealer. The redemption price for such shares is the net asset value
per share next calculated after an order in proper form is received by an
authorized dealer
21
provided such order is transmitted to the Distributor by the time designated by
the Distributor. It is the responsibility of authorized dealers to transmit
redemption requests received by them to the Distributor so they will be received
prior to such time. Redemptions completed through an authorized dealer may
involve additional fees charged by the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the account application
form. For accounts that are not established with telephone redemption
privileges, a shareholder may call the Fund at (800) 847-2424 to request that a
copy of the Telephone Redemption Authorization form be sent to the shareholder
for completion or visit our web site at www.vankampen.com to download this form.
Shares may be redeemed by calling (800) 847-2424, our automated telephone
system, which is generally accessible 24 hours a day, seven days a week. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. Telephone redemptions may not be available if the
shareholder cannot reach Investor Services by telephone, whether because all
telephone lines are busy or for any other reason; in such case, a shareholder
would have to use the Fund's other redemption procedures previously described.
Requests received by Investor Services prior to 4:00 p.m., New York time, will
be processed at the next determined net asset value per share. These privileges
are available for most accounts other than retirement accounts or accounts with
shares represented by certificates. If an account has multiple owners, Investor
Services may rely on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account for this account. This privilege is not available if the address of
record has been changed within 15 calendar days prior to a telephone redemption
request. Proceeds from redemptions payable by wire transfer are expected to be
wired on the next business day following the date of redemption. The Fund
reserves the right at any time to terminate, limit or otherwise modify this
redemption privilege.
Distributions from
the Fund
-------------------------------------------------------------------------------
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Dividends from stocks and interest earned from other investments are
the Fund's main sources of net investment income. The Fund's present policy,
which may be changed at any time by the Fund's Board of Trustees, is to
distribute at least annually all, or substantially all, of this net investment
income as dividends to shareholders. Dividends are automatically applied to
purchase additional shares of the Fund at the next determined net asset value
unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes
22
any net capital gains to shareholders as capital gain dividends at least
annually. As in the case of dividends, capital gain dividends are automatically
reinvested in additional shares of the Fund at the next determined net asset
value unless the shareholder instructs otherwise.
Shareholder Services
-------------------------------------------------------------------------------
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Statement of Additional Information or contact your
authorized dealer.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instructions regarding internet transactions. Van
Kampen Investments and its subsidiaries, including Investor Services, and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated through the internet are genuine. Such procedures
include requiring use of a personal identification number prior to acting upon
internet instructions and providing written confirmation of instructions
communicated through the internet. If reasonable procedures are employed, none
of Van Kampen Investments, Investor Services or the Fund will be liable for
following instructions received through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without a sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by visiting our web site at www.vankampen.com, by
writing to Investor Services or by telephone by calling (800) 847-2424 ((800)
421-2833 for the hearing impaired). The investor may, on the account application
form or prior to any declaration, instruct that dividends and/or capital gain
dividends be paid in cash, be reinvested in the Fund at the next determined net
asset value, or be reinvested in another Participating Fund at the next
determined net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next determined net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from an authorized dealer or the Distributor or by visiting our web
site at www.vankampen.com.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 60 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than that amount of time may only be
exchanged upon receipt of prior approval of the Adviser. It is the policy of the
Adviser, under normal circumstances, not to approve such requests. Class A
Shares of the Fund will be assessed an exchange fee of 2% on the proceeds of the
exchanged Class A Shares held for less than 60 days. See "Redemption of Shares"
for more information about when the exchange fee will apply.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date
23
of the initial purchase of such shares from a Participating Fund. When such
shares are redeemed and not exchanged for shares of another Participating Fund,
the shares are subject to the contingent deferred sales charge schedule imposed
by the Participating Fund from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by calling (800) 847-2424, our automated telephone system,
which is generally accessible 24 hours a day, seven days a week, or by visiting
our web site at www.vankampen.com. A shareholder automatically has these
exchange privileges unless the shareholder indicates otherwise by checking the
applicable box on the account application form. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape-
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
none of Van Kampen Investments, Investor Services or the Fund will be liable for
following telephone instructions which it reasonably believes to be genuine. If
the exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the same registration,
dividend and capital gain dividend options (except dividend diversification) and
authorized dealer of record as the account from which shares are exchanged,
unless otherwise specified by the shareholder. In order to establish a
systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must submit a
specific request.
The Fund reserves the right to reject any order to purchase its shares through
exchange or otherwise. Certain patterns of past exchanges and/or purchase or
sale transactions involving the Fund or other Participating Funds may result in
the Fund limiting or prohibiting, in the Fund's discretion, additional purchases
and/or exchanges. Determinations in this regard may be made based on the
frequency or dollar amount of the previous exchanges or purchases or sale
transactions. Generally, all shareholders are limited to a maximum of six
exchanges out of the Fund during a rolling 365-day period. Exchange privileges
will be suspended on the Fund if more than six exchanges out of the Fund are
made by a shareholder during a rolling 365-day period. If exchange privileges
are suspended, subsequent exchange requests during the stated period will not be
processed. Exchange privileges will be restored when the account history shows
fewer than six exchanges in the rolling 365-day period. This six exchange policy
does not apply to systematic exchange plans or employer-sponsored retirement
plans. The Fund may modify, restrict or terminate the exchange privilege at any
time. Shareholders will receive 60 days' notice of any termination or material
amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged shares and on any shares
previously exchanged for such shares or for any of their predecessors shall be
included. If the exchanged shares were acquired through reinvestment, those
shares are deemed to have been sold with a sales charge rate equal to the rate
previously paid on the shares on which the dividend or distribution was paid. If
a shareholder exchanges less than all of such shareholder's shares, the shares
upon which the highest sales charge rate was previously paid are deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time that shares of the
funds involved in the request are priced will be processed on the next business
day in the manner described herein.
24
Federal Income Taxation
-------------------------------------------------------------------------------
Distributions of the Fund's investment company taxable income (generally
ordinary income and net short-term capital gain) are taxable to shareholders as
ordinary income to the extent of the Fund's earnings and profits, whether paid
in cash or reinvested in additional shares. Distributions of the Fund's net
capital gain (which is the excess of net long-term capital gain over net
short-term capital loss) designated as capital gain dividends, if any, are
taxable to shareholders as long-term capital gain, whether paid in cash or
reinvested in additional shares, and regardless of how long the shares of the
Fund have been held by such shareholders. The Fund expects that its
distributions will consist primarily of ordinary income and capital gain
dividends. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a shareholder's shares and, after such adjusted
tax basis is reduced to zero, will constitute capital gain to such shareholder
(assuming such shares are held as a capital asset).
Although distributions generally are treated as taxable in the year they are
paid, distributions declared in October, November or December, payable to
shareholders of record on a specified date in such month and paid during January
of the following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "2003 Tax Act")
contains provisions that reduce the U.S. federal income tax rates on (1) long-
term capital gains received by individuals and (2) "qualified dividend income"
received by individuals from certain domestic and foreign corporations. The
reduced rate for capital gains generally applies to long-term capital gains from
sales or exchanges recognized on or after May 6, 2003, and ceases to apply for
taxable years beginning after December 31, 2008. The reduced rate for dividends
generally applies to "qualified dividend income" received in taxable years
beginning after December 31, 2002, and ceases to apply for taxable years
beginning after December 31, 2008. Because the Fund intends to invest primarily
in common stocks and other equity securities of foreign corporations, a portion
of the ordinary income dividends paid by the Fund may be eligible for the
reduced rate applicable to "qualified dividend income." Distributions from the
Fund designated as capital gain dividends may be eligible for the reduced rate
applicable to long-term capital gains.
The sale or exchange of shares may be a taxable transaction for federal income
tax purposes. Shareholders who sell their shares will generally recognize a gain
or loss in an amount equal to the difference between their adjusted tax basis in
the shares sold and the amount received. If the shares are held by the
shareholder as a capital asset, the gain or loss will be a capital gain or loss.
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to net
capital gains recognized by individuals and other non-corporate taxpayers on the
sale or exchange of shares is (i) the same as the maximum ordinary income tax
rate for capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008).
Backup withholding rules require the Fund, in certain circumstances, to withhold
28% of dividends and certain other payments, including redemption proceeds, paid
to shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and make certain required certifications (including certifications as to foreign
status, if applicable), or who are otherwise subject to backup withholding.
Foreign shareholders, including shareholders who are non-resident aliens, may be
subject to U.S. withholding tax on certain distributions (whether received in
cash or in shares) at a rate of 30% or such lower rate as prescribed by an
applicable treaty. Prospective foreign investors should consult their advisers
concerning the tax consequences to them of an investment in shares of the Fund.
The Fund has elected and qualified, and intends to continue to qualify, as a
regulated investment company under federal income tax law. If the Fund so
qualifies and distributes each year to its shareholders at least
25
90% of its investment company taxable income, the Fund will not be required to
pay federal income taxes on any income it distributes to shareholders. If the
Fund distributes less than an amount equal to the sum of 98% of its ordinary
income and 98% of its capital gain net income, then the Fund will be subject to
a 4% excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Shareholders and prospective investors should consult their own advisers
regarding the specific federal tax consequences of purchasing, holding and
disposing of shares of the Fund, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
26
Financial Highlights
-------------------------------------------------------------------------------
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods indicated. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all distributions and not including
payment of the maximum sales charge or taxes on Fund distributions or
redemptions). The information for the fiscal year ended August 31, 2003 and the
fiscal period ended August 31, 2002 has been audited by Ernst & Young LLP,
independent auditors, whose report, along with the Fund's most recent financial
statements, is included in the Statement of Additional Information and may be
obtained without charge by calling the telephone number on the back cover of
this Prospectus. The financial highlights table should be read in conjunction
with the financial statements and notes thereto included in the Statement of
Additional Information.
<Table>
<Caption>
CLASS A SHARES CLASS B SHARES CLASS C SHARES
SEPTEMBER 26, 2001 SEPTEMBER 26, 2001
(COMMENCEMENT OF (COMMENCEMENT OF
INVESTMENT INVESTMENT
YEAR ENDED OPERATIONS) TO YEAR ENDED OPERATIONS) TO YEAR ENDED
AUGUST 31, 2003 AUGUST 31, 2002 AUGUST 31, 2003 AUGUST 31, 2002 AUGUST 31, 2003
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, Beginning
of the Period............ $9.43 $10.00 $9.38 $10.00 $9.38
------ ------ ------ ------ ------
Net Investment
Income/Loss (g)........ .09 .03 -0-(d) (.04) -0-(d)
Net Realized and
Unrealized Gain/Loss... .88 (.28) .89 (.27) .89
------ ------ ------ ------ ------
Total from Investment
Operations............... .97 (.25) .89 (.31) .89
------ ------ ------ ------ ------
Less:
Distributions from Net
Investment Income...... .57 .31 .50 .30 .50
Distributions from Net
Realized Gain.......... -0- .01 -0- .01 -0-
------ ------ ------ ------ ------
Total Distributions........ .57 .32 .50 .31 .50
------ ------ ------ ------ ------
Net Asset Value, End of the
Period................... $9.83 $9.43 $9.77 $9.38 $9.77
====== ====== ====== ====== ======
Total Return* ............. 11.20%(a) -2.60%**(a) 10.40%(b) -3.37%**(b) 10.40%(c)
Net Assets at End of the
Period (In millions)..... $5.6 $1.6 $1.2 $.9 $.8
Ratio of Expenses to
Average Net Assets*
(f)...................... 1.75% 1.78% 2.50% 2.53% 2.50%(e)
Ratio of Net Investment
Income to Average Net
Assets*.................. .98% .33% (.02%) (.45%) .00%(e)
Portfolio Turnover......... 43% 62%** 43% 62%** 43%
* If certain expenses had not been voluntarily assumed by the Adviser, total return would have been lower and the ratios
would have been as follows:
Ratio of Expenses to
Average Net Assets (f)... 4.85% 15.81% 5.60% 16.56% 5.60%(e)
Ratio of Net Investment
Loss to Average Net
Assets................... (2.11%) (13.70%) (3.12%) (14.48%) (3.09%)(e)
<Caption>
CLASS C SHARES
SEPTEMBER 26, 2001
(COMMENCEMENT OF
INVESTMENT
OPERATIONS) TO
AUGUST 31, 2002
- --------------------------- ----------------------
Net Asset Value, Beginning
of the Period............ $10.00
------
Net Investment
Income/Loss (g)........ (.04)
Net Realized and
Unrealized Gain/Loss... (.27)
------
Total from Investment
Operations............... (.31)
------
Less:
Distributions from Net
Investment Income...... .30
Distributions from Net
Realized Gain.......... .01
------
Total Distributions........ .31
------
Net Asset Value, End of the
Period................... $9.38
======
Total Return* ............. -3.37%**(c)
Net Assets at End of the
Period (In millions)..... $.6
Ratio of Expenses to
Average Net Assets*
(f)...................... 2.53%
Ratio of Net Investment
Income to Average Net
Assets*.................. (.44%)
Portfolio Turnover......... 62%**
* If certain expenses had n
would have been as follow
Ratio of Expenses to
Average Net Assets (f)... 16.56%
Ratio of Net Investment
Loss to Average Net
Assets................... (14.47%)
</Table>
** Non-Annualized.
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 5.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a CDSC of 1% may
be imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower. These returns
include combined Rule 12b-1 fees and service fees of up to .25% and do not
reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 5%, charged on certain redemptions
made within one year of purchase and declining to 0% after the fifth year.
If the sales charges were included, total returns would be lower. These
returns include combined Rule 12b-1 fees and service fees of up to 1% and do
not reflect the deduction of taxes that a shareholder would pay on Fund
distributions or the redemption of Fund shares.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum CDSC of 1%, charged on certain redemptions
made within one year of purchase. If the sales charge was included, total
returns would be lower. These returns include combined Rule 12b-1 fees and
service fees of up to 1% and do not reflect the deduction of taxes that a
shareholder would pay on Fund distributions or the redemption of Fund
shares.
(d) Amount is less than $.01.
(e) The Total Return, Ratio of Expenses to Average Net Assets and Ratio of Net
Investment Income to Average Net Assets reflect the refund of certain 12b-1
fees during the period.
(f) The Ratio of Expenses to Average Net Assets does not reflect credits earned
on cash balances. If these credits were reflected as a reduction of
expenses, the ratios would decrease by .03% for the period ended August 31,
2002.
(g) Based on average shares outstanding.
27
For More Information
-------------------------------------------------------------------------------
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
- Call your broker
- WEB SITE
www.vankampen.com
- FUNDINFO(R)
Automated Telephone System 800-847-2424
DEALERS
- WEB SITE
www.vankampen.com
- FUNDINFO(R)
Automated Telephone System 800-847-2424
- Van Kampen Investments 800-421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF (TDD)
- For shareholder and dealer inquiries through TDD,
call 800-421-2833
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN ASSET MANAGEMENT
1221 Avenue of the Americas
New York, NY 10020
Distributor
VAN KAMPEN FUNDS INC.
1221 Avenue of the Americas
New York, NY 10020
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 947
Jersey City, NJ 07303-0947
Attn: Van Kampen International Advantage Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, P.O. Box 1713
Boston, MA 02110-1713
Attn: Van Kampen International Advantage Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
A Statement of Additional Information, which contains more details about the
Fund, is incorporated by reference in its entirety into this Prospectus.
You will find additional information about the Fund
in its annual and semiannual reports to shareholders.
The annual report explains the market conditions and
investment strategies affecting the Fund's performance during
its last fiscal year.
You can ask questions or obtain a free copy of the Fund's reports or its
Statement of Additional Information by calling (800) 847-2424.
Telecommunications Device for the Deaf users may call (800) 421-2833. A free
copy of the Fund's reports can also be ordered from our web site at
www.vankampen.com.
Information about the Fund, including its reports and Statement of Additional
Information, has been filed with the Securities and Exchange Commission (SEC).
It can be reviewed and copied at the SEC's Public Reference Room in Washington,
DC or on the EDGAR database on the SEC's internet site (http://www.sec.gov).
Information on the operation of the SEC's Public Reference Room may be obtained
by calling the SEC at 1-202-942-8090. You can also request copies of these
materials, upon payment of a duplicating fee, by electronic request at the SEC's
e-mail address (publicinfo@sec.gov) or by writing the Public Reference section
of the SEC, Washington, DC 20549-0102.
DECEMBER 30, 2003
CLASS A SHARES
CLASS B SHARES
CLASS C SHARES
PROSPECTUS
Van Kampen
International
Advantage Fund
[VAN KAMPEN INVESTMENTS LOGO]
IA PRO 12/03
65207PRO-00
The Fund's Investment Company
Act File No. is 811-9279.
The information in this statement of additional information is not complete
and may be changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective.
This statement of additional information is not an offer to sell securities
and is not soliciting an offer to buy these securities in any state where
the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED JUNE 30, 2004
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN INTERNATIONAL MAGNUM FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
DATED SEPTEMBER 1, 2004
---------------------
This Statement of Additional Information is available to the shareholders
of Van Kampen International Magnum Fund (the "Target Fund") in connection with a
proposed transaction whereby all of the assets and liabilities of the Target
Fund would be transferred to Van Kampen International Advantage Fund (the
"Acquiring Fund") in exchange for Class A, B and C Shares of the Acquiring Fund.
Unless otherwise defined herein, capitalized terms have the meanings given to
them in the Prospectus/Proxy Statement.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus/Proxy Statement dated September 1, 2004
relating to the reorganization of the Target Fund. A copy of the
Prospectus/Proxy Statement may be obtained, without charge, by writing to the
Van Kampen Client Relations Department at 1 Parkview Plaza, P.O. Box 5555,
Oakbrook Terrace, Illinois 60181-5555 or by calling 1-800-231-2808 (TDD users
may call 1-800-421-2833).
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
Proposed Reorganization..................................... B-1
Additional Information about the Target Fund................ B-1
Additional Information about the Acquiring Fund............. B-1
Financial Statements........................................ B-2
Pro Forma Financial Statements.............................. B-2
</Table>
The Acquiring Fund will provide, without charge, upon request of any person
to whom this Statement of Additional Information is delivered, a copy of any and
all documents that have been incorporated by reference in the registration
statement of which this Statement of Additional Information is a part.
PROPOSED REORGANIZATION
The shareholders of the Target Fund are being asked to approve an
acquisition by the Acquiring Fund of all the assets and liabilities of the
Target Fund solely in exchange for Class A, B and C Shares of the Acquiring Fund
(the "Reorganization") pursuant to an Agreement and Plan of Reorganization by
and between the Target Fund and the Acquiring Fund (the "Reorganization
Agreement"). A copy of a form of the Reorganization Agreement is attached hereto
as Appendix A.
ADDITIONAL INFORMATION ABOUT THE TARGET FUND
Included herein in its entirety is the Statement of Additional Information
for the Target Fund dated October 31, 2003, as supplemented, which has been
filed with the Securities and Exchange Commission (the "SEC") and is attached
hereto as Appendix B.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
Included herein in its entirety is the Statement of Additional Information
of the Acquiring Fund, dated December 30, 2003, as supplemented, which has been
filed with the SEC and is attached as hereto Appendix C.
B-1
FINANCIAL STATEMENTS
Incorporated herein by reference in their respective entireties are (i) the
audited annual financial statements of the Target Fund, dated June 30, 2003,
included as part of the Van Kampen Series Fund, Inc. Form N-CSR as filed with
the SEC on August 29, 2003, (ii) the unaudited semi-annual financial statements
of the Target Fund, dated December 31, 2003, included as part of the Van Kampen
Series Fund, Inc. Form N-CSRS as filed with the SEC on February 27, 2004, (iii)
the audited annual financial statements of the Acquiring Fund, dated August 31,
2003, included as part of the Van Kampen Equity Trust II Form N-CSR as filed
with the SEC on October 29, 2003, and (iv) the unaudited semi-annual financial
statements of the Acquiring Fund, dated February 29, 2004, included as part of
the Van Kampen Equity Trust II Form N-CSRS as filed with the SEC on April 28,
2004. Annual and semi-annual reports referenced as part of a Fund's filing on
Form N-CSR or Form N-CSRS may be obtained by following the instructions on the
cover of this Statement of Additional Information and may be reviewed and copied
at the SEC's Public Reference Room in Washington, DC or on the EDGAR database on
the SEC's internet site(http://www.sec.gov). Information on the operation of the
SEC's Public Reference Room may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of these materials, upon payment of
a duplicating fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the SEC,
Washington, DC 20549-0102.
PRO FORMA FINANCIAL STATEMENTS
Attached hereto as Appendix D are unaudited pro forma financial statements
of the Acquiring Fund giving effect to the Reorganization as of March 31, 2004.
B-2
APPENDIX A
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
A-1
FORM OF AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization (the "Agreement") is made as of
, 2004, by Van Kampen Equity Trust II (the "Equity Trust"), a
registered open-end investment company, SEC File No. 811-9279, on behalf of its
series, Van Kampen International Advantage Fund (the "Acquiring Fund"), and Van
Kampen Series Fund, Inc. (the "Series Fund"), a registered open-end investment
company, SEC File No. 811-7140, on behalf of its series, Van Kampen
International Magnum Fund (the "Target Fund").
W I T N E S S E T H:
WHEREAS, the Board of Directors of the Series Fund, on behalf of the Target
Fund (the "Target Fund Board"), and the Board of Trustees of the Equity Trust,
on behalf of the Acquiring Fund (the "Acquiring Fund Board" and, together with
the Target Fund Board, the "Boards"), have determined that this Agreement,
whereby the Target Fund would transfer all of its assets and liabilities to the
Acquiring Fund in exchange for shares of the Acquiring Fund, is in the best
interests of the shareholders of their respective funds; and
WHEREAS, the parties intend that this transaction qualify as a
reorganization within the meaning of Section 368(a) of the Internal Revenue Code
of 1986, as amended (the "Code");
NOW, THEREFORE, in consideration of the mutual promises contained herein,
and intending to be legally bound hereby, the parties hereto agree as follows:
1. PLAN OF TRANSACTION.
A. TRANSFER OF ASSETS. Upon satisfaction of the conditions precedent set
forth in Sections 7 and 8 hereof, the Target Fund will convey, transfer and
deliver to the Acquiring Fund at the closing provided for in Section 2 hereof,
all of the existing assets of the Target Fund (including accrued interest to the
Closing Date (as defined below)), free and clear of all liens, encumbrances and
claims whatsoever (the assets so transferred collectively being referred to as
the "Assets").
B. CONSIDERATION. In consideration thereof, the Acquiring Fund agrees that
the Acquiring Fund at the closing will (i) deliver to the Target Fund full and
fractional Class A, Class B and Class C common shares of beneficial interest,
par value $0.01 per share, of the Acquiring Fund with an aggregate net asset
value equal to the aggregate dollar value of the Assets net of any liabilities
of the Target Fund described in Section 3.E. hereof (the "Liabilities")
determined pursuant to Section 3.A. of this Agreement (collectively, the
"Acquiring Fund Shares") and (ii) assume all of the Liabilities of the Target
Fund. The calculation of Acquiring Fund Shares to be exchanged shall be carried
out to no less than two (2) decimal places. All Acquiring Fund Shares delivered
to the Target Fund in exchange for such Assets shall be delivered at net asset
value without sales load, commission or other transactional fees being imposed.
2. CLOSING OF THE TRANSACTION.
CLOSING DATE. The closing shall occur within fifteen (15) business days
after the later of the receipt of all necessary regulatory approvals and the
final adjournment of the meeting of shareholders of the Target Fund at which
this Agreement will be considered and approved, or such later date as soon as
practicable thereafter as the parties may mutually agree (the "Closing Date").
On the Closing Date, the Acquiring Fund shall deliver to the Target Fund the
Acquiring Fund Shares in the amount determined pursuant to Section 1.B. hereof,
and the Target Fund thereafter shall, in order to effect the distribution of
such shares to Target Fund shareholders, instruct the Acquiring Fund to register
the pro rata interest in the Acquiring Fund Shares (in full and fractional
shares) of each of the holders of record of shares of the Target Fund in
accordance with their holdings of Class A, Class B or Class C shares of the
Target Fund and shall provide as part of such instruction a complete and updated
list of such holders (including addresses and taxpayer identification numbers),
and the Acquiring Fund agrees promptly to comply with said instruction. The
Acquiring Fund shall have no obligation to inquire as to the validity, propriety
or correctness of such instruction, but shall assume that such instruction is
valid, proper and correct.
3. PROCEDURE FOR REORGANIZATION.
A. VALUATION. The value of the Assets and Liabilities of the Target Fund to
be transferred and assumed, respectively, by the Acquiring Fund shall be
computed as of the Closing Date, in the manner set forth in the most recent
Prospectus and Statement of Additional Information of the Acquiring Fund
(collectively, the "Acquiring Fund Prospectus"), copies of which have been
delivered to the Target Fund.
B. DELIVERY OF FUND ASSETS. The Assets shall be delivered to State Street
Bank and Trust Company or other custodian as designated by the Acquiring Fund
(collectively the "Custodian") for the benefit of the Acquiring Fund, duly
endorsed in proper form for transfer in such condition as to constitute a good
delivery thereof, free and clear of all liens, encumbrances and claims
whatsoever, in accordance with the custom of brokers, and shall be accompanied
by all necessary state stock transfer stamps, if any, the cost of which shall be
borne by the Target Fund.
C. FAILURE TO DELIVER SECURITIES. If the Target Fund is unable to make
delivery pursuant to Section 3.B. hereof to the Custodian of any of the
securities of the Target Fund, then, in lieu of such delivery, the Target Fund
shall deliver to the Custodian, with respect to said securities, executed copies
of an agreement of assignment and due bills, together with such other documents
as may be required by the Acquiring Fund or Custodian.
D. SHAREHOLDER ACCOUNTS. The Acquiring Fund, in order to assist the Target
Fund in the distribution of the Acquiring Fund Shares to Target Fund
shareholders after delivery of the Acquiring Fund Shares to the Target Fund,
will establish, pursuant to the request of the Target Fund, an open account with
the Acquiring Fund for each shareholder of the Target Fund and, upon request by
the Target Fund, shall transfer to such accounts the exact number of Acquiring
Fund Shares then held by the Target Fund specified in the instruction provided
pursuant to Section 2 hereof. The Acquiring Fund is not required to issue
certificates representing Acquiring Fund Shares unless requested to do so by a
shareholder. Upon liquidation or dissolution of the Target Fund, certificates
representing shares of the Target Fund shall become null and void.
E. LIABILITIES. The Liabilities shall include all of the Target Fund's
liabilities, debts, obligations, and duties of whatever kind or nature, whether
absolute, accrued, contingent, or otherwise, whether or not arising in the
ordinary course of business, whether or not determinable at the Closing Date,
and whether or not specifically referred to in this Agreement.
F. EXPENSES. In the event that the transactions contemplated herein are
consummated, Van Kampen Asset Management (or a subsidiary or affiliate thereof)
and the Acquiring Fund will pay the expenses of the Reorganization, including
the costs of the special meeting of shareholders of the Target Fund. In
addition, as part of the Reorganization, the Target Fund will write off its
remaining unamortized organizational expenses, which shall be reimbursed by Van
Kampen Asset Management (or a subsidiary or affiliate thereof). In the event
that the transactions contemplated herein are not consummated for any reason,
then all reasonable outside expenses incurred to the date of termination of this
Agreement shall be borne by Van Kampen Asset Management (or a subsidiary or
affiliate thereof).
G. DISSOLUTION. As soon as practicable after the Closing Date, but in no
event later than one year after the Closing Date, the Target Fund shall
voluntarily dissolve and completely liquidate by taking, in accordance with the
law in the state of its organization and federal securities laws, all steps as
shall be necessary and proper to effect a complete liquidation and dissolution
of the Target Fund. Immediately after the Closing Date, the share transfer books
relating to the Target Fund shall be closed and no transfer of shares shall
thereafter be made on such books.
4. REPRESENTATIONS AND WARRANTIES OF THE TARGET FUND.
The Target Fund hereby represents and warrants to the Acquiring Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Acquiring Fund that:
A. ORGANIZATION. The Target Fund is duly formed and in good standing under
the laws of the state of its organization and is duly authorized to transact
business in the state of its organization. The Target
2
Fund is qualified to do business in all jurisdictions in which it is required to
be so qualified, except jurisdictions in which the failure to so qualify would
not have a material adverse effect on the Target Fund. The Target Fund has all
material federal, state and local authorizations necessary to own all of its
properties and assets and to carry on its business as now being conducted,
except authorizations which the failure to so obtain would not have a material
adverse effect on the Target Fund.
B. REGISTRATION. The Series Fund is registered under the Investment Company
Act of 1940, as amended (the "1940 Act"), as an open-end management investment
company, and such registration has not been revoked or rescinded. The Target
Fund is in compliance in all material respects with the 1940 Act and the rules
and regulations thereunder with respect to its activities. All of the
outstanding shares of common stock of the Target Fund have been duly authorized
and are validly issued, fully paid and nonassessable and not subject to
pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Target Fund audited as of and for the year ended
June 30, 2003, true and complete copies of which have been heretofore furnished
to the Acquiring Fund, fairly represent the financial condition and the results
of operations of the Target Fund as of and for their respective dates and
periods in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Target Fund shall furnish to the Acquiring
Fund within five (5) business days after the Closing Date an unaudited statement
of assets and liabilities and the portfolio of investments and the related
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
the Target Fund's operations as of, and for the periods ending on, the dates of
such statements in conformity with generally accepted accounting principles
applied on a consistent basis during the periods involved and the results of its
operations and changes in financial position for the period then ended; and such
financial statements shall be certified by the Treasurer of the Target Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be,
no contingent Liabilities of the Target Fund not disclosed in the financial
statements delivered pursuant to Sections 4.C. and 4.D. which would materially
affect the Target Fund's financial condition, and there are no legal,
administrative or other proceedings pending or, to its knowledge, threatened
against the Target Fund which would, if adversely determined, materially affect
the Target Fund's financial condition. All Liabilities were incurred by the
Target Fund in the ordinary course of its business.
F. MATERIAL AGREEMENTS. The Target Fund is in compliance with all material
agreements, rules, laws, statutes, regulations and administrative orders
affecting its operations or its assets; and, except as referred to in the most
recent Prospectus and Statement of Additional Information of the Target Fund
(collectively, the "Target Fund Prospectus"), there are no material agreements
outstanding relating to the Target Fund to which the Target Fund is a party.
G. STATEMENT OF EARNINGS. As promptly as practicable, but in any case no
later than 30 calendar days after the Closing Date, the Target Fund shall
furnish the Acquiring Fund with a statement of the earnings and profits of the
Target Fund within the meaning of the Code as of the Closing Date.
H. TAX RETURNS. At the date hereof and on the Closing Date, all federal and
other material tax returns and reports of the Target Fund required by law to
have been filed by such dates shall have been filed, and all federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Target Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.
I. CORPORATE AUTHORITY. The Target Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Target
Fund Board, and except for obtaining approval of the Target Fund shareholders,
no
3
other corporate acts or proceedings by the Target Fund are necessary to
authorize this Agreement and the transactions contemplated herein. This
Agreement has been duly executed and delivered by the Target Fund and
constitutes a valid and binding obligation of the Target Fund enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is sought in a proceeding at equity or
law).
J. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Target Fund does not and will not (i)
result in a material violation of any provision of the Target Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Target Fund, (iii) result in a material violation or breach of or constitute
a default under any material contract, indenture, mortgage, loan agreement,
note, lease or other instrument or obligation to which the Target Fund is
subject or (iv) result in the creation or imposition of any lien, charge or
encumbrance upon any property or asset of the Target Fund. Except as have been
obtained, (i) no consent, approval, authorization, order or filing with or
notice to any court or governmental authority or agency is required for the
consummation by the Target Fund of the transactions contemplated by this
Agreement and (ii) no consent of or notice to any third party or entity is
required for the consummation by the Target Fund of the transactions
contemplated by this Agreement.
K. ABSENCE OF CHANGES. From the date of this Agreement through the Closing
Date, there shall not have been:
(1) any change in the business, results of operations, assets, financial
condition or manner of conducting the business of the Target Fund, other than
changes in the ordinary course of its business, or any pending or threatened
litigation, which has had or may have a material adverse effect on such
business, results of operations, assets, financial condition or manner of
conducting business;
(2) issued by the Target Fund any option to purchase or other right to
acquire shares of the Target Fund to any person other than subscriptions to
purchase shares at net asset value in accordance with terms in the Target Fund
Prospectus;
(3) any entering into, amendment or termination of any contract or
agreement by the Target Fund, except as otherwise contemplated by this
Agreement;
(4) any indebtedness incurred, other than in the ordinary course of
business, by the Target Fund for borrowed money, or any commitment to borrow
money entered into by the Target Fund;
(5) any amendment of the Target Fund's organizational documents; or
(6) any grant or imposition of any lien, claim, charge or encumbrance
(other than encumbrances arising in the ordinary course of business with respect
to covered options) upon any asset of the Target Fund other than a lien for
taxes not yet due and payable.
L. TITLE. On the Closing Date, the Target Fund will have good and
marketable title to the Assets, free and clear of all liens, mortgages, pledges,
encumbrances, charges, claims and equities whatsoever, other than a lien for
taxes not yet due and payable, and full right, power and authority to sell,
assign, transfer and deliver such Assets; upon delivery of such Assets, the
Acquiring Fund will receive good and marketable title to such Assets, free and
clear of all liens, mortgages, pledges, encumbrances, charges, claims and
equities whatsoever, other than a lien for taxes not yet due and payable.
M. PROSPECTUS/PROXY STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein, as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if it shall have been amended or
supplemented, conform and will conform as they relate to the Target Fund, in all
material respects, to the applicable requirements of the applicable federal and
state securities laws and the rules and regulations of the Securities and
Exchange Commission (the "SEC") thereunder, and do not and will not include any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not
4
misleading, except that no representations or warranties in this Section 4.M.
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Acquiring Fund furnished to the Target Fund
by the Acquiring Fund.
N. TAX QUALIFICATION. The Target Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years and has satisfied the distribution requirements imposed by Section
852 of the Code for each of its taxable years.
O. FAIR MARKET VALUE. The fair market value on a going concern basis of the
Assets will equal or exceed the Liabilities to be assumed by the Acquiring Fund
and those to which the Assets are subject.
P. TARGET FUND LIABILITIES. Except as otherwise provided for herein, the
Target Fund shall use reasonable efforts, consistent with its ordinary operating
procedures, to repay in full any indebtedness for borrowed money and have
discharged or reserved against all of the Target Fund's known debts, liabilities
and obligations including expenses, costs and charges whether absolute or
contingent, accrued or unaccrued.
5. REPRESENTATIONS AND WARRANTIES OF THE ACQUIRING FUND.
The Acquiring Fund hereby represents and warrants to the Target Fund, which
representations and warranties are true and correct on the date hereof, and
agrees with the Target Fund that:
A. ORGANIZATION. The Acquiring Fund is duly formed and in good standing
under the laws of the state of its organization and is duly authorized to
transact business in the state of its organization. The Acquiring Fund is
qualified to do business in all jurisdictions in which it is required to be so
qualified, except jurisdictions in which the failure to so qualify would not
have a material adverse effect on the Acquiring Fund. The Acquiring Fund has all
material federal, state and local authorizations necessary to own all of its
properties and assets and to carry on its business and the business thereof as
now being conducted, except authorizations which the failure to so obtain would
not have a material adverse effect on the Acquiring Fund.
B. REGISTRATION. The Equity Trust is registered under the 1940 Act as an
open-end management investment company and such registration has not been
revoked or rescinded. The Acquiring Fund is in compliance in all material
respects with the 1940 Act and the rules and regulations thereunder with respect
to its activities. All of the outstanding common shares of beneficial interest
of the Acquiring Fund have been duly authorized and are validly issued, fully
paid and nonassessable and not subject to pre-emptive or dissenters' rights.
C. AUDITED FINANCIAL STATEMENTS. The statement of assets and liabilities
and the portfolio of investments and the related statements of operations and
changes in net assets of the Acquiring Fund audited as of and for the year ended
August 30, 2003, true and complete copies of which have been heretofore
furnished to the Target Fund, fairly represent the financial condition and the
results of operations of the Acquiring Fund as of and for their respective dates
and periods in conformity with generally accepted accounting principles applied
on a consistent basis during the periods involved.
D. FINANCIAL STATEMENTS. The Acquiring Fund shall furnish to the Target
Fund within five (5) business days after the Closing Date an unaudited statement
of assets and liabilities and the portfolio of investments and the related
statements of operations and changes in net assets as of and for the interim
period ending on the Closing Date; such financial statements will represent
fairly the financial position and portfolio of investments and the results of
its operations as of, and for the period ending on, the dates of such statements
in conformity with generally accepted accounting principles applied on a
consistent basis during the periods involved and the results of its operations
and changes in financial position for the periods then ended; and such financial
statements shall be certified by the Treasurer of the Acquiring Fund as
complying with the requirements hereof.
E. CONTINGENT LIABILITIES. There are, and as of the Closing Date will be,
no contingent Liabilities of the Acquiring Fund not disclosed in the financial
statements delivered pursuant to Sections 5.C. and 5.D. which would materially
affect the Acquiring Fund's financial condition, and there are no legal,
administrative, or other proceedings pending or, to its knowledge, threatened
against the Acquiring Fund
5
which would, if adversely determined, materially affect the Acquiring Fund's
financial condition. All Liabilities were incurred by the Acquiring Fund in the
ordinary course of its business.
F. MATERIAL AGREEMENTS. The Acquiring Fund is in compliance with all
material agreements, rules, laws, statutes, regulations and administrative
orders affecting its operations or its assets; and, except as referred to in the
Acquiring Fund Prospectus, there are no material agreements outstanding relating
to the Acquiring Fund to which the Acquiring Fund is a party.
G. TAX RETURNS. At the date hereof and on the Closing Date, all federal and
other material tax returns and reports of the Acquiring Fund required by law to
have been filed by such dates shall have been filed, and all federal and other
taxes shown thereon shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Acquiring Fund's
knowledge no such return is currently under audit and no assessment has been
asserted with respect to any such return.
H. CORPORATE AUTHORITY. The Acquiring Fund has the necessary power to enter
into this Agreement and to consummate the transactions contemplated herein. The
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated herein have been duly authorized by the Acquiring
Fund Board, no other corporate acts or proceedings by the Acquiring Fund are
necessary to authorize this Agreement and the transactions contemplated herein.
This Agreement has been duly executed and delivered by the Acquiring Fund and
constitutes a valid and binding obligation of the Acquiring Fund enforceable in
accordance with its terms, except as such enforceability may be limited by
bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium or
similar laws affecting creditors' rights generally, or by general principles of
equity (regardless of whether enforcement is sought in a proceeding at equity or
law).
I. NO VIOLATION; CONSENTS AND APPROVALS. The execution, delivery and
performance of this Agreement by the Acquiring Fund does not and will not (i)
result in a material violation of any provision of the Acquiring Fund's
organizational documents, (ii) violate any statute, law, judgment, writ, decree,
order, regulation or rule of any court or governmental authority applicable to
the Acquiring Fund, (iii) result in a material violation or breach of or
constitute a default under any material contract, indenture, mortgage, loan
agreement, note, lease or other instrument or obligation to which the Acquiring
Fund is subject or (iv) result in the creation or imposition or any lien, charge
or encumbrance upon any property or asset of the Acquiring Fund. Except as have
been obtained, (i) no consent, approval, authorization, order or filing with or
notice to any court or governmental authority or agency is required for the
consummation by the Acquiring Fund of the transactions contemplated by this
Agreement and (ii) no consent of or notice to any third party or entity is
required for the consummation by the Acquiring Fund of the transactions
contemplated by this Agreement.
J. ABSENCE OF PROCEEDINGS. There are no legal, administrative or other
proceedings pending or, to its knowledge, threatened against the Acquiring Fund
which would materially affect its financial condition.
K. SHARES OF THE ACQUIRING FUND: REGISTRATION. The Acquiring Fund Shares to
be issued pursuant to Section 1 hereof will be duly registered under the
Securities Act of 1933, as amended (the "Securities Act"), and all applicable
state securities laws.
L. SHARES OF THE ACQUIRING FUND: AUTHORIZATION. The Acquiring Fund Shares
to be issued pursuant to Section 1 hereof have been duly authorized and, when
issued in accordance with this Agreement, will be validly issued, fully paid and
nonassessable, will not be subject to pre-emptive or dissenters' rights and will
conform in all material respects to the description thereof contained in the
Acquiring Fund Prospectus furnished to the Target Fund.
M. ABSENCE OF CHANGES. From the date hereof through the Closing Date, there
shall not have been any change in the business, results of operations, assets,
financial condition or manner of conducting the business of the Acquiring Fund,
other than changes in the ordinary course of its business, which has had a
material adverse effect on such business, results of operations, assets,
financial condition or manner of conducting business.
6
N. REGISTRATION STATEMENT. The Registration Statement and the
Prospectus/Proxy Statement contained therein, as of the effective date of the
Registration Statement, and at all times subsequent thereto up to and including
the Closing Date, as amended or as supplemented if they shall have been amended
or supplemented, conforms and will conform, as they relate to the Acquiring
Fund, in all material respects, to the applicable requirements of the applicable
federal securities laws and the rules and regulations of the SEC thereunder, and
do not and will not include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except that no representations or warranties in this Section 5
apply to statements or omissions made in reliance upon and in conformity with
written information concerning the Target Fund furnished to the Acquiring Fund
by the Target Fund.
O. TAX QUALIFICATION. The Acquiring Fund has qualified as a regulated
investment company within the meaning of Section 851 of the Code for each of its
taxable years and has satisfied the distribution requirements imposed by Section
852 of the Code for each of its taxable years.
6. COVENANTS.
During the period from the date of this Agreement and continuing until the
Closing Date, the Target Fund and Acquiring Fund each agree as follows (except
as expressly contemplated or permitted by this Agreement):
A. OTHER ACTIONS. The Target Fund and Acquiring Fund shall operate only in
the ordinary course of business consistent with prior practice. No party shall
take any action that would, or reasonably would be expected to, result in any of
its representations and warranties set forth in this Agreement being or becoming
untrue in any material respect.
B. GOVERNMENT FILINGS; CONSENTS. The Target Fund and Acquiring Fund shall
file all reports required to be filed by the Target Fund and Acquiring Fund with
the SEC between the date of this Agreement and the Closing Date and shall
deliver to the other party copies of all such reports promptly after the same
are filed. Except where prohibited by applicable statutes and regulations, each
party shall promptly provide the other (or its counsel) with copies of all other
filings made by such party with any state, local or federal government agency or
entity in connection with this Agreement or the transactions contemplated
hereby. Each of the Target Fund and the Acquiring Fund shall use all reasonable
efforts to obtain all consents, approvals and authorizations required in
connection with the consummation of the transactions contemplated by this
Agreement and to make all necessary filings with the appropriate federal and
state officials.
C. PREPARATION OF THE REGISTRATION STATEMENT AND THE PROSPECTUS/ PROXY
STATEMENT. In connection with the Registration Statement and the
Prospectus/Proxy Statement, each party hereto will cooperate with the other and
furnish to the other the information relating to the Target Fund or Acquiring
Fund, as the case may be, required by the Securities Act or the Securities
Exchange Act of 1934 and the rules and regulations thereunder, as the case may
be, to be set forth in the Registration Statement or the Prospectus/Proxy
Statement, as the case may be. The Target Fund shall promptly prepare for filing
with the SEC the Prospectus/Proxy Statement and the Acquiring Fund shall
promptly prepare and file with the SEC the Registration Statement, in which the
Prospectus/Proxy Statement will be included as a prospectus. In connection with
the Registration Statement, insofar as it relates to the Target Fund and its
affiliated persons, the Acquiring Fund shall only include such information as is
approved by the Target Fund for use in the Registration Statement. The Acquiring
Fund shall not amend or supplement any such information regarding the Target
Fund and such affiliates without the prior written consent of the Target Fund
which consent shall not be unreasonably withheld or delayed. The Acquiring Fund
shall promptly notify and provide the Target Fund with copies of all amendments
or supplements filed with respect to the Registration Statement. The Acquiring
Fund shall use all reasonable efforts to have the Registration Statement
declared effective under the Securities Act as promptly as practicable after
such filing. The Acquiring Fund shall also take any action (other than
qualifying to do business in any jurisdiction in which it is now not so
qualified) required to be taken under any applicable state securities laws in
connection with the issuance of the Acquiring Fund Shares in the transactions
contemplated by this Agreement, and the Target Fund shall furnish
7
all information concerning the Target Fund and the holders of the Target Fund's
shares as may be reasonably requested in connection with any such action.
D. ACCESS TO INFORMATION. During the period prior to the Closing Date, the
Target Fund shall make available to the Acquiring Fund a copy of each report,
schedule, registration statement and other document (the "Documents") filed or
received by it during such period pursuant to the requirements of federal or
state securities laws or federal or state banking laws (other than Documents
which such party is not permitted to disclose under applicable law). During the
period prior to the Closing Date, the Acquiring Fund shall make available to the
Target Fund each Document pertaining to the transactions contemplated hereby
filed or received by it during such period pursuant to federal or state
securities laws or federal or state banking laws (other than Documents which
such party is not permitted to disclose under applicable law).
E. SHAREHOLDERS MEETING. The Target Fund shall call a meeting of the Target
Fund shareholders to be held as promptly as practicable for the purpose of
voting upon the approval of this Agreement and the transactions contemplated
herein, and shall furnish a copy of the Prospectus/Proxy Statement and form of
proxy to each shareholder of the Target Fund as of the record date for such
meeting. The Target Fund Board shall recommend to the Target Fund shareholders
approval of this Agreement and the transactions contemplated herein, subject to
fiduciary obligations under applicable law.
F. COORDINATION OF PORTFOLIOS. The Target Fund and Acquiring Fund covenant
and agree to coordinate the respective portfolios of the Target Fund and
Acquiring Fund from the date of the Agreement up to and including the Closing
Date in order that at closing, when the Assets are added to the Acquiring Fund's
portfolio, the resulting portfolio will meet the Acquiring Fund's investment
objective, policies and restrictions as set forth in the Acquiring Fund
Prospectus, a copy of which has been delivered to the Target Fund.
G. DISTRIBUTION OF THE SHARES. At closing the Target Fund covenants that it
shall cause to be distributed the Acquiring Fund Shares in the proper pro rata
amount for the benefit of Target Fund shareholders and such that the Target Fund
shall not continue to hold amounts of said shares so as to cause a violation of
Section 12(d)(1) of the 1940 Act. The Target Fund covenants further that,
pursuant to Section 3.G., it shall liquidate and dissolve as promptly as
practicable after the Closing Date. The Target Fund covenants to use all
reasonable efforts to cooperate with the Acquiring Fund and the Acquiring Fund's
transfer agent in the distribution of said shares.
H. BROKERS OR FINDERS. Except as disclosed in writing to the other party
prior to the date hereof, each of the Target Fund and the Acquiring Fund
represents that no agent, broker, investment banker, financial advisor or other
firm or person is or will be entitled to any broker's or finder's fee or any
other commission or similar fee in connection with any of the transactions
contemplated by this Agreement, and each party shall hold the other harmless
from and against any and all claims, liabilities or obligations with respect to
any such fees, commissions or expenses asserted by any person to be due or
payable in connection with any of the transactions contemplated by this
Agreement on the basis of any act or statement alleged to have been made by such
first party or its affiliate.
I. ADDITIONAL AGREEMENT. In case at any time after the Closing Date any
further action is necessary or desirable in order to carry out the purposes of
this Agreement, the proper directors, trustees and officers of each party to
this Agreement shall take all such necessary action.
J. PUBLIC ANNOUNCEMENTS. For a period of time from the date of this
Agreement to the Closing Date, the Target Fund and the Acquiring Fund will
consult with each other before issuing any press releases or otherwise making
any public statements with respect to this Agreement or the transactions
contemplated herein and shall not issue any press release or make any public
statement prior to such consultation, except as may be required by law.
K. TAX STATUS OF REORGANIZATION. The intention of the parties is that the
transaction will qualify as a reorganization within the meaning of Section
368(a) of the Code. Neither the Acquiring Fund nor the Target Fund shall take
any action or cause any action to be taken (including, without limitation, the
filing of any tax return) that is inconsistent with such treatment or results in
the failure of the transaction to qualify
8
as a reorganization within the meaning of Section 368(a) of the Code. At or
prior to the Closing Date, the Acquiring Fund and the Target Fund will take such
action, or cause such action to be taken, as is reasonably necessary to enable
Skadden, Arps, Slate, Meagher & Flom LLP ("Skadden"), counsel to the Acquiring
Fund and the Target Fund, to render the tax opinion required herein.
L. DECLARATION OF DIVIDEND. At or immediately prior to the Closing Date,
the Target Fund shall declare and pay to its stockholders a dividend or other
distribution in an amount large enough so that it will have distributed
substantially all (and in any event not less than 98%) of its investment company
taxable income (computed without regard to any deduction for dividends paid) and
realized net capital gain, if any, for the current taxable year through the
Closing Date.
7. CONDITIONS TO OBLIGATIONS OF THE TARGET FUND.
The obligations of the Target Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions, unless waived in writing by the Target Fund:
A. SHAREHOLDER APPROVAL. This Agreement and the transactions contemplated
herein shall have been approved by the affirmative vote of the holders of a
majority of the outstanding shares of the Target Fund.
B. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Acquiring Fund contained herein shall be true in all
material respects as of the Closing Date, and there shall have been no material
adverse change in the financial condition, results of operations, business
properties or assets of the Acquiring Fund as of the Closing Date, and the
Target Fund shall have received a certificate of the President or Vice President
of the Acquiring Fund satisfactory in form and substance to the Target Fund so
stating. The Acquiring Fund shall have performed and complied in all material
respects with all agreements, obligations and covenants required by this
Agreement to be so performed or complied with by it on or prior to the Closing
Date.
C. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
D. REGULATORY APPROVAL. All necessary approvals, registrations and
exemptions under federal and state securities laws shall have been obtained.
E. NO INJUNCTIONS OR RESTRAINTS; ILLEGALITY. No temporary restraining
order, preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition (an "Injunction")
preventing the consummation of the transactions contemplated by this Agreement
shall be in effect, nor shall any proceeding by any state, local or federal
government agency or entity seeking any of the foregoing be pending. There shall
not have been any action taken or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the transactions contemplated
by this Agreement which makes the consummation of the transactions contemplated
by this Agreement illegal or which has a material adverse effect on business
operations of the Acquiring Fund.
F. TAX OPINION. The Target Fund shall have obtained an opinion from
Skadden, counsel for the Target Fund, dated as of the Closing Date, addressed to
the Target Fund, that the consummation of the transactions set forth in this
Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code.
G. OPINION OF COUNSEL.
(1) The Target Fund shall have received the opinion of Skadden, counsel for
the Acquiring Fund, dated as of the Closing Date, addressed to the Target Fund
substantially in the form and to the effect that:
(a) The Equity Trust is registered as an open-end, management
investment company under the 1940 Act.
(b) The Equity Trust is validly existing in good standing under the
laws of the State of Delaware.
9
(c) The Acquiring Fund has the power and authority to execute, deliver
and perform all of its obligations under the Agreement under the laws of
the State of Delaware. The execution and delivery of the Agreement and the
consummation by the Acquiring Fund of the transactions contemplated thereby
have been duly authorized by all requisite statutory trust action on the
part of the Acquiring Fund under the laws of the State of Delaware. The
Agreement has been duly executed and delivered by the Acquiring Fund under
the laws of the State of Delaware.
(d) The Agreement constitutes the valid and binding obligation of the
Acquiring Fund, enforceable against the Acquiring Fund in accordance with
its terms under the applicable laws of the State of Delaware.
(e) The execution and delivery by the Acquiring Fund of the Agreement
and the performance by the Acquiring Fund of its obligations under the
Agreement do not conflict with the Agreement and Declaration of Trust or
By-laws of the Equity Trust.
(f) Neither the execution, delivery or performance by the Acquiring
Fund of the Agreement nor the compliance by the Acquiring Fund with the
terms and provisions thereof will contravene any provision of any
applicable law of the State of Illinois, the State of Delaware or the
United States of America.
(g) No approval by any court, regulatory body, administrative agency
or governmental body of the State of Illinois, the State of Delaware or the
United States of America, which has not been obtained or taken and is not
in full force and effect, is required to authorize, or is required in
connection with, the execution or delivery of the Agreement by the
Acquiring Fund or the enforceability of the Agreement against the Acquiring
Fund.
(h) The Acquiring Fund Shares have been duly authorized by the Equity
Trust and, when delivered to the Target Fund in accordance with the terms
of the Agreement, will be validly issued, fully paid and nonassessable and
free and clear of any preemptive rights or any similar rights arising under
Delaware law or the Equity Trust's Agreement and Declaration of Trust or
its By-laws.
H. OFFICER CERTIFICATES. The Target Fund shall have received a certificate
of an authorized officer of the Acquiring Fund, dated as of the Closing Date,
certifying that the representations and warranties set forth in Section 5 are
true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Acquiring Fund Board.
8. CONDITIONS TO OBLIGATIONS OF ACQUIRING FUND.
The obligations of the Acquiring Fund hereunder with respect to the
consummation of the Reorganization are subject to the satisfaction of the
following conditions, unless waived in writing by the Acquiring Fund:
A. REPRESENTATIONS, WARRANTIES AND AGREEMENTS. Each of the representations
and warranties of the Target Fund contained herein shall be true in all material
respects as of the Closing Date, and there shall have been no material adverse
change in the financial condition, results of operations, business, properties
or assets of the Target Fund as of the Closing Date, and the Acquiring Fund
shall have received a certificate of an authorized officer of the Target Fund
satisfactory in form and substance to the Acquiring Fund so stating. The Target
Fund shall have performed and complied in all material respects with all
agreements, obligations and covenants required by this Agreement to be so
performed or complied with by them on or prior to the Closing Date.
B. REGISTRATION STATEMENT EFFECTIVE. The Registration Statement shall have
become effective and no stop orders under the Securities Act pertaining thereto
shall have been issued.
C. REGULATORY APPROVAL. All necessary approvals, registrations and
exemptions under federal and state securities laws shall have been obtained.
D. NO INJUNCTIONS OR RESTRAINTS: ILLEGALITY. No Injunction preventing the
consummation of the transactions contemplated by this Agreement shall be in
effect, nor shall any proceeding by any state, local or federal government
agency or entity seeking any of the foregoing be pending. There shall not
10
have been any action taken, or any statute, rule, regulation or order enacted,
entered, enforced or deemed applicable to the transactions contemplated by this
Agreement, which makes the consummation of the transactions contemplated by this
Agreement illegal.
E. TAX OPINION. The Acquiring Fund shall have obtained an opinion from
Skadden, counsel for the Acquiring Fund, dated as of the Closing Date, addressed
to the Acquiring Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a reorganization as described in
Section 368(a) of the Code.
F. OPINION OF COUNSEL.
(1) The Acquiring Fund shall have received the opinion of Skadden, counsel
for the Target Fund, dated as of the Closing Date, addressed to the Acquiring
Fund, substantially in the form and to the effect that:
(a) The Series Fund is registered as an open-end, management
investment company under the 1940 Act.
(b) Neither the execution, delivery or performance by the Target Fund
of the Agreement nor the compliance by the Target Fund with the terms and
provisions thereof will contravene any provision of any applicable law of
the State of Illinois or the United States of America.
(c) No approval by any court, regulatory body, administrative agency
or governmental body of the State of Illinois or the United States of
America, which has not been obtained or taken and is not in full force and
effect, is required to authorize, or is required in connection with, the
execution or delivery of the Agreement by the Target Fund or the
enforceability of the Agreement against the Target Fund.
(2) The Acquiring Fund shall have received the opinion of Miles &
Stockbridge P.C. ("Miles & Stockbridge"), Maryland counsel for the Target Fund,
dated as of the Closing Date, addressed to the Acquiring Fund substantially in
the form and to the effect that:
(a) The Series Fund is validly existing in good standing under the
laws of the State of Maryland.
(b) The Target Fund has the corporate power and authority to execute,
deliver and perform all of its obligations under the Agreement under the
laws of the State of Maryland. The execution and delivery of the Agreement
and the consummation by the Target Fund of the transactions contemplated
thereby have been duly authorized by all requisite corporate action on the
part of the Target Fund under the laws of the State of Maryland. The
Agreement has been duly executed and delivered by the Target Fund under the
laws of the State of Maryland.
(c) The Agreement constitutes the valid and binding obligation of the
Target Fund, enforceable against the Target Fund in accordance with its
terms under the applicable laws of the State of Maryland.
(d) The execution and delivery by the Target Fund of the Agreement and
the performance by the Target Fund of its obligations under the Agreement
do not conflict with the Articles of Incorporation or By-laws of the Series
Fund.
(e) Neither the execution, delivery or performance by the Target Fund
of the Agreement nor the compliance by the Target Fund with the terms and
provisions thereof will contravene any provision of any applicable law of
the State of Maryland.
(f) No approval by any court, regulatory body, administrative agency
or governmental body of the State of Maryland, which has not been obtained
or taken and is not in full force and effect, is required to authorize, or
is required in connection with, the execution or delivery of the Agreement
by the Target Fund or the consummation by the Target Fund of the
transactions contemplated thereby.
G. SHAREHOLDER LIST. The Target Fund shall have delivered to the Acquiring
Fund an updated list of all shareholders of the Target Fund, as reported by the
Target Fund's transfer agent, as of one (1) business day prior to the Closing
Date, with each shareholder's respective holdings in the Target Fund, taxpayer
identification numbers, Form W9 and last known address.
11
H. OFFICER CERTIFICATES. The Acquiring Fund shall have received a
certificate of an authorized officer of the Target Fund, dated as of the Closing
Date, certifying that the representations and warranties set forth in Section 4
are true and correct on the Closing Date, together with certified copies of the
resolutions adopted by the Target Fund Board and Target Fund shareholders.
9. AMENDMENT, WAIVER AND TERMINATION.
A. The parties hereto may, by agreement in writing authorized by the their
respective Boards, amend this Agreement at any time before or after approval
thereof by the shareholders of the Target Fund; provided, however, that after
receipt of Target Fund shareholder approval, no amendment shall be made by the
parties hereto which substantially changes the terms of Sections 1, 2 and 3
hereof without obtaining Target Fund shareholder approval thereof.
B. At any time prior to the Closing Date, either of the parties may by
written instrument signed by it (i) waive any inaccuracies in the
representations and warranties made to it contained herein and (ii) waive
compliance with any of the covenants or conditions made for its benefit
contained herein. No delay on the part of either party in exercising any right,
power or privilege hereunder shall operate as a waiver thereof, nor shall any
waiver on the part of any party of any such right, power or privilege, or any
single or partial exercise of any such right, power or privilege, preclude any
further exercise thereof or the exercise of any other such right, power or
privilege.
C. This Agreement may be terminated and the transactions contemplated
herein may be abandoned at any time prior to the Closing Date:
(1) by the consent of the Target Fund Board and the Acquiring Fund Board;
(2) by the Target Fund, if the Acquiring Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
(3) by the Acquiring Fund, if the Target Fund breaches in any material
respect any of its representations, warranties, covenants or agreements
contained in this Agreement;
(4) by either the Target Fund or the Acquiring Fund, if the closing has not
occurred on or prior to December 31, 2004 (provided that the right to terminate
this Agreement pursuant to this subsection C.(4) shall not be available to any
party whose failure to fulfill any of its obligations under this Agreement has
been the cause of or resulted in the failure of the closing to occur on or
before such date);
(5) by the Acquiring Fund in the event that: (a) all the conditions
precedent to the Acquiring Fund's obligation to close, as set forth in Section 8
of this Agreement, have been fully satisfied (or can be fully satisfied at the
closing); (b) the Acquiring Fund gives the Target Fund written assurance of its
intent to close irrespective of the satisfaction or nonsatisfaction of all
conditions precedent to the Target Fund's obligation to close, as set forth in
Section 7 of this Agreement; and (c) the Target Fund then fails or refuses to
close within the earlier of five (5) business days or December 31, 2004; or
(6) by the Target Fund in the event that: (a) all the conditions precedent
to the Target Fund's obligation to close, as set forth in Section 7 of this
Agreement, have been fully satisfied (or can be fully satisfied at the closing);
(b) the Target Fund gives the Acquiring Fund written assurance of its intent to
close irrespective of the satisfaction or nonsatisfaction of all the conditions
precedent to the Acquiring Fund's obligation to close, as set forth in Section 8
of this Agreement; and (c) the Acquiring Fund then fails or refuses to close
within the earlier of five (5) business days or December 31, 2004.
10. REMEDIES.
In the event of termination of this Agreement by either or both of the
Target Fund and Acquiring Fund pursuant to Section 9.C., written notice thereof
shall forthwith be given by the terminating party to the other party hereto, and
this Agreement shall therefore terminate and become void and have no effect, and
the transactions contemplated herein and thereby shall be abandoned without
further action by the parties hereto.
12
11. SURVIVAL OF WARRANTIES AND INDEMNIFICATION.
A. SURVIVAL. The representations and warranties included or provided for
herein, or in the schedules or other instruments delivered or to be delivered
pursuant hereto, shall survive the Closing Date for a three (3) year period,
except that any representation or warranty with respect to taxes shall survive
for the expiration of the statutory period of limitations for assessments of tax
deficiencies as the same may be extended from time to time by the taxpayer. The
covenants and agreements included or provided for herein shall survive and be
continuing obligations in accordance with their terms. The period for which a
representation, warranty, covenant or agreement survives shall be referred to
hereinafter as the "Survival Period." Notwithstanding anything set forth in the
immediately preceding sentence, the right of the Acquiring Fund and the Target
Fund to seek indemnity pursuant to this Agreement shall survive for a period of
ninety (90) days beyond the expiration of the Survival Period of the
representation, warranty, covenant or agreement upon which indemnity is sought.
In no event shall the Acquiring Fund or the Target Fund be obligated to
indemnify the other if indemnity is not sought within ninety (90) days of the
expiration of the applicable Survival Period.
B. INDEMNIFICATION. Each party (an "Indemnitor") shall indemnify and hold
the other and its directors, trustees, officers, agents and persons controlled
by or controlling any of them (each an "Indemnified Party") harmless from and
against any and all losses, damages, liabilities, claims, demands, judgments,
settlements, deficiencies, taxes, assessments, charges, costs and expenses of
any nature whatsoever (including reasonable attorneys' fees), including amounts
paid in satisfaction of judgments, in compromise or as fines and penalties, and
counsel fees reasonably incurred by such Indemnified Party in connection with
the defense or disposition of any claim, action, suit or other proceeding,
whether civil or criminal, before any court or administrative or investigative
body in which such Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or may have been
threatened (collectively, the "Losses") arising out of or related to any claim
of a breach of any representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall be indemnified
hereunder against any Losses arising directly from such Indemnified Party's (i)
willful misfeasance, (ii) bad faith, (iii) gross negligence or (iv) reckless
disregard of the duties involved in the conduct of such Indemnified Party's
position.
C. INDEMNIFICATION PROCEDURE. The Indemnified Party shall use its best
efforts to minimize any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity may be sought
hereunder. The Indemnified Party shall give written notice to the Indemnitor
within the earlier of ten (10) days of receipt of written notice to the
Indemnified Party or thirty (30) days from discovery by the Indemnified Party of
any matters which may give rise to a claim for indemnification or reimbursement
under this Agreement. The failure to give such notice shall not affect the right
of the Indemnified Party to indemnity hereunder unless such failure has
materially and adversely affected the rights of the Indemnitor; provided that in
any event such notice shall have been given prior to the expiration of the
Survival Period. At any time after ten (10) days from the giving of such notice,
the Indemnified Party may, at its option, resist, settle or otherwise
compromise, or pay such claim unless it shall have received notice from the
Indemnitor that the Indemnitor intends, at the Indemnitor's sole cost and
expense, to assume the defense of any such matter, in which case the Indemnified
Party shall have the right, at no cost or expense to the Indemnitor, to
participate in such defense. If the Indemnitor does not assume the defense of
such matter, and in any event until the Indemnitor states in writing that it
will assume the defense, the Indemnitor shall pay all costs of the Indemnified
Party arising out of the defense until the defense is assumed; provided,
however, that the Indemnified Party shall consult with the Indemnitor and obtain
the Indemnitor's prior written consent to any payment or settlement of any such
claim. The Indemnitor shall keep the Indemnified Party fully apprised at all
times as to the status of the defense. If the Indemnitor does not assume the
defense, the Indemnified Party shall keep the Indemnitor apprised at all times
as to the status of the defense. Following indemnification as provided for
hereunder, the Indemnitor shall be subrogated to all rights of the Indemnified
Party with respect to all third parties, firms or corporations relating to the
matter for which indemnification has been made.
13
12. SURVIVAL.
The provisions set forth in Sections 10, 11 and 16 hereof shall survive the
termination of this Agreement for any cause whatsoever.
13. NOTICES.
All notices hereunder shall be sufficiently given for all purposes
hereunder if in writing and delivered personally or sent by registered mail or
certified mail, postage prepaid. Notice to the Target Fund shall be addressed to
the Target Fund c/o Van Kampen Asset Management, 1221 Avenue of the Americas,
New York, New York 10020, Attention: General Counsel, or at such other address
as the Target Fund may designate by written notice to the Acquiring Fund. Notice
to the Acquiring Fund shall be addressed to the Acquiring Fund c/o Van Kampen
Asset Management, 1221 Avenue of the Americas, New York, New York 10020,
Attention: General Counsel, or at such other address and to the attention of
such other person as the Acquiring Fund may designate by written notice to the
Target Fund. Any notice shall be deemed to have been served or given as of the
date such notice is delivered personally or mailed.
14. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their successors and assigns. This Agreement shall not be
assigned by any party without the prior written consent of the other party
hereto.
15. BOOKS AND RECORDS.
The Target Fund and the Acquiring Fund agree that copies of the books and
records of the Target Fund relating to the Assets including, but not limited to,
all files, records, written materials (e.g., closing transcripts, surveillance
files and credit reports) shall be delivered by the Target Fund to the Acquiring
Fund on or prior to the Closing Date. In addition to, and without limiting the
foregoing, the Target Fund and the Acquiring Fund agree to take such action as
may be necessary in order that the Acquiring Fund shall have reasonable access
to such other books and records as may be reasonably requested, all for three
(3) complete fiscal and tax years after the Closing Date; namely, general
ledgers, journal entries, voucher registers, distribution journals, payroll
registers, monthly balance owing reports, income tax returns, tax depreciation
schedules and investment tax credit basis schedules.
16. GENERAL.
This Agreement supersedes all prior agreements between the parties (written
or oral), is intended as a complete and exclusive statement of the terms of the
Agreement between the parties and may not be amended, modified or changed or
terminated orally. This Agreement may be executed in one or more counterparts,
all of which shall be considered one and the same agreement, and shall become
effective when one or more counterparts have been executed by the Target Fund
and Acquiring Fund and delivered to each of the parties hereto. The headings
contained in this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement. This Agreement is
for the sole benefit of the parties hereto, and nothing in this Agreement,
expressed or implied, is intended to confer upon any other person any rights or
remedies under or by reason of this Agreement. This Agreement shall be governed
by and construed in accordance with the laws of the State of Illinois without
regard to principles of conflicts or choice of law.
14
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to be
executed and delivered by their duly authorized officers as of the day and year
first written above.
VAN KAMPEN EQUITY TRUST II
On Behalf of Its Series,
Van Kampen International Advantage
Fund
--------------------------------------
By: John L. Sullivan
Title: Treasurer
Attest:
- --------------------------------------
Elizabeth Nelson
Assistant Secretary
15
VAN KAMPEN SERIES FUND, INC.
On Behalf of Its Series,
Van Kampen International Magnum Fund
--------------------------------------
By: Stefanie V. Chang Yu
Title: Vice President
Attest:
- ---------------------------------------------------------
Sara L. Badler
Assistant Secretary
16
APPENDIX B
STATEMENT OF ADDITIONAL INFORMATION
OF VAN KAMPEN INTERNATIONAL MAGNUM FUND
Dated October 31, 2003
B-1
SUPPLEMENT DATED NOVEMBER 30, 2003
TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 30, 2003
VAN KAMPEN TAX FREE TRUST, ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN CALIFORNIA INSURED TAX FREE FUND
VAN KAMPEN INSURED TAX FREE INCOME FUND
VAN KAMPEN INTERMEDIATE TERM MUNICIPAL INCOME FUND
VAN KAMPEN MUNICIPAL INCOME FUND
VAN KAMPEN NEW YORK TAX FREE INCOME FUND
VAN KAMPEN STRATEGIC MUNICIPAL INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JANUARY 30, 2003,
VAN KAMPEN PENNSYLVANIA TAX FREE INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2003,
VAN KAMPEN U.S. GOVERNMENT TRUST, ON BEHALF OF ITS SERIES,
VAN KAMPEN U. S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 2003
VAN KAMPEN SERIES FUND, INC., ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN AMERICAN VALUE FUND
VAN KAMPEN EMERGING MARKETS FUND
VAN KAMPEN EMERGING MARKETS INCOME FUND
VAN KAMPEN EQUITY GROWTH FUND
VAN KAMPEN EUROPEAN VALUE EQUITY FUND
VAN KAMPEN FOCUS EQUITY FUND
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN GLOBAL FRANCHISE FUND
VAN KAMPEN GLOBAL VALUE EQUITY FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
VAN KAMPEN MID CAP GROWTH FUND
VAN KAMPEN VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 2003
VAN KAMPEN TAX FREE MONEY FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 31, 2003
VAN KAMPEN EQUITY TRUST, ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN AGGRESSIVE GROWTH FUND
VAN KAMPEN GROWTH FUND
VAN KAMPEN SELECT GROWTH FUND
VAN KAMPEN SMALL CAP GROWTH FUND
VAN KAMPEN SMALL CAP VALUE FUND
VAN KAMPEN UTILITY FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 31, 2003
VAN KAMPEN TRUST, ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN HIGH YIELD FUND
Effective November 30, 2003, the Fund's investment adviser, Van Kampen
Investment Advisory Corp. merged into its affiliate, Van Kampen Asset
Management. In all instances, references to Van Kampen Investment Advisory Corp.
are hereby deleted and replaced with Van Kampen Asset Management.
RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
MS SPT SAI
SUPPLEMENT DATED APRIL 5, 2004
TO THE
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2003,
AS PREVIOUSLY SUPPLEMENTED ON JULY 25, 2003,
VAN KAMPEN COMSTOCK FUND
VAN KAMPEN ENTERPRISE FUND
VAN KAMPEN EQUITY AND INCOME FUND
VAN KAMPEN GROWTH AND INCOME FUND
VAN KAMPEN HARBOR FUND
VAN KAMPEN LIMITED MATURITY GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2003,
AS PREVIOUSLY SUPPLEMENTED ON JULY 25, 2003 AND SEPTEMBER 2, 2003,
VAN KAMPEN REAL ESTATE SECURITIES FUND
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 30, 2003,
AS PREVIOUSLY SUPPLEMENTED ON JULY 25, 2003 AND NOVEMBER 30, 2003,
VAN KAMPEN U.S. GOVERNMENT TRUST,
ON BEHALF OF ITS SERIES,
VAN KAMPEN U.S. GOVERNMENT FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 31, 2003,
AS PREVIOUSLY SUPPLEMENTED ON NOVEMBER 30, 2003,
VAN KAMPEN EQUITY TRUST,
ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN AGGRESSIVE GROWTH FUND
VAN KAMPEN GROWTH FUND
VAN KAMPEN SELECT GROWTH FUND
VAN KAMPEN SMALL CAP GROWTH FUND
VAN KAMPEN SMALL CAP VALUE FUND
VAN KAMPEN UTILITY FUND
VAN KAMPEN VALUE OPPORTUNITIES FUND
STATEMENT OF ADDITIONAL INFORMATION DATED JULY 31, 2003,
AS PREVIOUSLY SUPPLEMENTED ON NOVEMBER 30, 2003,
VAN KAMPEN TRUST
ON BEHALF OF ITS SERIES,
VAN KAMPEN HIGH YIELD FUND
STATEMENT OF ADDITIONAL INFORMATION DATED SEPTEMBER 30, 2003
VAN KAMPEN RESERVE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 2003
VAN KAMPEN PACE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 2003,
AS PREVIOUSLY SUPPLEMENTED NOVEMBER 30, 2003,
VAN KAMPEN SERIES FUND, INC.,
ON BEHALF OF EACH OF ITS SERIES,
VAN KAMPEN AMERICAN VALUE FUND
VAN KAMPEN EMERGING MARKETS FUND
VAN KAMPEN EMERGING MARKETS INCOME FUND
VAN KAMPEN EQUITY GROWTH FUND
VAN KAMPEN EUROPEAN VALUE EQUITY FUND
VAN KAMPEN FOCUS EQUITY FUND
VAN KAMPEN GLOBAL EQUITY ALLOCATION FUND
VAN KAMPEN GLOBAL FRANCHISE FUND
VAN KAMPEN GLOBAL VALUE EQUITY FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
VAN KAMPEN MID CAP GROWTH FUND
VAN KAMPEN VALUE FUND
STATEMENT OF ADDITIONAL INFORMATION DATED OCTOBER 31, 2003,
AS PREVIOUSLY SUPPLEMENTED NOVEMBER 30, 2003,
VAN KAMPEN TAX FREE MONEY FUND
The Statement of Additional Information is hereby supplemented as follows:
The section entitled "GENERAL INFORMATION" is hereby amended by adding the
following sentence to the end of the fourth paragraph:
Transactions including purchases, exchanges and redemptions completed
through an authorized dealer, custodian, trustee or record keeper of a
retirement plan account may involve additional fees charged by the
authorized dealer, custodian, trustee or record keeper.
The section entitled "REDEMPTION OF SHARES" is amended by adding the
following sentence as the last sentence of the second paragraph:
Redemptions completed through an authorized dealer, custodian, trustee or
record keeper of a retirement plan account may involve additional fees
charged by the authorized dealer, custodian, trustee or record keeper.
RETAIN THIS SUPPLEMENT FOR FUTURE REFERENCE
MS SPT SAI 4/04
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN SERIES FUND, INC.
Van Kampen Series Fund, Inc. (the "Company") is an open-end management
investment company. The Company currently consists of the following seventeen
investment portfolios designed to offer a range of investment choices (each, a
"Fund" and collectively, the "Funds"): Van Kampen American Value Fund, Van
Kampen Asian Equity Fund (formerly known as Van Kampen Asian Growth Fund), Van
Kampen Emerging Markets Debt Fund, Van Kampen Emerging Markets Fund, Van Kampen
Emerging Markets Income Fund (formerly known as Van Kampen Worldwide High Income
Fund), Van Kampen Equity Growth Fund, Van Kampen European Value Equity Fund
(formerly known as Van Kampen European Equity Fund), Van Kampen Focus Equity
Fund (formerly known as Van Kampen Aggressive Equity Fund), Van Kampen Global
Equity Allocation Fund, Van Kampen Global Value Equity Fund (formerly known as
Van Kampen Global Equity Fund), Van Kampen Growth and Income Fund II, Van Kampen
International Magnum Fund, Van Kampen Japanese Equity Fund, Van Kampen Latin
American Fund, Van Kampen Mid Cap Growth Fund, Van Kampen Global Franchise Fund
(formerly known as Van Kampen Tax Managed Global Franchise Fund) and Van Kampen
Value Fund. For ease of reference, the words "Van Kampen" which begin the name
of each Fund, are not used hereinafter. Each Fund is organized as a diversified
series of the Company, except for Emerging Markets Debt Fund, Emerging Markets
Fund, Emerging Markets Income Fund, Focus Equity Fund, Global Franchise Fund,
International Magnum Fund and Latin American Fund, each of which is organized as
a non-diversified series of the Company.
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with each
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information for all Funds except for those Funds not currently
offering shares to the public including: Emerging Markets Debt Fund, Growth and
Income Fund II, Japanese Equity Fund. This Statement of Additional Information
does not include all the information that a prospective investor should consider
before purchasing shares of a Fund. Investors should obtain and read a
Prospectus of a Fund prior to purchasing shares of such Fund. A Prospectus for
each of the Funds may be obtained without charge from our web site at
www.vankampen.com or by writing or calling Van Kampen Funds Inc. at 1 Parkview
Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 847-2424 (or
(800) 421-2833 for the hearing impaired).
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
General Information......................................... B-2
Investment Objectives, Strategies and Risks................. B-9
Investment Restrictions..................................... B-31
Directors and Officers...................................... B-36
Investment Advisory Agreements.............................. B-47
Other Agreements............................................ B-50
Distribution and Service.................................... B-52
Transfer Agent.............................................. B-64
Portfolio Transactions and Brokerage Allocation............. B-64
Shareholder Services........................................ B-67
Redemption of Shares........................................ B-69
Contingent Deferred Sales Charge -- Class A................. B-69
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-70
Taxation.................................................... B-71
Performance Information..................................... B-75
Other Information........................................... B-81
Appendix A -- Description of Securities Ratings............. A-1
Appendix B -- Proxy Voting Policy and Procedures............ B-1
Reports of Independent Auditors, Financial Statements and
Notes to Financial Statements............................. F-1
</Table>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED OCTOBER 31, 2003.
MS SAI 10/03
GENERAL INFORMATION
The Company is a corporation organized in 1992 under the laws of the state
of Maryland. The Company's Articles of Incorporation, as amended (the
"Articles"), permit the Board of Directors to create one or more separate
investment portfolios and issue a series of shares for each portfolio. The
Articles also permit the Board of Directors to create multiple classes of shares
for each series. The Company's name at the time of its organization was Morgan
Stanley Series Fund, Inc. The Company changed its name to Van Kampen Series
Fund, Inc. in July 1998. Similarly, each Fund described herein at the time of
its organization began its name with the words "Morgan Stanley" and each Fund
changed its name to begin with the words "Van Kampen" in July 1998 (except for
the Equity Growth Fund which made this name change in June 1998 and the Global
Franchise Fund which has always had Van Kampen in its name since its
organization in June 1998).
Van Kampen Investment Advisory Corp. ("Advisory Corp.") is the investment
adviser (the "Adviser") for the Funds. Morgan Stanley Investment Management
Limited ("MSIM Limited") is a sub-adviser (a "Sub-Adviser") to European Value
Equity Fund, Global Franchise Fund, Global Value Equity and International Magnum
Fund. Morgan Stanley Investment Management Company ("MSIM Company") is a
sub-adviser (a "Sub-Adviser") to Asian Equity Fund and International Magnum
Fund. Morgan Stanley Asset & Investment Trust Co., Limited ("MSAITM") is a
sub-adviser (a "Sub-Adviser") to International Magnum Fund. The Funds are
distributed by Van Kampen Funds Inc. (the "Distributor") and the Funds receive
certain transfer agency and shareholder services from Van Kampen Investor
Services Inc. ("Investor Services"). Other service providers for the Funds are
described herein under "Other Agreements" or "Other Information."
Advisory Corp., the Distributor and Investor Services are wholly owned
subsidiaries of Van Kampen Investments Inc. ("Van Kampen Investments"), which is
an indirect wholly owned subsidiary of Morgan Stanley. MSIM Limited, MSIM
Company and MSAITM are wholly owned subsidiaries of Morgan Stanley. The
principal office of the Company, each Fund, the Adviser, the Distributor and Van
Kampen Investments is located at 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555. The principal office of Investor Services is located at Harborside
Financial Center, Plaza 2, Jersey City, NJ 07303-0947. The principal office of
MSIM Limited is located at 25 Cabot Square, Canary Wharf, London, United Kingdom
E14 4QA. The principal office of MSIM Company is located at 23 Church Street,
16-01 Capital Square, Singapore 049481. The principal office of MSAITM is
located at Yebisu Garden Place Tower, 20-3, Ebisu 4-chome, Shibuya-Ku, Tokyo,
Japan 150-6009.
As of the date of this Statement of Additional Information, the authorized
capitalization of the Company consists of 19,125,000,000 shares of common stock,
par value $0.001 per share, which can be divided into series, such as the Funds,
and further subdivided into classes of each series. Each share represents an
equal proportionate interest in the assets of the series with each other share
in such series and no interest in any other series. No series is subject to the
liabilities of any other series.
Each Fund currently offers three classes of shares, designated as Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with the provisions of the Articles. Each class of
shares of a Fund generally is identical in all respects except that each class
of shares is subject to its own sales charge schedule and its own distribution
and service expenses. Each class of shares also has exclusive voting rights with
respect to its distribution and service fees.
Shares of the Company entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution or service fee for a class of a
series would be voted upon by shareholders of only the class of such series
involved. Except as otherwise described in the Prospectus or herein, shares do
not have cumulative voting rights, preemptive rights or any conversion,
subscription or exchange rights.
B-2
The Company does not contemplate holding regular meetings of shareholders
to elect Directors or otherwise. Each Fund will assist shareholders in
communicating with other shareholders of such Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
In the event of liquidation, each of the shares of each Fund is entitled to
its portion of all of such Fund's net assets after all debts and expenses of the
Fund have been paid. The liquidation proceeds to holders of classes of shares
with higher distribution fees and transfer agency costs are likely to be less
than the liquidation proceeds to holders of classes of shares with lower
distribution fees and transfer agency costs.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of October 1, 2003, no person was known by the Company to own
beneficially or to hold of record 5% or more of the outstanding Class A Shares,
Class B Shares or Class C Shares of any Fund, except as follows:
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
AMERICAN VALUE FUND
MLPF&S for the Sole Benefit of its Customers................ A 30.87%
Attn: Fund Administration 97B64
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & CO........................................... A 9.72%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPF&S for the Sole Benefit of its Customers................ B 12.93%
Attn: Fund Administration 97B65
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Citigroup Global Markets Inc................................ B 6.15%
00109801250 C 21.78%
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
MLPF&S for the Sole Benefit of its Customers................ C 18.26%
Attn: Fund Administration 97CS8
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Morgan Stanley DW Inc. ..................................... B 20.65%
875 3rd Avenue C 9.31%
New York, NY 10022
ASIAN EQUITY FUND
Citigroup Global Markets Inc................................ A 11.50%
00109801250 B 7.14%
Attn: Cindy Tempesta, 7th Floor C 9.24%
333 West 34th Street
New York, NY 10001-2402
</Table>
B-3
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
PFPC Brokerage Services..................................... B 6.46%
FBO Primerica Financial Services
760 Moore Road
King of Prussia, PA 19406-1212
Morgan Stanley DW Inc. ..................................... B 20.27%
875 3rd Avenue C 5.19%
New York, NY 10022
EMERGING MARKETS FUND
MLPF&S for the Sole Benefit of its Customers................ A 26.52%
Attn: Fund Administration 97FK6
4800 Deer Lake Drive East, 2nd Floor
Jacksonville FL 32246-6484
Charles Schwab & Co Inc..................................... A 8.02%
Onesource Omnibus
Exclusive Benefit of its Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Morgan Stanley DW Inc. ..................................... A 5.59%
875 3rd Avenue B 26.72%
New York, NY 10022 C 8.71%
PFPC Brokerage Services..................................... B 5.61%
FBO Primerica Financial Services
760 Moore Road
King of Prussia, PA 19406-1212
Citigroup Global Markets Inc. .............................. B 5.05%
00109801250 C 10.40%
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
MLPF&S for the Sole Benefit of its Customers................ C 20.39%
Attn: Fund Administration 97N71
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
EMERGING MARKETS INCOME FUND
Trust Co. of America........................................ A 5.35%
FBO #120
PO Box 6503
Englewood, CO 80155-6503
Charles Schwab & Co Inc..................................... A 5.19%
Onesource Omnibus
Exclusive Benefit of its Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Edward Jones & CO........................................... A 9.27%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Morgan Stanley DW Inc. ..................................... A 6.93%
375 3rd Avenue B 36.54%
New York, NY 10022 C 9.03%
</Table>
B-4
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
Citigroup Global Markets Inc. .............................. A 7.28%
00109801250 B 5.18%
Attn: Cindy Tempesta, 7th Floor C 26.29%
333 West 34th Street
New York, NY 10001-2402
EQUITY GROWTH FUND
Edward Jones & CO........................................... A 47.32%
Attn: Mutual Fund B 8.10%
Shareholder Accounting C 8.49%
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Morgan Stanley DW Inc. ..................................... B 12.93%
875 3rd Avenue C 9.94%
New York, NY 10022
MLPF&S for the Sole Benefit of its Customers................ B 5.71%
Attn: Fund Administration 97238
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
PFPC Brokerage Services..................................... B 6.04%
FBO Primerica Financial Services
760 Moore Road
King of Prussia, PA 19406-1212
Citigroup Global Markets Inc. .............................. C 36.18%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
EUROPEAN VALUE EQUITY FUND
Van Kampen Funds Inc. ...................................... A 15.39%
Seed Capital/Discretionary B 14.68%
Attn: Eric Marmoll C 36.11%
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5305
Edward Jones & Co. ......................................... A 12.82%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Heights, MO 63043-3009
MLPF&S for the Sole Benefit of its Customers................ A 10.19%
Attn: Fund Administration 97FW6 B 8.34%
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Morgan Stanley DW Inc. ..................................... A 8.15%
875 3rd Avenue B 21.57%
New York, NY 10022 C 17.32%
FOCUS EQUITY FUND
Edward Jones & CO........................................... A 19.91%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
</Table>
B-5
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
Morgan Stanley DW Inc. ..................................... A 16.17%
875 3rd Avenue B 26.37%
New York, NY 10022 C 17.45%
MLPF&S for the Sole Benefit of its Customers................ C 5.93%
Attn: Fund Administration 97B63
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Citigroup Global Markets Inc. .............................. C 6.14%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
PFPC Brokerage Services..................................... A 6.00%
FBO Primerica Financial Services B 9.51%
760 Moore Road
King of Prussia, PA 19406-1212
GLOBAL EQUITY ALLOCATION FUND
Edward Jones & CO........................................... A 13.45%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Morgan Stanley DW Inc....................................... B 11.36%
875 3rd Avenue C 6.45%
New York, NY 10022
PFPC Brokerage Services..................................... A 8.74%
FBO Primerica Financial Services B 11.69%
760 Moore Road
King of Prussia, PA 19406-1212
Citigroup Global Markets Inc. .............................. C 8.30%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
GLOBAL FRANCHISE FUND
Charles Schwab & Co. Inc. .................................. A 21.32%
Onesource Omnibus
Exclusive Benefit of its Customers
101 Montgomery Street
San Francisco, CA 94104-4122
Morgan Stanley DW Inc. ..................................... A 7.31%
875 3rd Avenue B 22.12%
New York, NY 10020 C 14.51%
Edward Jones & CO........................................... A 14.54%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
PFPC Brokerage Services..................................... B 5.01%
FBO Primerica Financial Services
760 Moore Road
King of Prussia, PA 19406-1212
</Table>
B-6
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
MLPF&S for the Sole Benefit of its Customers................ C 14.64%
Attn: Fund Administration 97FW6
4800 Deer Lake Dr. East, 2nd Floor
Jacksonville, FL 32246-6484
Citigroup Global Markets Inc. .............................. C 5.42%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
GLOBAL VALUE EQUITY FUND
Edward Jones & CO........................................... A 30.72%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
MLPFS for the Sole Benefit of its Customers................. A 5.28%
Attn: Fund Administration 97R83
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Morgan Stanley DW Inc. ..................................... A 25.97%
875 3rd Avenue B 76.82%
New York, NY 10022 C 67.06%
Citigroup Global Markets Inc. .............................. C 7.25%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
INTERNATIONAL MAGNUM FUND
Edward Jones & CO........................................... A 20.50%
Attn: Mutual Fund B 6.09%
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Morgan Stanley DW Inc. ..................................... A 29.43%
375 3rd Avenue B 18.65%
New York, NY 10022 C 11.56%
Citigroup Global Markets Inc. .............................. C 18.30%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
LATIN AMERICAN FUND
Morgan Stanley DW Inc. ..................................... A 5.71%
375 3rd Avenue B 24.91%
New York, NY 10022 C 6.84%
The Private Bank & Trust Co. ............................... A 6.13%
Cust Daniel R Lee
08-0127
10 Dearborn Street, Suite 900
Chicago, IL 60602-4209
</Table>
B-7
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
Charles Schwab & Co Inc..................................... A 9.83%
Onesource Omnibus
Exclusive Benefit of its Customers
101 Montgomery Street
San Francisco, CA 94104-4122
MLPF&S for the Sole Benefit of its Customers................ A 7.54%
Attn: Fund Administration 97NB9
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
UBS Financial Services Inc. ................................ B 5.37%
FBO Irwin B. Nathanson and
Sally Nathanson, Joint Tenants
2 the Crossing
Purchase, NY 10577-2210
Citigroup Global Markets Inc. .............................. B 7.98%
00109801250 C 10.08%
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
MLPF&S for the Sole Benefit of its Customers................ C 6.75%
Attn: Fund Administration 97N91
4800 Deer Lake East, 2nd Floor
Jacksonville, FL 32246-6484
MID CAP GROWTH FUND
MLPF&S for the Sole Benefit of its Customers................ C 6.66%
Attn: Fund Administration 97238
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Morgan Stanley DW Inc. ..................................... A 5.73%
375 3rd Avenue B 17.50%
New York, NY 10022 C 19.50%
Edward Jones & CO........................................... A 26.17%
Attn: Mutual Fund
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Trustmark National Bank..................................... A 5.47%
FBO Various Trust Accounts -- RR
ATTN: Mutual Funds Trust RM 1030
248 E. Capitol St.
Jackson MS 39201-2503
PFPC Brokerage Services..................................... A 10.26%
FBO Financial Services B 18.46%
760 Moore Road
King of Prussia, PA 19406-3101
VALUE FUND
State Street Bank & Trust Co. .............................. A 18.57%
FBO ADF/MSDW Alliance
105 Rosemont Road
Westwood, MA 02090-2318
</Table>
B-8
<Table>
<Caption>
CLASS OF PERCENTAGE
NAME & ADDRESS OF HOLDER SHARES OWNERSHIP
------------------------ -------- ----------
Edward Jones & CO........................................... A 28.82%
Attn: Mutual Fund B 6.12%
Shareholder Accounting
201 Progress Pkwy
Maryland Hts., MO 63043-3009
Morgan Stanley DW Inc. ..................................... A 7.21%
375 3rd Avenue B 18.67%
New York, NY 10022 C 18.27%
MLPF&S for the Sole Benefit of its Customers................ B 6.40%
Attn: Fund Administration 97P52
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
Citigroup Global Markets Inc................................ C 13.69%
00109801250
Attn: Cindy Tempesta, 7th Floor
333 West 34th Street
New York, NY 10001-2402
MLPF&S for the Sole Benefit of its Customers................ C 6.13%
Attn: Fund Administration 97P53
4800 Deer Lake Drive East, 2nd Floor
Jacksonville, FL 32246-6484
</Table>
INVESTMENT OBJECTIVES, STRATEGIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the "Investment Objective(s), Strategies and Risks" sections in
each Fund's Prospectus and does not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to this
caption in each Fund's Prospectus for a complete presentation of the matters
disclosed below.
BORROWING AND LEVERAGE
To the extent allowed by the Funds' investment restrictions described
herein, certain Funds may engage in borrowing for temporary or emergency
purposes. To the extent allowed by the Funds' investment restrictions described
herein, certain Funds may engage in borrowing for investment purposes, also
known as leverage. Leveraging will magnify declines as well as increases in the
net asset value of a Fund's shares and in the return on a Fund's investments.
The extent to which a Fund may borrow will depend upon the availability of
credit. No assurance can be given that a Fund will be able to borrow on terms
acceptable to the Fund. Borrowing by a Fund will create the opportunity for
increased net income but, at the same time, will involve special risk
considerations. Borrowing will create interest expenses for a Fund which can
exceed the income from the assets obtained with the proceeds. To the extent the
income derived from securities purchased with funds obtained through borrowing
exceeds the interest and other expenses that a Fund will have to pay in
connection with such borrowing, such Fund's net income will be greater than if
the Fund did not borrow. Conversely, if the income from the assets obtained
through borrowing is not sufficient to cover the cost of borrowing, the net
income of the Fund will be less than if the Fund did not borrow, and therefore
the amount available for distribution to shareholders will be reduced. A Fund's
use of leverage may impair the ability of the Fund to maintain its qualification
for federal income tax purposes as a regulated investment company. The rights of
any lenders to a Fund to receive payments of interest on and repayments of
principal of borrowings will be senior to the rights of such Fund's
shareholders, and the terms of a Fund's borrowings may contain provisions that
limit certain activities of such Fund and could result in precluding the
purchase of securities and instruments that the Fund would otherwise purchase.
B-9
CONVERTIBLE SECURITIES, RIGHTS OR WARRANTS AND EQUITY-LINKED SECURITIES
Certain Funds may invest in convertible securities, rights or warrants to
purchase common stocks and other equity-linked securities. A convertible
security is a bond, debenture, note, preferred stock or other security that may
be converted into or exchanged for a prescribed amount of common stock or other
security of the same or a different issuer or into cash within a particular
period of time at a specified price or formula. A convertible security generally
entitles the holder to receive interest paid or accrued on debt securities or
the dividend paid on preferred stock until the convertible security matures or
is redeemed, converted or exchanged. Before conversion, convertible securities
generally have characteristics similar to both debt and equity securities. The
value of convertible securities tends to decline as interest rates rise and,
because of the conversion feature, tends to vary with fluctuations in the market
value of the underlying securities. Convertible securities ordinarily provide a
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities generally rank senior to common
stock in a corporation's capital structure but are usually subordinated to
comparable nonconvertible securities. Convertible securities generally do not
participate directly in any dividend increases or decreases of the underlying
security although the market prices of convertible securities may be affected by
any such dividend changes or other changes in the underlying securities. With
respect to each of the Funds, except Emerging Markets Debt Fund and Emerging
Markets Income Fund, up to 5% of the Fund's net assets may be invested in
convertible securities that are below investment grade. Debt securities rated
below investment grade are commonly known as junk bonds. Although the Fund
selects these securities primarily on the basis of their equity characteristics,
investors should be aware that convertible securities rated in these categories
are considered high risk securities; the rating agencies consider them
speculative with respect to the issuer's continuing ability to make timely
payments of interest and principal. Thus, to the extent that such convertible
securities are acquired by the Fund, there is a greater risk as to the timely
repayment of the principal of, and timely payment of interest or dividends on,
such securities than in the case of higher-rated convertible securities.
Rights and warrants are instruments giving holders the right, but not the
obligation, to buy shares of a company at a given price during a specified
period. Rights typically have a substantially shorter term than do warrants.
Rights and warrants may be considered more speculative and less liquid than
certain other types of investments in that they do not entitle a holder to
dividends or voting rights with respect to the underlying securities nor do they
represent any rights in the assets of the issuing company. Rights and warrants
may lack a secondary market.
Equity-linked securities are instruments whose value is based upon the
value of one or more underlying equity securities, a reference rate or an index.
Equity-linked securities come in many forms and may include features, among
others, such as the following: (i) may be issued by the issuer of the underlying
equity security or by a company other than the one to which the instrument is
linked (usually an investment bank), (ii) may convert into equity securities,
such as common stock, within a stated period from the issue date or may be
redeemed for cash or some combination of cash and the linked security at a value
based upon the value of the underlying equity security within a stated period
from the issue date, (iii) may have various conversion features prior to
maturity at the option of the holder or the issuer or both, (iv) may limit the
appreciation value with caps or collars of the value of underlying equity
security and (v) may have fixed, variable or no interest payments during the
life of the security which reflect the actual or a structured return relative to
the underlying dividends of the linked equity security. Investments in
equity-linked securities may subject the Fund to additional risks not ordinarily
associated with investments in other equity securities. Because equity-linked
securities are sometimes issued by a third party other than the issuer of the
linked security, the Fund is subject to risks if the underlying equity security,
reference rate or index underperforms and if the issuer defaults on the payment
of the dividend or the common stock at maturity. In addition, the trading market
for particular equity-linked securities may be less liquid, making it difficult
for the Fund to dispose of a particular security when necessary and reduced
liquidity in the secondary market for any such securities may make it more
difficult to obtain market quotations for valuing the Fund's portfolio.
B-10
DEPOSITARY RECEIPTS
Certain Funds may invest in American Depositary Receipts ("ADRs"), Global
Depositary Receipts ("GDRs"), European Depositary Receipts ("EDRs") and other
depositary receipts, to the extent that such depositary receipts become
available. ADRs are securities, typically issued by a U.S. financial institution
(a "depositary"), that evidence ownership interests in a security or a pool of
securities issued by a foreign issuer (the "underlying issuer") and deposited
with the depositary. ADRs include American Depositary Shares and New York Shares
and may be "sponsored" or "unsponsored." Sponsored ADRs are established jointly
by a depositary and the underlying issuer, whereas unsponsored ADRs may be
established by a depositary without participation by the underlying issuer.
GDRs, EDRs and other types of depositary receipts are typically issued by
foreign depositaries, although they may also be issued by U.S. depositaries, and
evidence ownership interests in a security or pool of securities issued by
either a foreign or a U.S. corporation.
Holders of unsponsored depositary receipts generally bear all the costs
associated with establishing the unsponsored depositary receipt. The depositary
of an unsponsored depositary receipt is under no obligation to distribute
shareholder communications received from the underlying issuer or to pass
through to the holders of the unsponsored depositary receipt voting rights with
respect to the deposited securities or pool of securities. Depositary receipts
are not necessarily denominated in the same currency as the underlying
securities to which they may be connected. Generally, depositary receipts in
registered form are designed for use in the U.S. securities market and
depositary receipts in bearer form are designed for use in securities markets
outside the United States. For purposes of the Funds' investment policies, a
Fund's investments in depositary receipts will be deemed to be investments in
the underlying securities.
EURODOLLAR AND YANKEE OBLIGATIONS
Eurodollar bank obligations are dollar-denominated certificates of deposit
and time deposits issued outside the U.S. capital markets by foreign branches of
banks and by foreign banks. Yankee bank obligations are dollar-denominated
obligations issued in the U.S. capital markets by foreign banks.
Eurodollar and Yankee obligations are subject to the same risks that
pertain to domestic issues, notably credit risk, market risk and liquidity risk.
Additionally, Eurodollar (and to a limited extent, Yankee) obligations are
subject to certain sovereign risks. One such risk is the possibility that a
sovereign country might prevent capital, in the form of dollars, from flowing
across its borders. Other risks include: adverse political and economic
developments; the extent and quality of government regulation of financial
markets and institutions; the imposition of foreign withholding taxes; and the
expropriation or nationalization of foreign issuers.
FOREIGN INVESTING
Certain Funds may or will invest in securities of foreign issuers. Unless
otherwise described in the Fund's prospectus, the Fund considers an issuer to be
from a particular country if (i) its principal securities trading market is in
that country; (ii) alone or on a consolidated basis it derives 50% or more of
its annual revenue from either goods produced, sales made or services performed
in that country; or (iii) it is organized under the laws of, or has a principal
office in that country. By applying these tests, it is possible that a
particular company could be deemed to be from more than one country. Securities
of foreign issuers may be denominated in U.S. dollars or in currencies other
than U.S. dollars. The percentage of assets invested in securities of a
particular country or denominated in a particular currency will vary in
accordance with the portfolio management team's assessment of the relative
yield, appreciation potential and the relationship of a country's currency to
the U.S. dollar, which is based upon such factors as fundamental economic
strength, credit quality and interest rate trends. Investments in securities of
foreign issuers present certain risks not ordinarily associated with investments
in securities of U.S. issuers. These risks include fluctuations in foreign
currency exchange rates, political, economic or legal developments (including
war or other instability, expropriation of assets,
B-11
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. Also, 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, a Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in securities of foreign issuers relating to volume
constraints, limitations or restrictions, clearance or settlement procedures, or
otherwise could impact yields and result in temporary periods when assets are
not fully invested or attractive investment opportunities are foregone.
Ratings of a non-U.S. debt instrument, to the extent that those ratings are
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located. Ratings generally take into account the currency in which
a non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, for example, typically have a lower
rating than local currency instruments due to the existence of an additional
risk that the government will be unable to obtain the required foreign currency
to service its foreign currency-denominated debt. In general, the ratings of
debt securities or obligations issued by a non-U.S. public or private entity
will not be higher than the rating of the currency or the foreign currency debt
of the central government of the country in which the issuer is located,
regardless of the intrinsic creditworthiness of the issuer.
The governments of some countries have been engaged in programs of selling
part or all of their stakes in government owned or controlled enterprises
("privatization"). The Adviser believes that privatization may offer investors
opportunities for significant capital appreciation and intends to invest assets
of the Funds in privatization in appropriate circumstances. In certain
countries, the ability of foreign entities, such as the Funds, to participate in
privatization may be limited by local law, or the terms on which the Funds may
be permitted to participate may be less advantageous than those for local
investors. There can be no assurance that governments will continue to sell
companies currently owned or controlled by them or that any privatization
programs in which the Funds participates will be successful.
FOREIGN CURRENCY EXCHANGE RISKS. To the extent a Fund invests in securities
denominated or quoted in currencies other than the U.S. dollar, such Fund will
be affected by changes in foreign currency exchange rates (and exchange control
regulations) which affect the value of investments in the Fund and the accrued
income and appreciation or depreciation of the investments. Changes in foreign
currency exchange ratios relative to the U.S. dollar will affect the U.S. dollar
value of the Fund's assets denominated in that currency and the Fund's yield on
such assets as well as any temporary uninvested reserves in bank deposits in
foreign currencies. In addition, the Fund will incur costs in connection with
conversions between various currencies. The Funds do not intend to invest in any
security in a country where the currency is not freely convertible to U.S.
dollars, unless the Fund has obtained the necessary governmental licensing to
convert such currency or other appropriately licensed or sanctioned contractual
guarantee to protect such investment against loss of that currency's external
value, or the Fund has a reasonable expectation at the time the investment is
made that such governmental licensing or other appropriately licensed or
sanctioned guarantee would be obtained or that the currency in which the
security is quoted would be freely convertible at the time of any proposed sale
of the security by the Fund.
A Fund's foreign currency exchange transactions may be conducted on a spot
(i.e., cash) basis at the spot rate for purchasing or selling currency
prevailing in the foreign currency exchange market. A Fund also may enter into
contracts with banks, brokers or dealers to purchase or sell securities or
foreign currencies at a future
B-12
date ("forward contracts"). A foreign currency forward contract is a negotiated
agreement between the contracting parties to exchange a specified amount of
currency at a specified future time at a specified rate. The rate can be higher
or lower than the spot rate between the currencies that are the subject of the
contract. These contracts are traded in the interbank market conducted directly
between currency traders (usually large commercial banks) and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for such trades.
A Fund may attempt to protect against adverse changes in the value of the
U.S. dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested, or by buying or selling a foreign currency option or futures
contract for such amount. Such strategies may be employed before the Fund
purchases a foreign security traded in the currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Seeking to protect against a
change in the value of a foreign currency in the foregoing manner does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Furthermore, such transactions reduce
or preclude the opportunity for gain if the value of the currency should move in
the direction opposite to the position taken. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had not
entered into such contracts. The Funds generally will not enter into a forward
contract with a term of greater than one year. At the maturity of a forward
contract, a Fund may either accept or make delivery of the currency specified in
the contract or, prior to maturity, enter into a closing purchase transaction
involving the purchase or sale of an offsetting contract. Closing purchase
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract. A Fund will
only enter into such a forward contract if it is expected that there will be a
liquid market in which to close out such contract. There can, however, be no
assurance that such a liquid market will exist in which to close a forward
contract, in which case the Fund may suffer a loss.
It is impossible to forecast with absolute precision the market value of a
particular portfolio security at the expiration of the contract. Accordingly, it
may be necessary for a Fund to purchase additional foreign currency on the spot
market (and bear the expense of such purchase) if the market value of the
security is less than the amount of foreign currency that such Fund is obligated
to deliver and if a decision is made to sell the security and make delivery of
the foreign currency.
If a Fund engages in an offsetting transaction, that Fund will incur a gain
or a loss to the extent that there has been movement in forward contract prices.
Should forward prices decline during the period between a Fund entering into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, such Fund will
realize a gain to the extent that the price of the currency it has agreed to
sell exceeds the price of the currency it has agreed to purchase. Should forward
prices increase, such Fund would suffer a loss to the extent that the price of
the currency it has agreed to purchase exceeds the price of the currency it has
agreed to sell.
The Funds are not required to enter into such transactions with regard to
their foreign currency-denominated securities. It also should be realized that
this method of protecting the value of portfolio securities against a decline in
the value of a currency does not eliminate fluctuations in the underlying prices
of the securities. It simply establishes a rate of exchange which one can
achieve at some future point in time. Additionally, although such contracts tend
to minimize the risk of loss due to a decline in the value of the hedged
currency, at the same time, they tend to limit any potential gain which might
result should the value of such currency increase.
In addition, Funds may cross-hedge currencies by entering into a
transaction to purchase or sell one or more currencies that are expected to
fluctuate in value relative to other currencies to which a portfolio has or
expects to have portfolio exposure. These Funds may also engage in proxy
hedging, which is defined as entering into positions in one currency to hedge
investments denominated in another currency, where two currencies are
economically linked. A Fund's entry into forward contracts, as well as any use
of proxy or cross hedging techniques, will generally require the Fund to
segregate cash or liquid securities in an amount at least equal to the Fund's
obligations throughout the duration of the contract. Funds may combine forward
contracts
B-13
with investments in securities denominated in other currencies to achieve
desired security and currency exposures. Such combinations are generally
referred to as synthetic securities. For example, in lieu of purchasing a
foreign bond, a Fund may purchase a U.S. dollar-denominated security and at the
same time enter into a forward contract to exchange U.S. dollars for the
contract's underlying currency at a future date. By matching the amount of U.S.
dollars to be exchanged with the anticipated value of the U.S. dollar-
denominated security, the Fund may be able to lock in the foreign currency value
of the security and adopt a synthetic position reflecting the credit quality of
the U.S. dollar-denominated security.
To the extent required by the rules and regulations of the SEC, the Fund
will segregate cash or liquid securities in an amount at least equal to the
value of such Fund's total assets committed to the consummation of forward
foreign currency exchange contracts. See also "Strategic Transactions".
FOREIGN CURRENCY EXCHANGE-RELATED SECURITIES. Foreign currency warrants are
warrants that entitle the holder to receive from their issuer an amount of cash
(generally, for warrants issued in the United States, in U.S. dollars) which is
calculated pursuant to a predetermined formula and based on the exchange rate
between a specified foreign currency and the U.S. dollar as of the exercise date
of the warrant. Foreign currency warrants generally are exercisable upon their
issuance and expire as of a specified date and time. Foreign currency warrants
have been issued in connection with U.S. dollar-denominated debt offerings by
major corporate issuers in an attempt to reduce the foreign currency exchange
risk which, from the point of view of prospective purchasers of the securities,
is inherent in the international fixed-income marketplace. Foreign currency
warrants may attempt to reduce the foreign exchange risk assumed by purchasers
of a security by, for example, providing for a supplemental payment in the event
that the U.S. dollar depreciates against the value of a major foreign currency.
The formula used to determine the amount payable upon exercise of a foreign
currency warrant may make the warrant worthless unless the applicable foreign
currency exchange rate moves in a particular direction (e.g., unless the U.S.
dollar appreciates or depreciates against the particular foreign currency to
which the warrant is linked or indexed). Foreign currency warrants are severable
from the debt obligations with which they may be offered, and may be listed on
exchanges. Foreign currency warrants may be exercisable only in certain minimum
amounts, and an investor wishing to exercise warrants who possesses less than
the minimum number required for exercise may be required either to sell the
warrants or to purchase additional warrants, thereby incurring additional
transaction costs. In the case of any exercise of warrants, there may be a time
delay between the time a holder of warrants gives instructions to exercise and
the time the exchange rate relating to exercise is determined, during which time
the exchange rate could change significantly, thereby affecting both the market
and cash settlement values of the warrants being exercised. The expiration date
of the warrants may be accelerated if the warrants should be delisted from an
exchange or if their trading should be suspended permanently, which would result
in the loss of any remaining "time value" of the warrants (i.e., the difference
between the current market value and the exercise value of the warrants), and,
in the case where the warrants were "out-of-the-money," in a total loss of the
purchase price of the warrants. Warrants are generally unsecured obligations of
their issuers and are not standardized foreign currency options issued by the
Options Clearing Corporation ("OCC"). Unlike foreign currency options issued by
the OCC, the terms of foreign exchange warrants generally will not be amended in
the event of governmental or regulatory actions affecting exchange rates or in
the event of the imposition of other regulatory controls affecting the
international currency markets. The initial public offering price of foreign
currency warrants is generally considerably in excess of the price that a
commercial user of foreign currencies might pay in the interbank market for a
comparable option involving significantly larger amounts of foreign currencies.
Foreign currency warrants are subject to complex political or economic factors.
Principal exchange rate linked securities are debt obligations the
principal on which is payable at maturity in an amount that may vary based on
the exchange rate between the U.S. dollar and a particular foreign currency at
or about that time. The return on "standard" principal exchange rate linked
securities is enhanced if the foreign currency to which the security is linked
appreciates against the U.S. dollar, and is adversely affected by increases in
the foreign exchange value of the U.S. dollar; "reverse" principal exchange rate
linked securities are like the "standard" securities, except that their return
is enhanced by increases in the value of the U.S. dollar and adversely impacted
by increases in the value of foreign currency. Interest payments on the
securities are generally made in U.S. dollars at rates that reflect the degree
of foreign currency risk assumed or
B-14
given up by the purchaser of the notes (i.e., at relatively higher interest
rates if the purchaser has assumed some of the foreign exchange risk, or
relatively lower interest rates if the issuer has assumed some of the foreign
exchange risk, based on the expectations of the current market). Principal
exchange rate linked securities may, in limited cases, be subject to
acceleration of maturity (generally, not without the consent of the holders of
the securities), which may have an adverse impact on the value of the principal
payment to be made at maturity.
Performance indexed paper is U.S. dollar-denominated commercial paper the
yield of which is linked to certain foreign exchange rate movements. The yield
to the investor on performance indexed paper is between the U.S. dollar and a
designated currency as of or about that time (generally, the index maturity two
days prior to maturity). The yield to the investor will be within a range
stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of
return that is above, market yields on U.S. dollar-denominated commercial paper,
with both the minimum and maximum rates of return on the investment
corresponding to the minimum and maximum values of the spot exchange rate two
business days prior to maturity.
INVESTING IN EMERGING MARKET COUNTRIES. The risks of foreign investment are
heightened when the issuer is from an emerging market country. The extent of
economic development, political stability and market depth of such countries
varies widely and investments in the securities of issuers in such countries
typically involve greater potential gain or loss than investments in securities
of issuers in more developed countries. Emerging market countries tend to have
economic structures that are less diverse and mature and political systems that
are less stable than those of developed markets. Emerging market countries may
be more likely to experience political turmoil or rapid changes in economic
conditions than more developed markets, and the financial condition of issuers
in emerging market countries may be more precarious than in other countries.
Certain countries depend to a larger degree upon international trade or
development assistance and, therefore, are vulnerable to changes in trade or
assistance which, in turn, may be affected by a variety of factors. A Fund may
be particularly sensitive to changes in the economies of certain countries
resulting from any reversal of economic liberalization, political unrest or the
imposition of sanctions by the United States or other countries.
A Fund's purchase and sale of portfolio securities of issuers determined by
the portfolio management team to be in emerging market countries may be
constrained by limitations as to daily changes in the prices of listed
securities, periodic or sporadic trading or settlement or limitations on
aggregate holdings by foreign investors. Such limitations may be computed based
on the aggregate trading volume by or holdings of such Fund, the Adviser, its
affiliates or their respective clients or other service providers. The Fund may
not be able to sell securities in circumstances where price, trading or
settlement volume limitations have been reached. Foreign investment in the
securities markets of certain emerging market countries is restricted or
controlled to varying degrees which may limit investment in such countries or
increase the administrative costs of such investments. For example, certain
countries may require governmental approval prior to investment by foreign
persons or limit investment by foreign persons to only a specified percentage of
an issuer's outstanding securities or a specific class of securities which may
have less advantageous terms (including price) than securities of the issuer
available for purchase by nationals. In addition, certain countries may restrict
or prohibit investment opportunities in issuers or industries deemed important
to national interests. Such restrictions may affect the market price, liquidity
and rights of securities that may be purchased by the Fund. The repatriation of
both investment income and capital from certain emerging market countries is
subject to restrictions such as the need for governmental consents. Due to
restrictions on direct investment in securities in certain countries, it is
anticipated that the Fund may invest in such countries through other investment
funds in such countries.
Many emerging market countries have experienced currency devaluations and
substantial (and, in some cases, extremely high) rates of inflation, which have
had a negative effect on the economies and securities markets of such countries.
Economies in emerging market countries generally are dependent heavily upon
commodity prices and international trade and, accordingly, have been and may
continue to be affected adversely by the economies of their trading partners,
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures negotiated by the countries with which
they trade.
B-15
Many emerging market countries are subject to a substantial degree of
economic, political and social instability. Governments of some emerging
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging market countries
have periodically used force to suppress civil dissent. Disparities of wealth,
the pace and success of political reforms, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some emerging markets countries. Unanticipated political
or social developments may result in sudden and significant investment losses.
Settlement procedures in emerging market countries are frequently less
developed and reliable than those in developed markets. In addition, significant
delays are common in certain markets in registering the transfer of securities.
Settlement or registration problems may make it more difficult for a Fund to
value its portfolio securities and could cause such Fund to miss attractive
investment opportunities, to have a portion of its assets uninvested or to incur
losses due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations. The
creditworthiness of the local securities firms used by the Fund in emerging
market countries may not be as sound as the creditworthiness of firms used in
more developed countries. As a result, the Fund may be subject to a greater risk
of loss if a securities firm defaults in the performance of its
responsibilities.
The small size and inexperience of the securities markets in certain
emerging market countries and the limited volume of trading in securities in
those countries may make a Fund's investments in such countries less liquid and
more volatile than investments in countries with more developed securities
markets. A Fund's investments in emerging market countries are subject to the
risk that the liquidity of a particular investment, or investments generally, in
such countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, the Fund may incur losses because it will be required to effect sales
at a disadvantageous time and only then at a substantial drop in price.
Investments in emerging market countries may be more difficult to price
precisely because of the characteristics discussed above and lower trading
volumes.
A Fund's use of foreign currency management techniques in emerging market
countries may be limited. Due to the limited market for these instruments in
emerging market countries, the Adviser does not currently anticipate that a
significant portion of the Funds' currency exposure in emerging market
countries, if any, will be covered by such instruments.
Investments in emerging market country government debt securities involve
special risks. Certain emerging market countries have historically experienced,
and may continue to experience, high rates of inflation, high interest rates,
exchange rate fluctuations, large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and unemployment. The issuer or
governmental authority that controls the repayment of an emerging market
country's debt may not be able or willing to repay the principal and/or interest
when due in accordance with the terms of such debt. As a result of the
foregoing, a government obligor may default on its obligations. If such an event
occurs, a Fund may have limited legal recourse against the issuer and/or
guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign government
debt securities to obtain recourse may be subject to the political climate in
the relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
government debt obligations in the event of default under their commercial bank
loan agreements.
Debt securities of corporate issuers in emerging market countries may
include debt securities or obligations issued (i) by banks located in emerging
market countries or by branches of emerging market country banks located outside
the country or (ii) by companies organized under the laws of an emerging market
country.
RUSSIAN INVESTING. The registration, clearing and settlement of securities
transactions in Russia are subject to significant risks not normally associated
with securities transactions in the United States and other more developed
markets. Ownership of shares in Russian issuers is evidenced by entries in an
issuer's share register (except where shares are held through depositories that
meet the requirements of the 1940 Act) and
B-16
the issuance of extracts from the register or, in certain limited cases, by
formal share certificates. However, Russian share registers are frequently
unreliable and the Funds could possibly lose their registration through
oversight, negligence or fraud. Moreover, Russia lacks a centralized registry to
record securities transactions and registrars located throughout Russia or the
companies themselves maintain share registers. Registrars are under no
obligation to provide extracts to potential purchasers in a timely manner or at
all and are not necessarily subject to effective state supervision. In addition,
while registrars are liable under law for losses resulting from their errors, it
may be difficult for the Funds to enforce any rights they may have against the
registrar or issuer of the securities in the event of loss of share
registration. Although Russian issuers with more than 1,000 shareholders are
required by law to employ an independent company to maintain share registers, in
practice, such issuers have not always followed this law. Because of this lack
of independence of registrars, management of a Russian issuer may be able to
exert considerable influence over who can purchase and sell the issuer's shares
by illegally instructing the registrar to refuse to record transactions on the
share register. Furthermore, these practices may prevent the Funds from
investing in the securities of certain Russian issuers and could cause a delay
in the sale of Russian securities by the Funds if the issuer deems a purchaser
unsuitable, which may expose the Funds to potential loss on their investment.
In light of the risks described above, the Board of Directors has approved
certain procedures concerning the Funds' investments in Russian securities.
Among these procedures is a requirement that the Funds not invest in the
securities of a Russian issuer unless that issuer's registrar has entered into a
contract with the Funds' sub-custodian containing certain protective conditions,
including, among other things, the sub-custodian's right to conduct regular
share confirmations on behalf of the Funds. This requirement will likely have
the effect of precluding investments in certain Russian issuers that the Funds
might otherwise make.
BRADY BONDS. Funds that invest in foreign debt securities may invest in
debt obligations customarily referred to as "Brady Bonds." Brady Bonds are
created through the exchange of existing commercial bank loans to foreign
entities for new obligations in connection with debt restructuring under a plan
introduced by former U.S. Secretary of the Treasury Nicholas F. Brady (the
"Brady Plan"). Brady Bonds may be collateralized or uncollateralized and issued
in various currencies (although most are U.S. dollar-denominated) and they are
actively traded in the over-the-counter secondary market. A Fund may purchase
Brady Bonds either in the primary or secondary markets. The price and yield of
Brady Bonds purchased in the secondary market will reflect the market conditions
at the time of purchase, regardless of the stated face amount and the stated
interest rate. With respect to Brady Bonds with no or limited collateralization,
a Fund will rely for payment of interest and principal primarily on the
willingness and ability of the issuing government to make payment in accordance
with the terms of the bonds.
U.S. dollar-denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Interest payments on these
Brady Bonds generally are collateralized by cash or securities in an amount
that, in the case of fixed rate bonds, is equal to at least one year of rolling
interest payments or, in the case of floating rate bonds, initially is equal to
at least one year's rolling interest payments based on the applicable interest
rate at that time and is adjusted at regular intervals thereafter. Certain Brady
Bonds are entitled to "value recovery payments" in certain circumstances, which
in effect constitute supplemental interest payments but generally are not
collateralized. Brady Bonds are often viewed as having three or four valuation
components: (i) the collateralized repayment of principal at final maturity;
(ii) the collateralized interest payments; (iii) the uncollateralized interest
payments; and (iv) any uncollateralized repayment of principal at maturity
(these uncollateralized amounts constitute the "residual risk"). In the event of
a default with respect to collateralized Brady Bonds as a result of which the
payment obligations of the issuer are accelerated, the U.S. Treasury zero coupon
obligations held as collateral for the payment of principal will not be
distributed to investors, nor will such obligations be sold and the proceeds
distributed. The collateral will be held to the scheduled maturity of the
defaulted Brady Bonds by the collateral agent, at which time the face amount of
the collateral will equal the principal payments which would have then been due
on the Brady Bonds in the normal course. In addition, in light of the residual
risk of the Brady Bonds and, among other factors, the history of defaults with
respect to
B-17
commercial bank loans by public and private entities of countries issuing Brady
Bonds, investments in Brady Bonds should be viewed as speculative.
ILLIQUID SECURITIES
Each Fund may invest a portion of its assets in illiquid securities, which
includes securities that are not readily marketable, repurchase agreements which
have a maturity of longer than seven days and generally includes securities that
are restricted from sale to the public without registration under the Securities
Act of 1933, as amended (the "1933 Act"). The sale of such securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of liquid securities trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities are often purchased at a discount from the market price of
unrestricted securities of the same issuer reflecting the fact that such
securities may not be readily marketable without some time delay. Investments in
securities for which market quotations are not readily available are valued at
their fair value as determined in good faith by the Adviser in accordance with
procedures approved by the Company's Board of Directors. Ordinarily, a Fund
would invest in restricted securities only when it receives the issuer's
commitment to register the securities without expense to that Fund. However,
registration and underwriting expenses (which typically range from 7% to 15% of
the gross proceeds of the securities sold) may be paid by a Fund. Restricted
securities which can be offered and sold to qualified institutional buyers under
Rule 144A under the 1933 Act ("144A Securities") and are determined to be liquid
under guidelines adopted by and subject to the supervision of the Company's
Board of Directors are not subject to the limitation on illiquid securities;
however, such securities are still subject to any Fund limitation on the
securities subject to legal or contractual restrictions on resale as described
in that Fund's investment restrictions. Such 144A Securities are subject to
monitoring and may become illiquid to the extent qualified institutional buyers
become, for a time, uninterested in purchasing such securities. Factors used to
determine whether 144A Securities are liquid include, among other things, a
security's trading history, the availability of reliable pricing information,
the number of dealers making quotes or making a market in such security and the
number of potential purchasers in the market for such security.
INVESTMENT COMPANY SECURITIES
Each Fund may invest in securities of other open-end or closed-end
investment companies, by purchase in the open market involving only customary
brokers' commissions or in connection with mergers, acquisitions of assets or
consolidations or as may otherwise be permitted by the 1940 Act.
Some emerging market countries have laws and regulations that currently
preclude direct foreign investments in the securities of their companies.
However, indirect foreign investments in the securities of companies listed and
traded on the stock exchanges in these countries are permitted by certain
emerging market countries through investment funds which have been specifically
authorized. Certain Funds may invest in these investment funds, including those
advised by Adviser or its affiliates, subject to applicable provisions of the
1940 Act, and other applicable laws.
If a Fund invests in such investment companies or investment funds, that
Fund's shareholders will bear not only their proportionate share of the expenses
of that Fund (including operating expenses and the fees of the Adviser), but
also will indirectly bear similar expenses of the underlying investment
companies or investment funds.
LOAN PARTICIPATIONS AND ASSIGNMENTS
Certain Funds may invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between an issuer of sovereign or
corporate debt obligations and one or more financial institutions ("Lenders").
Such Funds' investments in Loans are expected in most instances to be in the
form of participations in Loans ("Participations") and assignments of all or a
portion of Loans ("Assignments") from third parties.
In the case of Participations, a Fund will have the right to receive
payments of principal, interest and any fees to which it is entitled only from
the Lender selling the Participations and only upon receipt by the Lender
B-18
of the payments from the borrower. In the event of the insolvency of the Lender
selling a Participation, a Fund may be treated as a general creditor of the
Lender and may not benefit from any set-off between the Lender and the borrower.
A Fund will acquire Participations only if the Fund determines that the Lender
interpositioned between the Fund and the borrower is creditworthy.
When a Fund purchases Assignments from Lenders it will acquire direct
rights against the borrower on the Loan. Because Assignments are arranged
through private negotiations between potential assignees and potential
assignors, however, the rights and obligations acquired by a Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
The Funds anticipate that such loan interests may be sold only to a limited
number of institutional investors. The lack of a broad secondary market may have
an adverse impact on the value of such securities and a Fund's ability to
dispose of particular Assignments or Participations when necessary to meet the
Fund's liquidity needs or in response to a specific economic event such as a
deterioration in the creditworthiness of the borrower. The lack of a broad
secondary market for Assignments and Participations also may make it more
difficult for a Fund to value these securities for purposes of valuing the
Fund's portfolio and calculating its net asset value.
LOWER-GRADE SECURITIES
Certain Funds may invest in lower-grade income securities. Securities that
are in the lower-grade categories generally offer higher yields than are offered
by higher-grade securities of similar maturities, but they also generally
involve greater risks, such as greater credit risk, greater market risk and
volatility, greater liquidity concerns and potentially greater manager risk.
Investors should carefully consider the risks of owning shares of a Fund that
invests in lower-grade securities.
Credit risk relates to the issuer's ability to make timely payment of
interest and principal when due. 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 lower-grade 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 a Fund
experiences difficulties in the timely payment of principal and interest and
such issuer seeks to restructure the terms of its borrowings, such Fund may
incur additional expenses and may determine to invest additional assets with
respect to such issuer or the project or projects to which the Fund's securities
relate. Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as
a result of variation in the level of prevailing interest rates and yield
relationships in the income securities market and as a result of real or
perceived changes in credit risk. The value of such a Fund's investments can be
expected to fluctuate over time. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Income securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than income securities with shorter maturities. However, the
secondary market prices of 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 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 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 lower-grade securities in such a Fund and
thus in the net asset value of that Fund. Adverse publicity and investor
perceptions, whether or not based on rational analysis, may affect the value,
volatility and liquidity of lower-grade securities.
B-19
The markets for 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 lower-grade securities in which a Fund may invest, trading in such
securities may be relatively inactive. Prices of 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 lower-grade securities
generally could reduce market liquidity for such securities and make their sale
by the Fund more difficult, at least in the absence of price concessions. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. An economic downturn
or an increase in interest rates could severely disrupt the market for such
securities and adversely affect the value of outstanding securities or the
ability of the issuers to repay principal and interest. Further, a Fund may have
more difficulty selling such securities in a timely manner and at their stated
value than would be the case for securities for which an established retail
market does exist.
The Adviser is responsible for determining the net asset values of the
Funds' securities, subject to the supervision of the Company's Board of
Directors. During periods of reduced market liquidity or in the absence of
readily available market quotations for lower-grade securities, the ability to
value the securities becomes more difficult and the judgment of the Adviser may
play a greater role in the valuation of such securities due to the reduced
availability of reliable objective data.
A Fund may invest in securities not producing immediate cash income,
including securities in default, zero-coupon securities or pay-in-kind
securities, when their effective yield over comparable instruments producing
cash income make these investments attractive. 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. See
"Taxation" below. The Fund's portfolio management team will weigh these concerns
against the expected total returns from such instruments.
A Fund's investments may include securities with the lowest-grade assigned
by the recognized rating organizations and unrated securities of comparable
quality. Securities assigned such ratings include those of companies that are in
default or are in bankruptcy or reorganization. Such a Fund may invest in or own
securities of companies in various stages of financial restructuring, bankruptcy
or reorganization which are not currently paying interest or dividends. A Fund
may have limited recourse in the event of default on such securities. Securities
of such companies are regarded by the rating agencies as having extremely poor
prospects of ever attaining any real investment standing and are usually
available at deep discounts from the face values of the instruments. A security
purchased at a deep discount may currently pay a very high effective yield. In
addition, if the financial condition of the issuer improves, the underlying
value of the security may increase, resulting in capital appreciation. If the
company defaults on its obligations or remains in default, or if the plan of
reorganization does not provide sufficient payments for debtholders, the deep
discount securities may stop generating income and lose value or become
worthless. The portfolio management team will balance the benefits of deep
discount securities with their risks. While a broad portfolio of investments may
reduce the overall impact of a deep discount security that is in default or
loses its value, the risk cannot be eliminated.
Many lower-grade securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade securities choose not to
have a rating assigned to their obligations by any recognized rating
organization. As a result, a Fund's portfolio may consist of a higher portion of
unlisted or unrated securities as compared with an investment company that
invests primarily in higher-grade securities. Unrated securities are usually not
as attractive to as many buyers as are rated securities, a factor which may make
unrated securities less marketable. These factors may have the effect of
limiting the availability of the securities for purchase by a Fund and may also
limit the ability of a Fund to sell such securities at their fair value either
to meet redemption requests or in response to changes in the economy or the
financial markets. Further, to the extent a Fund owns or may acquire illiquid or
restricted lower-grade securities, these securities may involve special
registration responsibilities, liabilities and costs, and liquidity and
valuation difficulties.
B-20
The Funds will rely on judgment, analysis and experience of their portfolio
management teams in evaluating the creditworthiness of an issuer. The amount of
available information about the financial condition of certain lower-grade
issuers may be less extensive than other issuers. In its analysis, a portfolio
management team may consider the credit ratings of recognized rating
organizations in evaluating securities although the portfolio management team
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. Additionally, 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 a Fund to dispose of a
security. The portfolio management team continuously monitors the issuers of
securities held in a Fund. Additionally, since most foreign securities are not
rated, a Fund will invest in such securities based on the portfolio management
team's analysis without any guidance from published ratings. Because of the
number of investment considerations involved in investing in lower-grade
securities and foreign securities, achievement of such Fund's investment
objectives may be more dependent upon the portfolio management team's credit
analysis than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Adviser is unable at this time to predict what effect, if any,
legislation may have on the market for lower-grade securities.
MORTGAGE-RELATED DEBT SECURITIES
Mortgage-related debt securities represent ownership interests in
individual pools of residential mortgage loans. These securities are designed to
provide monthly payments of interest and principal to the investor. Each
mortgagor's monthly payment to his lending institution on his residential
mortgage is "passed-through" to investors. Mortgage pools consist of whole
mortgage loans or participations in loans. The terms and characteristics of the
mortgage instruments are generally uniform within a pool but may vary among
pools. Lending institutions which originate mortgages for the pools are subject
to certain standards, including credit and underwriting criteria for individual
mortgages included in the pools.
The coupon rate of interest on mortgage-related securities is lower than
the interest rates paid on the mortgages included in the underlying pool, but
only by the amount of the fees paid to the mortgage pooler, issuer, and/or
guarantor of payment of the securities for the guarantee of the services of
passing through monthly payments to investors. Actual yield may vary from the
coupon rate, however, if mortgage-related securities are purchased at a premium
or discount, traded in the secondary market at a premium or discount, or to the
extent that mortgages in the underlying pool are prepaid as noted above. In
addition, interest on mortgage-related securities is earned monthly, rather than
semi-annually as is the case for traditional bonds, and monthly compounding may
tend to raise the effective yield earned on such securities.
STRIPPED MORTGAGE-BACKED SECURITIES. Stripped mortgage-backed securities
("SMBS") are derivative multiclass mortgage securities. SMBS may be issued by
agencies or instrumentalities of the U.S. government or by private originators
of, or investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose entities
of the foregoing.
SMBS are usually structured with two or more classes that receive different
proportions of the interest and principal distributions on a pool of mortgage
assets. A common type of SMBS will have one class receiving some of the interest
and most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only or
"IO" class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying mortgage assets, and a rapid rate of principal payments may
have a material adverse effect on a Fund's yield to maturity from these
securities. If the underlying mortgage assets experience greater than
anticipated prepayments of principal, a Fund may fail to fully recoup its
initial investment in these securities even if the security is in one of the
highest rating categories.
B-21
Although SMBS are purchased and sold by institutional investors through
several investment banking firms acting as brokers or dealers, these securities
were only recently developed. As a result, established trading markets have not
yet developed and, accordingly, certain of these securities may be deemed
"illiquid" and are subject to a Fund's limitations on investment in illiquid
securities.
OBLIGATIONS OF DOMESTIC BANKS, FOREIGN BANKS AND FOREIGN BRANCHES OF U.S. BANKS
For purposes of the Funds' investment policies with respect to bank
obligations, the assets of a bank or savings institution will be deemed to
include the assets of its domestic and foreign branches. Investments in bank
obligations will include obligations of domestic branches of foreign banks and
foreign branches of domestic banks. Such investments may involve risks that are
different from investments in securities of domestic branches of U.S. banks. See
"Foreign Investing" above for a discussion of the risks of foreign investments.
These institutions may be subject to less stringent reserve requirements and to
different accounting, auditing, reporting and record keeping requirements than
those applicable to domestic branches of U.S. banks.
REPURCHASE AGREEMENTS
The Funds may engage in repurchase agreements with broker-dealers, banks
and other financial institutions to earn a return on temporarily available cash.
A repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a security and the seller agrees to repurchase
the obligation at a future time and set price, thereby determining the yield
during the holding period. Repurchase agreements involve certain risks in the
event of default by the other party. A Fund may enter into repurchase agreements
with broker-dealers, banks or other financial institutions deemed to be
creditworthy by the Adviser under guidelines approved by the Company's Board of
Directors. A Fund will not invest in repurchase agreements maturing in more than
seven days if any such investment, together with any other illiquid securities
held by the Fund, would exceed the Fund's limitation on illiquid securities
described herein. A Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of the bankruptcy or other default of a seller of a repurchase
agreement, a Fund could experience both delays in liquidating the underlying
securities and losses including: (a) possible decline in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto; (b) possible lack of access to income on the underlying security during
this period; and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Funds than would be available to the Funds investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. A Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
REVERSE REPURCHASE AGREEMENTS
To the extent allowed by the Fund's investment restrictions, certain Funds
may enter into reverse repurchase agreements with broker-dealers, banks and
other financial institutions that meet the credit
B-22
guidelines set by the Company's Board of Directors. In a reverse repurchase
agreement, a Fund sells a security and agrees to repurchase it at a mutually
agreed upon date and price, reflecting the interest rate effective for the term
of the agreement. It may also be viewed as the borrowing of money by a Fund. A
Fund's investment of the proceeds of a reverse repurchase agreement is the
speculative factor known as leverage. A Fund will enter into a reverse
repurchase agreement only if the interest income from investment of the proceeds
is expected to be greater than the interest expense of the transaction and the
proceeds are invested for a period no longer than the term of the agreement. A
Fund will segregate cash or liquid securities in an amount at least equal to its
purchase obligations under these agreements (including accrued interest). If
interest rates rise during a reverse repurchase agreement, it may adversely
affect a Fund's net asset value. In the event that the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, the
buyer or its trustee or receiver may receive an extension of time to determine
whether to enforce the Fund's repurchase obligation, and the Fund's use of
proceeds of the agreement may effectively be restricted pending such decision.
SECURITIES LENDING
Certain Funds may lend investment securities to qualified broker-dealers,
banks and other institutional borrowers who need to borrow securities to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
investment securities, a Fund attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Fund. Each Fund may lend its investment
securities to qualified brokers-dealers, domestic and foreign banks and other
institutional borrowers, so long as the terms, structure and the aggregate
amount of such loans are not inconsistent with the 1940 Act, or the rules and
regulations or interpretations of the SEC thereunder, which currently require
that (a) the borrower pledge and maintain with the Fund collateral consisting of
cash, an irrevocable letter of credit issued by a domestic U.S. bank, or liquid
securities having a value at all times not less than 100% of the value of the
securities loaned, including accrued interest, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time, and (d) the Fund receive reasonable
interest on the loan (which may include the Fund investing any cash collateral
in interest bearing short-term investments), any distributions on the loaned
securities and any increase in their market value. If the borrower fails to
return the borrowed securities or maintain the requisite amount of collateral,
the loan terminates, and the Fund could use the collateral to replace the
securities while holding the borrower liable for any excess of replacement cost
over collateral. As with any extensions of credit, there are risks of delay in
recovering and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to borrowers deemed by the Adviser to be
creditworthy and when the consideration which can be earned from such loans is
believed to justify the attendant risks. On termination of the loan, the
borrower is required to return the securities to the Fund; any gain or loss in
the market price during the loan would inure to the Fund. All relevant facts and
circumstances, including the creditworthiness of the broker-dealer, bank or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Company's Board of Directors.
At the present time, the staff of the SEC does not object if an investment
company pays reasonable negotiated fees in connection with loaned securities, so
long as such fees are set forth in a written contract and approved by the
investment company's Board of Directors. In addition, voting rights may pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted by the
Fund.
SHORT SALES
Unless limited by a Fund's fundamental investment restrictions described
herein, each Fund may from time to time sell securities short. A short sale is a
transaction in which a Fund sells a security in anticipation that the market
price of such security will decline. Unless limited by a Fund's fundamental
investment
B-23
restrictions described herein, each Fund may sell securities it owns or has the
right to acquire at no added cost (i.e., "against the box") or it does not own.
When the Fund makes a short sale, it must borrow the security sold short and
deliver it to the broker-dealer through which it made the short sale in order to
satisfy its obligation to deliver the security upon conclusion of the sale. The
Fund may have to pay a fee to borrow particular securities and is often
obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral of cash or liquid securities. Depending on arrangements made with the
broker-dealer, bank or other financial institution from which it borrowed the
security regarding payment over of any payments received by the Fund on such
security, the Fund may not receive any payments (including interest) on its
collateral deposited with such entity.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at which
it sold the security short, its potential loss is theoretically unlimited.
STRATEGIC TRANSACTIONS
Each Fund may, but is not required to, use various Strategic Transactions
(as defined in the Prospectuses) to earn income, facilitate portfolio management
and mitigate risks. Techniques and instruments may change over time as new
instruments and strategies are developed or regulatory changes occur. Although
the portfolio management team seeks to use such transactions to further the
Fund's investment objective(s), no assurance can be given that the use of these
transactions will achieve this result.
FUTURES CONTRACTS. Futures contracts provide for the future sale by one
party and purchase by another party of a specified amount of a specific security
or a specific currency at a specified future time and at a specified price.
Futures contracts that are traded in the United States and that are standardized
as to maturity date and underlying financial instrument, index or currency, are
traded on national futures contract exchanges. Futures contract exchanges and
trading are regulated under the Commodity Exchange Act by the Commodity Futures
Trading Commission ("CFTC"), a U.S. government agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities or currencies, in most cases the
contracts are closed out before the settlement date without the making or taking
of delivery. Closing out an open futures contract position is done by taking an
opposite position ("buying" a contract which has previously been "sold" or
"selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Unless otherwise limited in a Fund's Prospectus or herein, each Fund may
sell indexed financial futures contracts in anticipation of or during a market
decline to attempt to offset the decrease in market value of securities in its
portfolio that might otherwise result. An index futures contract is an agreement
to take or make delivery of an amount of cash equal to the difference between
the value of the index at the beginning and at the end of the contract period.
Successful use of index futures contracts will be subject to the portfolio
management team's ability to predict correctly movements in the direction of the
relevant securities market. No assurance can be given that the portfolio
management team's judgment in this respect will be correct.
Unless otherwise limited in a Fund's Prospectus or herein, each Fund may
buy indexed financial futures contracts in anticipation of or during a market
advance to attempt to capture the increase in market value of securities. For
example, if the Fund's portfolio management team believes that a portion of a
Fund's assets should be invested in emerging market country securities but such
investments have not been fully made and the portfolio management team
anticipates a significant market advance, the Fund may purchase index futures
contracts to gain rapid market exposure that may, in part or entirely, offset
increases in the cost of securities that it intends to purchase. In a
substantial majority of these transactions, the Fund will purchase such
securities upon termination of the futures contract position but, under unusual
market conditions, a futures position may be terminated without the
corresponding purchase of such securities.
B-24
Futures contract traders are required to make a good faith margin deposit
in cash or liquid securities to initiate and maintain open positions in futures
contracts. A margin deposit is intended to assure completion of the contract
(delivery or acceptance of the underlying security) if it is not terminated
prior to the specified delivery date. Minimal initial margin requirements are
established by the futures contract exchange and may be changed. Brokers may
establish deposit requirements which are higher than the exchange minimums.
After a futures contract position is opened, the value of the contract is
marked-to-market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of an
additional "variation" margin will be required. Conversely, a change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made for as
long as the contract remains open. The Funds expect to earn interest income on
their margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures contract markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the underlying securities with futures contracts that they trade, and use
futures contracts with the expectation of realizing profits from market
fluctuations. The Funds intend to use futures contracts only for hedging
purposes.
Regulations of the CFTC applicable to the Funds require generally that all
futures contract transactions constitute bona fide hedging transactions. A Fund
may engage in futures contract transactions for other purposes so long as the
aggregate initial margin and premiums required for such transaction will not
exceed 5% of the liquidation value of the Fund's portfolio, after taking into
account unrealized profits and unrealized losses on any such contracts it has
entered into. The Funds generally will only sell futures contracts to protect
securities owned against declines in price or purchase contracts to protect
against an increase in the price of securities intended for purchase. As
evidence of this hedging interest, the Funds expect that approximately 75% of
their respective futures contracts will be "completed"; that is, equivalent
amounts of related securities will have been purchased or are being purchased by
the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds will incur commission expenses in both opening and closing out futures
contracts positions, these costs are lower than transaction costs incurred in
the purchase and sale of the underlying securities.
Risk Factors in Futures Contract Transactions. Positions in futures
contracts may be closed out only on an exchange which provides a secondary
market for such futures contracts. However, there can be no assurance that a
liquid secondary market will exist for any particular futures contract at any
specific time. Thus, it may not be possible to close a futures contract
position. In the event of adverse price movements, a Fund would continue to be
required to make daily cash payments to maintain its required margin. In such
situations, if a Fund has insufficient cash, it may have to sell portfolio
securities to meet its daily margin requirement at a time when it may be
disadvantageous to do so. In addition, the Fund may be required to make delivery
of the instruments underlying the futures contracts it holds. The inability to
close options and futures contracts positions also could have an adverse impact
on the Fund's ability to effectively hedge.
The Funds will minimize the risk that they will be unable to close out a
futures contract by generally entering into futures contracts which are traded
on recognized international or national futures contract exchanges and for which
there appears to be a liquid secondary market, however, the Funds may enter into
over-the-counter futures contracts transactions to the extent permitted by
applicable law.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures contract pricing. As a result, a
relatively small price movement in a futures contract may result in immediate
and substantial loss (as well as gain) to the investor. For example, if, at the
time of purchase, 10% of the value of the futures contract is deposited as
margin, a subsequent 10% decrease in the value of the futures contract would
result in a total
B-25
loss of the margin deposit, before any deduction for the transaction costs, if
the account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. However, because the Funds engage in futures
contract strategies only for hedging purposes, the Adviser does not believe that
the Funds are subject to the risks of loss frequently associated with futures
contract transactions. The Fund would presumably have sustained comparable
losses if, instead of the futures contract, the Fund had invested in the
underlying security or currency and sold it after the decline.
Utilization of futures contracts transactions by a Fund does involve the
risk of imperfect or no correlation where the securities underlying futures
contracts have different maturities than the portfolio securities or currencies
being hedged. It is also possible that a Fund could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk that the Fund will lose margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in a futures
contract or related option.
Most futures contract exchanges limit the amount of fluctuation in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary, either up or down,
from the previous day's settlement price. Once the daily limit has been reached
in a particular type of contract, no trades may be made on that day at a price
beyond that limit. The daily limit governs only price movement during a
particular trading day and therefore does not limit potential losses, because
the limit may prevent the liquidation of unfavorable positions. Futures contract
prices have occasionally moved to the daily limit for several consecutive
trading days with little or no trading, thereby preventing prompt liquidation of
futures contract positions and subjecting some futures contract traders to
substantial losses.
OPTIONS TRANSACTIONS. Unless otherwise limited in a Fund's Prospectus or
herein, each Fund may write (i.e., sell) covered call options which give the
purchaser the right to buy the underlying security covered by the option from
the Fund at the stated exercise price. A "covered" call option means that, so
long as a Fund is obligated as the writer of the option, it will own (i) the
underlying securities subject to the option, or (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option.
A Fund will receive a premium from writing call options, which increases
the Fund's return on the underlying security in the event the option expires
unexercised or is closed out at a profit. By writing a call, a Fund will limit
its opportunity to profit from an increase in the market value of the underlying
security above the exercise price of the option for as long as the Fund's
obligation as writer of the option continues. Thus, in some periods a Fund will
receive less total return and in other periods a Fund will receive greater total
return from writing covered call options than it would have received from its
underlying securities had it not written call options.
A Fund may sell put options to receive the premiums paid by purchasers and
to close out a long put option position. In addition, when the Fund wishes to
purchase a security at a price lower than its current market price, a Fund may
write a covered put at an exercise price reflecting the lower purchase price
sought.
A Fund may purchase call options to close out a covered call position or to
protect against an increase in the price of a security it anticipates
purchasing. A Fund may purchase put options on securities which it holds in its
portfolio to protect itself against a decline in the value of the security. If
the value of the underlying security were to fall below the exercise price of
the put option purchased in an amount greater than the premium paid for the
option, the Fund would incur no additional loss. A Fund may also purchase put
options to close out written put positions in a manner similar to call option
closing purchase transactions. There are no other limits on a Fund's ability to
purchase call and put options.
Unless the parties provide for it, there is no central clearing or guaranty
function in an over-the-counter option ("OTC Option"). As a result, if the
counterparty fails to make or take delivery of the security, currency or other
instrument underlying an OTC Option it has entered into with a Fund or fails to
make a cash settlement payment due in accordance with the terms of that option,
the Fund will lose any premium it paid
B-26
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Fund must assess the creditworthiness of each such counterparty
or any guarantor of credit enhancement of the counterparty's credit to determine
the likelihood that the terms of the OTC Options will be satisfied. The staff of
the SEC currently takes the position that, in general, OTC Options on securities
purchased by the Fund and portfolio securities "covering" the amount of the
Fund's obligation pursuant to an OTC option sold by it are illiquid, and are
subject to the Fund's limitation on illiquid securities described herein.
Investments in options involve some of the same considerations that are
involved in connection with investments in futures contracts (e.g., the
existence of a liquid secondary market). In addition, the purchase of an option
also entails the risk that changes in the value of the underlying security or
contract will not be fully reflected in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
or underlying securities, an option may or may not be less risky than ownership
of the futures contract or actual securities. In general, the market prices of
options can be expected to be more volatile than the market prices on the
underlying futures contract or securities. In the opinion of the Adviser, the
risk that a Fund will be unable to close out an options contract will be
minimized by only entering into options transactions for which there appears to
be a liquid secondary market.
OPTIONS ON FOREIGN CURRENCIES. Unless otherwise limited in a Fund's
Prospectus or herein, each Fund may attempt to accomplish objectives similar to
those described herein with respect to foreign currency forward contracts and
futures contracts for currency by means of purchasing put or call options on
foreign currencies on exchanges. A put option gives a Fund the right to sell a
currency at the exercise price until the expiration of the option. A call option
gives a Fund the right to purchase a currency at the exercise price until the
expiration of the option.
The Funds may purchase and write options on foreign currencies in a manner
similar to that in which a Fund may utilize futures contracts on foreign
currencies or forward contracts. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. To protect against such diminution in the value of portfolio
securities, the Funds may purchase put options on the foreign currency. If the
value of the currency declines, the Funds will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on their portfolios which otherwise would have
resulted. Conversely, the Funds may purchase call options on currencies whose
value is projected to increase, causing an increase in the cost of securities
denominated in that currency. The purchase of such options could offset, at
least partially, the effects of the adverse movements in exchange rates. As in
the case of other types of options, however, the benefit to the Funds derived
from purchases of foreign currency options will be reduced by the amount of the
premium and related transaction costs. In addition, where currency exchange
rates do not move in the direction or to the extent anticipated, the Funds could
sustain losses on transactions in foreign currency options which would require
them to forego a portion or all of the benefits of advantageous changes in such
rates.
Funds may write options on foreign currencies for the same purposes. For
example, where a Fund anticipates a decline in the dollar value of foreign
currency denominated securities due to adverse fluctuations in exchange rates it
could, instead of purchasing a put option, write a call option on the relevant
currency. If the anticipated decline occurs, the option will most likely not be
exercised, and the diminution in value of portfolio securities will be offset by
the amount of the premium received. Similarly, instead of purchasing a call
option to hedge against an anticipated increase in the dollar cost of securities
to be acquired, the Fund could write a put option on the relevant currency
which, if rates move in the manner projected, will expire unexercised and allow
the portfolio to hedge such increased cost up to the amount of the premium. As
in the case of other types of options, however, the writing of a foreign
currency option will constitute only a partial hedge up to the amount of the
premium, and only if rates move in the expected direction. If this does not
occur, the option may be exercised and the Fund would be required to purchase or
sell the underlying currency at a loss which may not be offset by the amount of
the premium. Through the writing of options on foreign currencies, the Fund also
may be required to forego all or a portion of the benefits which might otherwise
have been obtained from favorable movements in exchange rates.
B-27
Funds may only write covered call options on foreign currencies. A call
option on a foreign currency written by the portfolio is "covered" if the Fund
owns the underlying foreign currency covered by the call, has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration held in a segregated
account) or can obtain that foreign currency upon conversion or exchange of
another foreign currency(ies) held in its portfolio. A written call option is
also covered if the Fund has a call on the same foreign currency and in the same
principal amount as the call written where the exercise price of the call held
(a) is equal to or less than the exercise price of the call written, or (b) is
greater than the exercise price of the call written if the Fund segregates cash
or liquid securities in an amount at least equal to the difference.
Funds may also write call options on foreign currencies for cross-hedging
purposes. A call option on a foreign currency is for cross-hedging purposes if
it is designed to provide a hedge against a decline in the U.S. dollar value of
a security which the portfolio owns or has the right to acquire due to an
adverse change in the exchange rate and which is denominated in the currency
underlying the option. In such circumstances, the Fund will either "cover" the
transaction as described above or collateralize the option by segregating cash
or liquid securities in an amount not less than the value of the underlying
foreign currency in U.S. dollars marked-to-market daily.
CAPS, FLOORS AND COLLARS. Unless otherwise limited by a Fund's Prospectus
or herein, each Fund may invest in caps, floors and collars, which are
instruments analogous to options transactions described above. In particular, a
cap is the right to receive the excess of a reference rate over a given rate and
is analogous to a put option. A floor is the right to receive the excess of a
given rate over a reference rate and is analogous to a call option. Finally, a
collar is an instrument that combines a cap and a floor. That is, the buyer of a
collar buys a cap and writes a floor, and the writer of a collar writes a cap
and buys a floor. The risks associated with caps, floors and collars are similar
to those associated with options. In addition, caps, floors and collars are
subject to risk of default by the counterparty because they are privately
negotiated instruments.
COMBINED TRANSACTIONS. Unless otherwise limited by a Fund's Prospectus or
herein, each Fund may enter into multiples of the forwards, futures contracts
and options transactions described above, including multiple options
transactions, multiple futures contract transactions, multiple foreign currency
transactions (including forward foreign currency exchange contracts) and any
combination of futures contracts, options and foreign currency transactions. The
Funds may enter into any of the foregoing, instead of a single transaction, as
part of a single portfolio management or hedging strategy when, in the opinion
of the Adviser, it is in the best interest of the Fund to do so. A combined
transaction, while part of a single strategy, may contain elements of risk that
are present in each of its component transactions and will be structured in
accordance with applicable SEC regulations and SEC staff guidelines.
RISKS OF OPTIONS ON FUTURES CONTRACTS, FORWARD CONTRACTS AND OPTIONS ON
FOREIGN CURRENCIES. Options on foreign currencies and forward contracts are not
traded on contract markets regulated by the CFTC or (with the exception of
certain foreign currency options) by the SEC. To the contrary, such instruments
are traded through financial institutions acting as market-makers, although
foreign currency options are also traded on certain national securities
exchanges, such as the Philadelphia Stock Exchange and the Chicago Board Options
Exchange, subject to SEC regulation. Similarly, options on currencies may be
traded over-the-counter. In an over-the-counter trading environment, many of the
protections afforded to exchange participants will not be available. For
example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
Although the purchase of an option cannot lose more than the amount of the
premium plus related transaction costs, this entire amount could be lost.
Moreover, a writer of options and a trader of forward contracts could lose
amounts substantially in excess of their initial investments.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the OCC, thereby reducing the risk of
counterparty default. Furthermore, a liquid secondary market in options traded
on
B-28
a national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a Fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effect of other
political and economic events. In addition, exchange-traded options of foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises or would result in undue burdens
on the OCC or its clearing member, impose special procedures on exercise and
settlement. These special procedures may include technical changes in the
mechanics of delivery of currency, the fixing of dollar settlement prices or
prohibitions on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
When conducted outside the United States, such transactions may not be regulated
as rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and are subject to the risk of governmental actions
affecting trading in or the prices of such transactions, securities, and other
instruments. The value of such positions also could be adversely affected by (i)
other complex foreign political, legal and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the United States,
(iv) the imposition of different exercise and settlement terms and procedures
and margin requirements than in the United States, and (v) lower trading volume
and liquidity.
STRUCTURED NOTES. Structured Notes are derivatives, the amount of principal
repayment and/or interest payments of which is based upon the movement of one or
more factors. These factors may include, but are not limited to, currency
exchange rates, interest rates (such as the prime lending rate and the London
Interbank Offered Rate) and stock indices such as the S&P 500 Index. In some
cases, the impact of the movements of these factors may increase or decrease
through the use of multipliers or deflators. The Funds may use structured notes
to tailor their investments to the specific risks and returns that the Fund is
willing to accept, while avoiding or reducing certain other risks.
SWAP CONTRACTS. A swap contract is an agreement to exchange the return
generated by one instrument for the return generated by another instrument. The
payment streams are calculated by reference to a specified index and an agreed
upon notional amount. The term "specified index" may include, but is not limited
to, currencies, fixed interest rates, prices, total return on interest rate
indices, fixed income indices, stock indices and commodity indices (as well as
amounts derived from arithmetic operations on these indices). For example, a
Fund may agree to swap the return generated by a fixed-income index for the
return generated by a second fixed-income index. The currency swaps in which a
Fund may enter will generally involve an agreement to pay interest streams in
one currency based on a specified index in exchange for receiving interest
streams denominated in another currency. Such swaps may involve initial and
final exchanges that correspond to the agreed upon notional amount.
The swaps in which the noted Funds may engage also include rate caps,
floors and collars under which one party pays a single or periodic fixed
amount(s) (or premium), and the other party pays periodic amounts based on the
movement of a specified index. Swaps do not involve the delivery of securities,
other underlying assets or principal. Accordingly, the risk of loss with respect
to swaps is limited to the net amount of payments that the Fund is contractually
obligated to make. If the other party to a swap defaults, the Fund's risk of
loss consists of the net amount of payments that the Fund is contractually
entitled to receive. Currency swaps usually involve the delivery of the entire
principal value of one designated currency in exchange for the other designated
currency. Therefore, the entire principal value of a currency swap is subject to
the risk that the other party to the swap will default on its contractual
delivery obligations. If there is a default by the
B-29
counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors, and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
Funds will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. The Fund's obligations under a swap
agreement will be accrued daily (offset against any amounts owing to the
portfolio) and, to avoid any potential leveraging of the Fund, the Fund will
segregate cash or liquid securities in an amount at least equal to any accrued
but unpaid net amounts owed to the swap counterparty. To the extent that these
swaps, caps, floors, and collars are entered into for hedging purposes, the Fund
believes such obligations do not constitute "senior securities" under the 1940
Act and, accordingly, will not treat them as being subject to the Fund's
borrowing restrictions. Funds may enter into over-the-counter derivatives
transactions (swaps, caps, floors, puts, etc., but excluding foreign exchange
contracts) with counterparties that are approved by the Adviser in accordance
with guidelines established by the Company's Board of Directors. These
guidelines provide for a minimum credit rating for each counterparty and various
credit enhancement techniques (for example, collateralization of amounts due
from counterparties) to limit exposure to counterparties with ratings below AA.
The use of swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Fund's portfolio management team is incorrect in
its forecasts of market values, interest rates and currency exchange rates, the
investment performance of the portfolio would be less favorable than it would
have been if this investment technique were not used.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that a Fund segregate cash and/or
liquid securities to the extent such Fund's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered (or securities
convertible into the needed securities without additional consideration), or
subject to any regulatory restrictions, the Fund must segregate an amount of
cash and/or liquid securities at least equal to the current amount of the
obligation. In the case of a futures contract or an option on a futures
contract, the Fund must deposit initial margin and possible daily variation
margin in addition to segregating cash and/or liquid securities sufficient to
meet its obligation to purchase or provide securities or currencies, or to pay
the amount owed at the expiration of an index-based futures contract. With
respect to swaps, the Fund will accrue the net amount of the excess, if any, of
its obligations over its entitlements with respect to each swap on a daily basis
and will segregate an amount of cash and/or liquid securities having a value
equal to the accrued excess. Caps, floors and collars require segregation of
cash and/or liquid securities with a value equal to the Fund's net obligation,
if any. Strategic Transactions may be covered by other means when consistent
with applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated cash
and/or liquid securities, equals its net outstanding obligation.
U.S. GOVERNMENT OBLIGATIONS
Examples of types of U.S. Government obligations include U.S. Treasury
Bills, Treasury Notes and Treasury Bonds and the obligations of Federal Home
Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks, Maritime
Administration, International Bank for Reconstruction and Development (the
"World Bank"), the Asian-American Development Bank and the Inter-American
Development Bank.
B-30
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Funds may purchase securities on a "when-issued" or "delayed delivery"
basis. In such transactions, instruments are bought with payment and delivery
taking place in the future to secure what is considered to be an advantageous
yield or price at the time of the transaction. The payment obligation and the
interest rates that will be received are each fixed at the time a Fund enters
into the commitment, and no interest accrues to the Fund until settlement. Thus,
it is possible that the market value at the time of settlement could be higher
or lower than the purchase price if the general level of interest rates has
changed. Because the Fund relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will segregate cash or liquid securities having an
aggregate value at least equal to the amount of such purchase commitments until
payment is made.
ZERO COUPON BONDS
Zero coupon bonds is a term used to describe notes and bonds that have been
stripped of their unmatured interest coupons or the coupons themselves, and also
receipts or certificates representing interest in such stripped debt obligations
and coupons. The timely payment of coupon interest and principal on zero coupon
bonds issued by the U.S. Treasury remains guaranteed by the "full faith and
credit" of the United States government.
A zero coupon bond does not pay interest. Instead, it is issued at a
substantial discount to its "face value" -- what it will be worth at maturity.
The difference between a security's issue or purchase price and its face value
represents the imputed interest that an investor will earn if the security is
held until maturity. Special tax considerations are associated with investing in
zero-coupon bonds. See "Taxation" below.
Zero coupon bonds may offer investors the opportunity to earn higher yields
than those available on U.S. Treasury Bonds of similar maturity. However, zero
coupon bond prices may also exhibit greater price volatility than ordinary debt
securities because of the manner in which their principal and interest is
returned to the investor.
Zero Coupon Treasury Bonds are sold under a variety of different names,
such as: Certificate of Accrual on Treasury Securities ("CATS"), Treasury
Receipts ("TRs"), Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") and Treasury Investment Growth Receipts ("TIGERS").
INVESTMENT RESTRICTIONS
Each Fund has adopted certain investment policies that are either
fundamental investment limitations or non-fundamental investment limitations.
Fundamental investment limitations may not be changed without shareholder
approval by the vote of a majority of its outstanding voting securities, which
is defined by the 1940 Act as the lesser of: (1) 67% or more of the voting
securities of the Fund present at a meeting, if the holders of more than 50% of
the Fund's outstanding voting securities are present or represented by proxy, or
(2) more than 50% of the outstanding voting securities of the Fund.
Non-fundamental investment limitations may be changed by the Board of Directors
of the Company without shareholder approval.
Each Fund is designated as either a diversified fund or a non-diversified
fund as those terms are defined under the 1940 Act. Like fundamental investment
restrictions, a fund which is designated as a diversified fund may not change
its status to a non-diversified fund without approval by the vote of a majority
of its outstanding voting securities. The following Funds are diversified funds:
American Value Fund, Asian Equity Fund, Equity Growth Fund, European Value
Equity Fund, Global Equity Allocation Fund, Global Value Equity Fund, Growth and
Income Fund II, Japanese Equity Fund, Mid Cap Growth Fund and Value Fund. The
following Funds are non-diversified funds: Emerging Markets Debt Fund, Emerging
Markets Fund, Emerging Markets Income Fund, Focus Equity Fund, Global Franchise
Fund, International Magnum Fund and Latin American Fund. As described in the
Prospectuses for the non-diversified funds, such funds may invest a greater
portion of their assets in a more limited number of issuers than diversified
funds, and therefore, non-diversified funds
B-31
are subject to greater risk because the changes in the financial condition of a
single issuer may cause greater fluctuation in the value of such funds' shares.
The percentage limitations contained in the restrictions and policies set
forth herein apply at the time of purchase of securities. With respect to the
limitation on borrowings and illiquid securities, the percentage limitations
apply at the time of purchase and on an ongoing basis.
For the purpose of describing fundamental investment limitations, the Funds
have been divided into two separate groups, which limitations apply only to the
Funds that form a part of that group. The groups are comprised as follows:
Category I Funds: American Value Fund, Asian Equity Fund,
Emerging Markets Fund, Emerging Markets Income
Fund, European Value Equity Fund, Focus Equity
Fund, Global Equity Allocation Fund, Growth and
Income Fund II, International Magnum Fund,
Japanese Equity Fund and Latin American Fund.
Category II Funds: Emerging Markets Debt Fund, Equity Growth Fund,
Global Franchise Fund, Global Value Equity
Fund, Mid Cap Growth Fund and Value Fund.
CATEGORY I FUNDS
The following are fundamental investment limitations with respect to the
Category I Funds. No Category I Fund will:
(1) invest in commodities, except that each of the American Value Fund,
Emerging Markets Fund, Emerging Markets Income Fund, European Value Equity Fund,
Focus Equity Fund, Growth and Income Fund II and Latin American Fund may invest
in futures contracts and options to the extent that not more than 5% of its
total assets are required as deposits to secure obligations under futures
contracts and not more than 20% of its total assets are invested in futures
contracts and options at any time.
(2) purchase or sell real estate or real estate limited partnerships,
although it may purchase and sell securities of companies which deal in real
estate and may purchase and sell securities which are secured by interests in
real estate.
(3) underwrite the securities of other issuers.
(4) invest for the purpose of exercising control over management of any
company.
(5) invest more than 5% of its total assets in securities of companies
which have (with predecessors) a record of less than three years' continuous
operation.
(6) except with respect to the Latin American Fund, acquire any securities
of companies within one industry if, as a result of such acquisition, more than
25% of the value of the Fund's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
(7) write or acquire options or interests in oil, gas or other mineral
exploration or development programs or leases.
(8) purchase on margin or sell short except as specified above in (1) and
except that the Emerging Markets Fund, Emerging Markets Income Fund, European
Value Equity Fund, Focus Equity Fund and Latin American Fund may enter into
short sales in accordance with its investment objective and policies.
(9) purchase or retain securities of an issuer if those officers and
directors of the Company or its investment adviser owning more than 1/2 of 1% of
such securities together own more than 5% of such securities.
B-32
(10) borrow, except from banks and as a temporary measure for extraordinary
or emergency purposes and then, in no event, in excess of 10% of the Fund's
total assets valued at the lower of market or cost and a Fund may not purchase
additional securities when borrowings exceed 5% of total assets, except that the
Emerging Markets Income Fund, Growth and Income Fund II and Latin American Fund
may enter into reverse repurchase agreements in accordance with its investment
objective and policies and except that each of the Emerging Markets Income Fund,
Focus Equity Fund and Latin American Fund may borrow amounts up to 33 1/3% of
its total assets (including the amount borrowed), less all liabilities and
indebtedness other than the borrowing.
(11) pledge, mortgage, or hypothecate any of its assets to an extent
greater than 10% of its total assets at Emerging Markets Income Fund fair market
value, except that each of the Focus Equity Fund and Latin American Fund may
pledge, mortgage or hypothecate its assets to secure borrowings in amounts up to
33 1/3% of its assets (including the amount borrowed).
(12) invest more than an aggregate of 15% of the total assets of the Fund,
determined at the time of investment, in illiquid assets, including repurchase
agreements having maturities of more than seven days or invest in fixed time
deposits with a duration of from two business days to seven calendar days if
more than 10% of the Fund's total assets would be invested in these time
deposits; provided, however, that no Fund shall invest (i) more than 10% of its
total assets in securities subject to legal or contractual restrictions on
resale, and (ii) in fixed time deposits with a duration of over seven calendar
days.
(13) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act.
(14) issue senior securities.
(15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, subject to the limitation
described in (12) above) which are publicly distributed, and (ii) by lending its
portfolio securities to banks, brokers, dealers and other financial institutions
so long as such loans are not inconsistent with the 1940 Act or the rules and
regulations or interpretations of the SEC thereunder.
(16) except for the Emerging Markets Fund, Emerging Markets Income Fund,
Focus Equity Fund, International Magnum Fund and Latin American Fund, purchase
more than 10% of any class of the outstanding securities of any issuer.
(17) except for the Emerging Markets Fund, Emerging Markets Income Fund,
Focus Equity Fund, International Magnum Fund and Latin American Fund, purchase
securities of an issuer (except obligations of the U.S. government and its
instrumentalities) if as the result, with respect to 75% of its total assets,
more than 5% of the Fund's total assets, at market value, would be invested in
the securities of such issuer.
The following are non-fundamental investment limitations with respect to
the Category I Funds. As a matter of non-fundamental policy, no Category I Fund
will:
(1) purchase warrants if, by reason of such purchase, more than 5% of the
value of the Fund's net assets would be invested in warrants valued at the lower
of cost or market. Included in this amount, but not to exceed 2% of the value of
the Fund's net assets, may be warrants that are not listed on a nationally
recognized stock exchange.
(2) invest in oil, gas or other mineral leases; invest up to 25% of its
total assets in privately placed securities; or invest more than 15% of its net
assets in illiquid securities.
(3) except with respect to the Latin American Fund, acquire any securities
of companies within one industry if, as a result of such acquisition, 25% or
more of the value of the Fund's total assets would be invested in securities of
companies within such industry; provided, however, that there shall be no
limitation on the purchase of obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities.
The percentage limitations contained in these restrictions apply at the
time of purchase of securities, except for limitations on borrowings and
illiquid securities which apply on an ongoing basis.
B-33
CATEGORY II FUNDS
The following are fundamental investment limitations with respect to the
Category II Funds. No Category II Fund will:
(1) invest in physical commodities or contracts on physical commodities,
except that any Fund may acquire physical commodities as a result of ownership
of securities or other instruments and may purchase or sell options or futures
contracts or invest in securities or other instruments backed by physical
commodities.
(2) purchase or sell real estate, although each Fund may purchase and sell
securities of companies which deal in real estate, other than real estate
limited partnerships, and may purchase and sell marketable securities which are
secured by interests in real estate.
(3) make loans except: (i) by purchasing debt securities in accordance with
their respective investment objectives and policies, or entering into repurchase
agreements, subject to the limitations described in non-fundamental investment
limitation (9) below, (ii) by lending their portfolio securities, and (iii) by
lending portfolio assets to other Funds, banks, brokers, dealers and other
financial institutions, so long as such loans are not inconsistent with the 1940
Act, the rules, regulations, interpretations or orders of the SEC and its staff
thereunder.
(4) except for the Emerging Markets Debt Fund and the Global Franchise
Fund, with respect to 75% of each Fund's assets, purchase a security if, as a
result, the Fund would hold more than 10% (taken at the time of such investment)
of the outstanding voting securities of any issuer.
(5) except for the Emerging Markets Debt Fund and the Global Franchise
Fund, with respect to 75% of each Fund's assets, purchase securities of any
issuer if, as a result, more than 5% of the Fund's total assets, taken at market
value at the time of such investment, would be invested in the securities of
such issuer except that this restriction does not apply to securities issued or
guaranteed by the U.S. government or its agencies or instrumentalities.
(6) issue any class of senior security or sell any senior security of which
it is the issuer, except that each Fund may borrow money as a temporary measure
for extraordinary or emergency purposes, provided that such borrowings do not
exceed 33 1/3% of the Fund's total assets (including the amount borrowed) less
liabilities (exclusive of borrowings) and except that the Emerging Markets Debt
Fund may borrow from banks in an amount not in excess of 33 1/3% of its total
assets (including the amount borrowed) less liabilities in accordance with its
investment objective and policies. The term "senior security" shall not include
any temporary borrowings that do not exceed 5% of the value of a Fund's total
assets at the time the Fund makes such temporary borrowing. Notwithstanding the
foregoing limitations on issuing or selling senior securities and borrowing, a
Fund may engage in investment strategies that obligate it either to purchase
securities or segregate assets, or enter into reverse repurchase agreements,
provided that it will segregate assets to cover its obligations pursuant to such
transactions in accordance with applicable rules, orders, or interpretations of
the SEC or its staff. This investment limitation shall not preclude a Fund from
issuing multiple classes of shares in reliance on SEC rules or orders.
(7) underwrite the securities of other issuers (except to the extent that a
Fund may be deemed to be an underwriter within the meaning of the 1933 Act in
connection with the disposition of restricted securities).
(8) acquire any securities of companies within one industry, if as a result
of such acquisition, more than 25% of the value of the Fund's total assets would
be invested in securities of companies within such industry; provided, however,
that there shall be no limitation on the purchase of obligations issued or
guaranteed by the U.S. government, its agencies or instrumentalities, when any
such Fund adopts a temporary defensive position.
The following are non-fundamental investment limitations with respect to
the Category II Funds. As a matter of non-fundamental policy, no Category II
Fund will:
(1) purchase on margin, except for use of short-term credit as may be
necessary for the clearance of purchases and sales of securities, provided that
each Fund may make margin deposits in connection with transactions in options,
futures contracts, and options on futures contracts.
B-34
(2) sell short unless the Fund (i) owns the securities sold short, (ii) by
virtue of its ownership of other securities, has the right to obtain securities
equivalent in kind and amount to the securities sold and, if the right is
conditional, the sale is made upon the same conditions, or (iii) segregates cash
or liquid securities an amount that, when combined with the amount of collateral
deposited with the broker in connection with the short sale, at least equals the
current market value of the security sold short or such other amount as the SEC
or its staff may permit by rule, regulation, order, or interpretation, except
that the Emerging Markets Debt Fund may from time to time sell securities short
without limitation but consistent with applicable legal requirements as stated
in its Prospectus; provided that transactions in futures contracts and options
are not deemed to constitute selling securities short.
(3) purchase or retain securities of an issuer if those officers and
directors of the Company or any of its investment advisers owning more than 1/2
of 1% of such securities together own more than 5% of such securities.
(4) borrow money other than from banks or other Funds of the Company,
provided that a Fund may borrow from banks or other Funds of the Company so long
as such borrowing is not inconsistent with the 1940 Act or the rules,
regulations, interpretations or orders of the SEC and its staff thereunder; or,
except for the Emerging Markets Debt Fund, purchase additional securities when
borrowings exceed 5% of total assets.
(5) pledge, mortgage or hypothecate assets in an amount greater than 10% of
its total assets in the case of the Emerging Markets Debt Fund, Equity Growth
Fund and Global Value Equity Funds or 50% of its total assets in the case of the
Mid Cap Growth Fund and Value Fund, provided that each Fund may segregate cash
or liquid securities without limit in order to comply with the requirements of
Section 18(f) of the 1940 Act and applicable rules, regulations or
interpretations of the SEC and its staff.
(6) invest more than an aggregate of 15% of the net assets of the Fund in
illiquid securities provided that this limitation shall not apply to any
investment in securities that are not registered under the 1933 Act but that can
be sold to qualified institutional investors in accordance with Rule 144A under
the 1933 Act and are determined to be liquid securities under guidelines or
procedures adopted by the Company's Board of Directors.
(7) invest for the purpose of exercising control over management of any
company.
(8) invest its assets in securities of any investment company, except by
purchase in the open market involving only customary brokers' commissions or in
connection with mergers, acquisitions of assets or consolidations and except as
may otherwise be permitted by the 1940 Act.
(9) in the case of the Emerging Markets Debt Fund, Equity Growth Fund and
Global Value Equity Fund, make loans as described in fundamental investment
limitations 3(ii) and 3(iii), above, in an amount exceeding 33 1/3% of its total
assets.
If a percentage limitation on investment or utilization of assets as set
forth above is adhered to at the time an investment is made, a later change in
percentage resulting from changes in the value or total cost of the Fund's
assets will not be considered a violation of the restriction, and the sale of
securities will not be required, except for the limitation on borrowings and
illiquid securities which apply on an ongoing basis.
B-35
DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors and the Fund's officers appointed by the Board of
Directors. The tables below list the directors and executive officers of the
Fund and their principal occupations during the last five years, other
directorships held by directors and their affiliations, if any, with Van Kampen
Investments Inc. ("Van Kampen Investments"), Van Kampen Investment Advisory
Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset Management"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services").
Advisory Corp. and Asset Management sometimes are referred to herein
collectively as the "Advisers." The term "Fund Complex" includes each of the
investment companies advised by the Advisers or their affiliates as of the date
of this Statement of Additional Information. Directors serve until reaching
their retirement age or until their successors are duly elected and qualified.
Officers are annually elected by the directors.
INDEPENDENT DIRECTORS
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT DIRECTOR FUND SERVED DURING PAST 5 YEARS BY DIRECTOR
David C. Arch (58) Director + Chairman and Chief Executive Officer of Blistex 90
Blistex Inc. Inc., a consumer health care products
1800 Swift Drive manufacturer. Former Director of the World
Oak Brook, IL 60523 Presidents Organization-Chicago Chapter.
Director of the Heartland Alliance, a nonprofit
organization serving human needs based in
Chicago.
J. Miles Branagan (71) Director + Private investor. Co-founder, and prior to 88
1632 Morning Mountain Road August 1996, Chairman, Chief Executive Officer
Raleigh, NC 27614 and President, MDT Corporation (now known as
Getinge/Castle, Inc., a subsidiary of Getinge
Industrier AB), a company which develops,
manufactures, markets and services medical and
scientific equipment.
Jerry D. Choate (65) Director + Prior to January 1999, Chairman and Chief 88
33971 Selva Road Executive Officer of the Allstate Corporation
Suite 130 ("Allstate") and Allstate Insurance Company.
Dana Point, CA 92629 Prior to January 1995, President and Chief
Executive Officer of Allstate. Prior to August
1994, various management positions at Allstate.
<Caption>
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT DIRECTOR HELD BY DIRECTOR
David C. Arch (58) Trustee/Director/
Blistex Inc. Managing General
1800 Swift Drive Partner of funds in
Oak Brook, IL 60523 the Fund Complex.
J. Miles Branagan (71) Trustee/Director/
1632 Morning Mountain Road Managing General
Raleigh, NC 27614 Partner of funds in
the Fund Complex.
Jerry D. Choate (65) Trustee/Director/
33971 Selva Road Managing General
Suite 130 Partner of funds in
Dana Point, CA 92629 the Fund Complex.
Director of Amgen
Inc., a
biotechnological
company, and Director
of Valero Energy
Corporation, an
independent refining
company.
</Table>
B-36
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT DIRECTOR FUND SERVED DURING PAST 5 YEARS BY DIRECTOR
Rod Dammeyer (62) Director + President of CAC, llc., a private company 90
CAC, llc. offering capital investment and management
4350 LaJolla Village Drive advisory services. Prior to July 2000, Managing
Suite 980 Partner of Equity Group Corporate Investment
San Diego, CA 92122-6223 (EGI), a company that makes private investments
in other companies.
Linda Hutton Heagy (55) Director + Managing Partner of Heidrick & Struggles, an 88
Heidrick & Struggles executive search firm. Trustee on the
233 South Wacker Drive University of Chicago Hospitals Board, Vice
Suite 7000 Chair of the Board of the YMCA of Metropolitan
Chicago, IL 60606 Chicago and a member of the Women's Board of
the University of Chicago. Prior to 1997,
Partner of Ray & Berndtson, Inc., an executive
recruiting firm. Prior to 1996, Trustee of The
International House Board, a fellowship and
housing organization for international graduate
students. Prior to 1995, Executive Vice
President of ABN AMRO, N.A., a bank holding
company. Prior to 1992, Executive Vice
President of La Salle National Bank.
R. Craig Kennedy (51) Director + Director and President of the German Marshall 88
11 DuPont Circle, N.W. Fund of the United States, an independent U.S.
Washington, D.C. 20016 foundation created to deepen understanding,
promote collaboration and stimulate exchanges
of practical experience between Americans and
Europeans. Formerly, advisor to the Dennis
Trading Group Inc., a managed futures and
option company that invests money for
individuals and institutions. Prior to 1992,
President and Chief Executive Officer, Director
and member of the Investment Committee of the
Joyce Foundation, a private foundation.
<Caption>
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT DIRECTOR HELD BY DIRECTOR
Rod Dammeyer (62) Trustee/Director/
CAC, llc. Managing General
4350 LaJolla Village Drive Partner of funds in
Suite 980 the Fund Complex.
San Diego, CA 92122-6223 Director of TeleTech
Holdings Inc.,
Stericycle, Inc.,
TheraSense, Inc.,
GATX Corporation,
Arris Group, Inc. and
Trustee of the
University of Chicago
Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001, Vice
Chairman and Director
of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser Communications
Corp., Matria
Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety,
Corp. and Grupo
Azcarero Mexico
(GAM). Prior to April
1999, Director of
Metal Management,
Inc.
Linda Hutton Heagy (55) Trustee/Director/
Heidrick & Struggles Managing General
233 South Wacker Drive Partner of funds in
Suite 7000 the Fund Complex.
Chicago, IL 60606
R. Craig Kennedy (51) Trustee/Director/
11 DuPont Circle, N.W. Managing General
Washington, D.C. 20016 Partner of funds in
the Fund Complex.
</Table>
B-37
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INDEPENDENT DIRECTOR FUND SERVED DURING PAST 5 YEARS BY DIRECTOR
Howard J Kerr (67) Director + Prior to 1998, President and Chief Executive 90
736 North Western Avenue Officer of Pocklington Corporation, Inc., an
P.O. Box 317 investment holding company. Director of the
Lake Forest, IL 60045 Marrow Foundation
Jack E. Nelson (67) Director + President of Nelson Investment Planning 88
423 Country Club Drive Services, Inc., a financial planning company
Winter Park, FL 32789 and registered investment adviser in the State
of Florida. President of Nelson Ivest Brokerage
Services Inc., a member of the NASD, Securities
Investors Protection Corp. and the Municipal
Securities Rulemaking Board. President of
Nelson Sales and Services Corporation, a
marketing and services company to support
affiliated companies.
Hugo F. Sonnenschein (62) Director + President Emeritus and Honorary Trustee of the 90
1126 E. 59th Street University of Chicago and the Adam Smith
Chicago, IL 60637 Distinguished Service Professor in the
Department of Economics at the University of
Chicago. Prior to July 2000, President of the
University of Chicago. Trustee of the
University of Rochester and a member of its
investment committee. Member of the National
Academy of Sciences, the American Philosophical
Society and a fellow of the American Academy of
Arts and Sciences.
Suzanne H. Woolsey (61) Director + Chief Communications Officer of the National 88
2101 Constitution Ave., Academy of Sciences/National Research Council,
N.W. an independent, federally chartered policy
Room 285 institution, since 2001 and previously Chief
Washington, D.C. 20418 Operating Officer from 1993 to 2001. Director
of the Institute for Defense Analyses, a
federally funded research and development
center, Director of the German Marshall Fund of
the United States, and Trustee of Colorado
College. Prior to 1993, Executive Director of
the Commission on Behavioral and Social
Sciences and Education at the National Academy
of Sciences/ National Research Council. From
1980 through 1989, Partner of Coopers &
Lybrand.
<Caption>
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INDEPENDENT DIRECTOR HELD BY DIRECTOR
Howard J Kerr (67) Trustee/Director/
736 North Western Avenue Managing General
P.O. Box 317 Partner of funds in
Lake Forest, IL 60045 the Fund Complex.
Director of the Lake
Forest Bank & Trust.
Jack E. Nelson (67) Trustee/Director/
423 Country Club Drive Managing General
Winter Park, FL 32789 Partner of funds in
the Fund Complex.
Hugo F. Sonnenschein (62) Trustee/Director/
1126 E. 59th Street Managing General
Chicago, IL 60637 Partner of funds in
the Fund Complex.
Director of Winston
Laboratories, Inc.
Suzanne H. Woolsey (61) Trustee/Director/
2101 Constitution Ave., Managing General
N.W. Partner of funds in
Room 285 the Fund Complex.
Washington, D.C. 20418 Director of Neurogen
Corporation, a
pharmaceutical
company, since
January 1998.
</Table>
B-38
INTERESTED DIRECTORS*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN
OF INTERESTED DIRECTOR FUND SERVED DURING PAST 5 YEARS BY DIRECTOR
Mitchell M. Merin* (50) Director, + President and Chief Executive Officer of funds 88
1221 Avenue of the President in the Fund Complex. Chairman, President, Chief
Americas and Chief Executive Officer and Director of the Advisers
New York, NY 10020 Executive and VK Advisors Inc. since December 2002.
Officer Chairman, President and Chief Executive Officer
of Van Kampen Investments since December 2002.
Director of Van Kampen Investments since
December 1999. Chairman and Director of Van
Kampen Funds Inc. since December 2002.
President, Director and Chief Operating Officer
of Morgan Stanley Investment Management since
December 1998. President and Director since
April 1997 and Chief Executive Officer since
June 1998 of Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Services Company Inc.
Chairman, Chief Executive Officer and Director
of Morgan Stanley Distributors Inc. since June
1998. Chairman since June 1998, and Director
since January 1998 of Morgan Stanley Trust.
Director of various Morgan Stanley
subsidiaries. President of the Morgan Stanley
Funds since May 1999. Previously Chief
Executive Officer of Van Kampen Funds Inc. from
December 2002 to July 2003, Chief Strategic
Officer of Morgan Stanley Investment Advisors
Inc. and Morgan Stanley Services Company Inc.
and Executive Vice President of Morgan Stanley
Distributors Inc. from April 1997 to June 1998.
Chief Executive Officer from September 2002 to
April 2003 and Vice President from May 1997 to
April 1999 of the Morgan Stanley Funds.
Richard F. Powers, III* Director + Advisory Director of Morgan Stanley. Prior to 90
(57) December 2002, Chairman, Director, President,
1 Parkview Plaza Chief Executive Officer and Managing Director
P.O. Box 5555 of Van Kampen Investments and its investment
Oakbrook Terrace, IL 60181 advisory, distribution and other subsidiaries.
Prior to December 2002, President and Chief
Executive Officer of funds in the Fund Complex.
Prior to May 1998, Executive Vice President and
Director of Marketing at Morgan Stanley and
Director of Dean Witter, Discover & Co. and
Dean Witter Realty. Prior to 1996, Director of
Dean Witter Reynolds Inc.
Wayne W. Whalen* (64) Director + Partner in the law firm of Skadden, Arps, 90
333 West Wacker Drive Slate, Meagher & Flom (Illinois), legal counsel
Chicago, IL 60606 to funds in the Fund Complex.
<Caption>
NAME, AGE AND ADDRESS OTHER DIRECTORSHIPS
OF INTERESTED DIRECTOR HELD BY DIRECTOR
Mitchell M. Merin* (50) Trustee/Director/
1221 Avenue of the Managing General
Americas Partner of funds in
New York, NY 10020 the Fund Complex.
Richard F. Powers, III* Trustee/Director/
(57) Managing General
1 Parkview Plaza Partner of funds in
P.O. Box 5555 the Fund Complex.
Oakbrook Terrace, IL 60181
Wayne W. Whalen* (64) Trustee/Director/
333 West Wacker Drive Managing General
Chicago, IL 60606 Partner of funds in
the Fund Complex.
</Table>
- ------------------------------------
* Such director is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act). Mr. Whalen is an interested person of certain funds
in the Fund Complex by reason of his firm currently acting as legal counsel to
such funds in the Fund Complex. Messrs. Merin and Powers are interested
persons of funds in the Fund Complex and the Advisers by reason of their
current or former positions with Morgan Stanley or its affiliates.
+ See Table D below.
B-39
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (62) Vice President ++ Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Advisers and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Advisers and Van Kampen Advisors Inc. Prior to December
2000, Executive Vice President and Chief Investment Officer
of Van Kampen Investments, and President and Chief Operating
Officer of the Advisers. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Advisers. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (36) Vice President ++ Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Vice ++ Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Advisers and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President ++ Executive Director and Portfolio Specialist of the Advisers
1 Parkview Plaza and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Advisers and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Advisers and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Advisers. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
Ronald E. Robison (64) Executive Vice ++ Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive and Managing Director of Morgan Stanley Investment
Officer Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
A. Thomas Smith III (46) Vice President and ++ Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary Director of Van Kampen Investments, Director of the
New York, NY 10020 Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Managing Director and General
Counsel-Mutual Funds of Morgan Stanley Investment Advisors,
Inc. Vice President and Secretary of funds in the Fund
Complex. Prior to July 2001, Managing Director, General
Counsel, Secretary and Director of Van Kampen Investments,
the Advisers, the Distributor, Investor Services, and
certain other subsidiaries of Van Kampen Investments. Prior
to December 2000, Executive Vice President, General Counsel,
Secretary and Director of Van Kampen Investments, the
Advisers, Van Kampen Advisors Inc., the Distributor,
Investor Services and certain other subsidiaries of Van
Kampen Investments. Prior to January 1999, Vice President
and Associate General Counsel to New York Life Insurance
Company ("New York Life"), and prior to March 1997,
Associate General Counsel of New York Life. Prior to
December 1993, Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior Associate, Willkie
Farr & Gallagher. Prior to January 1989, Staff Attorney at
the Securities and Exchange Commission, Division of
Investment Management, Office of Chief Counsel.
</Table>
B-40
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
John L. Sullivan (48) Vice President, ++ Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial the Advisers, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Advisers and Van
Kampen Advisors Inc.
</Table>
- ------------------------------------
++ See Table E below.
Each trustee/director who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Advisers or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Fund prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the retirement plan) and retires at or after attaining the age of
60, is eligible to receive a retirement benefit per year for each of the ten
years following such retirement from the Fund. Non-Affiliated Trustees retiring
prior to the age of 60 or with fewer than 10 years but more than 5 years of
service may receive reduced retirement benefits from the Fund.
B-41
Additional information regarding compensation and benefits for
trustees/directors is set forth below for the periods described in the notes
accompanying the table.
COMPENSATION TABLE
<Table>
<Caption>
Fund Complex
---------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Complex Upon Fund
Name(1) Company(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------- ------------- -------------
David C. Arch (2) $14,694 $147,500 $138,750
J. Miles Branagan $19,435 64,907 60,000 107,000
Jerry D. Choate 19,435 24,774 130,000 107,000
Rod Dammeyer (2) 26,231 147,500 138,750
Linda Hutton Heagy 19,435 6,858 147,500 107,000
R. Craig Kennedy 19,435 4,617 147,500 107,000
Howard J Kerr (2) 50,408 147,500 138,750
Jack E. Nelson 19,435 33,020 112,500 107,000
Hugo F. Sonnenschein (2) 26,282 147,500 138,750
Wayne W. Whalen 19,435 51,855 147,500 245,750
Suzanne H. Woolsey 19,435 15,533 147,500 107,000
</Table>
- ------------------------------------
(1) Directors not eligible for compensation are not included in the Compensation
Table.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from all operating series of the Company with respect to the
Company's fiscal year ended June 30, 2003. Messrs. Arch, Dammeyer, Kerr and
Sonnenschein were appointed to the Board of the Company on July 23, 2003,
and thus have no compensation from the Company to report during the fiscal
year ended June 30, 2003. The details of aggregate compensation before
deferral for the Company and each Fund during the fiscal year ended June 30,
2003 are shown in Table A below. The details of compensation deferred for
each series during the fiscal year ended June 30, 2003 are shown in Table B
below. The details of cumulative deferred compensation (including interest)
for each series of the Company as of June 30, 2003 are shown in Table C
below. The deferred compensation plan is described above the Compensation
Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2002. The
retirement plan is described above the Compensation Table. In 2003, efforts
have been under way to combine the trustees/directors/managing general
partners of the boards of the various Van Kampen-related funds in the Fund
Complex. Prior to 2003, only Messrs. Whalen and Powers served as trustees/
directors/managing general partners of all of the various Van Kampen-related
funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners are being elected or appointed,
as appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
B-42
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2002 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. In 2003, efforts have
been under way to combine the trustees/directors/managing general partners
of the boards of the various Van Kampen-related funds in the Fund Complex.
Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other
trustees/directors/managing general partners are being elected or appointed,
as appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
As of the date of this Statement of Additional Information, the following
Funds had not yet commenced investment operations and therefore are not reported
in tables A-E below: Van Kampen Emerging Markets Debt Fund, Van Kampen Growth
and Income Fund II and Van Kampen Japanese Equity Fund.
TABLE A
FISCAL YEAR 2003 AGGREGATE COMPENSATION FROM THE COMPANY AND EACH FUND
<Table>
<Caption>
FISCAL
FUND NAME YEAR-END ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON
--------- -------- ---- -------- ------ -------- ----- ------- ---- ------
American Value Fund............ 6/30 $0 $ 1,626 $ 1,626 $0 $ 1,626 $ 1,626 $0 $ 1,626
Asian Equity Fund.............. 6/30 0 1,265 1,265 0 1,265 1,265 0 1,265
Emerging Markets Fund.......... 6/30 0 1,319 1,319 0 1,319 1,319 0 1,319
Emerging Markets Income Fund... 6/30 0 1,293 1,293 0 1,293 1,293 0 1,293
Equity Growth Fund............. 6/30 0 1,280 1,280 0 1,280 1,280 0 1,280
European Value Equity Fund..... 6/30 0 1,212 1,212 0 1,212 1,212 0 1,212
Focus Equity Fund.............. 6/30 0 1,475 1,475 0 1,475 1,475 0 1,475
Global Equity Allocation
Fund.......................... 6/30 0 1,596 1,596 0 1,596 1,596 0 1,596
Global Franchise Fund.......... 6/30 0 1,691 1,691 0 1,691 1,691 0 1,691
Global Value Equity Fund....... 6/30 0 1,553 1,553 0 1,553 1,553 0 1,553
International Magnum Fund...... 6/30 0 1,286 1,286 0 1,286 1,286 0 1,286
Latin American Fund............ 6/30 0 1,227 1,227 0 1,227 1,227 0 1,227
Mid Cap Growth Fund............ 6/30 0 1,264 1,264 0 1,264 1,264 0 1,264
Value Fund..................... 6/30 0 1,348 1,348 0 1,348 1,348 0 1,348
-- ------- ------- -- ------- ------- -- -------
Company Total................. $0 $19,435 $19,435 $0 $19,435 $19,435 $0 $19,435
== ======= ======= == ======= ======= == =======
<Caption>
FUND NAME SONNENSCHEIN WHALEN WOOLSEY
--------- ------------ ------ -------
American Value Fund............ $0 $ 1,626 $ 1,626
Asian Equity Fund.............. 0 1,265 1,265
Emerging Markets Fund.......... 0 1,319 1,319
Emerging Markets Income Fund... 0 1,293 1,293
Equity Growth Fund............. 0 1,280 1,280
European Value Equity Fund..... 0 1,212 1,212
Focus Equity Fund.............. 0 1,475 1,475
Global Equity Allocation
Fund.......................... 0 1,596 1,596
Global Franchise Fund.......... 0 1,691 1,691
Global Value Equity Fund....... 0 1,553 1,553
International Magnum Fund...... 0 1,286 1,286
Latin American Fund............ 0 1,227 1,227
Mid Cap Growth Fund............ 0 1,264 1,264
Value Fund..................... 0 1,348 1,348
-- ------- -------
Company Total................. $0 $19,435 $19,435
== ======= =======
</Table>
B-43
TABLE B
2003 AGGREGATE COMPENSATION DEFERRED FROM THE COMPANY AND EACH FUND
<Table>
<Caption>
FISCAL
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY NELSON WHALEN
--------- -------- -------- ------ ----- ------ ------
American Value Fund...................................... 6/30 $ 837 $ 1,626 $ 1,626 $ 1,626 $ 1,626
Asian Equity Fund........................................ 6/30 636 1,265 1,265 1,265 1,265
Emerging Markets Fund.................................... 6/30 664 1,319 1,319 1,319 1,319
Emerging Markets Income Fund............................. 6/30 645 1,293 1,293 1,293 1,293
Equity Growth Fund....................................... 6/30 639 1,280 1,280 1,280 1,280
European Value Equity Fund............................... 6/30 606 1,212 1,212 1,212 1,212
Focus Equity Fund........................................ 6/30 747 1,475 1,475 1,475 1,475
Global Equity Allocation Fund............................ 6/30 811 1,596 1,596 1,596 1,596
Global Franchise Fund.................................... 6/30 794 1,691 1,691 1,691 1,691
Global Value Equity Fund................................. 6/30 797 1,553 1,553 1,553 1,553
International Magnum Fund................................ 6/30 646 1,286 1,286 1,286 1,286
Latin American Fund...................................... 6/30 614 1,227 1,227 1,227 1,227
Mid Cap Growth Fund...................................... 6/30 635 1,264 1,264 1,264 1,264
Value Fund............................................... 6/30 679 1,348 1,348 1,348 1,348
------ ------- ------- ------- -------
Company Total.......................................... $9,750 $19,435 $19,435 $19,435 $19,435
====== ======= ======= ======= =======
</Table>
TABLE C
2003 CUMULATIVE COMPENSATION DEFERRED (PLUS INTEREST)
FROM THE COMPANY AND EACH FUND
CURRENT DIRECTORS
<Table>
<Caption>
FORMER DIRECTORS
FISCAL ------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON WHALEN MILLER REES ROBINSON
--------- -------- -------- ------ ----- ------- ------ ------ ------ ---- --------
American Value Fund............ 6/30 $ 9,397 $ 5,671 $ 5,867 $ 3,575 $ 8,504 $ 7,489 $ 0 $ 0 $ 0
Asian Equity Fund.............. 6/30 6,297 3,827 3,999 2,376 5,865 5,154 0 0 0
Emerging Markets Fund.......... 6/30 6,440 3,943 4,133 2,427 6,032 5,302 0 0 0
Emerging Markets Income Fund... 6/30 6,699 3,921 4,198 2,535 6,243 5,438 0 0 0
Equity Growth Fund............. 6/30 5,251 3,772 3,712 1,967 4,909 4,532 0 0 0
European Value Equity Fund..... 6/30 4,755 3,540 3,413 1,779 4,452 4,147 0 0 0
Focus Equity Fund.............. 6/30 7,398 4,696 4,818 2,803 6,855 6,098 0 0 0
Global Equity Allocation
Fund......................... 6/30 11,490 5,137 6,870 5,209 12,574 9,825 613 173 1,226
Global Franchise Fund.......... 6/30 4,978 4,083 3,950 1,779 4,996 4,688 0 0 0
Global Value Equity Fund....... 6/30 9,181 5,123 5,597 3,473 8,415 7,256 0 0 0
International Magnum Fund...... 6/30 6,267 3,839 4,020 2,369 5,862 5,164 0 0 0
Latin American Fund............ 6/30 5,996 3,644 3,826 2,267 5,618 4,934 0 0 0
Mid Cap Growth Fund............ 6/30 3,294 3,290 2,948 1,240 3,332 3,334 0 0 0
Value Fund..................... 6/30 6,877 4,068 4,349 2,585 6,427 5,610 0 0 0
------- ------- ------- ------- ------- ------- ---- ---- ------
Company Total................ $94,320 $58,554 $61,700 $36,384 $90,084 $78,971 $613 $173 $1,226
======= ======= ======= ======= ======= ======= ==== ==== ======
<Caption>
FORMER DIRECTORS
-----------------
FUND NAME ROONEY SISTO
--------- ------ -----
American Value Fund............ $ 3,242 $ 3,234
Asian Equity Fund.............. 2,129 2,138
Emerging Markets Fund.......... 2,169 2,157
Emerging Markets Income Fund... 2,304 2,325
Equity Growth Fund............. 1,646 1,581
European Value Equity Fund..... 1,459 1,394
Focus Equity Fund.............. 2,475 2,401
Global Equity Allocation
Fund......................... 3,690 11,054
Global Franchise Fund.......... 1,458 1,387
Global Value Equity Fund....... 3,238 3,284
International Magnum Fund...... 2,114 2,099
Latin American Fund............ 2,023 2,019
Mid Cap Growth Fund............ 872 492
Value Fund..................... 2,352 2,356
------- -------
Company Total................ $31,171 $37,921
======= =======
</Table>
B-44
TABLE D
YEAR OF DIRECTOR ELECTION OR APPOINTMENT TO EACH FUND OF THE COMPANY
<Table>
<Caption>
FUND NAME ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR MERIN NELSON POWERS
--------- ---- -------- ------ -------- ----- ------- ---- ----- ------ ------
American Value Fund............ 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Asian Equity Fund.............. 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Emerging Markets Fund.......... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Emerging Markets Income Fund... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Equity Growth Fund............. 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
European Value Equity Fund..... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Focus Equity Fund.............. 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Global Equity Allocation
Fund.......................... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Global Franchise Fund.......... 2003 1998 1999 2003 1998 1998 2003 1999 1998 1999
Global Value Equity Fund....... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
International Magnum Fund...... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Latin American Fund............ 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
Mid Cap Growth Fund............ 2003 1999 1999 2003 1999 1999 2003 1999 1999 1999
Value Fund..................... 2003 1997 1999 2003 1997 1997 2003 1999 1997 1999
<Caption>
FUND NAME SONNENSCHEIN WHALEN WOOLSEY
--------- ------------ ------ -------
American Value Fund............ 2003 1997 1999
Asian Equity Fund.............. 2003 1997 1999
Emerging Markets Fund.......... 2003 1997 1999
Emerging Markets Income Fund... 2003 1997 1999
Equity Growth Fund............. 2003 1997 1999
European Value Equity Fund..... 2003 1997 1999
Focus Equity Fund.............. 2003 1997 1999
Global Equity Allocation
Fund.......................... 2003 1997 1999
Global Franchise Fund.......... 2003 1998 1999
Global Value Equity Fund....... 2003 1997 1999
International Magnum Fund...... 2003 1997 1999
Latin American Fund............ 2003 1997 1999
Mid Cap Growth Fund............ 2003 1999 1999
Value Fund..................... 2003 1997 1999
</Table>
TABLE E
YEAR OF OFFICER APPOINTMENT TO EACH FUND OF THE COMPANY
<Table>
<Caption>
FUND NAME BOYD CHANG MCALINDEN REYNOLDSON ROBISON SMITH SULLIVAN
--------- ---- ----- --------- ---------- ------- ----- --------
American Value Fund............................ 1998 2003 2002 2000 2003 1999 1997
Asian Equity Fund.............................. 1998 2003 2002 2000 2003 1999 1997
Emerging Markets Fund.......................... 1998 2003 2002 2000 2003 1999 1997
Emerging Markets Income Fund................... 1998 2003 2002 2000 2003 1999 1997
Equity Growth Fund............................. 1998 2003 2002 2000 2003 1999 1997
European Value Equity Fund..................... 1998 2003 2002 2000 2003 1999 1997
Focus Equity Fund.............................. 1998 2003 2002 2000 2003 1999 1997
Global Equity Allocation Fund.................. 1998 2003 2002 2000 2003 1999 1997
Global Franchise Fund.......................... 1998 2003 2002 2000 2003 1999 1998
Global Value Equity Fund....................... 1998 2003 2002 2000 2003 1999 1997
International Magnum Fund...................... 1998 2003 2002 2000 2003 1999 1997
Latin American Fund............................ 1998 2003 2002 2000 2003 1999 1997
Mid Cap Growth Fund............................ 1999 2003 2002 2000 2003 1999 1999
Value Fund..................................... 1998 2003 2002 2000 2003 1999 1997
</Table>
The Board of Directors has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised of directors who are not "interested persons" of the Fund (as defined
by the 1940 Act) (referred to herein as "Independent Directors" or "non-
interested directors").
The Board's audit committee consists of J. Miles Branagan, Jerry D. Choate
and R. Craig Kennedy. The audit committee makes recommendations to the Board of
Directors concerning the selection of the Fund's independent public auditors,
reviews with such auditors the scope and results of the Fund's annual audit and
considers any comments which the auditors may have regarding the Fund's
financial statements, books of account or internal controls.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Rod Dammeyer,
Howard J Kerr and Jack E. Nelson. The governance committee identifies
individuals qualified to serve on the Board that are
B-45
independent as defined in the 1940 Act and on committees of the Board, advises
the Board with respect to Board composition, procedures and committees, develops
and recommends to the Board a set of corporate governance principles applicable
to the Fund, monitors corporate governance matters and makes recommendations to
the Board, and acts as the administrative committee with respect to Board
policies and procedures, committee policies and procedures and codes of ethics.
During the Fund's last fiscal year, the audit committee of the Board held 5
meetings and the brokerage and services committee of the Board held 5 meetings.
The governance committee was recently organized and thus, did not have any
meetings during the Fund's last fiscal year.
The non-interested directors of the Fund select and nominate any other
non-interested directors of the Fund. While the non-interested directors of the
Fund expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Board of Directors as they deem
appropriate, they will review nominations from shareholders to fill any
vacancies. Nominations from shareholders should be in writing and addressed to
the non-interested directors at the Fund's office.
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2002, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each director of the Fund beneficially owned equity securities of the Fund and
of all of the funds in the Fund Complex overseen by the director in the dollar
range amounts specified below.
2002 DIRECTOR BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT DIRECTORS
<Table>
<Caption>
DOLLAR RANGE OF EQUITY SECURITIES
IN THE FUNDS ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON
- --------------------------------- ---- -------- ------ -------- ----- ------- ---- ------
American Value Fund............. none $1-$10,000 none none none $1-$10,000 none none
Asian Equity Fund............... none $1-$10,000 none none none $1-$10,000 none none
Emerging Markets Fund........... none $1-$10,000 none none none $1-$10,000 none none
Emerging Markets Income Fund.... none $1-$10,000 none none none $1-$10,000 none none
Equity Growth Fund.............. none $1-$10,000 none none none $1-$10,000 none none
European Value Equity Fund...... none $1-$10,000 none none none $1-$10,000 none none
Focus Equity Fund............... none $1-$10,000 none none none $1-$10,000 none none
Global Equity Allocation Fund... none none none none $1-$10,000 $1-$10,000 none none
$ 10,001-
Global Franchise Fund........... none $1-$10,000 none none none $ 50,000 none none
Global Value Equity Fund........ none none none none none $1-$10,000 none none
International Magnum Fund....... none none none none none $1-$10,000 none none
$ 10,001-
Latin American Fund............. none $1-$10,000 none none none $ 50,000 none none
Mid Cap Growth Fund............. none none none none none none none none
$ 10,001-
Value Fund...................... none $1-$10,000 none none none $ 50,000 none none
-------- ---------- ------- -------- ---------- ---------- ---------- ----
Aggregate dollar range of equity
securities in all registered
investment companies overseen
by director in the Fund $ 50,001- over $10,001- over $ 10,001- over
Complex...................... $100,000 $ 100,000 50,000 $100,000 50,000 $ 100,000 $1-$10,000 none
======== ========== ======= ======== ========== ========== ========== ====
<Caption>
DOLLAR RANGE OF EQUITY SECURITIES
IN THE FUNDS SONNENSCHEIN WOOLSEY
- --------------------------------- ------------ -------
American Value Fund............. none none
Asian Equity Fund............... none none
Emerging Markets Fund........... none none
Emerging Markets Income Fund.... none none
Equity Growth Fund.............. none none
European Value Equity Fund...... none none
Focus Equity Fund............... none none
Global Equity Allocation Fund... none none
Global Franchise Fund........... none none
Global Value Equity Fund........ none none
International Magnum Fund....... none none
Latin American Fund............. none none
Mid Cap Growth Fund............. none none
Value Fund...................... none none
-------- -------
Aggregate dollar range of equity
securities in all registered
investment companies overseen
by director in the Fund over $10,001-
Complex...................... $100,000 $50,000
======== =======
</Table>
B-46
INTERESTED DIRECTORS
<Table>
<Caption>
DOLLAR RANGE OF EQUITY SECURITIES IN THE FUNDS MERIN POWERS WHALEN
- ---------------------------------------------- ----- ------ ------
American Value Fund......................................... none none $1-$10,000
Asian Equity Fund........................................... none none $1-$10,000
Emerging Markets Fund....................................... none none $1-$10,000
Emerging Markets Income Fund................................ none none none
Equity Growth Fund.......................................... none none none
European Value Equity Fund.................................. none none none
$ 10,001-
Focus Equity Fund........................................... none none $ 50,000
Global Equity Allocation Fund............................... none none $1-$10,000
over
Global Franchise Fund....................................... $100,000 none $1-$10,000
$ 10,001-
Global Value Equity Fund.................................... none none $ 50,000
International Magnum Fund................................... none none none
Latin American Fund......................................... none none $1-$10,000
Mid Cap Growth Fund......................................... none none none
$ 10,001-
Value Fund.................................................. none none $ 50,000
-------- -------- ----------
Aggregate dollar range of equity securities in all
registered investment companies overseen by director in over over over
the Fund Complex....................................... $100,000 $100,000 $ 100,000
======== ======== ==========
</Table>
As of October 1, 2003, the directors and officers of the Funds owned as a
group less than 1% of the shares of each of the Funds.
The Fund, the Adviser, each Sub-Adviser, and the Distributor have adopted a
Code of Ethics (the "Code of Ethics") that sets forth general and specific
standards relating to the securities trading activities of their employees. The
Code of Ethics does not prohibit employees from acquiring securities that may be
purchased or held by the Fund, but is intended to ensure that all employees
conduct their personal transactions in a manner that does not interfere with the
portfolio transactions of the Fund or other Van Kampen funds, or that such
employees take unfair advantage of their relationship with the Fund. Among other
things, the Code of Ethics prohibits certain types of transactions absent prior
approval, imposes various trading restrictions (such as time periods during
which personal transactions may or may not be made) and requires quarterly
reporting of securities transactions and other reporting matters. All reportable
securities transactions and other required reports are to be reviewed by
appropriate personnel for compliance with the Code of Ethics. Additional
restrictions apply to portfolio managers, traders, research analysts and others
who may have access to nonpublic information about the trading activities of the
Fund or other Van Kampen funds or who otherwise are involved in the investment
advisory process. Exceptions to these and other provisions of the Code of Ethics
may be granted in particular circumstances after review by appropriate
personnel.
INVESTMENT ADVISORY AGREEMENTS
Each Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, each Fund retains the
Adviser to manage the investment of its assets, including the placing of orders
for the purchase and sale of portfolio securities. The Adviser obtains and
evaluates economic, statistical and financial information to formulate strategy
and implement the Fund's investment objective(s). The Adviser also furnishes
offices, necessary facilities and equipment, provides administrative services to
the Fund, renders periodic reports to the Board of Directors and permits its
officers
B-47
and employees to serve without compensation as directors of the Company or
officers of the Fund if elected to such positions. The Funds, however, bear the
costs of its day-to-day operations, including service fees, distribution fees,
custodian fees, legal and independent accountant fees, the costs of providing
reports and proxies to shareholders, compensation of directors of the Company
(other than those who are affiliated persons of the Adviser, Distributor or Van
Kampen Investments) and all other ordinary business expenses not specifically
assumed by the Adviser. The Advisory Agreement also provides that the Adviser
shall not be liable to a Fund for any error of judgment or of law, or for any
loss suffered by the Funds in connection with the matters to which the Advisory
Agreement relates, except a loss resulting from willful misfeasance, bad faith
or gross negligence on the part of the Adviser in the performance of its
obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the Advisory Agreement.
The Advisory Agreement also provides that, in the event the expenses of a
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction in which the Fund's shares are qualified for
offer and sale (excluding any expenses permitted to be excluded from the
computation under applicable law or regulation), the compensation due the
Adviser will be reduced by the amount of such excess and that, if a reduction in
and refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the fiscal year.
During the fiscal years ended June 30, 2003, 2002 and 2001, the Adviser
received the approximate advisory fees (net of fee waivers) from the Funds as
set forth in the table below.
<Table>
<Caption>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
--------- ----------------- ----------------- -----------------
American Value Fund........................... $2,957,800 $4,810,600 $6,834,800
Asian Equity Fund............................. 86,500 460,900 949,300
Emerging Markets Debt Fund(1)................. -- -- --
Emerging Markets Fund......................... 899,300 1,269,800 1,860,400
Emerging Markets Income Fund.................. 593,300 760,500 1,082,300
Equity Growth Fund............................ 516,900 620,700 754,000
European Value Equity Fund.................... -- -- 27,700
Focus Equity Fund............................. 1,854,300 3,157,700 4,458,200
Global Equity Allocation Fund................. 3,241,900 4,578,200 5,958,900
Global Franchise Fund......................... 4,683,200 809,800 --
Global Value Equity Fund...................... 2,953,100 4,319,500 5,211,200
Growth and Income Fund II(1).................. -- -- --
International Magnum Fund..................... 400,900 645,100 993,200
Japanese Equity Fund(1)....................... -- -- --
Latin American Fund........................... 152,000 295,500 704,700
Mid Cap Growth Fund........................... 409,100 677,100 870,200
Value Fund.................................... 875,400 1,425,100 1,237,100
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
B-48
During the fiscal years ended June 30, 2003, 2002 and 2001, the Adviser
waived approximate advisory fees from the Funds as set forth in the table below.
<Table>
<Caption>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
--------- ----------------- ----------------- -----------------
American Value Fund........................... $ -- $ -- $ --
Asian Equity Fund............................. 464,400 251,700 143,900
Emerging Markets Debt Fund(1)................. -- -- --
Emerging Markets Fund......................... 376,100 323,400 113,900
Emerging Markets Income Fund.................. 21,500 -- --
Equity Growth Fund............................ 41,800 81,700 82,100
European Value Equity Fund.................... 95,500 113,800 121,500
Focus Equity Fund............................. 211,800 198,500 116,800
Global Equity Allocation Fund................. 137,700 -- --
Global Franchise Fund......................... -- 1,700 151,000
Global Value Equity Fund...................... 117,000 -- --
Growth and Income Fund II(1).................. -- -- --
International Magnum Fund..................... 151,100 86,200 --
Japanese Equity Fund(1)....................... -- --
Latin American Fund........................... 138,100 164,200 15,800
Mid Cap Growth Fund........................... -- -- --
Value Fund.................................... 125,100 8,100 20,700
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
MSIM Limited is the investment subadviser to European Value Equity Fund,
Global Franchise Fund, Global Value Equity Fund and International Magnum Fund.
MSIM Company is the investment sub-adviser to Asian Equity Fund and
International Fund. MSAITM is sub-adviser to International Magnum Fund. The
sub-advisers provide investment advice and portfolio management services
pursuant to investment sub-advisory agreements and, subject to the supervision
of the Adviser and the Company's Board of Directors, make the Funds' investment
decisions, arrange for the execution of portfolio transactions and generally
manage the Funds' investments. The sub-advisers are entitled to receive
sub-advisory fees paid by the Adviser in an amount to be determined from time to
time by the Adviser and Subadviser but in no event is excess of the amount that
the Adviser actually receives from the Fund pursuant to its Advisory Agreement.
Each Advisory Agreement and each sub-advisory agreement may be continued
from year to year if specifically approved at least annually (a)(i) by a Fund's
Board of Directors or (ii) by a vote of a majority of such Fund's outstanding
voting securities and (b) by a vote of a majority of the Directors who are not
parties to the agreement or interested persons of any such party by votes cast
in person at a meeting called for such purpose. Each Advisory Agreement and each
sub-advisory agreement provides that it shall terminate automatically if
assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving each Advisory Agreement and each subadvisory agreement, the
Board of Directors, including the non-interested Directors, considered the
nature, quality and scope of the services provided by the Adviser and
subadviser, the performance, fees and expenses of each Fund compared to other
similar investment companies, the Adviser's and subadviser's expenses in
providing the services and the profitability of the Adviser, the subadviser and
their affiliated companies. The Board of Directors also reviewed the benefit to
the Adviser and subadviser of receiving third party research paid for by Fund
assets and the propriety of such an arrangement and evaluated other benefits the
Adviser and subadviser derive from their relationship with the Funds. The Board
of Directors considered the extent to which any economies of scale experienced
by the Adviser or subadviser are shared with the respective Fund's shareholders,
and the propriety of existing and
B-49
alternative breakpoints in the respective Fund's advisory fee schedule. The
Board of Directors considered comparative advisory fees of the Funds and other
investment companies at different asset levels, and considered the trends in the
industry versus historical and projected sales and redemptions of the Funds. The
Board of Directors reviewed reports from third parties about the foregoing
factors and considered changes, if any, in such items since its previous
approval. The Board of Directors discussed the financial strength of the
Adviser, the subadviser and their affiliated companies and the capability of the
personnel of the Adviser and subadviser. The Board of Directors reviewed the
statutory and regulatory requirements for approval of advisory agreements. The
Board of Directors, including the non-interested Directors, evaluated all of the
foregoing and determined, in the exercise of its business judgment, that
approval of each Advisory Agreement and each subadvisory agreement was in the
best interests of each Fund and its shareholders.
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records. The Fund pays all costs and expenses related to such services,
including all salary and related benefits of accounting personnel, as well as
the overhead and expenses of office space and the equipment necessary to render
such services. The Fund shares together with the other Van Kampen funds in the
cost of providing such services with 25% of such costs shared proportionately
based on the respective number of classes of securities issued per fund and the
remaining 75% of such costs based proportionately on the respective net assets
per fund.
<Table>
<Caption>
FISCAL YEAR ENDED
FUND NAME JUNE 30, 2003
--------- -----------------
American Value Fund......................................... $ 603,200
Asian Equity Fund........................................... 99,800
Emerging Markets Debt Fund(1)............................... --
Emerging Markets Fund....................................... 179,100
Emerging Markets Income Fund................................ 130,400
Equity Growth Fund.......................................... 113,800
European Value Equity Fund.................................. 15,900
Focus Equity Fund........................................... 387,300
Global Equity Allocation Fund............................... 580,400
Global Franchise Fund....................................... 683,300
Global Value Equity Fund.................................... 517,800
Growth and Income Fund II(1)................................ --
International Magnum Fund................................... 119,300
Japanese Equity Fund(1)..................................... --
Latin American Fund......................................... 39,000
Mid Cap Growth Fund......................................... 91,800
Value Fund.................................................. 214,800
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
Administration Agreement. Until March 1, 2003, the Adviser provided certain
administrative services to the Company pursuant to an administration agreement
between the Adviser and the Company. The services provided under the
Administration Agreement were subject to the supervision of the officers of the
Fund and Board of Directors of the Company and included day-to-day
administration of matters related to the corporate existence of the Company,
maintenance of its records, preparation of reports, supervision of the Company's
arrangements with its custodian and assistance in the preparation of the
Company's registration statements
B-50
under federal and state laws. The Administration Agreement also provided that
the Administrator through its agents would provide the Company dividend
disbursing and transfer agent services. The Administration Agreement also
provided that the Administrator would not be liable to the Company for any
actions or omissions if it or its agents or any of their employees acted without
gross negligence or willful misfeasance.
Under a sub-administration agreement between the Administrator and JPMorgan
Chase Bank ("Chase"), Chase Global Funds Services Company ("CGFSC"), a corporate
affiliate of Chase, provides certain administrative services to the Company. The
Administrator supervises and monitors such administrative services provided by
CGFSC. The services provided under the sub-administration agreement are subject
to the supervision of the Board of Directors of the Company. The Board of
Directors of the Company has approved the provision of services described above
pursuant to the sub-administration agreement as being in the best interests of
the Company. CGFSC's business address is 73 Tremont Street, Boston,
Massachusetts 02108-3913.
During the fiscal years ended June 30, 2003, 2002 and 2001, the Adviser
received the approximate administrative fees from the Funds as set forth in the
table below.
<Table>
<Caption>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
--------- ----------------- ----------------- -----------------
American Value Fund........................... $ 603,200 $1,451,300 $2,033,300
Asian Equity Fund............................. 99,800 181,200 279,300
Emerging Markets Debt Fund(1)................. -- -- --
Emerging Markets Fund......................... 179,100 323,300 401,800
Emerging Markets Income Fund.................. 130,400 258,300 365,900
Equity Growth Fund............................ 113,800 223,900 265,700
European Value Equity Fund.................... 15,900 28,900 41,900
Focus Equity Fund............................. 387,300 957,600 1,286,400
Global Equity Allocation Fund................. 580,400 1,162,700 1,527,100
Global Franchise Fund......................... 683,300 203,600 35,600
Global Value Equity Fund...................... 517,800 1,103,100 1,320,200
Growth and Income Fund II(1).................. -- -- --
International Magnum Fund..................... 119,300 230,400 320,900
Japanese Equity Fund(1)....................... -- -- --
Latin American Fund........................... 39,000 93,400 147,300
Mid Cap Growth Fund........................... 91,800 227,900 293,800
Value Fund.................................... 214,800 456,900 397,900
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
Legal Services Agreement. The Funds and certain other Van Kampen funds have
entered into legal services agreements pursuant to which Van Kampen Investments
provides legal services, including without limitation: accurate maintenance of
each fund's minute books and records, preparation and oversight of each fund's
regulatory reports and other information provided to shareholders, as well as
responding to day-to-day legal issues on behalf of the funds. Payment by the
Funds for such services is made on a cost basis for the salary and
salary-related benefits, including but not limited to bonuses, group insurance
and other regular wages for the employment of personnel. Other funds distributed
by the Distributor also receive legal services from Van Kampen Investments. Of
the total costs for such legal services provided to funds, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
B-51
During the fiscal years ended June 30, 2003, 2002 and 2001, Van Kampen
Investments received the following approximate fees from the Funds pursuant to
the legal services agreement:
<Table>
<Caption>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND NAME JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
--------- ----------------- ----------------- -----------------
American Value Fund........................... $26,800 $33,100 $52,400
Asian Equity Fund............................. 17,500 14,700 20,700
Emerging Markets Debt Fund(1)................. -- -- --
Emerging Markets Fund......................... 20,100 16,300 24,700
Emerging Markets Income Fund.................. 17,500 16,100 21,900
Equity Growth Fund............................ 18,500 14,400 20,200
European Value Equity Fund.................... 12,900 12,600 15,500
Focus Equity Fund............................. 21,100 28,100 35,300
Global Equity Allocation Fund................. 28,000 33,600 40,500
Global Franchise Fund......................... 39,500 25,500 17,900
Global Value Equity Fund...................... 26,100 32,900 38,700
Growth and Income Fund II(1).................. -- -- --
International Magnum Fund..................... 16,800 15,900 21,400
Japanese Equity Fund(1)....................... -- -- --
Latin American Fund........................... 14,200 14,200 18,700
Mid Cap Growth Fund........................... 15,500 14,900 16,600
Value Fund.................................... 19,900 19,800 22,200
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Funds' shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Funds through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of a Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by a Fund's Board of
Directors or (ii) by a vote of a majority of such Fund's outstanding voting
securities and (b) by a vote of a majority of Directors who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice.
B-52
Total underwriting commissions on the sale of shares of the Funds for the last
three fiscal years are shown in the chart below.
<Table>
<Caption>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2001
-------------------------- -------------------------- --------------------------
TOTAL AMOUNTS TOTAL AMOUNTS TOTAL AMOUNTS
UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY UNDERWRITING RETAINED BY
FUND NAME COMMISSIONS DISTRIBUTOR COMMISSIONS DISTRIBUTOR COMMISSIONS DISTRIBUTOR
--------- ------------ ----------- ------------ ----------- ------------ -----------
American Value Fund............... $ 146,858 $16,100 $ 138,409 $ 14,704 $ 221,543 $ 9,925
Asian Equity Fund................. 93,089 8,200 74,597 3,543 311,535 2,934
Emerging Markets Debt Fund(1)..... -- -- -- -- -- --
Emerging Markets Fund............. 68,294 4,806 135,535 14,887 356,398 33,733
Emerging Markets Income Fund...... 56,964 6,630 32,978 4,088 107,568 10,751
Equity Growth Fund................ 329,751 50,694 280,746 42,748 443,441 62,287
European Value Equity Fund........ 14,159 1,993 36,502 5,331 35,058 4,987
Focus Equity Fund................. 224,006 27,850 613,403 90,488 1,420,890 207,349
Global Equity Allocation Fund..... 298,912 40,900 581,585 75,160 1,315,763 161,017
Global Franchise Fund............. 4,386,457 614,000 2,191,796 322,412 168,421 27,571
Global Value Equity Fund.......... 232,006 36,500 133,607 13,682 244,542 30,645
Growth and Income Fund II(1)...... -- -- -- -- -- --
International Magnum Fund......... 327,735 17,410 214,245 13,179 437,666 9,923
Japanese Equity Fund(1)........... -- -- -- -- -- --
Latin American Fund............... 17,318 873 13,370 1,845 44,954 4,219
Mid Cap Growth Fund............... 90,100 13,300 254,534 37,103 705,625 81,498
Value Fund........................ 167,766 25,193 290,608 41,116 289,483 40,926
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
With respect to sales of Class A Shares of the Funds, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLES
With respect to Emerging Markets Debt Fund and Emerging Markets Income
Fund:
<Table>
<Caption>
TOTAL SALES CHARGE
---------------------- REALLOWED
AS % OF AS % OF NET TO DEALERS
OFFERING AMOUNT AS A % OF
SIZE OF INVESTMENT PRICE INVESTED OFFERING PRICE
------------------ -------- ----------- --------------
Less than $100,000.................................. 4.75% 4.99% 4.25%
$100,000 but less than $250,000..................... 3.75% 3.90% 3.25%
$250,000 but less than $500,000..................... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000................... 2.00% 2.04% 1.75%
$1,000,000 or more.................................. * * *
</Table>
B-53
With respect to all of the remaining Funds:
<Table>
<Caption>
TOTAL SALES CHARGE
---------------------- REALLOWED
AS % OF AS % OF NET TO DEALERS
OFFERING AMOUNT AS A % OF
SIZE OF INVESTMENT PRICE INVESTED OFFERING PRICE
------------------ -------- ----------- --------------
Less than $50,000................................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000...................... 4.75% 4.99% 4.00%
$100,000 but less than $250,000..................... 3.75% 3.90% 3.00%
$250,000 but less than $500,000..................... 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000................... 2.00% 2.04% 1.75%
$1,000,000 or more.................................. * * *
</Table>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase.
The one-year period ends on the first business day of the thirteenth month
after the purchase date. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed on a percentage of
the dollar value of such shares sold as follows: 1.00% on sales to $2 million,
plus 0.80% on the next $1 million and 0.50% on the excess over $3 million. For
single purchases of $20 million or more by an individual retail investor, the
Distributor will pay, at the time of purchase and directly out of the
Distributor's assets (and not out of the Fund's assets), a commission or
transaction fee of 1.00% to authorized dealers who initiate and are
responsible for such purchases. The commission or transaction fee of 1.00%
will be computed on a percentage of the dollar value of such shares sold.
With respect to sales of Class B Shares and Class C Shares, a commission or
transaction fee generally will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares are paid to the Distributor and are
used by the Distributor to defray its distribution related expenses in
connection with the sale of the Fund's shares, such as the payment to authorized
dealers for selling such shares. With respect to Class C Shares, the authorized
dealers generally receive from the Distributor ongoing distribution of up to
0.75% of the average daily net assets of a Fund's Class C Shares annually
commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily intended to result in sales of shares of the Fund
or other Van Kampen funds. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. The Distributor may provide
additional compensation to Edward D. Jones & Co. or an affiliate thereof based
on a combination of its quarterly sales of shares of the Funds and other Van
Kampen funds and increases in net assets of the Funds and other
B-54
Van Kampen funds over specified thresholds. All of the foregoing payments are
made by the Distributor out of its own assets. Such fees paid for such services
and activities with respect to a Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of such Fund on an annual basis. These
programs will not change the price an investor will pay for shares or the amount
that a Fund will receive from such sale.
Each of the Funds have each adopted a distribution plan (the "Distribution
Plan") with respect to each of its Class A Shares, Class B Shares and Class C
Shares pursuant to Rule 12b-1 under the 1940 Act. Each of the Funds also adopted
a service plan (the "Service Plan") with respect to each of its Class A Shares,
Class B Shares and Class C Shares. The Distribution Plan and the Service Plan
sometimes are referred to herein as the "Plans". The Plans provide that a Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Distribution Plan and the Service Plan are
being implemented through the Distribution and Service Agreement with the
Distributor of each such class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between a Fund and financial intermediaries who are acting as
brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Funds.
The Distributor must submit quarterly reports to the Fund's Board of
Directors setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Board of Directors. The Plans provide that they will continue
in full force and effect from year to year so long as such continuance is
specifically approved by a vote of the Board of Directors, and also by a vote of
the disinterested Directors, cast in person at a meeting called for the purpose
of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Board of Directors and also by the
disinterested Directors. Each of the Plans may be terminated with respect to any
class of shares at any time by a vote of a majority of the disinterested
Directors or by a vote of a majority of the outstanding voting shares of such
class.
The Plans obligate the Funds to accrue and pay to the Distributor the
compensation fee agreed to under its Distribution Agreement. The Plans do not
obligate the Funds to reimburse the Distributor for the actual expenses the
Distributor may incur in fulfilling its obligations under the Plan.
Because each Fund is a series of the Company, amounts paid to the
Distributor for expenses of one series of the Company may indirectly benefit the
other series of the Company. The Distributor will endeavor to allocate such
expenses among such series in an equitable manner. The Distributor will not use
the proceeds from the contingent deferred sales charge applicable to a
particular class of shares to defray distribution-related expenses attributable
to any other class of shares.
B-55
As of June 30, 2003, the unreimbursed distribution-related expenses with
respect to Class B Shares and Class C shares, and the percentage of the Fund's
net assets attributable to Class B Shares and Class C Shares are represented
below.
<Table>
<Caption>
B SHARES C SHARES
---------------------------- ----------------------------
APPROXIMATE APPROXIMATE
APPROXIMATE PERCENTAGE OF APPROXIMATE PERCENTAGE OF
UNREIMBURSED FUND'S NET UNREIMBURSED FUND'S NET
FUND NAME DISTRIBUTION ASSETS DISTRIBUTION ASSETS
--------- ------------ ------------- ------------ -------------
American Value Fund............. $1,892,200 1% $ 0 0.00%
Asian Equity Fund............... 2,331,300 21% 1,879,700 17%
Emerging Markets Fund........... 1,648,100 6% 375,400 3%
Emerging Markets Income Fund.... 3,139,900 8% 286,900 2%
Equity Growth Fund.............. 875,500 3% 13,900 less than 1%
European Value Equity Fund...... 7,900 less than 1% 0 0.00%
Focus Equity Fund............... 2,004,400 2% 41,200 less than 1%
Global Equity Allocation Fund... 0 0.00% 353,500 less than 1%
Global Franchise Fund........... 6,238,100 3% 362,600 less than 1%
Global Value Equity Fund........ 5,321,200 3% 0 0.00%
International Magnum Fund....... 606,800 3% 34,400 less than 1%
Latin American Fund............. 616,200 8% 52,900 1%
Mid Cap Growth Fund............. 1,407,300 5% 200 less than 1%
Value Fund...................... 1,659,600 3% 0 0.00%
</Table>
If the Distribution Plans are terminated or not continued, the Fund would
not be contractually obligated to pay the Distributor for any expenses not
previously reimbursed by the Fund or recovered through contingent deferred sales
charges.
B-56
For the fiscal year ended June 30, 2003, the Distributor received aggregate
fees under the Plans as follows:
<Table>
<Caption>
PERCENTAGE OF
FISCAL YEAR ENDED AVERAGE DAILY
FUND NAME JUNE 30, 2003 NET ASSETS
--------- ----------------- -------------
American Value Fund -- Class A.............................. $ 374,379 .25%
American Value Fund -- Class B.............................. 1,523,837 1.00%
American Value Fund -- Class C.............................. 662,555 1.00%
Asian Equity Fund -- Class A................................ 80,744 .25%
Asian Equity Fund -- Class B................................ 138,859 1.00%
Asian Equity Fund -- Class C................................ 119,159 1.00%
Emerging Markets Debt Fund -- Class A(1).................... -- --%
Emerging Markets Debt Fund -- Class B(1).................... -- --%
Emerging Markets Debt Fund -- Class C(1).................... -- --%
Emerging Markets Fund -- Class A............................ 156,005 .25%
Emerging Markets Fund -- Class B............................ 314,957 1.00%
Emerging Markets Fund -- Class C............................ 139,024 1.00%
Emerging Markets Income Fund -- Class A..................... 62,359 .25%
Emerging Markets Income Fund -- Class B..................... 396,104 1.00%
Emerging Markets Income Fund -- Class C..................... 164,995 1.00%
Equity Growth Fund -- Class A............................... 70,753 .25%
Equity Growth Fund -- Class B............................... 272,525 1.00%
Equity Growth Fund -- Class C............................... 144,645 1.00%
European Value Equity Fund -- Class A....................... 8,553 .25%
European Value Equity Fund -- Class B....................... 32,057 .84%
European Value Equity Fund -- Class C....................... 12,238 .89%
Focus Equity Fund -- Class A................................ 225,717 .25%
Focus Equity Fund -- Class B................................ 1,191,630 1.00%
Focus Equity Fund -- Class C................................ 247,660 1.00%
Global Equity Allocation Fund -- Class A.................... 460,687 .25%
Global Equity Allocation Fund -- Class B.................... 917,765 .77%
Global Equity Allocation Fund -- Class C.................... 440,215 1.00%
Global Franchise Fund -- Class A............................ 547,715 .25%
Global Franchise Fund -- Class B............................ 1,363,829 1.00%
Global Franchise Fund -- Class C............................ 828,011 1.00%
Global Value Equity Fund -- Class A......................... 125,862 .25%
Global Value Equity Fund -- Class B......................... 2,273,968 1.00%
Global Value Equity Fund -- Class C......................... 234,321 .97%
Growth and Income Fund II -- Class A(1)..................... -- --%
Growth and Income Fund II -- Class B(1)..................... -- --%
Growth and Income Fund II -- Class C(1)..................... -- --%
International Magnum Fund -- Class A........................ 100,542 .25%
International Magnum Fund -- Class B........................ 229,430 1.00%
International Magnum Fund -- Class C........................ 63,686 1.00%
Japanese Equity Fund -- Class A(1).......................... -- --%
Japanese Equity Fund -- Class B(1).......................... -- --%
Japanese Equity Fund -- Class C(1).......................... -- --%
Latin American Fund -- Class A.............................. 31,152 .25%
Latin American Fund -- Class B.............................. 79,552 1.00%
Latin American Fund -- Class C.............................. 37,145 1.00%
Mid Cap Growth Fund -- Class A.............................. 56,330 .25%
Mid Cap Growth Fund -- Class B.............................. 250,076 1.00%
Mid Cap Growth Fund -- Class C.............................. 73,782 .90%
Value Fund -- Class A....................................... 134,335 .25%
Value Fund -- Class B....................................... 602,441 1.00%
Value Fund -- Class C....................................... 135,432 .94%
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
B-57
With respect to the following funds, the Distributor has entered into
agreements with the following firms whereby certain shares of these Funds will
be offered pursuant to such firm's retirement plan alliance program(s):
AMERICAN VALUE FUND
Hewitt Associates, LLC
Huntington Bank
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Charles Schwab & Co., Inc.
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
ASIAN EQUITY FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Charles Schwab & Co., Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
EMERGING MARKETS FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
B-58
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, NA
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
EMERGING MARKETS INCOME FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
EQUITY GROWTH FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
First Union National Bank
Franklin Templeton
Great West Life Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
B-59
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
EUROPEAN VALUE EQUITY FUND
American Century Retirement Plan Services Inc.
GoldK Investment Services, Inc.
SunGard Institutional Brokerage Inc.
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
FOCUS EQUITY FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
GLOBAL EQUITY ALLOCATION FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
B-60
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
GLOBAL FRANCHISE FUND
American Century Retirement Services Inc.
GoldK Investment Services, Inc.
Merrill Lynch Pierce, Fenner & Smith, Incorporated
The Prudential Insurance Company of America
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
GLOBAL VALUE EQUITY FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Investments Institutional Operations Company, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
B-61
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
INTERNATIONAL MAGNUM FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith Incorporated
Morgan Stanley DW Inc.
National Deferred Compensations, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
LATIN AMERICAN FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
The Prudential Insurance Company of America
B-62
Delaware Charter Guarantee & Trust under the trade name of Trustar(SM)
Retirement Services
Charles Schwab & Co., Inc.
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
MID CAP GROWTH FUND
American Century Retirement Plan Services Inc.
GoldK Investment Services, Inc.
SunGard Institutional Brokerage Inc.
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
VALUE FUND
American Century Retirement Plan Services Inc.
Buck Consultants, Inc.
Fidelity Brokerage Services, Inc. & National Financial Services Corporation
First Union National Bank
Franklin Templeton
Great West Life & Annuity Insurance Company/Benefits Corp Equities, Inc.
GoldK Investment Services, Inc.
Hewitt Associates, LLC
Huntington Bank
Lincoln National Life Insurance Company
Merrill Lynch Pierce, Fenner & Smith, Incorporated
Morgan Stanley DW Inc.
National Deferred Compensation, Inc.
Nationwide Investment Services Corporation
Wells Fargo Bank, N.A. on behalf of itself and its Affiliated Banks
Smith Barney, Inc.
SunGard Institutional Brokerage Inc.
Union Bank of California, N.A.
Vanguard Marketing Corporation (a wholly-owned subsidiary of The Vanguard Group,
Inc.)
ABN Amro Trust Services Co.
AMVESCAP Retirement, Inc. (Formerly Invesco Retirement and Benefit Services,
Inc.)
ING Financial Advisers, LLC
Northern Trust Retirement Consulting, LLC
Trustees and other fiduciaries of retirement plans seeking to invest in
multiple fund families through a broker-dealer retirement plan alliance program
should contact the firms mentioned above for further information concerning the
program(s) including, but not limited to, minimum investment and operational
requirements.
B-63
TRANSFER AGENT
The Funds' transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency fees
are determined through negotiations with the Fund and are approved by the Fund's
Board of Directors. The transfer agency fees are based on competitive
benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Funds, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of each Fund's
portfolio business, the policies and practices in this regard are subject to
review by the Fund's Board of Directors.
With respect to the Emerging Markets Debt Fund and the Emerging Markets
Income Fund, most transactions made by such Funds are principal transactions at
net prices and the Funds generally incur little or no brokerage costs. The
portfolio securities in which these Funds invest are normally purchased directly
from the issuer or in the over-the-counter market from an underwriter or market
maker for the securities. Purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer to the underwriter and
purchases from dealers serving as market makers include a spread or markup to
the dealer between the bid and asked price. Sales to dealers are effected at bid
prices. These Funds may also purchase certain money market instruments directly
from an issuer, in which case no commissions or discounts are paid, or may
purchase and sell listed securities on an exchange, which are effected through
brokers who charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Funds and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Funds.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Funds, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Funds' shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services.
B-64
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for a Fund and another advisory account. In
some cases, this procedure could have an adverse effect on the price or the
amount of securities available to such Fund. In making such allocations among a
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which the Funds may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Funds
or affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Board of Directors has adopted certain policies incorporating
the standards of Rule 17e-1 issued by the SEC under the 1940 Act which require
that the commissions paid to affiliates of the Funds must be reasonable and fair
compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the Board of Directors and to maintain records in connection with such reviews.
After consideration of all factors deemed relevant, the Board of Directors will
consider from time to time whether the advisory fee for each Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
Unless otherwise disclosed below, the Fund paid no commissions to
affiliated brokers during the last three fiscal years. The Funds paid the
following commissions to brokers during the fiscal years shown:
<Table>
<Caption>
EMERGING EMERGING EUROPEAN
AMERICAN ASIAN MARKETS EMERGING MARKETS EQUITY VALUE FOCUS
FISCAL YEAR ENDED VALUE EQUITY DEBT MARKETS INCOME GROWTH EQUITY EQUITY
JUNE 30, 2003 FUND FUND FUND(1) FUND FUND FUND FUND FUND
----------------- -------- ------ -------- -------- -------- ------ -------- ------
Total brokerage
commissions........... $ 2,658,527 $ 337,594 $-- $ 473,255 $ 0 $ 393,178 $27,158 $ 1,390,962
Commissions with Morgan
Stanley & Co.
Incorporated.......... $ 0 $ 72,598 $-- $ 13,188 $ 0 $ 10,967 $ 184 $ 22,527
Percentage of total
commissions......... 0% 21.50% -- 2.79% 0% 2.79% 0.68% 1.62%
Percentage of total
value of brokerage
transactions with
Morgan Stanley & Co.
Incorporated.......... 0% 35.79% -- 1.78% 0% 2.59% 0.17% 1.24%
Commissions for
research services..... $ 2,359,902 $ 294,777 $-- $ 413,557 $-- $ 381,339 $26,724 $ 1,348,541
Value of research
transactions.......... $809,136,918 $195,578,751 $-- $91,581,343 $-- $306,682,283 $907,169 $1,054,110,199
<Caption>
GLOBAL
EQUITY GLOBAL
FISCAL YEAR ENDED ALLOCATION FRANCHISE
JUNE 30, 2003 FUND FUND
----------------- ---------- ---------
Total brokerage
commissions........... $ 286,351 $ 544,061
Commissions with Morgan
Stanley & Co.
Incorporated.......... $ 0 $ 1,503
Percentage of total
commissions......... 0% 0.28%
Percentage of total
value of brokerage
transactions with
Morgan Stanley & Co.
Incorporated.......... 0% 0.02%
Commissions for
research services..... $ 248,970 $ 543,008
Value of research
transactions.......... $686,744,491 $22,050,403
</Table>
<Table>
<Caption>
GROWTH INTER-
GLOBAL AND NATIONAL JAPANESE LATIN MID CAP
FISCAL YEAR ENDED VALUE INCOME MAGNUM EQUITY AMERICAN GROWTH VALUE
JUNE 30, 2003 EQUITY FUND FUND II(1) FUND FUND(1) FUND FUND FUND
----------------- ----------- ---------- -------- -------- -------- ------- -----
Total brokerage commissions..... $ 248,105 $-- $ 137,776 $-- $ 106,670 $ 506,465 $ 367,352
Commissions with Morgan Stanley
& Co. Incorporated............. $ 16,612 $-- $ 524 $-- $ 42 $ 4,774 $ 6,801
Percentage of total
commissions.................. 6.70% -- 0.38% -- 0.04% 0.94% 1.85%
Percentage of total value of
brokerage transactions with
Morgan Stanley & Co.
Incorporated................... 0.82% -- 0.03% -- 0.05% 0.79% 1.62%
Commissions for research
services....................... $ 234,353 $-- $ 111,449 $-- $ 93,288 $ 506,465 $ 296,577
Value of research
transactions................... $1,492,477,804 $-- $9,412,193 $-- $41,015,213 $256,025,537 $337,175,524
</Table>
- ---------------
(1) Not operational as of June 30, 2003.
B-65
<Table>
<Caption>
EMERGING EMERGING EUROPEAN
AMERICAN ASIAN MARKETS EMERGING MARKETS EQUITY VALUE
FISCAL YEAR ENDED VALUE EQUITY DEBT MARKETS INCOME GROWTH EQUITY
JUNE 30, 2002 FUND FUND FUND(1) FUND FUND FUND FUND
----------------- ------------ -------- -------- ------------ --------- ------------ -----------
Total brokerage
commissions................ $ 2,322,090 $504,235 $-- $ 566,477 $ 0 $ 229,250 $ 35,325
Commissions with Morgan
Stanley & Co.
Incorporated............... $ -- $ 88,666 $-- $ 33,524 $-- $ 20,413 $ --
Percentage of total
commissions.............. 0% 17.58% -- 5.92% 0% 8.90% 0%
Percentage of total value of
brokerage transactions with
Morgan Stanley & Co.
Incorporated............... 0% 17.70% -- 1.93% 0% 10.64% 0%
Percentage of total value of
brokerage transactions with
Dean Witter................ 0% 0% -- 0% 0% 0% 0%
<Caption>
GLOBAL
FOCUS EQUITY GLOBAL
FISCAL YEAR ENDED EQUITY ALLOCATION FRANCHISE
JUNE 30, 2002 FUND FUND FUND
----------------- ------------ ------------ ------------
Total brokerage
commissions................ $ 890,226 $ 204,743 $ 153,492
Commissions with Morgan
Stanley & Co.
Incorporated............... $ 43,669 $ -- $ 163
Percentage of total
commissions.............. 4.91% 0% 0.11%
Percentage of total value of
brokerage transactions with
Morgan Stanley & Co.
Incorporated............... 5.60% 0% 0.04%
Percentage of total value of
brokerage transactions with
Dean Witter................ 0% 0% 0%
</Table>
<Table>
<Caption>
GLOBAL GROWTH INTER-
VALUE AND NATIONAL JAPANESE LATIN MID CAP
FISCAL YEAR ENDED EQUITY INCOME MAGNUM EQUITY AMERICAN GROWTH VALUE
JUNE 30, 2002 FUND FUND II(1) FUND FUND(1) FUND FUND FUND
----------------- ------------ ---------- ------------ -------- ----------- ------------ ------------
Total brokerage commissions..... $ 522,842 $-- $ 152,525 $-- $ 105,741 $ 419,825 $ 280,454
Commissions with Morgan Stanley
& Co. Incorporated............. $ 14,547 $-- $ 70 $-- $ 1,925 $ 1,386 $ --
Percentage of total
commissions.................. 2.78% -- 0.05% -- 1.82% 0.33% 0%
Percentage of total value of
brokerage transactions with
Morgan Stanley & Co.
Incorporated................... 2.30% -- 0.04% -- 0.23% 0.44% 0%
</Table>
- ---------------
(1) Not operational as of June 30, 2002.
<Table>
<Caption>
EMERGING EMERGING EUROPEAN
AMERICAN ASIAN MARKETS EMERGING MARKETS EQUITY VALUE
FISCAL YEAR ENDED VALUE EQUITY DEBT MARKETS INCOME GROWTH EQUITY
JUNE 30, 2001 FUND FUND FUND(1) FUND FUND FUND FUND
----------------- -------- ------ -------- -------- -------- ------ --------
Total brokerage
commissions......... $ 2,628,442 $ 787,894 $-- $ 815,320 $ 862 $ 135,132 $ 25,128
Commissions with
Morgan Stanley & Co.
Incorporated........ $ 0 $ 182,300 $-- $ 49,400 $ 0 $ 1,300 $ 0
Percentage of total
commissions....... 0% 23.14% -- 6.06% 0% 0.96% 0%
Percentage of total
commissions....... 0% 0% -- 0% 0% 0% 0%
Percentage of total
value of brokerage
transactions with
Morgan Stanley & Co.
Incorporated........ 0% 22.04% -- 6.13% 0% 1.01% 0%
<Caption>
GLOBAL
FOCUS EQUITY GLOBAL
FISCAL YEAR ENDED EQUITY ALLOCATION FRANCHISE
JUNE 30, 2001 FUND FUND FUND
----------------- ------ ---------- ---------
Total brokerage
commissions......... $ 678,542 $ 335,416 $ 37,793
Commissions with
Morgan Stanley & Co.
Incorporated........ $ 1,800 $ 0 $ 1,200
Percentage of total
commissions....... 0.27% 0% 3.18%
Percentage of total
commissions....... 0% 0% 0%
Percentage of total
value of brokerage
transactions with
Morgan Stanley & Co.
Incorporated........ 0.25% 0% 3.97%
</Table>
B-66
<Table>
<Caption>
GROWTH
GLOBAL AND INTER-
VALUE INCOME NATIONAL JAPANESE LATIN MID CAP
FISCAL YEAR ENDED EQUITY FUND MAGNUM EQUITY AMERICAN GROWTH VALUE
JUNE 30, 2001 FUND II(1) FUND FUND(1) FUND FUND FUND
----------------- ------ ------ -------- -------- -------- ------- -----
Total brokerage commissions.......... $ 679,701 $-- $ 161,602 $-- $ 185,435 $ 274,871 $ 480,961
Commissions with Morgan Stanley & Co.
Incorporated........................ $ 27,200 $-- $ -- $-- $ 1,600 $ 0 $ 800
Percentage of total commissions..... 4.00% -- 0% -- 0.86% 0% 0.17%
Percentage of total value of
brokerage transactions with Morgan
Stanley & Co. Incorporated.......... 4.80% -- 0% -- 2.45% 0% 0.47%
</Table>
- ---------------
(1) Not operational as of June 30, 2001.
SHAREHOLDER SERVICES
The Funds offer a number of shareholder services designed to facilitate
investment in their respective shares at little or no extra cost to the
investor. Below is a description of such services. The following information
supplements the section in each Fund's Prospectus captioned "Shareholder
Services."
INVESTMENT ACCOUNT
Each shareholder of each Fund has an investment account under which the
investor's shares of the Fund are held by Investor Services, the Funds' transfer
agent. Investor Services performs bookkeeping, data processing and
administrative services related to the maintenance of shareholder accounts.
Except as described in the Prospectus and this Statement of Additional
Information, after each share transaction in an account, the shareholder
receives a statement showing the activity in the account. Each shareholder who
has an account in any of the Van Kampen funds will receive statements quarterly
from Investor Services showing any reinvestments of dividends and capital gain
dividends and any other activity in the account since the preceding statement.
Such shareholders also will receive separate confirmations for each purchase or
sale transaction other than reinvestment of dividends and capital gain dividends
and systematic purchases or redemptions. Additional shares may be purchased at
any time through authorized dealers or by mailing a check and detailed
instructions directly to Investor Services.
SHARE CERTIFICATES
Generally, the Funds will not issue share certificates. However, upon
written or telephone request to a Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of that Fund. A
shareholder will be required to surrender such certificates upon an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc. c/o
Investor Services, PO Box 947, Jersey City, NJ 07303-0947, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to
B-67
the account on the second business day following normal payment. To utilize this
option, the shareholder's bank must be a member of ACH. In addition, the
shareholder must fill out the appropriate section of the account application
form. The shareholder must also include a voided check or deposit slip from the
bank account into which redemption proceeds are to be deposited together with
the completed application. Once Investor Services has received the application
and the voided check or deposit slip, such shareholder's designated bank
account, following any redemption, will be credited with the proceeds of such
redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing Investor Services or by calling (800)
847-2424 ((800) 421-2833 for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may elect, by completing the appropriate section of the
account application form or by calling (800) 847-2424 ((800) 421-2833 for the
hearing impaired), to have all dividends and capital gain dividends paid on a
class of shares of a Fund invested into shares of the same class of any of the
Participating Funds (as defined in each Prospectus) so long as the investor has
a pre-existing account for such class of shares of the other fund. Both accounts
must be of the same type, either non-retirement or retirement. If the accounts
are retirement accounts, they must both be for the same class and of the same
type of retirement plan (e.g. IRA, 403(b)(7), 401(k), Money Purchase and Profit
Sharing Keogh plans) and for the benefit of the same individual. If a qualified,
pre-existing account does not exist, the shareholder must establish a new
account subject to any requirements of the Participating Fund into which
distributions will be invested. Distributions are invested into the selected
Participating Fund, provided that shares of such Participating Fund are
available for sale, at its net asset value per share as of the payable date of
the distribution from the Fund.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for periodic checks in any
amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan and may be
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the applicable Fund are redeemed to
provide the amount of the periodic withdrawal payment. Dividends and capital
gain dividends on shares held in accounts with systematic withdrawal plans are
reinvested in additional shares at the next determined net asset value per
share. If periodic withdrawals continuously exceed reinvested dividends and
capital gain dividends, the shareholder's original investment will be
correspondingly reduced and ultimately exhausted. Redemptions made concurrently
with the purchase of additional shares ordinarily will be disadvantageous to the
shareholder because of the duplication of sales charges. Any gain or loss
realized by the shareholder upon redemption of shares is a taxable event. Each
Fund reserves the right to amend or terminate the systematic withdrawal program
upon 30 days' notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of a
Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a
B-68
fractional share to round off his or her purchase to the next full share) in
Class A Shares of such Fund. A Class C Shareholder who has redeemed shares of
the Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a fractional share to round
off his or her purchase to the next full share) in Class C Shares of the Fund
with credit given for any contingent deferred sales charge paid upon such
redemption, provided that such shareholder has not previously exercised this
reinstatement privilege with respect to Class C Shares of the Fund. Shares
acquired in this manner will be deemed to have the original cost and purchase
date of the redeemed shares for purposes of applying the CDSC-Class C (defined
below) to subsequent redemptions. Reinstatements are made at the net asset value
per share (without sales charge) next determined after the order is received,
which must be made within 180 days after the date of the redemption, provided
that shares of the Fund are available for sale. Reinstatement at net asset value
per share is also offered to participants in eligible retirement plans for
repayment of principal (and interest) on their borrowings on such plans,
provided that shares of the Funds are available for sale.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by a Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for such Fund to fairly determine the value of its net assets; or
(d) the SEC, by order, so permits.
In addition, if the Company's Board of Directors determines that payment
wholly or partly in cash would be detrimental to the best interests of the
remaining shareholders of a Fund, such Fund may pay the redemption proceeds in
whole or in part by a distribution-in-kind of portfolio securities held by the
Fund in lieu of cash in conformity with applicable rules of the SEC. A
distribution-in-kind may result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the shareholder may have brokerage costs and a gain or loss for federal income
tax purposes upon the shareholder's disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE -- CLASS A
As described in the Funds' Prospectuses under "Purchase of Shares -- Class
A Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of a
Participating Fund are exchanged for shares of another Participating Fund, the
purchase date for the shares acquired by exchange will be assumed to be the date
on which shares were purchased in the fund from which the exchange was made. If
the exchanged shares themselves are acquired through an exchange, the purchase
date is assumed to carry over from the date of the original election to purchase
shares subject to a CDSC-Class A rather than a front-end load sales charge. In
determining whether a CDSC-Class A is payable, it is assumed that shares being
redeemed first are any shares in the shareholder's account not subject to a
contingent deferred sales charge, followed by shares held the longest in the
shareholder's account. The contingent deferred sales charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no sales charge
is assessed on shares derived from reinvestment of dividends or capital gain
dividends.
B-69
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGES
As described in the Funds' Prospectuses under "Redemption of Shares,"
redemptions of Class B Shares and Class C Shares will be subject to a contingent
deferred sales charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived
on redemptions of Class B Shares and Class C Shares in the circumstances
described below:
REDEMPTION UPON DEATH OR DISABILITY
A Fund will waive the CDSC-Class B and C on redemptions following the death
or disability of a Class B shareholder and Class C shareholder. An individual
will be considered disabled for this purpose if he or she meets the definition
thereof in Section 72(m)(7) of the Code, which in pertinent part defines a
person as disabled if such person "is unable to engage in any substantial
gainful activity by reason of any medically determinable physical or mental
impairment which can be expected to result in death or to be of long-continued
and indefinite duration." While the Funds do not specifically adopt the balance
of the Code's definition which pertains to furnishing the Secretary of Treasury
with such proof as he or she may require, the Distributor will require
satisfactory proof of death or disability before it determines to waive the
CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
A Fund will waive the CDSC-Class B and C when a total or partial redemption
is made in connection with certain distributions from retirement plans. The
CDSC-Class B and C will be waived upon the tax-free rollover or transfer of
assets to another retirement plan invested in one or more Participating Funds;
in such event, as described below, the Fund will "tack" the period for which the
original shares were held on to the holding period of the shares acquired in the
transfer or rollover for purposes of determining what, if any, CDSC-Class B and
C is applicable in the event that such acquired shares are redeemed following
the transfer or rollover. The charge also will be waived on any redemption which
results from the return of an excess contribution or other contribution pursuant
to Code Section 408(d)(4) or (5), the return of excess contributions or deferral
amounts pursuant to Code Section 401(k)(8) or 402(g)(2), the financial hardship
of the employee pursuant to U.S. Treasury regulation Section 1.401(k)-1(d)(2) or
the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge will be waived on any minimum
distribution required to be distributed in accordance with Code Section
401(a)(9).
The Funds do not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in a Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The
B-70
Fund reserves the right to change the terms and conditions of the systematic
withdrawal plan and the ability to offer the systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
A Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectuses.
INVOLUNTARY REDEMPTIONS OF SHARES
Each Fund reserves the right to redeem shareholder accounts with balances
of less than a specified dollar amount as set forth in the Funds' Prospectuses.
Prior to such redemptions, shareholders will be notified in writing and allowed
a specified period of time to purchase additional shares to bring the value of
the account up to the required minimum balance. Each Fund will waive the
CDSC-Class B and C upon such involuntary redemption.
REDEMPTION BY ADVISER
A Fund may waive the CDSC-Class B and C when a total or partial redemption
is made by the Adviser with respect to its investments in such Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUNDS
The Company and each of the Funds will be treated as separate corporations
for federal income tax purposes. The Funds have elected and qualified and intend
to continue to qualify each year, to be treated as regulated investment
companies under Subchapter M of the Code. To qualify as a regulated investment
company, each Fund must comply with certain requirements of the Code relating
to, among other things, the sources of its income and diversification of its
assets.
If a Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including ordinary
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss) and meets
certain other requirements, it will not be required to pay federal income taxes
on any income it distributes to shareholders. Each Fund intends to distribute at
least the minimum amount necessary to satisfy the 90% distribution requirement.
A Fund will not be subject to federal income tax on any net capital gain
distributed to shareholders and designated as capital gain dividends.
To avoid a 4% excise tax, each Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, a Fund will be treated as having been distributed.
If a Fund failed to qualify as a regulated investment company or failed to
satisfy the 90% distribution requirement in any taxable year, that Fund would be
taxed as an ordinary corporation on its taxable income (even if such income were
distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
for taxation as a regulated investment company.
Some of the Funds' investment practices are subject to special provisions
of the Code that may, among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Fund to
B-71
recognize income or gain without a corresponding receipt of cash with which to
make distributions in amounts necessary to satisfy the 90% distribution
requirement and the distribution requirements for avoiding income and excise
taxes. Each Fund will monitor its transactions and may make certain tax
elections to mitigate the effect of these rules and prevent its disqualification
as a regulated investment company.
Investments of a Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, a
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year to maintain its qualification as a
regulated investment company and to avoid income and excise taxes. To generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and to avoid income and excise taxes, such Fund may have to dispose
of securities that it would otherwise have continued to hold.
A Fund may invest in or own debt securities of companies in various stages
of financial restructuring, bankruptcy or reorganization which are not currently
paying interest or are in default. Investments in debt securities that are at
risk of or in default present special tax issues for such a Fund. Federal income
tax rules are not entirely clear about issues such as when the Fund may cease to
accrue interest, original issue discount or market discount, when and to what
extent deductions may be taken for bad debts or worthless securities, how
payments received on obligations in default should be allocated between
principal and income and whether exchanges of debt obligations in a bankruptcy
or workout context are taxable. These and other issues will be addressed by the
Fund, in the event it invests in such securities, in order to seek to ensure
that it distributes sufficient income to preserve its status as a regulated
investment company and does not become subject to U.S. federal income or excise
tax.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Funds may invest in non-U.S. corporations that could be classified as
"passive foreign investment companies" as defined for federal income tax
purposes. For federal income tax purposes, such an investment may, among other
things, cause the Funds to recognize income or gain without a corresponding
receipt of cash, to incur an interest charge on taxable income that is deemed to
have been deferred and/or to recognize ordinary income that would otherwise have
been treated as capital gain.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of a Fund's investment company taxable income are taxable to
shareholders as ordinary income to the extent of such Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of a Fund's net capital gains designated as capital gain dividends, if any, are
taxable to shareholders as long-term capital gains regardless of the length of
time shares of such Fund have been held by such shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a shareholder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gains to such shareholder (assuming such shares
are held as a capital asset). The Jobs and Growth Tax Relief Reconciliation Act
of 2003 (the "2003 Tax Act") contains provisions that reduce the U.S. federal
income tax rates on (1) long-term capital gains received by individuals and (2)
"qualified dividend income" received by individuals from certain domestic and
foreign corporations. The reduced rate for capital gains generally applies to
long-term capital gains from sales or exchanges recognized on or after May 6,
2003, and ceases to apply for taxable years beginning after December 31, 2008.
The reduced rate for dividends generally applies to "qualified dividend income"
received in taxable years beginning after December 31, 2002, and ceases to apply
for taxable years beginning after December 31, 2008. In the case of a Fund
intending to invest primarily in common stocks and other equity securities, a
portion of the ordinary income dividends paid by such Fund should be eligible
for the reduced rate applicable to "qualified dividend income." In the case of a
Fund that intends to invest primarily in debt securities, ordinary income
dividends paid by such Fund generally will not be eligible for the reduced rate
applicable to "qualified dividend income." Distributions from the Funds
designated as capital gain dividends will be eligible for the reduced rate
applicable to long-term capital gains. For a summary of the maximum tax rates
applicable to capital gains (including capital gain dividends), see
B-72
"Capital Gains Rates" below. Tax-exempt shareholders not subject to federal
income tax on their income generally will not be taxed on distributions from a
Fund.
Shareholders receiving distributions in the form of additional shares
issued by a Fund will be treated for federal income tax purposes as receiving a
distribution in an amount equal to the fair market value of the shares received,
determined as of the distribution date. The basis of such shares will equal
their fair market value on the distribution date.
Each Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Some portion of
the distributions from a Fund may be eligible for the corporate dividends
received deduction if such Fund receives qualifying dividends during the year
and if certain requirements of the Code are satisfied.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by a Fund and received
by the shareholders on the December 31st prior to the date of payment. In
addition, certain other distributions made after the close of a taxable year of
a Fund may be "spilled back" and treated as paid by such Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by a Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of a Fund may be
entitled to claim United States foreign tax credits with respect to such taxes,
subject to certain provisions and limitations contained in the Code. If more
than 50% of the value of a Fund's total assets at the close of its taxable year
consists of stock or securities of foreign corporations and such Fund meets
certain holding period requirements, the Fund will be eligible to file, and may
file, an election with the Internal Revenue Service ("IRS") pursuant to which
shareholders of such Fund will be required (i) to include their respective pro
rata portions of such taxes in their United States income tax returns as gross
income and (ii) to treat such respective pro rata portions as taxes paid by
them. Each shareholder will be entitled, subject to certain limitations, either
to deduct his pro rata portion of such foreign taxes in computing his taxable
income or to credit them against his United States federal income taxes. No
deduction for such foreign taxes may be claimed by a shareholder who does not
itemize deductions. Each shareholder of a Fund that may be eligible to file the
election described in this paragraph will be notified annually whether the
foreign taxes paid by such Fund will "pass through" for that year and, if so,
such notification will designate (i) the shareholder's portion of the foreign
taxes paid to each country and (ii) the portion of dividends that represent
income derived from sources within each country. The amount of foreign taxes for
which a shareholder may claim a credit in any year will be subject to an overall
limitation such that the credit may not exceed the shareholder's United States
federal income tax attributable to the shareholder's foreign source taxable
income. This limitation generally applies separately to certain specific
categories of foreign source income including "passive income," which includes
dividends and interest. Because the application of the foregoing rules depends
on the particular circumstances of each shareholder, shareholders are urged to
consult their tax advisers.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) a Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, such Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss
B-73
in an amount equal to the difference between their adjusted tax basis in the
shares sold and the amount received. If the shares are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the maximum
tax rates applicable to capital gains, see "Capital Gains Rates" below. Any loss
recognized upon a taxable disposition of shares held for six months or less will
be treated as a long-term capital loss to the extent of any capital gain
dividends received with respect to such shares. For purposes of determining
whether shares have been held for six months or less, the holding period is
suspended for any periods during which the shareholder's risk of loss is
diminished as a result of holding one or more other positions in substantially
similar or related property or through certain options or short sales.
CAPITAL GAINS RATES
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers
investing in a Fund is (i) the same as the maximum ordinary income tax rate for
capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008). The maximum long-term capital gains rate for corporations is
35%.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
For purposes of this and the following paragraphs, a "Non-U.S. Shareholder"
shall include any shareholder who is not
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized under the laws of the
United States or any state or political subdivision thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court
and which has one or more U.S. fiduciaries who have the authority to
control all substantial decisions of the trust, or (ii) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A Non-U.S. Shareholder generally will be subject to withholding of U.S.
federal income tax at a 30% rate (or lower applicable treaty rate), rather than
backup withholding (discussed below), on dividends from the Fund (other than
capital gain dividends) that are not "effectively connected" with a U.S. trade
or business carried on by such shareholder, provided that the shareholder
furnishes to the Fund a properly completed Internal Revenue Service ("IRS") Form
W-8BEN certifying the shareholder's non-United States status.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to U.S. federal income tax in the case of
(i) a Non-U.S. Shareholder that is a corporation and (ii) an individual Non-U.S.
Shareholder who is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding and information reporting on capital gain dividends and redemption
proceeds paid to them upon the sale of their shares. See "Backup Withholding"
and "Information Reporting" below.
If income from a Fund or gains realized from the sale of shares are
effectively connected with a Non-U.S. Shareholder's U.S. trade or business, then
such amounts will not be subject to the 30% withholding described above, but
rather will be subject to U.S. federal income tax on a net basis at the tax
rates applicable to U.S. citizens and residents or domestic corporations. To
establish that income from a Fund or gains realized from the sale of shares are
effectively connected with a U.S. trade or business, a Non-U.S. Shareholder must
provide such Fund with a properly completed IRS Form W-8ECI certifying that such
amounts are effectively connected with the Non-U.S. Shareholder's U.S. trade or
business. Non-U.S. Shareholders that are corporations may also be subject to an
additional "branch profits tax" with respect to income from the Fund that is
effectively connected with a U.S. trade or business.
B-74
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. To claim tax treaty benefits, Non-U.S. Shareholders will be
required to provide a Fund with a properly completed IRS Form W-8BEN certifying
their entitlement to the benefits. In addition, in certain cases where payments
are made to a Non-U.S. Shareholder that is a partnership or other pass-through
entity, both the entity and the persons holding an interest in the entity will
need to provide certification. For example, an individual Non-U.S. Shareholder
who holds shares in a Fund through a non-U.S. partnership must provide an IRS
Form W-8BEN to claim the benefits of an applicable tax treaty. Non-U.S.
Shareholders are advised to consult their advisers with respect to the tax
implications of purchasing, holding and disposing of shares of a Fund.
BACKUP WITHHOLDING
A Fund may be required to withhold federal income tax ("backup
withholding") at a rate of 28% from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends paid to a
shareholder if (i) the shareholder fails to properly furnish such Fund with its
correct taxpayer identification number, (ii) the IRS notifies the Fund that the
shareholder has failed to properly report certain interest and dividend income
to the IRS and to respond to notices to that effect or (iii) when required to do
so, the shareholder fails to certify that the taxpayer identification number
provided is correct, that the shareholder is not subject to backup withholding
and that the shareholder is a U.S. person (as defined for U.S. federal income
tax purposes). Redemption proceeds may be subject to backup withholding under
the circumstances described in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to backup withholding. To
avoid backup withholding on capital gain dividends and redemption proceeds from
the sale of shares, Non-U.S. Shareholders must provide a properly completed IRS
Form W-8BEN certifying their non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INFORMATION REPORTING
Each Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends, capital gain dividends or
redemption proceeds paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such amounts. In
the case of a Non-U.S. Shareholder, the Fund must report to the IRS and such
shareholder the amount of dividends, capital gain dividends or redemption
proceeds paid that are subject to withholding (including backup withholding, if
any) and the amount of tax withheld with respect to such amounts. This
information may also be made available to the tax authorities in a Non-U.S.
Shareholder's country of residence.
GENERAL
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
tax advisers regarding the specific federal tax consequences of purchasing,
holding and disposing of shares of a Fund as well as the effects of state, local
and foreign tax laws and any proposed tax law changes.
PERFORMANCE INFORMATION
The Company may from time to time quote various performance figures to
illustrate the Funds' past performance.
Performance quotations by investment companies are subject to rules adopted
by the SEC, which require the use of standardized performance quotations. In the
case of total return, non-standardized performance
B-75
quotations may be furnished by the Company but must be accompanied by certain
standardized performance information computed as required by the SEC. Current
yield and average annual compounded total return quotations used by the Company
are based on the standardized methods of computing performance mandated by the
SEC. An explanation of those and other methods used by the Company to compute or
express performance follows.
TOTAL RETURN
From time to time the Funds may advertise total return for prior periods.
Total return figures are based on historical earnings and are not intended to
indicate future performance. The average annual total return is determined by
finding the average annual compounded rates of return over one-year, five-year
and ten-year periods (or over the life of the Fund, if shorter) that would
equate an initial hypothetical investment to its ending redeemable value. The
calculation assumes: the maximum sales load is deducted from the initial
payment; all dividends and distributions are reinvested when paid at the price
stated in the Prospectuses; the deduction of all applicable Company expenses on
an annual basis; and the amount was completely redeemed at the end of each one-,
five- and ten-year period (or over the life of the Fund) including deduction of
the applicable maximum deferred sales load at the time, in the amount and under
the terms disclosed in the Prospectus. The Adviser may waive or reimburse fees
and/or expenses from time to time; the Fund's returns calculated without waivers
or reimbursements would be lower than returns reflecting any waivers or
reimbursements.
Total return figures are calculated according to the following formula:
P(1 + T)(n) = ERV
where:
<Table>
P = a hypothetical initial payment
T = average annual total return
n = number of years
ERV = ending redeemable value of hypothetical payment made at the
beginning of the 1-, 5-, or 10-year periods at the end of
the 1-, 5-, or 10-year periods (or fractional portion
thereof).
</Table>
Calculated using the formula above, the average annualized total return,
for each of the Funds that commenced operations prior to June 30, 2003 for the
one and five year periods ended June 30, 2003 and for the period from the
inception of each Fund through June 30, 2003 are as follows:
<Table>
<Caption>
ONE-YEAR FIVE-YEAR INCEPTION
INCEPTION PERIOD ENDED PERIOD ENDED THROUGH
DATE JUNE 30, 2003 JUNE 30, 2003 JUNE 30, 2003
--------- ------------- ------------- -------------
American Value Fund
Class A Shares............................ 10/18/93 -7.67% -1.16% 8.01%
Class B Shares(1)......................... 08/01/95 -7.63 -0.99 7.68
Class C Shares(1)......................... 10/18/93 -3.16 -0.62 7.91
Asian Equity Fund
Class A Shares............................ 06/23/93 -15.75 1.54 -4.63
Class B Shares(1)......................... 08/01/95 -15.57 1.91 -9.92
Class C Shares(1)......................... 06/23/93 -12.17 2.13 -4.70
Emerging Markets Debt Fund
Class A Shares............................ N/A -- -- --
Class B Shares............................ N/A -- -- --
Class C Shares............................ N/A -- -- --
</Table>
B-76
<Table>
<Caption>
ONE-YEAR FIVE-YEAR INCEPTION
INCEPTION PERIOD ENDED PERIOD ENDED THROUGH
DATE JUNE 30, 2003 JUNE 30, 2003 JUNE 30, 2003
--------- ------------- ------------- -------------
Emerging Markets Fund
Class A Shares............................ 07/06/94 -4.21 0.46 -2.86
Class B Shares(1)......................... 08/01/95 -4.01 0.68 -2.03
Class C Shares(1)......................... 07/06/94 -0.01 1.02 -2.88
Emerging Markets Income Fund
Class A Shares............................ 04/21/94 16.70 -0.27 6.25
Class B Shares(1)......................... 08/01/95 17.52 -0.23 5.76
Class C Shares(1)......................... 04/21/94 20.49 -0.03 6.02
Equity Growth Fund
Class A Shares............................ 05/28/98 -9.34 -4.16 -3.54
Class B Shares............................ 05/28/98 -9.32 -3.97 -3.11
Class C Shares............................ 05/28/98 -5.02 -3.62 -3.04
European Value Equity Fund
Class A Shares............................ 09/25/98 -12.59 N/A -0.82
Class B Shares............................ 09/25/98 -12.25 N/A -0.35
Class C Shares............................ 09/25/98 -8.12 N/A -0.02
Focus Equity Fund
Class A Shares............................ 01/02/96 -9.17 -4.11 6.91
Class B Shares............................ 01/02/96 -9.25 -3.95 7.00
Class C Shares............................ 01/02/96 -5.43 -3.69 6.95
Global Equity Allocation Fund
Class A Shares............................ 01/04/93 -11.42 -4.05 5.94
Class B Shares(1)......................... 08/01/95 -11.40 -3.85 3.99
Class C Shares(1)......................... 01/04/93 -7.66 -3.60 5.77
Global Franchise Fund
Class A Shares............................ 09/25/98 -7.15 N/A 13.25
Class B Shares............................ 09/25/98 -7.14 N/A 13.57
Class C Shares............................ 09/25/98 -3.21 N/A 13.95
Global Value Equity Fund
Class A Shares............................ 10/29/97 -18.10 -2.84 -0.64
Class B Shares............................ 10/29/97 -18.11 -2.64 -0.31
Class C Shares............................ 10/29/97 -14.36 -2.30 -0.25
Growth and Income Fund II
Class A Shares............................ N/A -- -- --
Class B Shares............................ N/A -- -- --
Class C Shares............................ N/A -- -- --
International Magnum Fund
Class A Shares............................ 07/01/96 -18.33 -8.58 -2.94
Class B Shares............................ 07/01/96 -18.72 -8.39 -2.80
Class C Shares............................ 07/01/96 -15.32 -8.12 -2.81
</Table>
B-77
<Table>
<Caption>
ONE-YEAR FIVE-YEAR INCEPTION
INCEPTION PERIOD ENDED PERIOD ENDED THROUGH
DATE JUNE 30, 2003 JUNE 30, 2003 JUNE 30, 2003
--------- ------------- ------------- -------------
Japanese Equity Fund
Class A Shares............................ N/A -- -- --
Class B Shares............................ N/A -- -- --
Class C Shares............................ N/A -- -- --
Latin American Fund
Class A Shares............................ 07/06/94 1.20 -1.46 2.92
Class B Shares(1)......................... 08/01/95 1.67 -1.25 6.12
Class C Shares(1)......................... 07/06/94 5.56 -0.99 2.83
Mid Cap Growth Fund
Class A Shares............................ 10/25/99 -5.64 N/A -12.02
Class B Shares............................ 10/25/99 -5.59 N/A -11.83
Class C Shares............................ 10/25/99 -1.31 N/A -11.19
Value Fund
Class A Shares............................ 07/07/97 -9.56 -2.00 -0.60
Class B Shares............................ 07/07/97 -9.39 -1.94 -0.41
Class C Shares............................ 07/07/97 -5.17 -1.52 -0.34
</Table>
- ---------------
The Emerging Markets Debt, Growth and Income II, and Japanese Equity Funds had
not commenced operations in the fiscal year ended June 30, 2003.
(1) The Class B shares listed above were created on May 1, 1995. The original
Class B shares were renamed Class C shares, as listed above, on May 1, 1995.
The Class B shares commenced operations on August 1, 1995.
YIELD FOR CERTAIN FUNDS
From time to time certain of the Funds may advertise yield.
Current yield reflects the income per share earned by a Fund's investments.
Current yield is determined by dividing the net investment income per share
earned during a 30-day base period by the maximum offering price per share on
the last day of the period and annualizing the result. Expenses accrued for the
period include any fees charged to all shareholders during the base period.
Current yield figures are obtained using the following formula:
<Table>
Yield = 2[( a - b + 1)(6) - 1]
-----
cd
</Table>
where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive income distributions
d = the maximum offering price per share on the last day of the period
B-78
The respective current yields for the following Funds 30-day period ended
June 30, 2003 were as follows:
<Table>
<Caption>
CLASS A CLASS B CLASS C
FUND NAME SHARES SHARES SHARES
- --------- ------- ------- -------
Emerging Markets Income Fund................................ 5.76% 5.32% 5.31%
</Table>
COMPARISONS
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding the Company may discuss
various measures of Fund performance as reported by various financial
publications. Advertisements may also compare performance (as calculated above)
to performance as reported by other investments, indices and averages.
In assessing such comparisons of performance an investor should keep in
mind that the composition of the investments in the reported indices and
averages is not identical to the composition of investments in the Company's
Funds, that the averages are generally unmanaged, and that the items included in
the calculations of such averages may not be identical to the formula used by
the Company to calculate its performance. In addition, there can be no assurance
that the Company will continue this performance as compared to such other
averages.
GENERAL PERFORMANCE INFORMATION
Each Fund's performance will fluctuate. Past performance is not necessarily
indicative of future return. Actual performance will depend on such variables as
portfolio quality, average portfolio maturity, the type of portfolio instruments
acquired, changes in interest rates, portfolio expenses and other factors.
Performance is one basis investors may use to analyze a Fund as compared to
other funds and other investment vehicles. However, performance of other funds
and other investment vehicles may not be comparable because of the foregoing
variables, and differences in the methods used in valuing their portfolio
instruments, computing net asset value and determining performance.
From time to time, a Fund's performance may be compared to other mutual
funds tracked by financial or business publications and periodicals. For
example, a Fund may quote Morningstar, Inc. in its advertising materials.
Morningstar, Inc. is a mutual fund rating service that rates mutual funds on the
basis of risk-adjusted performance. Rankings that compare the performance of the
Funds to one another in appropriate categories over specific periods of time may
also be quoted in advertising.
Fund advertising may include data on historical returns of the capital
markets in the United States compiled or published by research firms, including
returns on common stocks, small capitalization stocks, long-term corporate
bonds, intermediate-term government bonds, long-term government bonds, Treasury
bills, the U.S. rate of inflation (based on the Consumer Price Index), and
combinations of various capital markets. The performance of these capital
markets is based on the returns of different indices. The Funds may use the
performance of these capital markets in order to demonstrate general
risk-versus-reward investment scenarios. Performance comparisons may also
include the value of a hypothetical investment in any of these capital markets.
The risks associated with the security types in any capital market may or may
not correspond directly to those of the Funds. The Funds may also compare their
performance to that of other compilations or indices that may be developed and
made available in the future.
The Funds may include in advertisements, charts, graphs or drawings which
illustrate the potential risks and rewards of investment in various investment
vehicles, including but not limited to, foreign securities, stocks, bonds,
treasury bills and shares of a Fund. In addition, advertisements may include a
discussion of certain attributes or benefits to be derived by an investment in a
Fund and/or other mutual funds, shareholder profiles and hypothetical investor
scenarios, timely information on financial management, tax and retirement
planning and various investment alternatives. The Funds may also from time to
time include discussions or illustrations of the effects of compounding in
advertisements. "Compounding" refers to the fact that, if dividends or other
distributions on a Fund investment are reinvested by being paid in additional
Fund shares,
B-79
any future income or capital appreciation of a Fund would increase the value,
not only of the original investment in the Fund, but also of the additional Fund
shares received through reinvestment.
The Funds may include in its advertisements, discussions or illustrations
of the potential investment goals of a prospective investor (including materials
that describe general principles of investing, such as asset allocation,
diversification, risk tolerance, goal setting, questionnaires designed to help
create a personal financial profile, worksheets used to project savings needs
based on assumed rates of inflation and hypothetical rates of return and action
plans offering investment alternatives), investment management techniques,
policies or investment suitability of a Fund (such as value investing, market
timing, dollar cost averaging, asset allocation, constant ratio transfer,
automatic account rebalancing, the advantages and disadvantages of investing in
tax-deferred and taxable investments). Advertisements and sales materials
relating to a Fund may include information regarding the background and
experience of its portfolio managers; the resources, expertise and support made
available to the portfolio managers and the portfolio managers' goals,
strategies and investment techniques.
The Funds' advertisements may discuss economic and political conditions of
the United States and foreign countries, the relationship between sectors of the
U.S., a foreign, or the global economy and the U.S., a foreign, or the global
economy as a whole and the effects of inflation. The Funds may include
discussions and illustrations of the growth potential of various global markets
including, but not limited to, Africa, Asia, Europe, Latin America, North
America, South America, Emerging Markets and individual countries. These
discussions may include the past performance of the various markets or market
sectors; forecasts of population, gross national product and market performance;
and the underlying data which supports such forecasts. From time to time,
advertisements, sales literature, communications to shareholders or other
materials may summarize the substance of information contained in the Funds'
shareholder reports (including the investment composition of a Fund), as well as
views as to current market, economic, trade and interest rate trends,
legislative, regulatory and monetary developments, investment strategies and
related matters believed to be of relevance to a Fund.
The Funds may quote various measures of volatility and benchmark
correlation in advertising. The Funds may compare these measures to those of
other funds. Measures of volatility seek to compare the historical share price
fluctuations or total returns to those of a benchmark. Measures of benchmark
correlation indicate how valid a comparative benchmark may be. Measures of
volatility and correlation may be calculated using averages of historical data.
A Fund may also advertise its current interest rate sensitivity, duration,
weighted average maturity or similar maturity characteristics.
The Funds may advertise examples of the effects of periodic investment
plans, including the principle of dollar cost averaging. In such a program, an
investor invests a fixed dollar amount in a Fund at periodic intervals, thereby
purchasing fewer shares when prices are high and more shares when prices are
low. While such a strategy does not assure a profit or guard against loss in a
declining market, the investor's average cost per share can be lower than if
fixed numbers of shares are purchased at the same intervals. In evaluating such
a plan, investors should consider their ability to continue purchasing shares
during periods of low price levels.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Funds' marketing materials may also show each Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes a Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their funds in direct or sales force distribution channels. The study
showed that investors working with a professional representative have tended
over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based thereon are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Funds may also be marketed on the internet.
B-80
OTHER INFORMATION
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
each of the Funds and all cash, including proceeds from the sale of shares of
the Funds and of securities in each Fund's investment portfolio, are held by
State Street Bank and Trust Company, 225 West Franklin Street, Boston,
Massachusetts 02110, as custodian. The custodian also provides accounting
services to each of the Funds.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent auditors.
INDEPENDENT AUDITORS
Independent auditors for the Company perform an annual audit of the Funds'
financial statements. The Company's Board of Directors has engaged Deloitte &
Touche LLP, located at Two Prudential Plaza, 180 North Stetson Avenue, Chicago,
Illinois 60601, to be the Company's independent auditors.
LEGAL COUNSEL
Counsel to the Funds is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-81
APPENDIX A
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard &
Poor's (S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of
an obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated.
The issue credit rating is not a recommendation to purchase, sell, or hold
a financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor.
Issue credit ratings are based on current information furnished by the
obligors or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any credit rating and may, on occasion,
rely on unaudited financial information. Credit ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
Issue credit ratings can be either long-term or short-term. Short-term
ratings are generally assigned to those obligations considered short-term in the
relevant market. In the U.S., for example, that means obligations with an
original maturity of no more than 365 days including commercial paper.
Short-term ratings are also used to indicate the creditworthiness of an obligor
with respect to put features on long-term obligations. The result is a dual
rating, in which the short-term rating addresses the put feature, in addition to
the usual long-term rating. Medium-term notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to meet
its financial commitment on an obligation in accordance with the terms
of the obligation:
2. Nature of and provisions of the obligation: and
3. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As
such, they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations
only in small degree. The obligor's capacity to meet its financial commitment on
the obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
A-1
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than
obligations rated "BB", but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment, and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse business, financial, or economic conditions, the obligor is not likely
to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: The "C" rating may be used to cover a situation where a bankruptcy
petition has been filed or similar action has been taken, but payments on this
obligation are being continued.
D: An obligation rated "D" is in payment default. The "D" rating category
is used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or Minus (-): The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
c: The "c" subscript is used to provide additional information to investors
that the bank may terminate its obligation to purchase tendered bonds if the
long-term credit rating of the issuer is below an investment-grade level and/or
the issuer's bonds are deemed taxable.
p: The letter "p" indicates that the rating is provisional. A provisional
rating assumes the successful completion of the project financed by the debt
being rated and indicates that payment of debt service requirements is largely
or entirely dependent upon the successful, timely completion of the project.
This rating, however, while addressing credit quality subsequent to completion
of the project, makes no comment on the likelihood of or the risk of default
upon failure of such completion. The investor should exercise his own judgment
with respect to such likelihood and risk.
*: Continuance of the ratings is contingent upon S&P's receipt of an
executed copy of the escrow agreement or closing documentation confirming
investments and cash flows.
r: The "r" highlights derivative, hybrid, and certain other obligations
that S&P's believes may experience high volatility or high variability in
expected returns as a result of noncredit risks. Examples of such obligations
are securities with principal or interest return indexed to equities,
commodities, or currencies; certain swaps and options; and interest-only and
principal-only mortgage securities. The absence of an "r" symbol should not be
taken as an indication that an obligation will exhibit no volatility or
variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
A-2
BOND INVESTMENT QUALITY STANDARDS
Under present commercial bank regulations issued by the Comptroller of the
Currency, bonds rated in the top four categories ("AAA", "AA", "A", "BBB",
commonly known as investment-grade ratings) generally are regarded as eligible
for bank investment. Also, the laws of various states governing legal
investments impose certain rating or other standards for obligations eligible
for investment by savings banks, trust companies, insurance companies, and
fiduciaries in general.
MUNICIPAL NOTES
A S&P's note rating reflects the liquidity factors and market access risks
unique to notes. Notes due in three years or less will likely receive a note
rating. Notes maturing beyond three years will most likely receive a long-term
debt rating. The following criteria will be used in making that assessment.
-- Amortization schedule -- the larger the final maturity relative to other
maturities, the more likely it will be treated as a note; and
-- Source of payment -- the more dependent the issue is on the market for
its refinancing, the more likely it will be treated as a note.
Note rating symbols are as follows:
SP-1: Strong capacity to pay principal and interest. An issue determined to
possess a very strong capacity to pay debt service is given a plus (+)
designation.
SP-2: Satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the term of the
notes.
SP-3: Speculative capacity to pay principal and interest.
COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1: A short-term obligation rated "A-1" is rated in the highest category
by S&P's. The obligor's capacity to meet its financial commitment on the
obligation is strong. Within this category, certain obligations are designated
with a plus sign (+). This indicates that the obligor's capacity to meet its
financial commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation.
A-3
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P's believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition or the taking of a similar action
if payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold
a financial obligation inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained from other sources it
considers reliable. S&P does not perform an audit in connection with any rating
and may, on occasion, rely on unaudited financial information. The ratings may
be changed, suspended or withdrawn as a result of changes in, or unavailability
of, such information, or based on other circumstances.
TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or
demand feature as part of their structure. The first rating addresses the
likelihood of repayment of principal and interest as due, and the second rating
addresses only the demand feature. The long-term debt rating symbols are used
for bonds to denote the long-term maturity and the commercial paper rating
symbols for the put option (for example, "AAA/A-1+"). With short-term demand
debt, S&P's note rating symbols are used with the commercial paper rating
symbols (for example, "SP-1+/A-1+").
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
Aaa: Bonds and preferred stock which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of investment risk and are
generally referred to as "gilt edged." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa: Bonds and preferred stock which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group they comprise what are
generally known as high-grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear somewhat larger
than the Aaa securities.
A: Bonds and preferred stock which are rated A possess many favorable
investment attributes and are to be considered as upper-medium-grade
obligations. Factors giving security to principal and interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa: Bonds and preferred stock which are rated Baa are considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Ba: Bonds and preferred stock which are rated Ba are judged to have
speculative elements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very moderate, and
thereby not well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B: Bonds and preferred stock which are rated B generally lack
characteristics of the desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any long period
of time may be small.
A-4
Caa: Bonds and preferred stock which are rated Caa are of poor standing.
Such issues may be in default or there may be present elements of danger with
respect to principal or interest.
Ca: Bonds and preferred stock which are rated Ca represent obligations
which are speculative in a high degree. Such issues are often in default or have
other marked shortcomings.
C: Bonds and preferred stock which are rated C are the lowest rated class
of bonds, and issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Moody's assigns ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below. For notes
with any of the following characteristics, the rating of the individual note may
differ from the indicated rating of the program:
1) Notes containing features which link the cash flow and/or market value
to the credit performance of any third party or parties.
2) Notes allowing for negative coupons, or negative principal.
3) Notes containing any provision which could obligate the investor to make
any additional payments.
Market participants must determine whether any particular note is rated,
and if so, at what rating level. Moody's encourages market participants to
contact Moody's Ratings Desks directly if they have questions regarding ratings
for specific notes issued under a medium-term note program.
Note: Moody's applies numerical modifiers, 1, 2, and 3 in each generic
rating classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of that generic rating category.
SHORT-TERM EXEMPT NOTES
In municipal debt issuance, there are three rating categories for
short-term obligations that are considered investment grade. These ratings are
designated as Moody's Investment Grade (MIG) and are divided into three
levels -- MIG 1 through MIG 3.
In addition, those short-term obligations that are of speculative quality
are designated SG, or speculative grade.
In the case of variable rate demand obligations (VRDOs), a two-component
rating is assigned. The first element represents Moody's evaluation of the
degree of risk associated with scheduled principal and interest payments. The
second element represents Moody's evaluation of the degree of risk associated
with the demand feature, using the MIG rating scale.
The short-term rating assigned to the demand feature of VRDOs is designated
as VMIG. When either the long- or short-term aspect of a VRDO is not rated, that
piece is designated NR, e.g., Aaa/NR or NR/VMIG 1.
MIG ratings expire at note maturity. By contrast, VMIG rating expirations
will be a function of each issue's specific structural or credit features.
MIG 1/VMIG 1. This designation denotes superior credit quality. Excellent
protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes strong credit quality. Margins of
protection are ample, although not as large as in the preceding group.
A-5
MIG 3/VMIG 3. This designation denotes acceptable credit quality. Liquidity
and cash-flow protection may be narrow, and market access for refinancing is
likely to be less well-established.
SG. This designation denotes speculative-grade credit quality. Debt
instruments in this category may lack sufficient margins of protection.
TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term ratings are opinions of the ability of issuers to honor
senior financial obligations and contracts. Such obligations generally have an
original maturity not exceeding one year, unless explicitly noted.
Moody's employs the following designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
PRIME-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability
for repayment of senior short-term debt obligations. Prime-1 repayment ability
will often be evidenced by many of the following characteristics:
-- Leading market positions in well established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured
sources of alternate liquidity.
PRIME-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay senior short-term debt obligations. This will normally be evidenced by
many of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, may be more subject to variation than is the
case for Prime-1 securities. Capitalization characteristics, while still
appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
PRIME-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable
ability for repayment of senior short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt-protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
NOT PRIME
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
In addition, in certain countries the prime rating may be modified by the
issuer's or guarantor's senior unsecured long-term debt rating.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has
been suspended or withdrawn, it may be for reasons unrelated to the quality of
the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated
as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
A-6
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effects of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa: An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is a reasonable assurance the earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated "a" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "aaa"
and "aa" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be a medium-grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset protection
may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues
so rated can thus be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating
classifications "aa" through "b". The modifier 1 indicates that the security
ranks in the higher end of its generic rating category, the modifier 2 indicates
a mid-range ranking, and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
A-7
APPENDIX B
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policies
and procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide discretionary
Investment Management services and for which a MSIM entity has the authority to
vote their proxies. The policies and procedures and general guidelines in this
section will be reviewed and, as necessary, updated periodically to address new
or revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van Kampen
Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and
collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxyrelated services to institutional
investment managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee (see Section IV.A. below) will carefully monitor
and supervise the services provided by the proxy research services.
Voting Proxies for certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
B-1
will be voted on a best efforts basis only, consistent with the Client Proxy
Standard. ISS has been retained to provide assistance to the MSIM Affiliates in
connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, antitakeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its Board's
members be comprised of independent and unaffiliated Directors.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Recommendations to set retirement ages or require specific levels of
stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of common
stock (or securities convertible into common stock) if: (i) a clear
and legitimate business purpose is stated; (ii) the number of shares
requested is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization does not
exceed 100% of shares currently authorized and at least 30% of the
new authorization will be outstanding.
B-2
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in the
corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
- Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal: (i)
defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by disinterested
shareholders; and (iii) contains no anti-takeover measures or other
provisions restricting the rights of shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
- Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
B-3
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions (i.e.,
takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and analysis
will be used along with MSIM Affiliates' research and analysis, based
on, among other things, MSIM internal company-specific knowledge.
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option plans
should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the issued
capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject
to the review and approval of the Proxy Review Committee, as
appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the Securities
and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Requiring shareholder approval for bylaw or charter amendments.
B-4
- Requiring shareholder approval for shareholder rights plan or poison
pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
- Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM will
vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines (as
expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other
matters): (1) address any outstanding issues relating to MSIM's
Proxy Voting Policy and Procedures; and (2) generally review
proposals at upcoming shareholder meetings of MSIM portfolio
companies in accordance with this Policy and Procedures
including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal
was presented to shareholders. The Committee, or its designee,
will timely communicate to ISS MSIM's Proxy Voting Policy and
Procedures (and any amendments to them and/or any additional
guidelines or procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as appropriate,
for matters for which specific direction has been provided in
Sections I, II, and III above; and (3) determine how to vote
matters for which specific direction has not been provided in
Sections I, II and III above. Split votes will generally not be
approved within a single Global Investor Group team. The Committee
may take into account ISS recommendations and the research provided
by IRRC as well as any other relevant information they may request
or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of
B-5
action with respect to, the conflict(s) in question ("Special
Committee"). The Special Committee may request the assistance of
the Law and Compliance Departments and will have sole discretion to
cast a vote. In addition to the research provided by ISS and IRRC,
the Special Committee may request analysis from MSIM Affiliate
investment professionals and outside sources to the extent it deems
appropriate.
(f) The Committee and the Special Committee, or their designee(s), will
document in writing all of their decisions and actions, which
documentation will be maintained by the Committee and the Special
Committee, or their designee(s) for a period of at least 6 years.
To the extent these decisions relate to a security held by a MSIM
U.S. registered investment company, the Committee and Special
Committee, or their designee(s), will report their decisions to
each applicable Board of Trustees/Directors of those investment
companies at each Board's next regularly Scheduled Board meeting.
The report will contain information concerning decisions made by
the Committee and Special Committee during the most recently ended
calendar quarter immediately preceding the Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
B-6
APPENDIX C
STATEMENT OF ADDITIONAL INFORMATION
OF VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
Dated December 30, 2003
C-1
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
INTERNATIONAL ADVANTAGE FUND
Van Kampen International Advantage Fund's (the "Fund") investment objective
is to seek long-term capital appreciation. The Fund's portfolio management team
seeks to achieve the Fund's investment objective by investing primarily in a
diversified portfolio of equity securities of foreign issuers.
The Fund is organized as a diversified series of Van Kampen Equity Trust
II, an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge from our web site at www.vankampen.com or by writing or calling Van
Kampen Funds Inc. at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois
60181-5555 or (800) 847-2424 (or (800) 421-2833 for the hearing impaired).
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
General Information......................................... B-2
Investment Objective, Strategies and Risks.................. B-4
Strategic Transactions...................................... B-12
Investment Restrictions..................................... B-21
Trustees and Officers....................................... B-23
Investment Advisory Agreement............................... B-36
Other Agreements............................................ B-37
Distribution and Service.................................... B-38
Transfer Agent.............................................. B-42
Portfolio Transactions and Brokerage Allocation............. B-42
Shareholder Services........................................ B-44
Redemption of Shares........................................ B-47
Contingent Deferred Sales Charge-Class A.................... B-47
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-48
Taxation.................................................... B-50
Fund Performance............................................ B-55
Other Information........................................... B-58
Appendix A -- Proxy Voting Policy and Procedures............ B-60
Report of Independent Auditors.............................. F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-13
</Table>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED DECEMBER 30, 2003.
IA SAI 12/03
GENERAL INFORMATION
The Trust is a statutory trust organized under the laws of the State of
Delaware by an Agreement and Declaration of Trust (the "Declaration of Trust")
dated April 1, 1999. The Fund is organized as a series of the Trust.
Van Kampen Asset Management (the "Adviser" or "Asset Management"), Van
Kampen Funds Inc. (the "Distributor"), and Van Kampen Investor Services Inc.
("Investor Services") are wholly owned subsidiaries of Van Kampen Investments
Inc. ("Van Kampen Investments"), which is an indirect wholly owned subsidiary of
Morgan Stanley. The principal office of the Trust and Fund is located at 1
Parkview Plaza, Oakbrook Terrace, IL 60181-5555. The principal office of the
Adviser, the Distributor and Van Kampen Investments is located at 1221 Avenue of
the Americas, New York, NY 10020. The principal office of Investor Services is
located at Harborside Financial Center, Plaza 2, Jersey City, NJ 07303-0947.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated as Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with the provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class of shares is subject to its own sales charge schedule and its own
distribution and service expenses. Each class of shares also has exclusive
voting rights with respect to its distribution and service fees.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series and separate votes are taken by each class of a series on matters
affecting an individual class of such series. For example, a change in
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution or service fee for a class of a
series would be voted upon by shareholders of only the class of such series
involved. Except as otherwise described in the Prospectus or herein, shares do
not have cumulative voting rights, preemptive rights or any conversion,
subscription or exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
B-2
In the event of liquidation, each of the shares of the Fund is entitled to
its portion of all of the Fund's net assets after all debts and expenses of the
Fund have been paid. The liquidation proceeds to holders of classes of shares
with higher distribution fees and transfer agency costs are likely to be less
than the liquidation proceeds to holders of classes of shares with lower
distribution fees and transfer agency costs.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
As of December 1, 2003, no person was known by the Fund to own beneficially
or to hold of record 5% or more of the outstanding Class A Shares, Class B
Shares or Class C Shares of the Fund, except as follows:
<Table>
<Caption>
NAME AND ADDRESS PERCENTAGE OF
OF HOLDER CLASS OF SHARES OWNERSHIP
---------------- --------------- -------------
Morgan Stanley Investment Mgmt Inc. A 9.21%
Attn: Tom Papa B 6.84%
1221 Avenue of Americas 3rd Floor C 6.84%
New York, NY 10020
Aces Trust Fund
HEF Aggressive Portfolio-1 A 18.86%
Attn: C.J. Glover
State Capitol Building Suite S-106
600 Dexter Avenue
Montgomery, AL 36130-3024
Aces Trust Fund
HEF Equity Portfolio A 9.90%
Attn: C.J. Glover
State Capitol Building Suite S-106
600 Dexter Avenue
Montgomery, AL 36130-3024
Aces Trust Fund
HEF Moderate Portfolio-1 A 10.52%
Attn: C.J. Glover
State Capitol Building Suite S-106
600 Dexter Avenue
Montgomery, AL 36130-3024
</Table>
B-3
<Table>
<Caption>
NAME AND ADDRESS PERCENTAGE OF
OF HOLDER CLASS OF SHARES OWNERSHIP
---------------- --------------- -------------
Aces Trust Fund A 6.86%
HEF Moderate Portfolio-3
Attn: C.J. Glover
State Capitol Building Suite S-106
600 Dexter Avenue
Montgomery, AL 36130-3024
</Table>
INVESTMENT OBJECTIVE, STRATEGIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other financial institutions to earn a return on temporarily available cash. A
repurchase agreement is a short-term investment in which the purchaser (i.e.,
the Fund) acquires ownership of a security and the seller agrees to repurchase
the obligation at a future time and set price, thereby determining the yield
during the holding period. Repurchase agreements involve certain risks in the
event of default by the other party. The Fund may enter into repurchase
agreements with broker-dealers, banks and other financial institutions deemed to
be creditworthy by the Adviser under guidelines approved by the Fund's Board of
Trustees. The Fund will not invest in repurchase agreements maturing in more
than seven days if any such investment, together with any other illiquid
securities held by the Fund, would exceed the Fund's limitation on illiquid
securities described herein. The Fund does not bear the risk of a decline in the
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of the bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto; (b) possible lack of access to income on the underlying security
during this period; and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund than would be available to the Fund investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
B-4
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
which includes securities that are not readily marketable, repurchase agreements
which have a maturity of longer than seven days and generally includes
securities that are restricted from sale to the public without registration
under the Securities Act of 1933, as amended (the "1933 Act"). The sale of such
securities often requires more time and results in higher brokerage charges or
dealer discounts and other selling expenses than does the sale of liquid
securities trading on national securities exchanges or in the over-the-counter
markets. Restricted securities are often purchased at a discount from the market
price of unrestricted securities of the same issuer reflecting the fact that
such securities may not be readily marketable without some time delay.
Investments in securities for which market quotations are not readily available
are valued at their fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Board of Trustees. Ordinarily,
the Fund would invest in restricted securities only when it receives the
issuer's commitment to register the securities without expense to the Fund.
However, registration and underwriting expenses (which typically range from 7%
to 15% of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief (such as "no action" letters issued by the staff of the SEC
interpreting or providing guidance on the 1940 Act or regulations thereunder)
from the provisions of the 1940 Act, as amended from time to time.
CONVERTIBLE SECURITIES
The Fund's investments in convertible securities may include securities
with enhanced convertible features or "equity-linked" features. These securities
come in many forms and may include features, among others, such as the
following: (i) may be issued by the issuer of the underlying equity security on
its own securities or securities it holds of another
B-5
company or be issued by a third party (typically a brokerage firm or other
financial entity) on a security of another company, (ii) may convert into equity
securities, such as common stock, or may be redeemed for cash or some
combination of cash and the linked security at a value based upon the value of
the underlying equity security, (iii) may have various conversion features prior
to maturity at the option of the holder or the issuer or both, (iv) may limit
the appreciation value with caps or collars of the value of underlying equity
security and (v) may have fixed, variable or no interest payments during the
life of the security which reflect the actual or a structured return relative to
the underlying dividends of the linked equity security. Generally these
securities are designed to give investors enhanced yield opportunities to the
equity securities of an issuer, but these securities may involve a limited
appreciation potential, downside exposure, or a finite time in which to capture
the yield advantage. For example, certain securities may provide a higher
current dividend income than the dividend income on the underlying security
while capping participation in the capital appreciation of such security. Other
securities may involve arrangements with no interest or dividend payments made
until maturity of the security or an enhanced principal amount received at
maturity based on the yield and value of the underlying equity security during
the security's term or at maturity. Besides enhanced yield opportunities,
another advantage of using such securities is that they may be used for
portfolio management or hedging purposes to reduce the risk of investing in a
more volatile underlying equity security. There may be additional types of
convertible securities with features not specifically referred to herein in
which the Fund may invest consistent with its investment objective and policies.
Investments in enhanced convertible or equity-linked securities may subject
the Fund to additional risks not ordinarily associated with investments in
traditional convertible securities. Particularly when such securities are issued
by a third party on an underlying linked security of another company, the Fund
is subject to risks if the underlying security underperforms or the issuer
defaults on the payment of the dividend or the underlying security at maturity.
In addition, the trading market for certain securities may be less liquid than
for other convertible securities making it difficult for the Fund to dispose of
a particular security in a timely manner, and reduced liquidity in the secondary
market for any such securities may make it more difficult to obtain market
quotations for valuing the Fund's portfolio.
Up to 5% of the Fund's net assets may be invested in convertible securities
that are below investment grade. Debt securities rated below investment grade
are commonly known as junk bonds. Although the Fund selects these securities
primarily on the basis of their equity characteristics, investors should be
aware that convertible securities rated in these categories are considered high
risk securities; the rating agencies consider them speculative with respect to
the issuer's continuing ability to make timely payments of interest and
principal. Thus, to the extent that such convertible securities are acquired by
the Fund, there is a greater risk as to the timely repayment of the principal
of, and timely payment of interest or dividends on, such securities than in the
case of higher-rated convertible securities.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend its portfolio securities to broker-dealers, banks and other institutional
borrowers of securities
B-6
provided that such loans are at all times secured by collateral that is at least
equal to the market value, determined daily, of the loaned securities and are
callable at any time by the Fund. The advantage of such loans is that the Fund
continues to receive the interest or dividends on the loaned securities, while
at the same time the Fund earns interest on the collateral which is invested in
short-term obligations or the Fund receives an agreed-upon amount of interest
from the borrower of the security. The Fund may pay reasonable finders',
administrative and custodial fees in connection with loans of its securities.
There is no assurance as to the extent to which securities loans can be
effected.
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of delay
in recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Adviser to be creditworthy
and when the consideration which can be earned from such loans is believed to
justify the attendant risks. On termination of the loan, the borrower is
required to return the securities to the Fund; any gain or loss in the market
price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
FOREIGN SECURITIES
The Fund will invest in securities of foreign issuers. The Fund considers
an issuer to be from a particular country if (i) its principal securities
trading market is in that country; (ii) alone or on a consolidated basis it
derives 50% or more of its annual revenue from either goods produced, sales made
or services performed in that country; or (iii) it is organized under the laws
of, or has a principal office in that country. By applying these tests, it is
possible that a particular issuer could be deemed to be from more than one
country.
The Fund also may purchase foreign securities in the form of American
Depositary Receipts ("ADRs") and European Depositary Receipts ("EDRs") or other
securities representing underlying shares of foreign companies. These securities
may not necessarily be denominated in the same currency as the underlying
securities but generally are denominated in the currency of the market in which
they are traded. ADRs are receipts typically issued by an American bank or trust
company which evidence ownership of underlying securities issued by a foreign
corporation. ADRs are publicly traded on exchanges or over-the-counter in the
United States and are issued through "sponsored" or "unsponsored" arrangements.
In a sponsored ADR arrangement, the foreign issuer assumes the obligation to pay
some or all of the depositary's transaction fees, whereas under an unsponsored
arrangement, the foreign issuer assumes no obligations and the depositary's
transaction fees are paid by the ADR holders. In addition, less information
generally is available for an unsponsored ADR than about a sponsored ADR and
financial information about a company may not be as reliable for an unsponsored
ADR as it is for a sponsored
B-7
ADR. The Fund may invest in ADRs through both sponsored and unsponsored
arrangements. EDRs are receipts issued in Europe by banks or depositaries which
evidence similar ownership arrangements.
Foreign Currency Exchange Risks. To the extent the Fund invests in
securities denominated or quoted in currencies other than the U.S. dollar, the
Fund will be affected by changes in foreign currency exchange rates (and
exchange control regulations) which affect the value of investments in the Fund
and the income and appreciation or depreciation of the investments. Changes in
foreign currency exchange ratios relative to the U.S. dollar will affect the
U.S. dollar value of the Fund's assets denominated in that currency and the
Fund's yield on such assets. In addition, the Fund will incur costs in
connection with conversions between various currencies.
The Fund's foreign currency exchange transactions may be conducted on a
spot basis (that is, cash basis) at the spot rate for purchasing or selling
currency prevailing in the foreign currency exchange market. The Fund also may
enter into contracts with banks, brokers or dealers to purchase or sell
securities or foreign currencies at a future date ("forward contracts"). A
foreign currency forward contract is a negotiated agreement between the
contracting parties to exchange a specified amount of currency at a specified
future time at a specified rate. The rate can be higher or lower than the spot
rate between the currencies that are the subject of the contract.
The Fund may attempt to protect against adverse changes in the value of the
U.S. dollar in relation to a foreign currency by entering into a forward
contract for the purchase or sale of the amount of foreign currency invested or
to be invested or by buying or selling a foreign currency option or futures
contract for such amount. Such strategies may be employed before the Fund
purchases a foreign security traded in the currency which the Fund anticipates
acquiring or between the date the foreign security is purchased or sold and the
date on which payment therefor is made or received. Seeking to protect against a
change in the value of a foreign currency in the foregoing manner does not
eliminate fluctuations in the prices of portfolio securities or prevent losses
if the prices of such securities decline. Furthermore, such transactions reduce
or preclude the opportunity for gain if the value of the currency should move in
the direction opposite to the position taken. Unanticipated changes in currency
prices may result in poorer overall performance for the Fund than if it had not
entered into such contracts.
The Fund is not required to enter into such transactions with regard to its
foreign currency-denominated securities. It also should be realized that this
method of protecting the value of portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which one can achieve
at some future point in time. In addition, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
at the same time, they tend to limit any potential gain which might result
should the value of such currency increase.
The Fund may cross-hedge currencies by entering into a transaction to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which a portfolio has or expects to have
portfolio exposure. The Fund may also engage in proxy hedging, which is defined
as entering into positions in one currency to hedge investments denominated in
another currency, where two currencies are economi-
B-8
cally linked. The Fund's entry into forward contracts, as well as any use of
proxy or cross hedging techniques, will generally require the Fund to segregate
cash and/or liquid securities at least equal to the Fund's obligations
throughout the duration of the contract. The Fund may combine forward contracts
with investments in securities denominated in other currencies to achieve
desired security and currency exposures. Such combinations are generally
referred to as synthetic securities. For example, in lieu of purchasing a
foreign bond, the Fund may purchase a U.S. dollar-denominated security and at
the same time enter into a forward contract to exchange U.S. dollars for the
contract's underlying currency at a future date. By matching the amount of U.S.
dollars to be exchanged with the anticipated value of the U.S.
dollar-denominated security, the Fund may be able to lock in the foreign
currency value of the security and adopt a synthetic position reflecting the
credit quality of the U.S. dollar-denominated security.
To the extent required by the rules and regulations of the SEC, the Fund
will segregate cash and/or liquid securities in an amount at least equal to the
value of the Fund's total assets committed to the consummation of forward
foreign currency exchange contracts. If the value of the segregated assets
declines, additional cash and/or liquid securities will be segregated on a daily
basis so that the value of the segregated assets will be at least equal to the
amount of the Fund's commitments with respect to such contracts. See also
"Strategic Transactions".
Investing in Emerging Market Countries. The risks of foreign investment are
heightened when the issuer is from an emerging market country. The extent of
economic development, political stability and market depth of such countries
varies widely and investments in the securities of issuers in such countries
typically involve greater potential gain or loss than investments in securities
of issuers in more developed countries. Emerging market countries tend to have
economic structures that are less diverse and mature and political systems that
are less stable than developed markets. Emerging market countries may be more
likely to experience political turmoil or rapid changes in economic conditions
than more developed markets and the financial condition of issuers in emerging
market countries may be more precarious than in other countries. Certain
countries depend to a larger degree upon international trade or development
assistance and, therefore, are vulnerable to changes in trade or assistance
which, in turn, may be affected by a variety of factors. The Fund may be
particularly sensitive to changes in the economies of certain countries
resulting from any reversal of economic liberalization, political unrest or the
imposition of sanctions by the U.S. or other countries.
The Fund's purchase and sale of portfolio securities in emerging market
countries may be constrained by limitations as to daily changes in the prices of
listed securities, periodic or sporadic trading or settlement or limitations on
aggregate holdings by foreign investors. Such limitations may be computed based
on the aggregate trading volume by or holdings of the Fund, the Fund's Adviser,
its affiliates or their respective clients or other service providers. The Fund
may not be able to sell securities in circumstances where price, trading or
settlement volume limitations have been reached. Foreign investment in the
securities markets of certain emerging market countries is restricted or
controlled to varying degrees which may limit investment in such countries or
increase the administrative costs of such investments. For example, certain
countries may require governmental approval prior to investments by foreign
persons or limit investment by foreign persons to only a specified percentage of
an issuer's outstanding securities or a specific class of
B-9
securities which may have less advantageous terms (including price) than
securities of the issuer available for purchase by nationals. In addition,
certain countries may restrict or prohibit investment opportunities in issuers
or industries deemed important to national interests. Such restrictions may
affect the market price, liquidity and rights of securities that may be
purchased by the Fund. The repatriation of both investment income and capital
from certain emerging market countries is subject to restrictions such as the
need for governmental consents. Due to restrictions on direct investment in
securities in certain countries, it is anticipated that the Fund may invest in
such countries through other investment funds in such countries.
Many emerging market countries have experienced currency devaluations and
substantial (and, in some cases, extremely high) rates of inflation, which have
had a negative effect on the economics and securities markets of such countries.
Economies in emerging market countries generally are dependent heavily upon
commodity prices and international trade and, accordingly, have been and may
continue to be affected adversely by the economies of their trading partners,
trade barriers, exchange controls, managed adjustments in relative currency
values and other protectionist measures or negotiated by the countries with
which they trade.
Many emerging market countries are subject to a substantial degree of
economic, political and social instability, Governments of some emerging
countries are authoritarian in nature or have been installed or removed as a
result of military coups, while governments in other emerging market countries
have periodically used force to suppress civil dissent. Disparities of wealth,
the pace and success of political reforms, and ethnic, religious and racial
disaffection, among other factors, have also led to social unrest, violence
and/or labor unrest in some emerging market countries. Unanticipated political
or social developments may result in sudden and significant investment losses.
Settlement procedures in emerging market countries are frequently less
developed and reliable than those in developed markets. In addition, significant
delays are common in certain markets in registering the transfer of securities.
Settlement or registration problems may make it more difficult for the Fund to
value its portfolio securities and could cause the Fund to miss attractive
investment opportunities, to have a portion of its assets uninvested or to incur
losses due to the failure of a counterparty to pay for securities the Fund has
delivered or the Fund's inability to complete its contractual obligations. The
creditworthiness of the local securities firms used by the Fund in emerging
market countries may not be as sound as the creditworthiness of firms used in
more developed countries. As a result, the Fund may be subject to a greater risk
of loss if a securities firm defaults in the performance of its
responsibilities.
The small size and inexperience of the securities markets in certain
emerging market countries and the limited volume of trading in securities in
those countries may make the Fund's investments in such countries less liquid
and more volatile than investments in countries with more developed securities
markets. The Fund's investments in emerging market countries are subject to the
risk that the liquidity of a particular investment, or investments generally, in
such countries will shrink or disappear suddenly and without warning as a result
of adverse economic, market or political conditions or adverse investor
perceptions, whether or not accurate. Because of the lack of sufficient market
liquidity, the Fund may incur losses because it will be required to effect sales
at a disadvantageous time and only then at a substantial drop in price.
Investments in emerging market countries
B-10
may be more difficult to price precisely because of the characteristics
discussed above and lower trading volumes.
The Fund's use of foreign currency management techniques in emerging market
countries may be limited. Due to the limited market for these instruments in
emerging market countries, the Adviser does not currently anticipate that a
significant portion of the Fund's currency exposure in emerging market
countries, if any, will be covered by such instruments.
WHEN-ISSUED AND DELAYED DELIVERY
The Fund may purchase or sell debt securities on a "when-issued" or
"delayed delivery" basis. These transactions occur when securities are purchased
or sold by the Fund with payment and delivery taking place in the future,
frequently a month or more after such transaction. This price is fixed on the
date of the commitment, and the seller continues to accrue interest on the
securities covered until delivery and payment take place. No income accrues to
the Fund on securities in connection with such transactions prior to the date
the Fund actually takes delivery of such securities. These transactions are
subject to market fluctuation; the value of the securities at delivery may be
more or less than their purchase price, and yields generally available on
securities when delivery occurs may be higher or lower than yields on the
securities obtained pursuant to such transactions. The Fund may either settle a
commitment by taking delivery of the securities or may either resell or
repurchase a commitment on or before the settlement date in which event the Fund
may reinvest the proceeds in another when-issued commitment. The Fund's use of
when-issued and delayed delivery transactions may increase its overall
investment exposure and thus its potential for gain or loss. When engaging in
such transactions, the Fund relies on the other party to complete the
transaction; should the other party fail to do so, the Fund might lose a
purchase or sale opportunity that could be more advantageous than alternative
opportunities at the time of the failure. The Fund maintains segregated assets
(which is marked to market daily) of cash, liquid securities or the security
covered by the commitment (in the case of a sale) with the Fund's custodian in
an aggregate amount at least equal to the amount of its commitment as long as
the obligation to purchase or sell continues.
Since the market value of both the securities or currency subject to the
commitment and the securities or currency held as segregated assets may
fluctuate, the use of commitments may magnify the impact of interest rate
changes on the Fund's net asset value.
A commitment sale is covered if the Fund owns or has the right to acquire
the underlying securities or currency subject to the commitment. A commitment
sale is for cross-hedging purposes if it is not covered, but is designed to
provide a hedge against a decline in value of a security or currency which the
Fund owns or has the right to acquire. By entering into a commitment sale
transaction, the Fund foregoes or reduces the potential for both gain and loss
in the security which is being hedged by the commitment sale.
SHORT SALES AGAINST THE BOX
The Fund may from time to time make short sales of securities it owns or
has the right to acquire. A short sale is "against the box" to the extent that
the Fund contemporaneously owns or has the right to obtain at no added cost
securities identical to
B-11
those sold short. In a short sale, the Fund does not immediately deliver the
securities sold and does not receive the proceeds from the sale. The Fund is
required to recognize gain from the short sale for federal income tax purposes
at the time it enters into the short sale, even though it does not receive the
sales proceeds until it delivers the securities. The Fund is said to have a
short position in the securities sold until it delivers such securities at which
time it receives the proceeds of the sale. The Fund may not make short sales or
maintain a short position if to do so would cause more than 25% of its total
assets, taken at market value, to be involved in such sales. The Fund may close
out a short position by purchasing and delivering an equal amount of the
securities sold short, rather than by delivering securities already held by the
Fund, because the Fund may want to continue to receive interest and dividend
payments on securities in its portfolio.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or as regulatory changes occur. Although the Adviser
seeks to use such transactions to further the Fund's investment objective, no
assurance can be given that the use of these transactions will achieve this
result.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option selling program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Selling options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund would write call
options only on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund owns or has the
right to acquire securities of the type that it would be obligated to deliver if
any outstanding option were exercised. An option is for cross-hedging purposes
if it is not covered by the security subject to the option, but is designed to
provide a hedge against another security which the Fund owns or has the right to
acquire. In such circumstances, the Fund collateralizes the option by
segregating cash and/or liquid securities in an amount at least equal to the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would segregate cash and/or liquid securities in an amount at least equal
to the exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
B-12
Closing Purchase Transactions and Offsetting Transactions. To terminate its
position as a writer of a call or put option, the Fund could enter into a
"closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund would realize a gain
(loss) if the premium plus commission paid in the closing purchase transaction
is lesser (greater) than the premium it received on the sale of the option. The
Fund would also realize a gain if an option it has written lapses unexercised.
The Fund could sell options that are listed on an exchange as well as
options which are privately negotiated in over-the-counter transactions. The
Fund could close out its position as a seller of an option only if a liquid
secondary market exists for options of that series, but there is no assurance
that such a market will exist, particularly in the case of over-the-counter
options, since they can be closed out only with the other party to the
transaction. Alternatively, the Fund could purchase an offsetting option, which
would not close out its position as a seller, but would provide an asset of
equal value to its obligation under the option sold. If the Fund is not able to
enter into a closing purchase transaction or to purchase an offsetting option
with respect to an option it has sold, it will be required to maintain the
securities subject to the call or the collateral securing the option until a
closing purchase transaction can be entered into (or the option is exercised or
expires) even though it might not be advantageous to do so. The staff of the SEC
currently takes the position that, in general, over-the-counter options on
securities purchased by the Fund, and portfolio securities "covering" the amount
of the Fund's obligation pursuant to an over-the-counter option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on illiquid securities described herein.
Risks of Writing Options. By selling a call option, the Fund loses the
potential for gain on the underlying security above the exercise price while the
option is outstanding; by selling a put option the Fund might become obligated
to purchase the underlying security at an exercise price that exceeds the then
current market price.
PURCHASING CALL AND PUT OPTIONS
The Fund could purchase call options to protect against anticipated
increases in the prices of securities it wishes to acquire. Alternatively, call
options could be purchased for capital appreciation. Since the premium paid for
a call option is typically a small fraction of the price of the underlying
security, a given amount of funds will purchase call options covering a much
larger quantity of such security than could be purchased directly. By purchasing
call options, the Fund could benefit from any significant increase in the price
of the underlying security to a greater extent than had it invested the same
amount in the security directly. However, because of the very high volatility of
option premiums, the Fund would bear a significant risk of losing the entire
premium if the price of the underlying security did not rise sufficiently, or if
it did not do so before the option expired.
Put options may be purchased to protect against anticipated declines in the
market value of either specific portfolio securities or of the Fund's assets
generally. Alternatively, put options may be purchased for capital appreciation
in anticipation of a price decline in the underlying security and a
corresponding increase in the value of the put option. The purchase of put
options for capital appreciation involves the same significant risk of loss as
described above for call options.
B-13
In any case, the purchase of options for capital appreciation would
increase the Fund's volatility by increasing the impact of changes in the market
price of the underlying securities on the Fund's net asset value.
OPTIONS ON STOCK INDICES
Options on stock indices are similar to options on stock, but the delivery
requirements are different. Instead of giving the right to take or make delivery
of stock at a specified price, an option on a stock index gives the holder the
right to receive an amount of cash which amount will depend upon the closing
level of the stock index upon which the option is based being greater than (in
the case of a call) or less than (in the case of a put) the exercise price of
the option. The amount of cash received will be the difference between the
closing price of the index and the exercise price of the option, multiplied by a
specified dollar multiple. The writer of the option is obligated, in return for
the premium received, to make delivery of this amount.
Some stock index options are based on a broad market index such as the
Standard & Poor's 500 or the New York Stock Exchange Composite Index, or a
narrower index such as the Standard & Poor's 100. Indices are also based on an
industry or market segment such as the AMEX Oil and Gas Index or the Computer
and Business Equipment Index. A stock index fluctuates with changes in the
market values of the stocks included in the index. Options are currently traded
on several exchanges.
Gain or loss to the Fund on transactions in stock index options will depend
on price movements in the stock market generally (or in a particular industry or
segment of the market) rather than price movements of individual securities. As
with stock options, the Fund may offset its position in stock index options
prior to expiration by entering into a closing transaction, or it may let the
option expire unexercised.
OPTIONS ON FOREIGN CURRENCIES
The Fund may purchase and write options on foreign currencies in a manner
similar to that in which forward contracts or futures contracts on foreign
currencies will be utilized. For example, a decline in the dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
dollar value of such securities, even if their value in the foreign currency
remains constant. To protect against such diminutions in the value of portfolio
securities, the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right to sell such
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a foreign currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Fund may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Fund deriving from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, where currency exchange rates do not move in the direction
or to the extent anticipated the Fund could sustain losses on transactions in
foreign currency options which would require it to forego a portion or all of
the benefits of advantageous changes in such rates.
B-14
The Fund may write options on foreign currencies for the same types of
purposes. For example, where the Fund anticipates a decline in the dollar value
of foreign currency denominated securities due to adverse fluctuations in
exchange rates it could, instead of purchasing a put option, write a call option
on the relevant currency. If the expected decline occurs, the option will most
likely not be exercised, and the diminution in value of portfolio securities
will be offset by the amount of the premium received.
Similarly, instead of purchasing a call option to protect against an
anticipated increase in the dollar cost of securities to be acquired, the Fund
could write a put option on the relevant currency which, if rates move in the
manner projected, will expire unexercised and allow the Fund to protect against
such increased cost up to the amount of the premium. As in the case of other
types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Fund would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Fund also may be required to
forego all or a portion of the benefits which might otherwise have been obtained
from favorable movements in exchange rates.
The Fund intends to write covered call options on foreign currencies. A
call option written on a foreign currency by the Fund is "covered" if the Fund
owns the underlying foreign currency covered by the call or has an absolute and
immediate right to acquire that foreign currency without additional cash
consideration (or for additional cash consideration as segregated by its
custodian) upon conversion or exchange of other foreign currency held in its
portfolio. A call option is also covered if the Fund has a call on the same
foreign currency and in the same principal amount as the call written where the
exercise price of the call held (a) is equal to or less than the exercise price
of the call written or (b) is greater than the exercise price of the call
written if the difference is segregated by the Fund in cash and/or liquid
securities.
The value of a foreign currency option is dependent upon the value of the
underlying foreign currency relative to the U.S. dollar. As a result, the price
of the option position may vary with changes in the value of either or both
currencies and has no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank
market (conducted directly between currency traders, usually large commercial
banks, and their customers) involve substantially larger amounts than those that
may be involved in the use of foreign currency options, investors may be
disadvantaged by having to deal in an odd lot market (generally consisting of
transactions of less than $1 million) for the underlying foreign currencies at
prices that are less favorable than for round lots.
There is no systematic reporting of last sale information for foreign
currencies and there is no regulatory requirement that quotations available
through dealers or other market sources be firm or revised on a timely basis.
Quotation information available is generally representative of very large
transactions in the interbank market and thus may not reflect relatively smaller
transactions (i.e., less than $1 million) where rates may be less favorable. The
interbank market in foreign currencies is a global, around-the-clock market. To
the extent that the U.S. options markets are closed while the markets for the
underlying currencies remain open, significant price and rate movements may take
place in the underlying markets that cannot be reflected in the options markets.
B-15
The Fund may write call options on foreign currencies for cross-hedging
purposes. A call option on a foreign currency is for cross-hedging purposes if
it is not covered, but is designed to protect against a decline in the U.S.
dollar value of a security which the Fund owns or has the right to acquire and
which is denominated in the currency underlying the option due to an adverse
change in the exchange rate. In such circumstances, the Fund collateralizes the
option by segregating cash and/or liquid securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked to market
daily.
FUTURES CONTRACTS
The Fund may engage in transactions involving futures contracts and options
on futures contracts in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool."
The Fund may enter into contracts for the purchase or sale for future
delivery of securities or foreign currencies, or contracts based on financial
indices including any stock index or index of U.S. government securities,
foreign government securities or corporate debt securities. An index futures
contract is an agreement pursuant to which a party agrees to take or make
delivery of an amount of cash equal to a specified dollar amount multiplied by
the difference between the index value at a specified time and the price at
which the futures contract originally was struck. No physical delivery of the
underlying securities in the index is made.
Currently, securities index futures contracts can be purchased with respect
to several indices on various exchanges. Differences in the securities included
in the indices may result in differences in correlation of the futures contracts
with movements in the value of the securities being hedged. The Fund also may
invest in foreign stock index futures contracts traded outside the United States
which involve additional risks including fluctuations in foreign exchange rates,
foreign currency exchange controls, political and economic instability,
differences in financial reporting and securities regulation and trading, and
foreign taxation issues.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit an amount of cash and/or
liquid securities equal to a percentage (which will normally range between 1%
and 10%) of the contract amount with either a futures commission merchant
pursuant to rules and regulations promulgated under the 1940 Act or with its
custodian in an account in the broker's name. This amount is known as initial
margin. The nature of initial margin in futures contracts transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the initial margin
account, called variation margin, are made on a daily basis as the price of the
underlying securities or index fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as marking to
market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives a
B-16
variation margin payment equal to that increase in value. Conversely, where the
Fund purchases a futures contract and the value of the underlying security or
index declines, the position is less valuable, and the Fund is required to make
a variation margin payment.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Contracts Strategies. When the Fund anticipates a significant
market or market sector advance, the purchase of a futures contract affords a
hedge against not participating in the advance at a time when the Fund is
otherwise fully invested ("anticipatory hedge"). Such purchase of a futures
contract would serve as a temporary substitute for the purchase of individual
securities, which may be purchased in an orderly fashion once the market has
stabilized. As individual securities are purchased, an equivalent amount of
futures contracts could be terminated by offsetting sales. The Fund may sell
futures contracts in anticipation of or in a general market or market sector
decline that may adversely affect the market value of the Fund's securities
("defensive hedge"). To the extent that the Fund's portfolio of securities
changes in value in correlation with the underlying security or index, the sale
of futures contracts would substantially reduce the risk to the Fund of a market
decline and, by so doing, provides an alternative to the liquidation of
securities positions in the Fund. Ordinarily transaction costs associated with
futures contracts transactions are lower than transaction costs that would be
incurred in the purchase and sale of the underlying securities.
Special Risks Associated with Futures Contract Transactions. There are
several risks connected with the use of futures contracts. These include the
risk of imperfect correlation between movements in the price of the futures
contracts and of the underlying securities or index; the risk of market
distortion; the risk of illiquidity; and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contract.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contracts. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository
B-17
requirements, investors may close futures contracts through offsetting
transactions, which could distort the normal relationship between the futures
contract market and the securities or index underlying the futures contract.
Second, from the point of view of speculators, the deposit requirements in the
futures contract market are less onerous than margin requirements in the
securities markets. Therefore, increased participation by speculators in the
futures contract markets may cause temporary price distortions. Due to the
possibility of price distortion in the futures contract markets and because of
the imperfect correlation between movements in futures contracts and movements
in the securities underlying them, a correct forecast of general market trends
by the Adviser may still not result in a successful hedging transaction.
There is also the risk that futures contracts markets may not be
sufficiently liquid. Futures contracts may be closed out only on an exchange or
board of trade that provides a market for such futures contracts. Although the
Fund intends to purchase or sell futures contracts only on exchanges and boards
of trade where there appears to be an active secondary market, there can be no
assurance that an active secondary market will exist for any particular contract
or at any particular time. In the event of such illiquidity, it might not be
possible to close a futures contract position and, in the event of adverse price
movement, the Fund would continue to be required to make daily payments of
variation margin. Since the securities being hedged would not be sold until the
related futures contract is sold, an increase, if any, in the price of the
securities may to some extent offset losses on the related futures contract. In
such event, the Fund would lose the benefit of the appreciation in value of the
securities.
Successful use of futures contracts is also subject to the Adviser's
ability to correctly predict the direction of movements in the market. For
example, if the Fund hedges against a decline in the market, and market prices
instead advance, the Fund will lose part or all of the benefit of the increase
in value of its securities holdings because it will have offsetting losses in
futures contracts. In such cases, if the Fund has insufficient cash, it may have
to sell portfolio securities at a time when it is disadvantageous to do so in
order to meet the daily variation margin.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures contract
exchanges and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. Once the daily limit has
been reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures contract positions and
subjecting some futures contract traders to substantial losses. In such event,
and in the event of adverse price movements, the Fund would be required to make
daily cash payments of variation margin. In such circumstances, an increase in
the value of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. However, there is no guarantee
that the price of the securities being hedged will, in fact, correlate with the
price movements in a futures contract and thus provide an offset to losses on
the futures contract.
The Fund will not enter into futures contracts or options transactions
(except for closing transactions) other than for bona fide hedging purposes if,
immediately thereafter,
B-18
the sum of its initial margin and premiums on open futures contracts and options
exceed 5% of the fair market value of the Fund's assets; however, in the case of
an option that is in-the-money at the time of purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. To prevent leverage in
connection with the purchase of futures contracts by the Fund, the Fund
segregates cash and/or liquid securities in an amount at least equal to the
market value of the obligation under the futures contracts (less any related
margin deposits).
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures contract position is accompanied by cash representing the difference
between the current market price of the futures contract and the exercise price
of the option. The Fund could purchase put options on futures contracts in lieu
of, and for the same purposes as, the sale of a futures contract; at the same
time, it could write put options at a lower strike price (a "put bear spread")
to offset part of the cost of the strategy to the Fund. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contracts.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures contracts. The Adviser will not
purchase options on futures contracts on any exchange unless in the Adviser's
opinion, a liquid secondary exchange market for such options exists. Compared to
the use of futures contracts, the purchase of options on futures contracts
involves less potential risk to the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs). However, there may be
circumstances, such as when there is no movement in the price of the underlying
security or index, when the use of an option on a future contract would result
in a loss to the Fund when the use of a future contract would not.
ADDITIONAL RISKS OF OPTIONS, FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Each of the exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with others (regardless of whether such
options are written on the same or different exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
B-19
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in options, futures contracts or options on futures contracts,
the Fund could experience delays or losses in liquidating open positions
purchased or incur a loss of all or part of its margin deposits. Transactions
are entered into by the Fund only with brokers or financial institutions deemed
creditworthy by the Adviser.
Unlike transactions entered into by the Fund in futures contracts, options
on foreign currencies and forward contracts are not traded on contract markets
regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, subject to SEC
regulation. Similarly, options on currencies may be traded OTC. In an OTC
trading environment, many of the protections afforded to exchange participants
will not be available. For example, there are no daily price fluctuation limits,
and adverse market movements could, therefore, continue to an unlimited extent
over a period of time. Although the purchaser of an option cannot lose more than
the amount of the premium plus related transaction costs, this entire amount
could be lost. Moreover, the option writer and a trader of forward contracts
could lose amounts substantially in excess of their initial investments, due to
the margin and collateral requirements associated with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting the Fund
to liquidate open positions at a profit prior to exercise or expiration, or to
limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the OTC market. For example,
exercise and settlement of such options must be made exclusively through the
OCC, which has established banking relationships in applicable foreign countries
for this purpose. As a result, the OCC may, if it determines that foreign
governmental restrictions or taxes would prevent the orderly settlement of
foreign currency option exercises, or would result in undue burdens on the OCC
or its clearing member, impose special procedures on exercise and settlement,
such as technical changes in the mechanics of delivery of currency, the fixing
of dollar settlement prices or prohibitions, on exercise.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by
B-20
(i) other complex foreign political and economic factors, (ii) lesser
availability than in the United States of data on which to make trading
decisions, (iii) delays in the Fund's ability to act upon economic events
occurring in foreign markets during nonbusiness hours in the United States, (iv)
the imposition of different exercise and settlement terms and procedures and
margin requirements than in the United States and (v) lesser trading volume.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many derivative transactions, in addition to other requirements, require
that the Fund segregate cash and/or liquid securities to the extent the Fund's
obligations are not otherwise "covered" as described above. In general, either
the full amount of any obligation by the Fund to pay or deliver securities or
assets must be covered at all times by the securities, instruments or currency
required to be delivered (or securities convertible into the needed securities
without additional consideration), or, subject to applicable regulatory
restrictions, the Fund must segregate cash and/or liquid securities in an amount
at least equal to the current amount of the obligation. In the case of a futures
contract or an option on a futures contract, the Fund must deposit initial
margin and possible daily variation margin in addition to segregating cash
and/or liquid securities sufficient to meet its obligation to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. Derivative transactions may be covered by other
means when consistent with applicable regulatory policies. The Fund may also
enter into offsetting transactions so that its combined position, coupled with
any segregated cash and/or liquid securities, equals its net outstanding
obligation.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities, which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting,
if the holders of more than 50% of the Fund's outstanding voting securities are
present or represented by proxy; or (ii) more than 50% of the Fund's outstanding
voting securities. The percentage limitations contained in the restrictions and
policies set forth herein apply at the time of purchase of securities. With
respect to the limitations on illiquid securities and borrowings, the percentage
limitations apply at the time of purchase and on an ongoing basis. These
restrictions provide that the Fund shall not:
1. Invest in a manner inconsistent with its classification as a
"diversified company" as provided by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief applicable to the Fund from the provisions of the 1940
Act, as amended from time to time.
2. Issue senior securities nor borrow money, except the Fund may issue
senior securities or borrow money to the extent permitted by (i) the
1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or
B-21
other relief applicable to the Fund from the provisions of the 1940 Act,
as amended from time to time.
3. Act as an underwriter of securities issued by others, except to the
extent that, in connection with the disposition of portfolio securities,
it may be deemed to be an underwriter under applicable securities laws.
4. Invest in any security if, as a result, 25% or more of the value of the
Fund's total assets, taken at market value at the time of each
investment, are in the securities of issuers in any particular industry
except (a) excluding securities issued or guaranteed by the U.S.
government and its agencies and instrumentalities or securities of state
and municipal governments or their political subdivisions, (b) when the
Fund has taken a temporary defensive position, or (c) as otherwise
provided by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the 1940 Act, as amended
from time to time.
5. Purchase or sell real estate except that the Fund may: (a) acquire or
lease office space for its own use, (b) invest in securities of issuers
that invest in real estate or interests therein or that are engaged in
or operate in the real estate industry, (c) invest in securities that
are secured by real estate or interests therein, (d) purchase and sell
mortgage-related securities, (e) hold and sell real estate acquired by
the Fund as a result of the ownership of securities and (f) as otherwise
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time, or (iii) an exemption or other relief
applicable to the Fund from the provisions of the 1940 Act, as amended
from time to time.
6. Purchase or sell physical commodities unless acquired as a result of
ownership of securities or other instruments; provided that this
restriction shall not prohibit the Fund from purchasing or selling
options, futures contracts and related options thereon, forward
contracts, swaps, caps, floors, collars and any other financial
instruments or from investing in securities or other instruments backed
by physical commodities or as otherwise permitted by (i) the 1940 Act,
as amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time, or (iii) an
exemption or other relief applicable to the Fund from the provisions of
the 1940 Act, as amended from time to time.
7. Make loans of money or property to any person, except (a) to the extent
that securities or interests in which the Fund may invest are considered
to be loans, (b) through the loan of portfolio securities, (c) by
engaging in repurchase agreements or (d) as may otherwise be permitted
by (i) the 1940 Act, as amended from time to time, (ii) the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or (iii) an exemption or other relief applicable to the
Fund from the provisions of the 1940 Act, as amended from time to time.
B-22
The Fund has an operating policy not to borrow money except for temporary
purposes and then in an amount not in excess of 5% of the value of the total
assets of the Fund at the time the borrowing is made.
TRUSTEES AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Trustees and the Fund's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Fund
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management ("Asset Management"
or the "Adviser"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen
Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services Inc.
("Investor Services"). The term "Fund Complex" includes each of the investment
companies advised by the Adviser or its affiliates as of the date of this
Statement of Additional Information. Trustees serve until reaching their
retirement age or until their successors are duly elected and qualified.
Officers are annually elected by the trustees.
INDEPENDENT TRUSTEES
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (58) Trustee + Chairman and Chief Executive 88 Trustee/Director/
Blistex Inc. Officer of Blistex Inc., a Managing General
1800 Swift Drive consumer health care products Partner of funds in
Oak Brook, IL 60523 manufacturer. Former Director of the Fund Complex.
the World Presidents
Organization-Chicago Chapter.
Director of the Heartland
Alliance, a nonprofit
organization serving human needs
based in Chicago.
J. Miles Branagan (71) Trustee + Private investor. Co-founder, and 86 Trustee/Director/
1632 Morning Mountain Road prior to August 1996, Chairman, Managing General
Raleigh, NC 27614 Chief Executive Officer and Partner of funds in
President, MDT Corporation (now the Fund Complex.
known as Getinge/ Castle, Inc., a
subsidiary of Getinge Industrier
AB), a company which develops,
manufactures, markets and
services medical and scientific
equipment.
Jerry D. Choate (65) Trustee + Prior to January 1999, Chairman 86 Trustee/Director/
33971 Selva Road and Chief Executive Officer of Managing General
Suite 130 the Allstate Corporation Partner of funds in
Dana Point, CA 92629 ("Allstate") and Allstate the Fund Complex.
Insurance Company. Prior to Director of Amgen
January 1995, President and Chief Inc., a
Executive Officer of Allstate. biotechnological
Prior to August 1994, various company, and Director
management positions at Allstate. of Valero Energy
Corporation, an
independent refining
company.
</Table>
B-23
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer (63) Trustee + President of CAC, llc., a private 88 Trustee/Director/
CAC, llc. company offering capital Managing General
4350 LaJolla Village Drive investment and management Partner of funds in
Suite 980 advisory services. Prior to July the Fund Complex.
San Diego, CA 92122-6223 2000, Managing Partner of Equity Director of TeleTech
Group Corporate Investment (EGI), Holdings Inc.,
a company that makes private Stericycle, Inc.,
investments in other companies. TheraSense, Inc.,
GATX Corporation,
Arris Group, Inc. and
Trustee of the
University of Chicago
Hospitals and Health
Systems. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001, Vice
Chairman and Director
of Anixter
International, Inc.
and IMC Global Inc.
Prior to July 2000,
Director of Allied
Riser Communications
Corp., Matria
Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety,
Corp. and Grupo
Azcarero Mexico
(GAM). Prior to April
1999, Director of
Metal Management,
Inc.
Linda Hutton Heagy (55) Trustee + Managing Partner of Heidrick & 86 Trustee/Director/
Heidrick & Struggles Struggles, an executive search Managing General
233 South Wacker Drive firm. Trustee on the University Partner of funds in
Suite 7000 of Chicago Hospitals Board, Vice the Fund Complex.
Chicago, IL 60606 Chair of the Board of the YMCA of
Metropolitan Chicago and a member
of the Women's Board of the
University of Chicago. Prior to
1997, Partner of Ray & Berndtson,
Inc., an executive recruiting
firm. Prior to 1996, Trustee of
The International House Board, a
fellowship and housing
organization for international
graduate students. Prior to 1995,
Executive Vice President of ABN
AMRO, N.A., a bank holding
company. Prior to 1992, Executive
Vice President of La Salle
National Bank.
</Table>
B-24
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (51) Trustee + Director and President of the 86 Trustee/Director/
11 DuPont Circle, N.W. German Marshall Fund of the Managing General
Washington, D.C. 20016 United States, an independent Partner of funds in
U.S. foundation created to deepen the Fund Complex.
understanding, promote
collaboration and stimulate
exchanges of practical experience
between Americans and Europeans.
Formerly, advisor to the Dennis
Trading Group Inc., a managed
futures and option company that
invests money for individuals and
institutions. Prior to 1992,
President and Chief Executive
Officer, Director and member of
the Investment Committee of the
Joyce Foundation, a private
foundation.
Howard J Kerr (68) Trustee + Prior to 1998, President and 88 Trustee/Director/
736 North Western Avenue Chief Executive Officer of Managing General
P.O. Box 317 Pocklington Corporation, Inc., an Partner of funds in
Lake Forest, IL 60045 investment holding company. the Fund Complex.
Director of the Marrow Foundation Director of the Lake
Forest Bank & Trust.
Jack E. Nelson (67) Trustee + President of Nelson Investment 86 Trustee/Director/
423 Country Club Drive Planning Services, Inc., a Managing General
Winter Park, FL 32789 financial planning company and Partner of funds in
registered investment adviser in the Fund Complex.
the State of Florida. President
of Nelson Ivest Brokerage
Services Inc., a member of the
NASD, Securities Investors
Protection Corp. and the
Municipal Securities Rulemaking
Board. President of Nelson Sales
and Services Corporation, a
marketing and services company to
support affiliated companies.
Hugo F. Sonnenschein (63) Trustee + President Emeritus and Honorary 88 Trustee/Director/
1126 E. 59th Street Trustee of the University of Managing General
Chicago, IL 60637 Chicago and the Adam Smith Partner of funds in
Distinguished Service Professor the Fund Complex.
in the Department of Economics at Director of Winston
the University of Chicago. Prior Laboratories, Inc.
to July 2000, President of the
University of Chicago. Trustee of
the University of Rochester and a
member of its investment
committee. Member of the National
Academy of Sciences, the American
Philosophical Society and a
fellow of the American Academy of
Arts and Sciences.
</Table>
B-25
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Suzanne H. Woolsey, P.H.D. Trustee + Currently with Paladin Capital 86 Trustee/Director/
(62) Group -- Paladin Homeland Managing General
2001 Pennsylvania Ave., Security Fund since November Partner of funds in
N.W. 2003. Previously, Chief the Fund Complex.
Suite 400 Communications Officer of the Director of Neurogen
Washington, D.C. 20006 National Academy of Corporation, a
Sciences/National Research pharmaceutical
Council, an independent, company, since
federally chartered policy January 1998.
institution, since 2001 and
previously Chief Operating
Officer from 1993 to 2001.
Director of the Institute for
Defense Analyses, a federally
funded research and development
center, Director of the German
Marshall Fund of the United
States, and Trustee of Colorado
College. Prior to 1993, Executive
Director of the Commission on
Behavioral and Social Sciences
and Education at the National
Academy of Sciences/National
Research Council. From 1980
through 1989, Partner of Coopers
& Lybrand.
</Table>
B-26
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (50) Trustee, +; President and Chief Executive 86 Trustee/Director/
1221 Avenue of the President President Officer of funds in the Fund Managing General
Americas and Chief and Chief Complex. Chairman, President, Partner of funds in
New York, NY 10020 Executive Executive Chief Executive Officer and the Fund Complex.
Officer Officer Director of Asset Management and
since 2002 Van Kampen Advisors Inc. since
December 2002. Chairman,
President and Chief Executive
Officer of Van Kampen Investments
since December 2002. Director of
Van Kampen Investments since
December 1999. Chairman and
Director of Van Kampen Funds Inc.
since December 2002. President,
Director and Chief Operating
Officer of Morgan Stanley
Investment Management since
December 1998. President and
Director since April 1997 and
Chief Executive Officer since
June 1998 of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. Chairman, Chief Executive
Officer and Director of Morgan
Stanley Distributors Inc. since
June 1998. Chairman since June
1998, and Director since January
1998 of Morgan Stanley Trust.
Director of various Morgan
Stanley subsidiaries. President
of the Morgan Stanley Funds since
May 1999. Previously Chief
Executive Officer of Van Kampen
Funds Inc. from December 2002 to
July 2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. and Executive Vice President
of Morgan Stanley Distributors
Inc. from April 1997 to June
1998. Chief Executive Officer
from September 2002 to April 2003
and Vice President from May 1997
to April 1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* Trustee + Advisory Director of Morgan 88 Trustee/Director/
(57) Stanley. Prior to December 2002, Managing General
1 Parkview Plaza Chairman, Director, President, Partner of funds in
P.O. Box 5555 Chief Executive Officer and the Fund Complex.
Oakbrook Terrace, IL 60181 Managing Director of Van Kampen
Investments and its investment
advisory, distribution and other
subsidiaries. Prior to December
2002, President and Chief
Executive Officer of funds in the
Fund Complex. Prior to May 1998,
Executive Vice President and
Director of Marketing at Morgan
Stanley and Director of Dean
Witter, Discover & Co. and Dean
Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds
Inc.
</Table>
B-27
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Wayne W. Whalen* (64) Trustee + Partner in the law firm of 88 Trustee/Director/
333 West Wacker Drive Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 Flom (Illinois), legal counsel to Partner of funds in
funds in the Fund Complex. the Fund Complex.
</Table>
- ------------------------------------
+ See Table D below.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of certain funds in the
Fund Complex by reason of his firm currently acting as legal counsel to such
funds in the Fund Complex. Messrs. Merin and Powers are interested persons of
funds in the Fund Complex and the Adviser by reason of their current or former
positions with Morgan Stanley or its affiliates.
B-28
OFFICERS
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
Stephen L. Boyd (63) Vice President ++ Managing Director of Global Research Investment Management.
2800 Post Oak Blvd. Vice President of funds in the Fund Complex. Prior to
45th Floor December 2002, Chief Investment Officer of Van Kampen
Houston, TX 77056 Investments and President and Chief Operations Officer of
the Adviser and Van Kampen Advisors Inc. Prior to May 2002,
Executive Vice President and Chief Investment Officer of
funds in the Fund Complex. Prior to May 2001, Managing
Director and Chief Investment Officer of Van Kampen
Investments, and Managing Director and President of the
Adviser and Van Kampen Advisors Inc. Prior to December 2000,
Executive Vice President and Chief Investment Officer of Van
Kampen Investments, and President and Chief Operating
Officer of the Adviser. Prior to April 2000, Executive Vice
President and Chief Investment Officer for Equity
Investments of the Adviser. Prior to October 1998, Vice
President and Senior Portfolio Manager with AIM Capital
Management, Inc. Prior to February 1998, Senior Vice
President and Portfolio Manager of Van Kampen American
Capital Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American Capital
Management, Inc.
Stefanie V. Chang (37) Vice President ++ Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Vice President of funds in the Fund Complex.
New York, NY 10020
Joseph J. McAlinden (60) Executive Vice ++ Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
John R. Reynoldson (50) Vice President ++ Executive Director and Portfolio Specialist of the Adviser
1 Parkview Plaza and Van Kampen Advisors Inc. Vice President of funds in the
P.O. Box 5555 Fund Complex. Prior to July 2001, Principal and Co-head of
Oakbrook Terrace, IL 60181 the Fixed Income Department of the Adviser and Van Kampen
Advisors Inc. Prior to December 2000, Senior Vice President
of the Adviser and Van Kampen Advisors Inc. Prior to May
2000, Senior Vice President of the investment grade taxable
group for the Adviser. Prior to June 1999, Senior Vice
President of the government securities bond group for Asset
Management.
Ronald E. Robison (64) Executive Vice ++ Chief Executive Officer and Chairman of Investor Services.
1221 Avenue of the Americas President and Executive Vice President and Principal Executive Officer of
New York, NY 10020 Principal funds in the Fund Complex. Chief Global Operations Officer
Executive and Managing Director of Morgan Stanley Investment
Officer Management Inc. Managing Director of Morgan Stanley.
Managing Director and Director of Morgan Stanley Investment
Advisors Inc. and Morgan Stanley Services Company Inc. Chief
Executive Officer and Director of Morgan Stanley Trust. Vice
President of the Morgan Stanley Funds.
</Table>
B-29
<Table>
<Caption>
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUND SERVED DURING PAST 5 YEARS
A. Thomas Smith III (47) Vice President and ++ Managing Director of Morgan Stanley, Managing Director and
1221 Avenue of the Americas Secretary Director of Van Kampen Investments, Director of the Adviser,
New York, NY 10020 Van Kampen Advisors Inc., the Distributor, Investor Services
and certain other subsidiaries of Van Kampen Investments.
Managing Director and General Counsel-Mutual Funds of Morgan
Stanley Investment Advisors, Inc. Vice President and
Secretary of funds in the Fund Complex. Prior to July 2001,
Managing Director, General Counsel, Secretary and Director
of Van Kampen Investments, the Adviser, the Distributor,
Investor Services, and certain other subsidiaries of Van
Kampen Investments. Prior to December 2000, Executive Vice
President, General Counsel, Secretary and Director of Van
Kampen Investments, the Adviser, Van Kampen Advisors Inc.,
the Distributor, Investor Services and certain other
subsidiaries of Van Kampen Investments. Prior to January
1999, Vice President and Associate General Counsel to New
York Life Insurance Company ("New York Life"), and prior to
March 1997, Associate General Counsel of New York Life.
Prior to December 1993, Assistant General Counsel of The
Dreyfus Corporation. Prior to August 1991, Senior Associate,
Willkie Farr & Gallagher. Prior to January 1989, Staff
Attorney at the Securities and Exchange Commission, Division
of Investment Management, Office of Chief Counsel.
John L. Sullivan (48) Vice President, ++ Director and Managing Director of Van Kampen Investments,
1 Parkview Plaza Chief Financial the Adviser, Van Kampen Advisors Inc. and certain other
P.O. Box 5555 Officer and subsidiaries of Van Kampen Investments. Vice President,
Oakbrook Terrace, IL 60181 Treasurer Chief Financial Officer and Treasurer of funds in the Fund
Complex. Head of Fund Accounting for Morgan Stanley
Investment Management. Prior to December 2002, Executive
Director of Van Kampen Investments, the Adviser and Van
Kampen Advisors Inc.
</Table>
- ------------------------------------
++ See Table E below.
Each trustee/director who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees/directors to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
by reference to the return on the common shares of the Fund or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Fund may invest in securities of those
funds selected by the Non-Affiliated Trustees in order to match the deferred
compensation obligation. The deferred compensation plan is not funded and
obligations thereunder represent general unsecured claims against the general
assets of the Fund. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Fund prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the
B-30
retirement plan) and retires at or after attaining the age of 60, is eligible to
receive a retirement benefit per year for each of the ten years following such
retirement from the Fund. Non-Affiliated Trustees retiring prior to the age of
60 or with fewer than 10 years but more than 5 years of service may receive
reduced retirement benefits from the Fund.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
<Table>
<Caption>
Fund Complex
---------------------------------------------
Aggregate
Aggregate Estimated
Pension or Maximum Total
Retirement Annual Compensation
Aggregate Benefits Benefits from before
Compensation Accrued as the Fund Deferral from
from the Part of Complex Upon Fund
Name(1) Trust(2) Expenses(3) Retirement(4) Complex(5)
------- ------------ ----------- ------------- -------------
David C. Arch $ 383 $14,694 $147,500 $138,750
J. Miles Branagan 2,599 64,907 60,000 107,000
Jerry D. Choate 2,599 24,774 130,000 107,000
Rod Dammeyer 383 26,231 147,500 138,750
Linda Hutton Heagy 2,599 6,858 147,500 107,000
R. Craig Kennedy 2,599 4,617 147,500 107,000
Howard J Kerr 383 50,408 147,500 138,750
Jack E. Nelson 2,599 33,020 112,500 107,000
Hugo F. Sonnenschein 383 26,282 147,500 138,750
Wayne W. Whalen 2,603 51,855 147,500 245,750
Suzanne H. Woolsey 2,599 15,533 147,500 107,000
</Table>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from all operating series of the Trust during the fiscal year ended
August 31, 2003. Messrs. Arch, Dammeyer, Kerr and Sonnenschein were
appointed to the Board of the Trust on July 23, 2003, and thus the amounts
above reflect compensation from the Trust for the period July 23, 2003 until
the end of the fiscal year ended August 31, 2003. The details of aggregate
compensation before deferral for each operating series of the Trust during
the fiscal year ended August 31, 2003 are shown in Table A below. The
details of compensation deferred for each operating series of the Trust
during the fiscal year ended August 31, 2003 are shown in Table B below. The
details of cumulative deferred compensation (including interest) for each
operating series of the Trust as of August 31, 2003 are shown in Table C
below. The deferred compensation plan is described above the Compensation
Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2002. The
retirement plan is described above the Compensation Table. In 2003, efforts
have been under way to combine the trustees/directors/managing general
partners of the boards of the various Van Kampen-related funds in the Fund
Complex. Prior to 2003, only Messrs. Whalen
B-31
and Powers served as trustees/directors/managing general partners of all of
the various Van Kampen-related funds in the Fund Complex; and during 2003,
other trustees/directors/managing general partners are being elected or
appointed, as appropriate, to most of the respective boards of the
underlying Van Kampen-related funds. The amounts in this column represent
amounts for each trustee based on funds he/she oversaw for the period
mentioned above; and thus it is anticipated that the amounts will increase
in future compensation tables based on the increased number of funds
overseen by such trustees going forward.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2002 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis. In 2003, efforts have
been under way to combine the trustees/directors/managing general partners
of the boards of the various Van Kampen-related funds in the Fund Complex.
Prior to 2003, only Messrs. Whalen and Powers served as
trustees/directors/managing general partners of all of the various Van
Kampen-related funds in the Fund Complex; and during 2003, other trustees/
directors/managing general partners are being elected or appointed, as
appropriate, to most of the respective boards of the underlying Van
Kampen-related funds. The amounts in this column represent amounts for each
trustee based on funds he/she oversaw for the period mentioned above; and
thus it is anticipated that the amounts will increase in future compensation
tables based on the increased number of funds overseen by such trustees
going forward.
TABLE A
2003 AGGREGATE COMPENSATION FROM
THE TRUST AND EACH SERIES
<Table>
<Caption>
TRUSTEE
FISCAL -------------------------------------------------------------------------------------
FUND NAME YEAR-END ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN
--------- -------- ---- -------- ------ -------- ----- ------- ---- ------ ------------
International
Advantage Fund...... 8/31 $161 $1,162 $1,162 $161 $1,162 $1,162 $161 $1,162 $161
Technology Fund...... 8/31 $222 $1,437 $1,437 $222 $1,437 $1,437 $222 $1,437 $222
---- ------ ------ ---- ------ ------ ----
Trust Total......... $383 $2,599 $2,599 $383 $2,599 $2,599 $383 $2,599 $383
<Caption>
TRUSTEE
----------------
FUND NAME WHALEN WOOLSEY
--------- ------ -------
International
Advantage Fund...... $1,163 $1,162
Technology Fund...... $1,440 $1,440
Trust Total......... $2,603 $2,599
</Table>
B-32
TABLE B
2003 AGGREGATE COMPENSATION DEFERRED FROM
THE TRUST AND EACH SERIES
<Table>
<Caption>
TRUSTEE
FISCAL ----------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE DAMMEYER HEAGY NELSON SONNENSCHEIN WHALEN
--------- -------- -------- ------ -------- ----- ------ ------------ ------
International Advantage
Fund.................... 8/31 $401 $1,162 $161 $1,162 $1,162 $161 $1,163
Technology Fund........... 8/31 $471 $1,437 $222 $1,437 $1,437 $222 $1,440
---- ------ ---- ------ ------ ----
Trust Total............. $872 $2,599 $383 $2,599 $2,599 $383 $2,603
</Table>
TABLE C
2003 CUMULATIVE COMPENSATION DEFERRED
(PLUS INTEREST) FROM THE TRUST AND EACH SERIES
<Table>
<Caption>
TRUSTEE
FISCAL --------------------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY NELSON SONNENSCHEIN ROONEY SISTO WHALEN
--------- -------- -------- ------ -------- ----- ------- ------ ------------ ------ ----- ------
International
Advantage Fund...... 8/31 $1,248 $2,076 $161 $1,982 $ 137 $2,079 $161 $ 97 $ 0 $2,065
Technology Fund...... 8/31 6,736 6,347 222 5,313 2,740 6,282 222 2,076 1,561 6,171
------ ------ ---- ------ ------ ------ ---- ------
Trust Total......... $7,984 $8,423 $383 $7,295 $2,877 $8,361 $383 $2,173 $1,561 $8,236
</Table>
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<Table>
<Caption>
TRUSTEE
-----------------------------------------------------------------------------------------------------
FUND NAME ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR MERIN NELSON SONNENSCHEIN POWERS
--------- ---- -------- ------ -------- ----- ------- ---- ----- ------ ------------ ------
International
Advantage Fund...... 2003 2001 2001 2003 2001 2001 2003 2001 2001 2003 2001
Technology Fund...... 2003 1999 1999 2003 1999 1999 2003 1999 1999 2003 1999
<Caption>
TRUSTEE
-----------------
FUND NAME WHALEN WOOLSEY
--------- ------ -------
International
Advantage Fund...... 2001 2001
Technology Fund...... 1999 1999
</Table>
TABLE E
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<Table>
<Caption>
OFFICER
---------------------------------------------------------------------------------------
FUND NAME BOYD CHANG MCALINDEN MERIN REYNOLDSON ROBISON SMITH SULLIVAN ZIMMERMANN
--------- ---- ----- --------- ----- ---------- ------- ----- -------- ----------
International Advantage
Fund...................... 2001 2003 2002 2002 2001 2003 2001 2001 2001
Technology Fund............. 1999 2003 2002 2002 1999 2003 1999 1999 1999
</Table>
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised of trustees who are not "interested persons" of the Fund (as defined
by the 1940 Act) (referred to herein as "Independent Trustees" or
"non-interested trustees").
B-33
The Board's audit committee consists of J. Miles Branagan, Jerry D. Choate
and R. Craig Kennedy. The audit committee makes recommendations to the Board of
Trustees concerning the selection of the Fund's independent public auditors,
reviews with such auditors the scope and results of the Fund's annual audit and
considers any comments which the auditors may have regarding the Fund's
financial statements, books of account or internal controls.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Rod Dammeyer,
Howard J Kerr and Jack E. Nelson. The governance committee identifies
individuals qualified to serve on the Board that are independent as defined in
the 1940 Act and on committees of the Board, advises the Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to the Fund, monitors
corporate governance matters and makes recommendations to the Board, and act as
the administrative committee with respect to Board policies and procedures,
committee policies and procedures and code of ethics.
During the Fund's last fiscal year, the audit committee of the Board held
five meetings and the brokerage and services committee of the Board held five
meetings. The governance committee was recently organized and had only one
meeting during the Fund's last fiscal year.
The non-interested trustees of the Fund select and nominate any other
non-interested trustees of the Fund. While the non-interested trustees of the
Fund expect to be able to continue to identify from their own resources an ample
number of qualified candidates for the Board of Trustees as they deem
appropriate, they will review nominations from shareholders to fill any
vacancies. Nominations from shareholders should be in writing and addressed to
the non-interested trustees at the Fund's office.
B-34
In addition to deferred compensation balances as described in the
Compensation Table, as of December 31, 2002, the most recently completed
calendar year prior to the date of this Statement of Additional Information,
each trustee of each series of the Trust beneficially owned equity securities of
each series of the Trust, including the Fund, and of all of the funds in the
Open-End Fund Complex overseen by the trustee in the dollar range amounts
specified below.
2002 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
<Table>
<Caption>
ARCH BRANAGAN CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON
---- -------- ------ -------- ----- ------- ---- ------
DOLLAR RANGE OF EQUITY SECURITIES
IN THE TRUST:
INTERNATIONAL ADVANTAGE FUND.... none none none none none none none none
TECHNOLOGY FUND................. none none none none none $1-$10,000 none none
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN BY
TRUSTEE IN THE OPEN-END FUND
COMPLEX......................... $50,001- over $10,001- over $10,001- over $1-$10,000 none
$100,000 $100,000 $50,000 $100,000 $50,000 $100,000
<Caption>
SONNENSCHEIN WOOLSEY
------------ -------
DOLLAR RANGE OF EQUITY SECURITIES
IN THE TRUST:
INTERNATIONAL ADVANTAGE FUND.... none none
TECHNOLOGY FUND................. none none
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN BY
TRUSTEE IN THE OPEN-END FUND
COMPLEX......................... over $10,001-
$100,000 $50,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
MERIN POWERS WHALEN
----- ------ ------
DOLLAR RANGE OF EQUITY SECURITIES IN THE TRUST:
INTERNATIONAL ADVANTAGE FUND............................ none none none
TECHNOLOGY FUND......................................... $50,000- none $1-$10,000
$100,000
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN
THE OPEN-END FUND COMPLEX............................... over $100,000 over $100,000 over $100,000
</Table>
As of December 1, 2003, the trustees and officers of the Trust, as a group
owned less than 1% of the shares of the Fund.
The Fund, the Adviser and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere with the portfolio transactions
of the Fund or other Van Kampen funds, or that such employees take unfair
advantage of their relationship with the Fund. Among other things, the Code of
Ethics prohibits certain types of transactions absent prior approval, imposes
various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have
B-35
access to nonpublic information about the trading activities of the Fund or
other Van Kampen funds or who otherwise are involved in the investment advisory
process. Exceptions to these and other provisions of the Code of Ethics may be
granted in particular circumstances after review by appropriate personnel.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objective. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Fund's Board of Trustees
and permits its officers and employees to serve without compensation as trustees
of the Trust or officers of the Fund if elected to such positions. The Fund,
however, bears the costs of its day-to-day operations, including distribution
fees, service fees, custodian fees, legal and independent accountant fees, the
costs of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments) and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any error of judgment or of law,
or for any loss suffered by the Fund in connection with the matters to which the
Advisory Agreement relates, except a loss resulting from willful misfeasance,
bad faith, gross negligence on the part of the Adviser in the performance of its
obligations and duties or by reason of its reckless disregard of its obligations
and duties under the Advisory Agreement.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in any jurisdiction in which the Fund's shares are qualified for
offer and sale (excluding any expenses permitted to be excluded from the
computation under applicable law or regulation), the compensation due the
Adviser will be reduced by the amount of such excess and that, if a reduction in
and refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the fiscal year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
In approving the Advisory Agreement, the Board of Trustees, including the
non-interested Trustees, considered the nature, quality and scope of the
services provided by the Adviser, the performance, fees and expenses of the Fund
compared to other similar investment companies, the Adviser's expenses in
providing the services and the profitability of the Adviser and its affiliated
companies. The Board of Trustees also reviewed the benefit to the Adviser of
receiving third party research paid for by Fund assets and the propriety of such
an arrangement and evaluated other benefits the Adviser derives from its
B-36
relationship with the Fund. The Board of Trustees considered the extent to which
any economies of scale experienced by the Adviser are shared with the Fund's
shareholders, and the propriety of existing and alternative breakpoints in the
Fund's advisory fee schedule. The Board of Trustees considered comparative
advisory fees of the Fund and other investment companies at different asset
levels, and considered the trends in the industry versus historical and
projected sales and redemptions of the Fund. The Board of Trustees reviewed
reports from third parties about the foregoing factors and considered changes,
if any, in such items since its previous approval. The Board of Trustees
discussed the financial strength of the Adviser and its affiliated companies and
the capability of the personnel of the Adviser. The Board of Trustees reviewed
the statutory and regulatory requirements for approval of advisory agreements.
The Board of Trustees, including the non-interested Trustees, evaluated all of
the foregoing and determined, in the exercise of its business judgment, that
approval of the Advisory Agreement was in the best interests of the Fund and its
shareholders.
ADVISORY FEES
<Table>
<Caption>
Fiscal Year Fiscal Period
Ended Ended
August 31, August 31,
2003 2002
----------- -------------
The Adviser received the approximate advisory fee of.... $43,500 $20,600
</Table>
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Asset Management provides accounting
services to the Fund supplementary to those provided by the custodian. Such
services are expected to enable the Fund to more closely monitor and maintain
its accounts and records. The Fund pays all costs and expenses related to such
services, including all salary and related benefits of accounting personnel, as
well as the overhead and expenses of office space and the equipment necessary to
render such services. The Fund shares together with the other Van Kampen funds
in the cost of providing such services with 25% of such costs shared
proportionately based on the respective number of classes of securities issued
per fund and the remaining 75% of such costs based proportionately on the
respective net assets per fund.
ACCOUNTING SERVICES FEES
<Table>
<Caption>
Fiscal Year Fiscal Period
Ended Ended
August 31, August 31,
2003 2002
----------- -------------
The Adviser received the approximate accounting services
fees of............................................... $ 0 $ 0
</Table>
Legal Services Agreement. The Fund and certain other Van Kampen funds have
entered into legal services agreements pursuant to which Van Kampen Investments
provides legal services, including without limitation: accurate maintenance of
each fund's minute books and records, preparation and oversight of each fund's
regulatory reports, and
B-37
other information provided to shareholders, as well as responding to day-to-day
legal issues on behalf of the funds. Payment by the funds for such services is
made on a cost basis for the salary and salary-related benefits, including but
not limited to bonuses, group insurance and other regular wages for the
employment of personnel. Other funds distributed by the Distributor also receive
legal services from Van Kampen Investments. Of the total costs for legal
services provided to the funds distributed by the Distributor, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
LEGAL SERVICES FEES
<Table>
<Caption>
Fiscal Year Fiscal Period
Ended Ended
August 31, August 31,
2003 2002
----------- -------------
Van Kampen Investments received the approximate legal
services fees of........................................ $18,300 $10,900
</Table>
DISTRIBUTION AND SERVICE
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Distribution and Service Agreement"). The
Distributor has the exclusive right to distribute shares of the Fund through
authorized dealers on a continuous basis. The Distributor's obligation is an
agency or "best efforts" arrangement under which the Distributor is required to
take and pay for only such shares of the Fund as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Distributor bears the cost of printing (but not typesetting) prospectuses used
in connection with this offering and certain other costs including the cost of
supplemental sales literature and advertising. The Distribution and Service
Agreement is renewable from year to year if approved (a)(i) by the Fund's Board
of Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by a vote of a majority of Trustees who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the fiscal
periods shown in the chart below.
<Table>
<Caption>
Total Amounts
Underwriting Retained by
Commissions Distributor
------------ -----------
Fiscal year ended August 31, 2003....................... $7,700 $ 400
Fiscal period ended August 31, 2002..................... $8,500 $1,300
</Table>
B-38
With respect to sales of Class A Shares of the Fund, the total sales
charges and concessions reallowed to authorized dealers at the time of purchase
are as follows:
CLASS A SHARES SALES CHARGE TABLE
<Table>
<Caption>
Total Sales Charge
------------------------- Reallowed
As % of As % of Net To Dealers
Size of Offering Amount As a % of
Investment Price Invested Offering Price
- ------------------------------------------------------------------------------------------------
Less than $50,000........................... 5.75% 6.10% 5.00%
$50,000 but less than $100,000.............. 4.75% 4.99% 4.00%
$100,000 but less than $250,000............. 3.75% 3.90% 3.00%
$250,000 but less than $500,000............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........... 2.00% 2.04% 1.75%
$1,000,000 or more.......................... * * *
- ------------------------------------------------------------------------------------------------
</Table>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase.
The one-year period ends on the first business day of the thirteenth month
after the purchase date. A commission or transaction fee will be paid by the
Distributor at the time of purchase directly out of the Distributor's assets
(and not out of the Fund's assets) to authorized dealers who initiate and are
responsible for purchases of $1 million or more computed on a percentage of
the dollar value of such shares sold as follows: 1.00% on sales to $2 million,
plus 0.80% on the next $1 million and 0.50% on the excess over $3 million.
With respect to sales of Class B Shares and Class C Shares of the Fund, a
commission or transaction fee generally will be paid by the Distributor at the
time of purchase directly out of the Distributor's assets (and not out of the
Fund's assets) to authorized dealers who initiate and are responsible for such
purchases computed based on a percentage of the dollar value of such shares sold
of 4.00% on Class B Shares and 1.00% on Class C Shares.
Proceeds from any contingent deferred sales charge and any distribution
fees on Class B Shares and Class C Shares of the Fund are paid to the
Distributor and are used by the Distributor to defray its distribution related
expenses in connection with the sale of the Fund's shares, such as the payment
to authorized dealers for selling such shares. With respect to Class C Shares,
the authorized dealers generally receive from the Distributor the ongoing
distribution fees of up to 0.75% of the average daily net assets of the Fund's
Class C Shares annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily
B-39
intended to result in sales of shares of the Fund or other Van Kampen funds.
Fees may include payment for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives for meetings
or seminars of a business nature. In some instances additional compensation or
promotional incentives may be offered to brokers, dealers or financial
intermediaries that have sold or may sell significant amounts of shares during
specified periods of time. The Distributor may provide additional compensation
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
quarterly sales of shares of the Fund and other Van Kampen funds and increases
in net assets of the Fund and other Van Kampen funds over specified thresholds.
All of the foregoing payments are made by the Distributor out of its own assets.
Such fees paid for such services and activities with respect to the Fund will
not exceed in the aggregate 1.25% of the average total daily net assets of the
Fund on an annual basis. These programs will not change the price an investor
will pay for shares or the amount that a Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each of its Class A Shares, Class B Shares and Class C Shares
pursuant to Rule 12b-1 under the 1940 Act. The Fund also adopted a service plan
(the "Service Plan") with respect to each of its Class A Shares, Class B Shares
and Class C Shares. The Distribution Plan and the Service Plan sometimes are
referred to herein as the "Plans." The Plans provide that the Fund may spend a
portion of the Fund's average daily net assets attributable to each class of
shares in connection with the distribution of the respective class of shares and
in connection with the provision of ongoing services to shareholders of such
class, respectively. The Distribution Plan and the Service Plan are being
implemented through the Distribution and Service Agreement with the Distributor
of each such class of the Fund's shares, sub-agreements between the Distributor
and members of the NASD who are acting as securities dealers and NASD members or
eligible non-members who are acting as brokers or agents and similar agreements
between the Fund and financial intermediaries who are acting as brokers
(collectively, "Selling Agreements") that may provide for their customers or
clients certain services or assistance, which may include, but not be limited
to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Fund's Board of
Trustees setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the Trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is
B-40
specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to any
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to any class of shares at any time by a
vote of a majority of the disinterested Trustees or by a vote of a majority of
the outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These unreimbursed actual net
expenses may or may not be recovered through plan fees or contingent deferred
sales charges in future years.
Because of fluctuations in net asset value, the plan fees with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class.
As of August 31, 2003, there were approximately $15,300 and $0 of
unreimbursed distribution-related expenses with respect to Class B Shares and
Class C Shares, respectively, representing approximately 1% and 0% of the Fund's
net assets attributable to Class B Shares and Class C Shares, respectively. If
the Plans are terminated or not continued, the Fund would not be contractually
obligated to pay the Distributor for any expenses not previously reimbursed by
the Fund or recovered through contingent deferred sales charges.
B-41
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended August 31, 2003, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $9,993 or 0.25% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Class A
shareholders and for administering the Class A Share Plans. For the fiscal year
ended August 31, 2003, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $4,096 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $2,978 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $1,118 for
fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended August 31,
2003, the Fund's aggregate expenses paid under the Plans for Class C Shares were
$6,276 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $6,190 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $86 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into agreements whereby shares of the Fund will
be offered pursuant to such firm's retirement plan alliance programs with the
following firms: (i) ABN Amro Trust Services Co.; (ii) AMVESCAP Retirement,
Inc.; (iii) ING Financial Advisers, LLC; and (iv) Northern Trust Retirement
Consulting, LLC. Trustees and other fiduciaries of retirement plans seeking to
invest in multiple fund families through a broker-dealer retirement plan
alliance program should contact the firms mentioned above for further
information concerning the program(s) including, but not limited to, minimum
size and operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency fees
are determined through negotiations with the Fund and are approved by the Fund's
Board of Trustees. The transfer agency fees are based on competitive benchmarks.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of prices and any brokerage commissions on such transactions. While
the Adviser will be primarily responsible for the placement of the Fund's
portfolio business, the policies and practices in this regard are subject to
review by the Fund's Board of Trustees.
B-42
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with the Fund, the Adviser or the
Distributor and with brokerage firms participating in the distribution of the
Fund's shares if it reasonably believes that the quality of execution and the
commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
B-43
Certain broker-dealers, through which the Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Fund or
affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
Unless otherwise disclosed below, the Fund paid no commissions to
affiliated brokers during the last fiscal year or the previous fiscal period.
The Fund paid the following commissions to all brokers and affiliated brokers
during the fiscal year/period shown:
Commissions Paid:
<Table>
<Caption>
Affiliated
Brokers
---------------
All Morgan
Brokers Stanley DW Inc.
------- ---------------
Fiscal year ended August 31, 2003.................... $14,349 $608
Fiscal period ended August 31, 2002.................. $ 8,616 $374
Fiscal year 2003 Percentages:
Commissions with affiliate to total commissions.... 4.24%
Value of brokerage transactions with affiliate to
total transactions.............................. 0.84%
</Table>
During the fiscal year ended August 31, 2003, the Fund paid $0 in brokerage
commissions on transactions totaling $0 to brokers selected primarily on the
basis of research services provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in
B-44
any of the Van Kampen funds will receive statements quarterly from Investor
Services showing any reinvestments of dividends and capital gain dividends and
any other activity in the account since the preceding statement. Such
shareholders also will receive separate confirmations for each purchase or sale
transaction other than reinvestment of dividends and capital gain dividends and
systematic purchases or redemptions. Additional shares may be purchased at any
time through authorized dealers or by mailing a check and detailed instructions
directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 947, Jersey City, NJ 07303-0947, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP-IRAs; Simple IRAs; 401(k) plans; 403(b)(7) plans in the case of employees of
public school systems and certain non-profit organizations; or other pension or
profit sharing plans. Documents and forms containing detailed information
regarding these plans are available from the Distributor.
AUTOMATED CLEARING HOUSE("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. To utilize this option, the
shareholder's bank must be a member of ACH. In addition, the shareholder must
fill out the appropriate section of the account application form. The
shareholder must also include a voided check or deposit slip from the bank
account into which redemption proceeds are to be deposited together with the
completed application. Once Investor Services has received the application and
the voided check or deposit slip, such shareholder's designated bank account,
following any redemption, will be credited with the proceeds of such redemption.
Once enrolled in the ACH plan, a shareholder may terminate participation at any
time by writing Investor Services or by calling (800) 847-2424 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may elect, by completing the appropriate section of the
account application form or by calling (800) 847-2424 ((800) 421-2833 for the
hearing impaired), to have all dividends and capital gain dividends paid on a
class of shares of the Fund
B-45
invested into shares of the same class of any of the Participating Funds (as
defined in the Prospectus) so long as the investor has a pre-existing account
for such class of shares of the other fund. Both accounts must be of the same
type, either non-retirement or retirement. If the accounts are retirement
accounts, they must both be for the same class and of the same type of
retirement plan (e.g. IRA, 403(b)(7), 401(k), Money Purchase and Profit Sharing
Keogh plans) and for the benefit of the same individual. If a qualified,
pre-existing account does not exist, the shareholder must establish a new
account subject to any requirements of the Participating Fund into which
distributions will be invested. Distributions are invested into the selected
Participating Fund, provided that shares of such Participating Fund are
available for sale, at its net asset value per share as of the payable date of
the distribution from the Fund.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for periodic checks in any
amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan and may be
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain dividends
on shares held in accounts with systematic withdrawal plans are reinvested in
additional shares at the next determined net asset value per share. If periodic
withdrawals continuously exceed reinvested dividends and capital gain dividends,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Redemptions made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any gain or loss realized by the
shareholder upon redemption of shares is a taxable event. The Fund reserves the
right to amend or terminate the systematic withdrawal program upon 30 days'
notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a fractional share to round
off his or her purchase to the next full share) in Class A Shares of the Fund. A
Class C Shareholder who has redeemed
B-46
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption (and may include that amount necessary to acquire a fractional share
to round off his or her purchase to the next full share) in Class C Shares of
the Fund with credit given for any contingent deferred sales charge paid upon
such redemption, provided that such shareholder has not previously exercised
this reinstatement privilege with respect to Class C Shares of the Fund. Shares
acquired in this manner will be deemed to have the original cost and purchase
date of the redeemed shares for purposes of applying the CDSC-Class C (defined
below) to subsequent redemptions. Reinstatements are made at the net asset value
per share (without a sales charge) next determined after the order is received,
which must be made within 180 days after the date of the redemption, provided
that shares of the Fund are available for sale. Reinstatement at net asset value
per share is also offered to participants in eligible retirement plans for
repayment of principal (and interest) on their borrowings on such plans,
provided that shares of the Fund are available for sale.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock Exchange
(the "Exchange") is closed. The right of redemption may be suspended and the
payment therefor may be postponed for more than seven days during any period
when (a) the Exchange is closed for other than customary weekends or holidays;
(b) the SEC determines trading on the Exchange is restricted; (c) the SEC
determines an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is not reasonably
practicable for the Fund to fairly determine the value of its net assets; or (d)
the SEC, by order, so permits.
In addition, if the Fund's Board of Trustees determines that payment wholly
or partly in cash would be detrimental to the best interests of the remaining
shareholders of the Fund, the Fund may pay the redemption proceeds in whole or
in part by a distribution-in-kind of portfolio securities held by the Fund in
lieu of cash in conformity with applicable rules of the SEC. A
distribution-in-kind may result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the shareholder may have brokerage costs and a gain or loss for federal income
tax purposes upon the shareholder's disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Fund's Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC-Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of a
Participating Fund are exchanged for shares of another Participating Fund, the
purchase date for the shares acquired by exchange will be assumed to be the date
on which shares were purchased in the fund from which the exchange was made. If
the exchanged shares themselves are acquired through an exchange, the purchase
date is assumed to carry over from the date of the original election to purchase
shares subject to a CDSC-Class A rather than a front-end load sales charge. In
determining whether a CDSC-Class A is payable, it is assumed that shares being
redeemed first are any shares in the shareholder's account not subject to a
contingent deferred sales charge
B-47
followed by shares held the longest in the shareholder's account. The contingent
deferred sales charge is assessed on an amount equal to the lesser of the then
current market value or the cost of the shares being redeemed. Accordingly, no
sales charge is imposed on increases in net asset value above the initial
purchase price. In addition, no sales charge is assessed on shares derived from
reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C
CONTINGENT DEFERRED SALES CHARGES
As described in the Fund's Prospectus under "Redemption of Shares,"
redemptions of Class B Shares and Class C Shares will be subject to a contingent
deferred sales charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived
on redemptions of Class B Shares and Class C Shares in the circumstances
described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code (the
"Code"), which in pertinent part defines a person as disabled if such person "is
unable to engage in any substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to result in
death or to be of long-continued and indefinite duration." While the Fund does
not specifically adopt the balance of the Code's definition which pertains to
furnishing the Secretary of Treasury with such proof as he or she may require,
the Distributor will require satisfactory proof of death or disability before it
determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution or other
contribution pursuant to Code Section 408(d)(4) or (5), the return of excess
contributions or excess deferral amounts pursuant to Code Section 401(k)(8) or
402(g)(2), the financial hardship
B-48
of the employee pursuant to U.S. Treasury regulation Section 1.401(k)-(1)(d)(2)
or the death or disability of the employee (see Code Section 72(m)(7) and
72(t)(2)(A)(ii)). In addition, the charge will be waived on any minimum
distribution required to be distributed in accordance with Code Section
401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
REDEMPTION PURSUANT TO THE FUND'S SYSTEMATIC WITHDRAWAL PLAN
A shareholder may elect to participate in a systematic withdrawal plan with
respect to the shareholder's investment in the Fund. Under the systematic
withdrawal plan, a dollar amount of a participating shareholder's investment in
the Fund will be redeemed systematically by the Fund on a periodic basis, and
the proceeds sent to the designated payee of record. The amount to be redeemed
and frequency of the systematic withdrawals will be specified by the shareholder
upon his or her election to participate in the systematic withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
B-49
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund has elected and
qualified, and intends to continue to qualify, as a regulated investment company
under Subchapter M of the Code. To qualify as a regulated investment company,
the Fund must comply with certain requirements of the Code relating to, among
other things, the sources of its income and diversification of its assets.
If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income (generally including ordinary
income and net short-term capital gain, but not net capital gain, which is the
excess of net long-term capital gain over net short-term capital loss) and meets
certain other requirements, it will not be required to pay federal income taxes
on any income it distributes to shareholders. The Fund intends to distribute at
least the minimum amount necessary to satisfy the 90% distribution requirement.
The Fund will not be subject to federal income tax on any net capital gain
distributed to shareholders and designated as capital gain dividends.
To avoid a 4% excise tax, the Fund will be required to distribute, by
December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year) plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay taxes and make
distributions (which could be subject to interest charges) before requalifying
for taxation as a regulated investment company.
Some of the Fund's investment practices are subject to special provisions
of the Code that may, among other things, (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in non-U.S. corporations that could be classified as
"passive foreign investment companies" as defined for federal income tax
purposes. For federal
B-50
income tax purposes, such an investment may, among other things, cause the Fund
to recognize income or gain without a corresponding receipt of cash, to incur an
interest charge on taxable income that is deemed to have been deferred and/or to
recognize ordinary income that would otherwise have been treated as capital
gain.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's investment company taxable income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains designated as capital gain dividends, if any,
are taxable to shareholders as long-term capital gains regardless of the length
of time shares of the Fund have been held by such shareholders. Distributions in
excess of the Fund's earnings and profits will first reduce the adjusted tax
basis of a shareholder's shares and, after such adjusted tax basis is reduced to
zero, will constitute capital gain to such shareholder (assuming such shares are
held as a capital asset). The Jobs and Growth Tax Relief Reconciliation Act of
2003 (the "2003 Tax Act") contains provisions that reduce the U.S. federal
income tax rates on (1) long-term capital gains received by individuals and (2)
"qualified dividend income" received by individuals from certain domestic and
foreign corporations. The reduced rate for capital gains generally applies to
long-term capital gains from sales or exchanges recognized on or after May 6,
2003, and ceases to apply for taxable years beginning after December 31, 2008.
The reduced rate for dividends generally applies to "qualified dividend income"
received in taxable years beginning after December 31, 2002, and ceases to apply
for taxable years beginning after December 31, 2008. Because the Fund intends to
invest primarily in common stocks and other equity securities of foreign
corporations, a portion of the ordinary income dividends paid by the Fund may be
eligible for the reduced rate applicable to "qualified dividend income."
Distributions from the Fund designated as capital gains dividends will be
eligible for the reduced rate applicable to long-term capital gains. For a
summary of the maximum tax rates applicable to capital gains (including capital
gain dividends), see "Capital Gains Rates" below. Tax-exempt shareholders not
subject to federal income tax on their income generally will not be taxed on
distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal their fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the corporate dividends received
deduction.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such
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case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Shareholders of the Fund may be
entitled to claim U.S. foreign tax credits with respect to such taxes, subject
to certain provisions and limitations contained in the Code. If more than 50% of
the value of the Fund's total assets at the close of its taxable year consists
of stock or securities of foreign corporations and the Fund meets certain
holding period requirements, the Fund will be eligible to file, and may file, an
election with the Internal Revenue Service ("IRS") pursuant to which
shareholders of the Fund will be required (i) to include their respective pro
rata portions of such taxes in their U.S. income tax returns as gross income and
(ii) to treat such respective pro rata portions as taxes paid by them. Each
shareholder will be entitled, subject to certain limitations, either to deduct
his pro rata portion of such foreign taxes in computing his taxable income or to
credit them against his U.S. federal income taxes. No deduction for such foreign
taxes may be claimed by a shareholder who does not itemize deductions. Each
shareholder of the Fund will be notified annually regarding whether the foreign
taxes paid by the Fund will "pass through" for that year and, if so, such
notification will designate (i) the shareholder's portion of the foreign taxes
paid to each country and (ii) the portion of the dividends that represent income
derived from sources within each country. The amount of foreign taxes for which
a shareholder may claim a credit in any year will be subject to an overall
limitation such that the credit may not exceed the shareholder's U.S. federal
income tax attributable to the shareholder's foreign source taxable income. This
limitation generally applies separately to certain specific categories of
foreign source income including "passive income," which includes dividends and
interest. Because the application of the foregoing rules depends on the
particular circumstances of each shareholder, shareholders are urged to consult
their tax advisers.
Certain foreign currency gains or losses attributable to currency exchange
rate fluctuations are treated as ordinary income or loss. Such income or loss
may increase or decrease (or possibly eliminate) the Fund's income available for
distribution. If, under the rules governing the tax treatment of foreign
currency gains and losses, the Fund's income available for distribution is
decreased or eliminated, all or a portion of the dividends declared by the Fund
may be treated for federal income tax purposes as a return of capital or, in
some circumstances, as capital gains. Generally, a shareholder's tax basis in
Fund shares will be reduced to the extent that an amount distributed to such
shareholder is treated as a return of capital.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize a gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares are held as a capital asset, the
gain or loss will be a capital gain or loss. For a summary of the maximum tax
rates applicable to capital gains, see "Capital Gains Rates" below. Any loss
recognized upon a taxable disposition of shares held for six months or less will
be
B-52
treated as a long-term capital loss to the extent of any capital gain dividends
received with respect to such shares. For purposes of determining whether shares
have been held for six months or less, the holding period is suspended for any
periods during which the shareholder's risk of loss is diminished as a result of
holding one or more other positions in substantially similar or related property
or through certain options or short sales.
CAPITAL GAINS RATES
As a consequence of the 2003 Tax Act, the maximum tax rate applicable to
net capital gains recognized by individuals and other non-corporate taxpayers
investing in the Fund is (i) the same as the maximum ordinary income tax rate
for capital assets held for one year or less or (ii) for net capital gains
recognized on or after May 6, 2003, 15% for capital assets held for more than
one year (20% for net capital gains recognized in taxable years beginning after
December 31, 2008). The maximum long-term capital gains rate for corporations is
35%.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
For purposes of this and the following paragraphs, a "Non-U.S. Shareholder"
shall include any shareholder who is not:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized under the laws of the
United States or any state or political subdivision thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court
and which has one or more U.S. fiduciaries who have the authority to
control all substantial decisions of the trust, or (ii) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A Non-U.S. Shareholder generally will be subject to withholding of U.S.
federal income tax at a 30% rate (or lower applicable treaty rate), rather than
backup withholding (discussed below), on dividends from the Fund (other than
capital gain dividends) that are not "effectively connected" with a U.S. trade
or business carried on by such shareholder, provided that the shareholder
furnishes to the Fund a properly completed IRS Form W-8 BEN certifying the
shareholder's non-United States status.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to U.S. federal income tax in the case of
(i) a Non-U.S. Shareholder that is a corporation and (ii) an individual Non-U.S.
Shareholder who is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding and information reporting on capital gain dividends and redemption
proceeds paid to them upon the sale of their shares. See "Backup Withholding"
and "Information Reporting" below.
B-53
If income from the Fund or gains realized from the sale of shares are
effectively connected with a Non-U.S. Shareholder's U.S. trade or business, then
such amounts will not be subject to the 30% withholding described above, but
rather will be subject to U.S. federal income tax on a net basis at the tax
rates applicable to U.S. citizens and residents or domestic corporations. To
establish that income from the Fund or gains realized from the sale of shares
are effectively connected with a U.S. trade or business, a Non-U.S. Shareholder
must provide the Fund with a properly completed IRS Form W-8ECI certifying that
such amounts are effectively connected with the Non-U.S. Shareholder's U.S.
trade or business. Non-U.S. Shareholders that are corporations may also be
subject to an additional "branch profits tax" with respect to income from the
Fund that is effectively connected with a U.S. trade or business.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. To claim tax treaty benefits, Non-U.S. Shareholders will be
required to provide the Fund with a properly completed IRS Form W-8BEN
certifying their entitlement to the benefits. In addition, in certain cases
where payments are made to a Non-U.S. Shareholder that is a partnership or other
pass-through entity, both the entity and the persons holding an interest in the
entity will need to provide certification. For example, an individual Non-U.S.
Shareholder who holds shares in the Fund through a non-U.S. partnership must
provide an IRS Form W-8BEN to claim the benefits of an applicable tax treaty.
Non-U.S. Shareholders are advised to consult their advisers with respect to the
tax implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax ("backup
withholding") at a rate of 28% from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends paid to a
shareholder (other than a Non-U.S. Shareholder) if (i) the shareholder fails to
properly furnish the Fund with its correct taxpayer identification number, (ii)
the IRS notifies the Fund that the shareholder has failed to properly report
certain interest and dividend income to the IRS and to respond to notices to
that effect or (iii) when required to do so, the shareholder fails to certify
that the taxpayer identification number provided is correct, that the
shareholder is not subject to backup withholding and that the shareholder is a
U.S. person (as defined for U.S. federal income tax purposes). Redemption
proceeds may be subject to backup withholding under the circumstances described
in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to backup withholding. To
avoid backup withholding on capital gain dividends and redemption proceeds from
the sale of shares, Non-U.S. Shareholders must provide a properly completed IRS
Form W-8BEN certifying their non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
B-54
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends, capital gain dividends or
redemption proceeds paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such amounts. In
the case of a Non-U.S. Shareholder, the Fund must report to the IRS and such
shareholder the amount of dividends, capital gain dividends or redemption
proceeds paid that are subject to withholding (including backup withholding, if
any) and the amount of tax withheld with respect to such amounts. This
information may also be made available to the tax authorities in the Non-U.S.
Shareholder's country of residence.
GENERAL
The federal income tax discussion set forth above is for general
information only. Shareholders and prospective investors should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares of the Fund, as well as the effects of state, local and
foreign tax laws and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year, five-year and ten-year periods (or life of the
Fund, if shorter). Other total return quotations, aggregate or average, over
other time periods may also be included.
The total return of the Fund for a particular period represents the
increase (or decrease) in the value of a hypothetical investment in the Fund
from the beginning to the end of the period. Total return is calculated by
subtracting the value of the initial investment from the ending value and
showing the difference as a percentage of the initial investment; the
calculation assumes the initial investment is made at the current maximum public
offering price (which includes the maximum sales charge for Class A Shares);
that all income dividends or capital gain dividends during the period are
reinvested in Fund shares at net asset value; and that any applicable contingent
deferred sales charge has been paid. The Fund's total return will vary depending
on market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends or capital gain dividends
paid by the Fund or to reflect that 12b-1 fees may have changed over time.
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
Total return is calculated separately for Class A Shares, Class B Shares
and Class C Shares of the Fund. Total return figures for Class A Shares include
the maximum sales charge. Total return figures for Class B Shares and Class C
Shares include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares will differ.
B-55
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares.
Non-standardized total return calculations do not reflect the imposition of
a contingent deferred sales charge, and if any contingent deferred sales charge
imposed at the time of redemption were reflected, it would reduce the
performance quoted.
The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time, marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sector holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their funds' shares in direct or sales force distribution channels.
The study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based thereon are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Fund may also be marketed on the internet.
B-56
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, the Dow
Jones Industrial Average, Standard & Poor's indices, NASDAQ Composite Index,
other appropriate indices of investment securities, or with investment or
savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking or rating services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce the Fund's performance. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information including
performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
August 31, 2003 was 4.77%, and (ii) the approximately one-year, eleven month
period from September 26, 2001 (commencement of distribution of Class A Shares
of the Fund) to August 31, 2003 was 1.08%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from September 26,
2001 (commencement of distribution of Class A Shares of the Fund) to August 31,
2003 was 2.08%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from September 26,
2001
B-57
(commencement of distribution of Class A Shares of the Fund) to August 31, 2003
was 8.31%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended August 31, 2003 was 5.40%, and (ii) the approximately one-year,
eleven month period from September 26, 2001 (commencement of distribution of
Class A Shares of the Fund) to August 31, 2003 was 1.42%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
September 26, 2001 (commencement of distribution of Class B Shares of the Fund)
to August 31, 2003 was 2.77%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
September 26, 2001 (commencement of distribution of Class B Shares of the Fund)
to August 31, 2003 was 6.67%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended August 31, 2003 was 9.40%, and (ii) the approximately one year,
eleven month period from September 26, 2001 (commencement of distribution of
Class A Shares of the Fund) to August 31, 2003 was 3.41%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
September 26, 2001 (commencement of distribution of Class C Shares of the Fund)
to August 31, 2003 was 6.67%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
September 26, 2001 (commencement of distribution of Class C Shares of the Fund)
to August 31, 2003 was 6.67%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West
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Franklin Street, Boston, Massachusetts 02110, as custodian. The custodian also
provides accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent auditors.
INDEPENDENT AUDITORS
Independent auditors for the Fund perform an annual audit of the Fund's
financial statements. The Fund's Board of Trustees has engaged Ernst & Young
LLP, located at 233 South Wacker Drive, Chicago, Illinois 60606, to be the
Fund's independent auditors.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-59
APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policies
and procedures for voting proxies with respect to securities held in the
accounts of clients applies to those MSIM entities that provide discretionary
Investment Management services and for which a MSIM entity has the authority to
vote their proxies. The policies and procedures and general guidelines in this
section will be reviewed and, as necessary, updated periodically to address new
or revised proxy voting issues. The MSIM entities covered by these policies and
procedures currently include the following: Morgan Stanley Investment Advisors
Inc., Morgan Stanley Alternative Investment Partners, L.P., Morgan Stanley AIP
GP LP, Morgan Stanley Investment Management Inc., Morgan Stanley Investment
Group Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Investments LP, Morgan Stanley Hedge Fund Partners GP LP, Morgan
Stanley Hedge Fund Partners LP, Van Kampen Investment Advisory Corp., Van Kampen
Asset Management Inc., and Van Kampen Advisors Inc. (each a "MSIM Affiliate" and
collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will vote proxies as part of its authority to manage,
acquire and dispose of account assets. With respect to the MSIM registered
management investment companies (Van Kampen, Institutional and Advisor
Funds)(collectively referred to as the "MSIM Funds"), each MSIM Fund will vote
proxies pursuant to authority granted under its applicable investment advisory
agreement or, in the absence of such authority, as authorized by its Board of
Directors or Trustees. A MSIM Affiliate will not vote proxies if the "named
fiduciary" for an ERISA account has reserved the authority for itself, or in the
case of an account not governed by ERISA, the Investment Management Agreement
does not authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in
a prudent and diligent manner, vote proxies in the best interests of clients,
including beneficiaries of and participants in a client's benefit plan(s) for
which we manage assets, consistent with the objective of maximizing long-term
investment returns ("Client Proxy Standard"). In certain situations, a client or
its fiduciary may provide a MSIM Affiliate with a statement of proxy voting
policy. In these situations, the MSIM Affiliate will comply with the client's
policy unless to do so would be inconsistent with applicable laws or regulations
or the MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. In
addition to research, ISS provides vote execution, reporting, and recordkeeping.
MSIM's Proxy Review Committee
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(see Section IV.A. below) will carefully monitor and supervise the services
provided by the proxy research services.
Voting Proxies for certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, consistent with the Client Proxy
Standard. ISS has been retained to provide assistance to the MSIM Affiliates in
connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, antitakeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may vote in a manner that is contrary to the following general guidelines,
pursuant to the procedures set forth in Section IV. below, provided the vote is
consistent with the Client Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items the following proposals are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- Election of Directors.
- Limiting Directors' liability and broadening indemnification of
Directors.
- Requirement that a certain percentage (up to 66 2/3%) of its Board's
members be comprised of independent and unaffiliated Directors.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
B-61
- Recommendations to set retirement ages or require specific levels of
stock ownership by Directors.
- General updating/corrective amendments to the charter.
- Elimination of cumulative voting.
- Elimination of preemptive rights.
- Provisions for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, are
generally voted in support of management, subject to the review and
approval of the Proxy Review Committee, as appropriate.
CAPITALIZATION CHANGES
- Capitalization changes that eliminate other classes of stock and
voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i) a
clear and legitimate business purpose is stated; (ii) the number of
shares requested is reasonable in relation to the purpose for which
authorization is requested; and (iii) the authorization does not
exceed 100% of shares currently authorized and at least 30% of the
new authorization will be outstanding.
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in the
corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
COMPENSATION
- Director fees, provided the amounts are not excessive relative to
other companies in the country or industry.
B-62
- Employee stock purchase plans that permit discounts up to 15%, but
only for grants that are part of a broad based employee plan,
including all non-executive employees.
- Establishment of Employee Stock Option Plans and other employee
ownership plans.
ANTI-TAKEOVER MATTERS
- Modify or rescind existing supermajority vote requirements to amend
the charters or bylaws.
- Adoption of anti-greenmail provisions provided that the proposal:
(i) defines greenmail; (ii) prohibits buyback offers to large block
holders not made to all shareholders or not approved by
disinterested shareholders; and (iii) contains no anti-takeover
measures or other provisions restricting the rights of shareholders.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on the shareholder, are
generally voted against (notwithstanding management support), subject
to the review and approval of the Proxy Review Committee, as
appropriate.
- Capitalization changes that add classes of stock that which
substantially dilute the voting interests of existing shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Creation of "blank check" preferred stock.
- Changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Amendments to bylaws that would require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
4. The following types of non-routine proposals, which potentially may
have a potential financial or best interest impact on an issuer, are
voted as determined by the Proxy Review Committee.
CORPORATE TRANSACTIONS
- Mergers, acquisitions and other special corporate transactions
(i.e., takeovers, spin-offs, sales of assets, reorganizations,
restructurings and recapitalizations) will be examined on a
case-by-case basis. In all cases, ISS and IRRC research and analysis
will be used along with MSIM Affiliates' research and analysis,
based on, among other things, MSIM internal company-specific
knowledge.
B-63
- Change-in-control provisions in non-salary compensation plans,
employment contracts, and severance agreements that benefit
management and would be costly to shareholders if triggered.
- Shareholders rights plans that allow appropriate offers to
shareholders to be blocked by the board or trigger provisions that
prevent legitimate offers from proceeding.
- Executive/Director stock option plans. Generally, stock option plans
should meet the following criteria:
(i) Whether the stock option plan is incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Anti-takeover and related provisions that serve to prevent the
majority of shareholders from exercising their rights or effectively
deter the appropriate tender offers and other offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals are generally supported, subject to
the review and approval of the Proxy Review Committee, as appropriate:
- Requiring auditors to attend the annual meeting of shareholders.
- Requirement that members of the company's compensation, nominating
and audit committees be comprised of independent or unaffiliated
Directors.
- Requirement that a certain percentage of its Board's members be
comprised of independent and unaffiliated Directors.
- Confidential voting.
- Reduction or elimination of supermajority vote requirements.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Restoring cumulative voting in the election of directors.
B-64
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Requiring shareholder approval for bylaw or charter amendments.
- Requiring shareholder approval for shareholder rights plan or poison
pill.
- Requiring shareholder approval of golden parachutes.
- Elimination of certain anti-takeover related provisions.
- Prohibit payment of greenmail.
3. The following shareholder proposals are generally not supported,
subject to the review and approval of the Committee, as appropriate.
- Requirements that the issuer prepare reports that are costly to
provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
- Restrictions related to social, political or special interest issues
that impact the ability of the company to do business or be
competitive and that have a significant financial or best interest
impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
IV. ADMINISTRATION OF PROXY POLICIES AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them. Following are some of
the functions and responsibilities of the Committee.
(a) The Committee, which will consist of members designated by MSIM's
Chief Investment Officer, is responsible for establishing MSIM's
proxy voting policies and guidelines and determining how MSIM will
vote proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend as necessary MSIM's proxy voting policies and guidelines (as
expressed in these Proxy Voting Policy and Procedures) and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other matters):
(1) address any outstanding issues relating to MSIM's Proxy Voting
Policy and Procedures; and (2) generally review proposals at
upcoming shareholder meetings of MSIM portfolio companies in
accordance with this Policy and Procedures including, as
appropriate, the voting results of prior shareholder
B-65
meetings of the same issuer where a similar proposal was presented
to shareholders. The Committee, or its designee, will timely
communicate to ISS MSIM's Proxy Voting Policy and Procedures (and
any amendments to them and/or any additional guidelines or
procedures it may adopt).
(d) The Committee will meet on an ad hoc basis to (among other
matters): (1) authorize "split voting" (i.e., allowing certain
shares of the same issuer that are the subject of the same proxy
solicitation and held by one or more MSIM portfolios to be voted
differently than other shares) and/or "override voting" (i.e.,
voting all MSIM portfolio shares in a manner contrary to the
Procedures); (2) review and approve upcoming votes, as
appropriate, for matters for which specific direction has been
provided in Sections I, II, and III above; and (3) determine how
to vote matters for which specific direction has not been provided
in Sections I, II and III above. Split votes will generally not be
approved within a single Global Investor Group team. The Committee
may take into account ISS recommendations and the research
provided by IRRC as well as any other relevant information they
may request or receive.
(e) In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will designate a special
committee to review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee"). The Special
Committee may request the assistance of the Law and Compliance
Departments and will have sole discretion to cast a vote. In
addition to the research provided by ISS and IRRC, the Special
Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems
appropriate.
(f) The Committee and the Special Committee, or their designee(s),
will document in writing all of their decisions and actions, which
documentation will be maintained by the Committee and the Special
Committee, or their designee(s) for a period of at least 6 years.
To the extent these decisions relate to a security held by a MSIM
U.S. registered investment company, the Committee and Special
Committee, or their designee(s), will report their decisions to
each applicable Board of Trustees/Directors of those investment
companies at each Board's next regularly Scheduled Board meeting.
The report will contain information concerning decisions made by
the Committee and Special Committee during the most recently ended
calendar quarter immediately preceding the Board meeting.
(g) The Committee and Special Committee, or their designee(s), will
timely communicate to applicable PMs, the Compliance Departments
and, as necessary to ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
B-66
APPENDIX D
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the
combination of Van Kampen International Advantage Fund and Van Kampen
International Magnum Fund. The statements are presented as of March 31, 2004,
the most recent interim period for which financial information is currently
available.
The unaudited Pro Forma Portfolio of Investments and Pro Forma Condensed
Statement of Assets and Liabilities reflect the financial position as if the
transaction occurred on March 31, 2004. The Pro Forma Condensed Statement of
Operations reflects the expenses for the twelve months ended March 31, 2004. The
pro forma statements give effect to the proposed exchange of Van Kampen
International Advantage Fund shares for the assets and liabilities of Van Kampen
International Magnum Fund, with Van Kampen International Advantage Fund being
the surviving entity. The proposed transaction will be accounted for as a
tax-free reorganization in accordance with accounting principles generally
accepted in the United States. The historical cost basis of the investments is
carried over to the surviving entity. It is not anticipated that Van Kampen
International Advantage Fund will sell any securities of Van Kampen
International Magnum Fund acquired in the reorganization other than in the
ordinary course of business.
D-1
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND
VAN KAMPEN INTERNATIONAL MAGNUM FUND
PROFORMA PORTFOLIO OF INVESTMENTS
March 31, 2004
(Unaudited)
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- -----------------------------------------------------------------------------------------------------------------------------------
COMMON AND PREFERRED STOCKS 94.3%
AUSTRALIA 2.9%
Amcor, Ltd. 9,150 9,150 $ -- $ 56,016.00 $56,016.00
AMP, Ltd. 71,900 71,900 309,771 309,771
Australia and New Zealand Banking Group, Ltd. 9,572 9,572 138,882 138,882
BHP Biliton, Ltd. 40,978 40,978 384,454 384,454
Coles Myer, Ltd. 10,650 10,650 66,177 66,177
Commonwealth Bank of Australia 7,750 7,750 197,492 197,492
Foster's Brewing, Ltd. 40,100 40,100 134,714 134,714
National Australia Bank, Ltd. 6,325 7,700 14,025 150,046 182,665 332,711
News Corp., Ltd. 29,940 29,940 269,899 269,899
Qantas Airways, Ltd. 36,568 26,963 63,531 95,424 70,360 165,784
Rio Tinto, Ltd. 3,767 11,200 14,967 99,194 294,921 394,115
Westpac Banking Corp., Ltd. 13,400 13,400 179,964 179,964
------------- ------------- ----------
344,664 2,285,315 2,629,979
------------- ------------- ----------
BRAZIL 0.1%
Petroleo Brasileiro, SA - ADR 1,934 1,934 64,789 64,789
------------- ------------- ----------
BELGIUM 0.9%
AGFA-Gevaert, NV 8,696 8,696 213,277 213,277
Fortis 14,748 14,748 314,157 314,157
Solvay, SA 3,626 3,626 291,825 291,825
------------- ------------- ----------
819,259 819,259
------------- ------------- ----------
BERMUDA 0.5%
Esprit Holdings, Ltd. 66,000 66,000 276,099 276,099
Li & Fung, Ltd. 94,400 94,400 144,153 144,153
------------- ------------- ----------
420,252 420,252
------------- ------------- ----------
CANADA 0.1%
Inco, Ltd. 2,127 2,127 73,145 73,145
------------- ------------- ----------
DENMARK 0.5%
Danske Bank A/S 7,519 7,519 170,273 170,273
Novo-Nordisk A/S 6,119 6,119 284,219 284,219
------------- ------------- ----------
454,492 454,492
------------- ------------- ----------
FINLAND 2.7%
Nokia Oyj 7,999 72,839 80,838 164,191 1,495,123 1,659,314
Pohjola Group Plc, Series D 2,734 2,734 80,747 80,747
Sampo Oyj, Series A 26,145 26,145 305,653 305,653
Stora Enso Oyj 9,240 9,240 116,437 116,437
TietoEnator Oyj 8,466 8,466 258,269 258,269
------------- ------------- ----------
280,628 2,139,792 2,420,420
------------- ------------- ----------
FRANCE 9.2%
Atos Origin 2,760 2,760 180,182 180,182
Aventis, SA 1,076 6,065 7,141 82,824 466,847 549,671
Axa 35,718 35,718 746,348 746,348
BNP Paribas, SA 2,290 17,251 19,541 182,981 1,055,722 1,238,703
Cap, Gemini SA (a) 3,339 3,888 7,227 127,501 148,465 275,966
Carrefour, SA (a) 5,996 5,996 296,180 296,180
France Telecom, SA (a) 26,989 26,989 691,487 691,487
Groupe Danone 1,673 1,673 274,643 274,643
L'Oreal, SA 2,612 2,612 200,253 200,253
M6 - Metropole Television 3,111 6,526 9,637 93,413 195,954 289,367
Neopost, SA (a) 3,143 3,143 169,486 169,486
Peugeot, SA 4,731 4,731 241,379 241,379
Schneider Electric, SA 2,301 13,617 15,918 150,075 888,125 1,038,200
Societe Generale 4,334 4,334 370,673 370,673
Technip, SA 1,215 1,215 164,470 164,470
Total, SA, Class B 1,164 6,442 7,606 214,003 1,184,372 1,398,375
Vinci, SA 2,643 2,643 254,018 254,018
------------- ------------- ----------
850,797 7,528,604 8,379,401
------------- ------------- ----------
D-2
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
GERMANY 6.0%
Adidas-Salomon, AG 2,528 2,528 294,421 294,421
Allianz, AG 2,646 4,653 7,299 288,420 507,379 795,799
BASF, AG 2,575 2,575 130,966 130,966
Bayerische Motoren Werke AG 5,219 5,219 212,520 212,520
Duetsche Bank, AG 1,842 1,842 153,347 153,347
Deutsche Boerse, AG 9,886 9,886 561,691 561,691
Deutsche Telekom, AG (a) 8,195 10,492 18,687 147,439 188,765 336,204
E.On, AG 2,481 2,647 5,128 163,647 174,596 338,243
Fresenius Medical Care, AG 4,047 4,047 267,239 267,239
Infineon Technologies, AG 14,923 14,923 218,534 218,534
Munchener Ruckversicherungs 693 693 77,068 77,068
Porsche AG - Preferred Stock 201 389 590 121,454 235,053 356,507
SAP, AG 1,094 1,746 2,840 173,198 276,421 449,619
Siemens, AG 2,252 11,568 13,820 166,473 855,131 1,021,604
Volkswagen, AG 5,022 5,022 219,640 219,640
------------- ------------- ----------
1,564,584 3,868,818 5,433,402
------------- ------------- ----------
HONG KONG 1.6%
Cathay Pacific Airways, Ltd. 104,000 104,000 212,194 212,194
Cheung Kong Holdings, Ltd. 22,100 22,100 185,045 185,045
Great Eagle Holding Co. 50,000 50,000 88,543 88,543
Henderson Land Development Co., Ltd. 95,000 95,000 454,712 454,712
Hong Kong & China Gas Co., Ltd. 59,000 59,000 100,695 100,695
Hysan Development Co., Ltd. 97,000 97,000 168,039 168,039
Sun Hung Kai Properties, Ltd. 11,000 11,000 100,573 100,573
Television Broadcasts, Ltd. 26,000 26,000 122,112 122,112
------------- ------------- ----------
100,573 1,331,340 1,431,913
------------- ------------- ----------
INDIA 0.1%
Ranbaxy Laboratories, Ltd. - GDR 3,913 3,913 89,216 89,216
------------- ------------- ----------
INDONESIA 0.1%
PT Telekomunikasi Indonesia - ADR 3,184 3,184 53,650 53,650
------------- ------------- ----------
IRELAND 0.8%
Allied Irish Banks Plc (a) 18,321 18,321 273,706 273,706
Bank of Ireland 35,002 35,002 437,622 437,622
------------- ------------- ----------
711,328 711,328
------------- ------------- ----------
ISRAEL 0.1%
Teva Pharmaceutical Industries, Ltd. - ADR 1,034 1,034 65,566 65,566
------------- ------------- ----------
ITALY 3.0%
ENI S.p.A. 3,727 35,843 39,570 75,034 721,613 796,647
Telecom Italia S.p.A. (a) 200,535 200,535 629,285 629,285
Telecom Italia S.p.A.-RNC (a) 45,278 200,277 245,555 142,084 455,952 598,036
UniCredito Italiano S.p.A. 25,874 115,679 141,553 123,541 552,336 675,877
------------- ------------- ----------
340,659 2,359,186 2,699,845
------------- ------------- ----------
JAPAN 22.3%
Amada Co., Ltd. 43,000 43,000 276,262 276,262
Canon, Inc. 3,000 8,000 11,000 155,056 413,482 568,538
Casio Computer Co., Ltd. 27,000 27,000 320,525 320,525
Dai Nippon Printing Co., Ltd. 9,000 16,000 25,000 148,526 264,046 412,572
Daiwa Securities Group, Inc. 23,000 23,000 187,467 187,467
Daicel Chemical Industries, Ltd. 47,000 47,000 214,077 214,077
Daifuku Co., Ltd. 37,000 37,000 207,556 207,556
Daikin Industries, Ltd. 16,000 16,000 401,975 401,975
Denki Kagaku Kogyo KK 63,000 63,000 223,522 223,522
Denso Corp. 6,500 6,500 147,720 147,720
East Japan Railway Co. 49 49 257,017 257,017
FamilyMart Co., Ltd. 11,100 11,100 340,605 340,605
Fanuc, Ltd. 2,100 2,100 131,495 131,495
Fuji Machine Manufacturing Co. 8,900 8,900 116,152 116,152
Fuji Photo Film Co., Ltd. 10,000 10,000 317,399 317,399
Fujitec Co., Ltd. 15,000 15,000 80,980 80,980
Fujitsu, Ltd. (a) 52,000 52,000 331,591 331,591
Furukawa Electric Co., Ltd. 32,000 32,000 124,275 124,275
Hitachi Capital Corp. 17,100 17,100 321,880 321,880
Hitachi High-Technologies Corp. 5,000 5,000 79,494 79,494
Hitachi, Ltd. 53,000 53,000 410,136 410,136
Honda Motor Co. 3,400 3,400 156,494 156,494
House Foods Corp. 9,800 9,800 133,442 133,442
Kaneka Corp. 38,000 38,000 380,419 380,419
Kao Corp. 7,000 7,000 159,755 159,755
Kurita Water Industries, Ltd. 17,100 17,100 225,464 225,464
Kyocera Corp. 4,400 4,400 368,759 368,759
D-3
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Kyudenko Co., Ltd. 14,000 14,000 64,036 64,036
Lintec Corp. 11,000 11,000 184,063 184,063
Matsushita Electric Industrial Co., Ltd. 12,000 31,000 43,000 185,031 477,998 663,029
Millea Holdings, Inc. 8 8 124,275 124,275
Minebea Co., Ltd. 38,000 38,000 190,938 190,938
Mitsubishi Chemical Corp. 85,000 85,000 259,194 259,194
Mitsubishi Corp. 35,000 35,000 412,811 412,811
Mitsubishi Estate Co., Ltd. 13,000 22,000 35,000 175,893 297,665 473,558
Mitsubishi Heavy Industries, Ltd. 82,000 82,000 265,772 265,772
Mitsubishi Logistics Corp. 11,000 11,000 117,294 117,294
Mitsui Sumitomo Insurance Co., Ltd. 7,000 7,000 74,373 74,373
Mitsumi Electric Co., Ltd. 16,200 16,200 188,121 188,121
Nagase & Co., Ltd. 14,000 14,000 127,267 127,267
NEC Corp. 49,000 49,000 402,205 402,205
Nifco, Inc. 12,000 12,000 179,278 179,278
Nintendo Co., Ltd. 3,700 3,700 372,892 372,892
Nippon Meat Packers, Inc. 14,000 14,000 164,185 164,185
Nippon Telegraph & Telephone Corp. 58 58 328,139 328,139
Nissan Motor Co., Ltd. 41,900 41,900 468,078 468,078
Nissha Printing Co., Ltd. 6,000 6,000 97,234 97,234
Nisshinbo Industries, Inc. 21,000 21,000 146,196 146,196
NTT DoCoMo, Inc. 92 92 202,906 202,906
Obayashi Corp. 43,000 43,000 234,617 234,617
Ono Pharmaceutical Co., Ltd. 7,000 7,000 318,167 318,167
Promise Co., Ltd. 1,300 1,300 89,131 89,131
Ricoh Co., Ltd. 21,000 21,000 430,934 430,934
Rinnai Corp. 4,600 4,600 123,287 123,287
Rohm Co., Ltd. 1,500 1,500 193,748 193,748
Ryosan Co., Ltd. 8,800 8,800 192,396 192,396
Sangetsu Co., Ltd. 1,300 1,300 30,978 30,978
Sanki Engineering Co., Ltd. 6,000 6,000 39,124 39,124
Sankyo Co., Ltd. 17,100 17,100 371,400 371,400
Sanwa Shutter Corp. 31,000 31,000 178,357 178,357
Sekisui Chemical Co., Ltd. 38,000 38,000 259,078 259,078
Sekisui House, Ltd. 23,000 23,000 258,705 258,705
Shin-Etsu Chemical Co., Ltd. 4,900 4,900 205,801 205,801
Shin-Etsu Polymer Co., Ltd. 22,000 22,000 134,804 134,804
SMC Corp. 1,200 1,200 142,801 142,801
Sony Corp. 4,300 8,400 12,700 179,777 351,191 530,968
Sumitomo Chemical, Ltd. 36,000 36,000 169,152 169,152
Sumitomo Electric Industries, Ltd. 12,000 12,000 108,971 108,971
Sumitomo Trust and Banking Co., Ltd. 24,000 24,000 159,486 159,486
Suzuki Motor Co., Ltd. 18,000 18,000 279,446 279,446
Takeda Chemical Industries, Ltd. 3,300 3,300 146,828 146,828
TDK Corp. 2,200 5,100 7,300 167,713 388,790 556,503
Toho Co., Ltd. 5,400 5,400 88,546 88,546
Tokyo Electric Power Co., Inc. 3,300 10,400 13,700 74,522 234,856 309,378
Toshiba Corp. (a) 27,000 93,000 120,000 122,204 420,923 543,127
Toyo Ink Mfg Co, Ltd. 22,000 22,000 101,894 101,894
Toyota Motor Corp. 13,900 13,900 517,160 517,160
Tsubakimoto Chain Co. 40,000 40,000 153,426 153,426
Yamaha Corp. 20,100 20,100 374,881 374,881
Yamaha Motor Co. 13,000 13,000 178,386 178,386
Yamanouchi Pharmaceutical Co., Ltd. 11,300 11,300 387,918 387,918
------------- ------------- ----------
3,415,377 16,795,436 20,210,813
------------- ------------- ----------
NETHERLANDS 6.2%
Aegon, NV 21,012 21,012 268,917 268,917
ASML Holdings, NV 8,920 8,920 163,666 163,666
EADS (a) 7,706 9,986 17,692 166,427 215,668 382,095
Koninklijke (Ahold), NV (a) 14,616 14,616 119,790 119,790
Koninklijke (Royal) Philips Electronics, NV (a) 8,193 13,616 21,809 237,237 394,265 631,502
Koninkliske Numico, NV (a) 3,523 10,738 14,261 104,050 317,140 421,190
Royal Dutch Petroleum Co. 7,460 18,755 26,215 354,818 892,038 1,246,856
STMicroelectronics, NV 10,380 16,478 26,858 244,998 388,929 633,927
Unilever, NV CVA 3,339 9,322 12,661 230,719 644,133 874,852
VNU, NV 6,043 6,043 173,271 173,271
Wolters Kluwer, NV 12,427 27,441 39,868 212,721 469,725 682,446
------------- ------------- ----------
2,007,697 3,590,815 5,598,512
------------- ------------- ----------
D-4
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
MEXICO 0.1%
Fomento Economico Mexicano SA de C.V. 15,371 15,371 75,681 75,681
Wal-Mart de Mexico SA de C.V. 24,142 24,142 73,772 73,772
------------- ------------- -----------
149,453 149,453
------------- ------------- -----------
NORWAY 0.6%
DnB Holding, ASA (a) 48,056 48,056 315,323 315,323
Telenor, ASA 18,834 15,822 34,656 130,721 109,816 240,537
------------- ------------- -----------
130,721 425,139 555,860
------------- ------------- -----------
REPUBLIC OF KOREA 0.1%
Kookmin Bank (a) 2,698 2,698 109,761 109,761
------------- ------------- -----------
RUSSIA 0.1%
YUKOS Corp. - ADR 1,507 1,507 91,023 91,023
------------- ------------- -----------
SINGAPORE 1.4%
CapitaLand, Ltd. 161,000 161,000 161,558 161,558
City Developments, Ltd. 31,000 31,000 112,949 112,949
Neptune Orient Lines Ltd. (a) 119,000 119,000 155,662 155,662
Oversea-Chinese Banking Corp., Ltd. 24,000 24,000 176,323 176,323
Sembcorp Industries, Ltd. 111,000 111,000 102,102 102,102
Singapore Airlines, Ltd. 45,000 45,000 295,664 295,664
United Overseas Bank, Ltd. 13,000 13,000 104,050 104,050
Venture Corp., Ltd. 18,000 18,000 207,502 207,502
------------- ------------- -----------
104,050 1,211,760 1,315,810
------------- ------------- -----------
SPAIN 1.8%
ACS Actividades Cons y Serv 4,329 4,329 212,025 212,025
Amadeus Global Travel Distribution, SA 20,047 20,047 113,728 113,728
Banco Bilbao Vizcaya, SA (a) 34,818 34,818 461,462 461,462
Grupo Ferrovial, SA 3,638 3,638 147,962 147,962
Telefonica, SA (a) 47,463 47,463 719,002 719,002
------------- ------------- -----------
113,728 1,540,451 1,654,179
------------- ------------- -----------
SWEDEN 1.0%
Assa Abloy AB 18,122 18,122 221,088 221,088
Autoliv, Inc. - SDR 5,354 5,354 217,966 217,966
Electrolux AB, Class B 5,453 5,453 111,359 111,359
Securitas AB, Class B (a) 12,419 12,419 179,508 179,508
SKF AB, Class B 5,867 5,867 212,398 212,398
------------- ------------- -----------
942,319 942,319
------------- ------------- -----------
SWITZERLAND 8.7%
ABB, Ltd. (a) 44,190 44,190 260,732 260,732
CIBA Specialty Chemicals AG 3,734 3,734 254,970 254,970
Compagnie Financiere Richemont, AG 6,441 6,441 173,229 173,229
Converium Holdings, AG 2,409 4,090 6,499 117,972 200,292 318,264
Credit Suisse Group (a) 4,248 11,550 15,798 147,298 400,494 547,792
Holcim, Ltd. 1,760 6,126 7,886 94,183 327,820 422,003
Nestle, SA 675 2,321 2,996 172,209 592,143 764,352
Novartis AG 5,797 31,296 37,093 246,340 1,329,904 1,576,244
Roche Holding AG 3,326 3,326 325,100 325,100
Schindler Holding, AG (Registered) 666 666 212,259 212,259
Swiss Reinsurance (a) 4,424 4,424 305,055 305,055
Swisscom AG 628 628 206,349 206,349
Syngenta AG 1,703 11,339 13,042 124,290 827,553 951,843
UBS AG (a) 3,904 17,584 21,488 290,167 1,306,942 1,597,109
------------- ------------- -----------
1,365,688 6,549,613 7,915,301
------------- ------------- -----------
TAIWAN-REPUBLIC OF CHINA 0.4%
Hon Hai Precision Industry Co., Ltd. - GDR 16,874 16,874 165,365 165,365
Taiwan Semiconductor Manufacturing Co., Ltd. - ADR (a) 21,657 21,657 226,099 226,099
------------- ------------- -----------
391,464 391,464
------------- ------------- -----------
UNITED KINGDOM 23.0%
3i Group Plc 9,823 9,823 113,919 113,919
Allied Domecq Plc 55,186 55,186 459,652 459,652
Amvescap Plc 28,120 4,838 32,958 207,644 35,725 243,369
AstraZeneca Group Plc 16,076 16,076 747,820 747,820
Barclays Plc 20,593 88,610 109,203 181,963 782,973 964,936
BOC Group Plc 24,617 24,617 408,715 408,715
BP Plc 9,844 56,392 66,236 82,763 474,116 556,879
British American Tobacco Plc 22,144 22,144 334,177 334,177
British Sky Broadcasting Plc (a) 10,360 15,867 26,227 129,602 198,494 328,096
D-5
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
Cadbury Schweppes Plc 12,865 21,777 34,642 101,758 172,249 274,007
Celltech Group Plc (a) 5,924 5,924 50,844 50,844
Compass Group Plc 35,283 35,283 233,215 233,215
Corus Group Plc (a) 174,144 174,144 132,445 132,445
Diageo Plc 31,785 31,785 415,499 415,499
EMAP Plc 5,842 5,842 93,386 93,386
GlaxoSmithKline Plc 19,599 74,611 94,210 385,929 1,469,184 1,855,113
GUS Plc 11,779 11,779 162,664 162,664
Hays Plc 226,609 226,609 520,174 520,174
HBOS Plc 11,503 11,503 156,520 156,520
HSBC Holdings Plc 16,651 56,049 72,700 248,365 836,023 1,084,388
Intercontinental Hotels Group 8,787 8,787 80,519 80,519
ITV Plc 100,300 100,300 246,417 246,417
Jarvis Plc 38,895 38,895 129,083 129,083
Lloyds TSB Group Plc 8,479 77,034 85,513 64,643 587,300 651,943
MFI Furniture Group Plc 47,811 75,008 122,819 129,583 203,295 332,878
Misys Plc 30,120 30,120 114,261 114,261
National Grid Transco Plc 15,470 36,366 51,836 122,648 288,314 410,962
Pearson Plc 12,494 12,494 142,476 142,476
Prudential Plc 23,755 94,359 118,114 195,997 778,535 974,532
Reed Elsevier Plc 76,454 76,454 678,732 678,732
Rentokil Initial Plc 150,220 150,220 504,774 504,774
Rolls-Royce Group Plc 47,693 47,693 197,851 197,851
Royal Bank of Scotland Group Plc 10,247 47,696 57,943 313,244 1,458,037 1,771,281
Scottish & Southern Energy Plc 13,059 13,059 165,533 165,533
Shell Transport & Trading Co. Plc 131,485 131,485 861,822 861,822
Smith & Nephew Plc (a) 26,503 26,503 261,672 261,672
Smiths Group Plc 13,501 39,807 53,308 159,561 470,456 630,017
Standard Chartered Plc 7,136 7,136 119,860 119,860
Tesco Plc 59,523 59,523 269,700 269,700
Vedanta Resources Plc (a) 18,290 24,783 43,073 111,283 150,789 262,072
Vodafone Group Plc 87,124 823,621 910,745 206,817 1,955,134 2,161,951
WPP Group Plc 27,428 27,428 278,390 278,390
Yell Group Plc 75,412 75,412 448,059 448,059
------------- ------------- -----------
3,202,804 17,627,799 20,830,603
------------- ------------- -----------
TOTAL COMMON AND PREFERRED STOCKS 94.3% 14,910,037 70,601,718 85,511,755
------------- ------------- -----------
INVESTMENT COMPANY 0.8%
UNITED KINGDOM 0.2%
Templeton Emerging Markets Investment Trust Plc 56,195 56,195 151,528 151,528
------------- ------------- -----------
UNITED STATES 0.6%
iShares MSCI Emerging Markets Index 2,967 2,967 520,708 520,708
------------- ------------- -----------
TOTAL INVESTMENT COMPANY 0.8% 672,236 672,236
------------- ------------- -----------
TOTAL LONG-TERM INVESTMENTS 95.1%
(Cost $68,857,764) 15,582,273 70,601,718 86,183,991
------------- ------------- -----------
SHORT-TERM INVESTMENTS 2.7%
REPURCHASE AGREEMENT 2.5%
State Street Bank & Trust Co. ($2,258,000 par
collateralized by U.S. Government obligations
in a pooled cash account, interest rate of
0.65%, dated 03/31/04, to be sold on 04/01/04
at $2,258,041)
(Cost $2,258,000) 2,258,000 2,258,000
EURODOLLAR TIME DEPOSIT 0.2%
State Street Bank & Trust Corp. ($210,000 par
collateralized by U.S. Government Obligations
in a pooled cash account, 0.00% coupon, dated
03/31/04, to be sold on 04/01/04 at $210,000)
(Cost $210,000) 210,000 210,000
------------- ------------- -----------
TOTAL SHORT-TERM INVESTMENTS
(Cost $2,468,000) 210,000 2,258,000 2,468,000
------------- ------------- -----------
D-6
INTERNATIONAL INTERNATIONAL INTERNATIONAL INTERNATIONAL
ADVANTAGE MAGNUM ADVANTAGE MAGNUM PROFORMA
FUND FUND PROFORMA MARKET MARKET MARKET
DESCRIPTION SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS 97.8%
(Cost $71,325,764) 15,792,273 72,859,718 88,651,991
FOREIGN CURRENCY 0.3%
(Cost $258,251) 44,548 216,874 261,422
OTHER ASSETS IN EXCESS OF LIABILITIES 1.9% (99,121) 1,843,832 1,744,711
------------- ------------- -----------
NET ASSETS 100.0% $ 15,737,700 $ 74,920,424 $90,658,124
============= ============= ===========
(a) Non-income producing security as this stock currently does not declare
dividends.
ADR - American Depositary Receipt
GDR - Global Depositary Receipt
SDR - Stockholm Depositary Receipt
D-7
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND - VAN KAMPEN INTERNATIONAL MAGNUM FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
March 31, 2004
(Unaudited)
Amounts in Thousands
International International
Advantage Magnum
Fund Fund Adjustments(1) Pro Forma(2)
------------- ------------- -------------- ------------
Total Investments (Cost of $13,879, $57,447 and $71,326, respectively)... $ 15,792 $ 72,860 $ 88,652
Foreign Currency (Cost of $44, $214 and $258, respectively) ............. 45 217 262
Other Assets Less Liabilities ........................................... (99) 1,843 $ (31) 1,713
------------- ------------- ----------- --------
NET ASSETS .............................................................. $ 15,738 $ 74,920 $ (31) $ 90,627
============= ============= =========== ========
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share) ................................... $ 13,260 $ 83,217 $ 96,477
Net Unrealized Appreciation ............................................. 1,907 15,779 17,686
Accumulated Undistributed Net Investment Loss ........................... (36) (172 (31) (239)
Accumulated Net Realized Gain/Loss ...................................... 607 (23,904 (23,297)
------------- ------------- ----------- --------
NET ASSETS .............................................................. $ 15,738 $ 74,920 $ (31) $ 90,627
============= ============= =========== ========
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE:
CLASS A
Net Assets .................................................... $ 11,746 $ 42,681 $ (23) $ 54,404
Shares Outstanding ............................................ 998 3,491 135 4,624
------------- ------------- --------
Net Asset Value and Redemption Price Per Share ................ 11.77 12.23 11.77
Maximum Sales Charge (5.75%* of offering price) ............... 0.72 0.75 0.72
------------- ------------- --------
Maximun Offering Price to Public .............................. $ 12.49 $ 12.98 $ 12.49
============= ============= ========
CLASS B
Net Assets .................................................... $ 2,525 $ 25,443 $ (5) $ 27,963
Shares Outstanding ............................................ 217 2,141 43 2,401
------------- ------------- --------
Net Asset Value and Offering Price Per Share .................. $ 11.65 $ 11.88 $ 11.65
============= ============= ========
CLASS C
Net Assets ................................................. $ 1,467 $ 6,796 $ (3) $ 8,260
Shares Outstanding ......................................... 125 569 10 704
------------- ------------- --------
Net Asset Value and Offering Price Per Share ............... $ 11.74 $ 11.94 $ 11.74
============= ============= ========
* ON SALES OF $50,000 OR MORE, THE SALES CHARGE WILL BE REDUCED.
(1) A non-recurring cost associated with this transaction of approximately
$359,000 will be incurred. Of this cost approximately $328,000 will be borne
by Van Kampen Asset Management and approximately $31,000 by Van Kampen
International Advantage Fund.
(2) The pro forma statements presume the issuance by Van Kampen International
Advantage Fund of approximately 3,626,000 Class A shares, 2,184,000 Class B
shares, and 579,000 Class C shares in exchange for the assets and
liabilities of the Van Kampen International Magnum Fund.
D-8
VAN KAMPEN INTERNATIONAL ADVANTAGE FUND - VAN KAMPEN INTERNATIONAL MAGNUM FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Twelve Months Ended March 31, 2004
(Unaudited)
Amounts in Thousands
International International
Advantage Magnum
Fund Fund Adjustments(1) Pro Forma
------------- ------------- -------------- ---------
INVESTMENT INCOME:
Dividends ................................... $ 189 $ 1,492 $ 1,681
Interest .................................... 1 41 42
------------- ------------- ----------- ---------
Total Income ......................... 190 1,533 1,723
------------- ------------- ----------- ---------
EXPENSES:
Investment Advisory Fee ..................... 83 534 $ 65 682
Distribution (12b-1) and Service Fees ....... 23 390 413
All Other Expenses (1) ...................... 190 666 (110) 746
------------- ------------- ----------- ---------
Total Expense ............................. 296 1,590 (45) 1,841
Investment Advisory Fee Reduction ......... 83 104 398 585
Other Expenses Reduction .................. 37 156 (193) 0
Less Credits Earned on Cash Balances ...... 0 5 5
------------- ------------- ----------- ---------
Net Expenses .............................. 176 1,325 (250) 1,251
------------- ------------- ----------- ---------
NET INVESTMENT INCOME ........................... $ 14 $ 208 $ 250 $ 472
============= ============= =========== =========
REALIZED AND UNREALIZED GAIN/LOSS :
Net Realized Gain ........................... $ 870 $ 3,652 $ 4,522
Net Unrealized Appreciation During the
Period .................................... 2,416 23,539 25,955
------------- ------------- ----------- ---------
NET REALIZED AND UNREALIZED GAIN ................ $ 3,286 $ 27,191 $ 30,477
============= ============= =========== =========
NET INCREASE IN NET ASSETS FROM OPERATIONS ...... $ 3,300 $ 27,399 $ 250 $ 30,949
============= ============= =========== =========
(1) Reflects the reduction in other operating expenses as a result of the
elimination of certain duplicative expenses and the result of operating a
larger, more efficient fund.
D-9
PART C:
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Pursuant to Del. Code Ann. Title 12 Section 3817, a Delaware statutory
trust may provide in its governing instrument for the indemnification of its
officers and trustees from and against any and all claims and demands
whatsoever.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust. Article 8, Section 8.4 of the Agreement and
Declaration of Trust provides that each officer and trustee of the Registrant
shall be indemnified by the Registrant against all liabilities incurred in
connection with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, in which the officer or trustee may be or
may have been involved by reason of being or having been an officer or trustee,
except that such indemnity shall not protect any such person against a liability
to the Registrant or any shareholder thereof to which such person would
otherwise be subject by reason of (i) not acting in good faith in the reasonable
belief that such person's actions were not in the best interests of the Fund,
(ii) having acted with willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office or
(iii) for a criminal proceeding had reasonable cause to believe the conduct was
unlawful (collectively, "Disabling Conduct"). Absent a court determination that
an officer or trustee seeking indemnification was not liable on the merits or
guilty of Disabling Conduct in the conduct of his or her office, the decision by
the Registrant to indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent trustees, after
review of the facts, that such officer or trustee is not guilty of Disabling
Conduct in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to trustees, officers and
controlling persons of the Registrant pursuant to the foregoing provisions or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by the trustee, officer,
or controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such trustee, officer or controlling person
in connection with the shares being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
Pursuant to Section 7 of the Distribution and Service Agreement, the
Registrant agrees to indemnify and hold harmless Van Kampen Funds Inc. (the
"Distributor") and each of its trustees and officers and each person if any, who
controls the Distributor within the meaning of Section 15 of the 1933 Act
against any loss, liability, claim damages or expense (including the reasonable
cost of investing or defending any alleged loss, liability, claim, damages, or
expense and reasonable counsel fees) arising by reason of any person acquiring
C-1
any shares, based upon the ground that the Registration Statement, prospectus,
shareholder reports or other information filed or made public by the Registrant
(as from time to time amended) included an untrue statement of a material fact
or omitted to state a material fact required to be stated or necessary in order
to make the statements not misleading under the 1933 Act, or any other statute
or the common law. The Registrant does not agree to indemnify the Distributor or
hold it harmless to the extent that the statement or omission was made in
reliance upon, and in conformity with, information furnished to the Registrant
by or on behalf of the Distributor. In no case is the indemnity of the
Registrant in favor of the Distributor or any person indemnified to be deemed to
protect the Distributor or any person against any liability to the Fund or its
security holders to which the Distributor or such person would otherwise be
subject by reason of willful misfeasance, bad faith or gross negligence in the
performance of its duties or by reason of its reckless disregard of its
obligations and duties under the agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses,
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided
that Investor Services acted in good faith with due diligence and without
negligence or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information, records and documents which have been prepared on
behalf of, or have been furnished by, the Fund, or the carrying out by
Investor Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal
or state law or regulation or ruling by any federal agency unless such
violation results from any failure by Investor Services to comply with
written instructions from the Fund that such offers or sales were not
permitted under such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement, or
the Fund's lack of good faith, negligence or willful misconduct or breach
of any representation or warranty made by the Fund under the agreement
provided that if the reason for such failure is attributable to any action
of the Fund's investment adviser or distributor or any person providing
accounting or legal services to the Fund, Investor Services only will be
entitled to indemnification if such entity is otherwise entitled to the
indemnification from the Fund.
ITEM 16. EXHIBITS
<Table>
(1) (a) Agreement and Declaration of Trust(1)
(b) Certificate of Designation(5)
(2) Bylaws(1)
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization (included as
Appendix A to the Reorganization SAI)+
(5) Specimen Share Certificates(5)
(6) Investment Advisory Agreement(5)
(7) (a) Distribution and Service Agreement(5)
(b) Form of Dealer Agreement(8)
(c) Form of Broker Fully Disclosed Selling Agreement(2)
(d) Form of Bank Fully Disclosed Selling Agreement(2)
(8) (a) Form of Trustee Deferred Compensation Plan(3)
(b) Form of the Trustee Retirement Plan(3)
</Table>
C-2
<Table>
(9) (a)(i) Custodian Contract(2)
(ii) Amendment to Custodian Contract(6)
(b) Transfer Agency and Service Agreement(2)
(10) (a) Plan of Distribution Pursuant to 12b-1(5)
(b) Form of Shareholder Assistance Agreement(2)
(c) Form of Administrative Service Agreement(2)
(d) Form of Shareholder Servicing Agreement(7)
(e) Amended and Restated Service Plan(7)
(f) Second Amended and Restated Multi-Class Plan+
(11) (a) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP+
(12) Tax Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
relating to the Reorganization++
(13) (a)(i) Fund Accounting Agreement(2)
(ii) Amendments to Fund Accounting Agreement(4)(8)
(b) Amended and Restated Legal Services Agreement(7)
(14) (a) Consent of Independent Auditors++
(b) Consent of Independent Auditors++
(15) Not Applicable
(16) Power of Attorney(8)
(17) (a) Form of Proxy Card for Target Fund+
(b) Prospectus of Target Fund+
</Table>
- ---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File No. 333-75493, filed April 1, 1999.
(2) Incorporated herein by reference to Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
June 4, 1999.
(3) Incorporated herein by reference to Post-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
December 23, 1999.
(4) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
March 7, 2000.
(5) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
September 25, 2001.
(6) Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
December 20, 2001.
(7) Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
December 20, 2002.
(8) Incorporated herein by reference to Post-Effective Amendment No. 9 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493, filed
December 19, 2003.
+ Filed herewith.
++ To be filed by further amendment.
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant agrees that prior to any public re-offering
of the securities registered through the use of a prospectus which is a part of
this registration statement by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c) of the Securities Act, the
re-offering prospectus will contain the information called for by the applicable
registration form for re-offerings by
C-3
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The undersigned registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as a part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the 1933 Act, each post-effective
amendment shall be deemed to be a new registration statement for the securities
offered therein, and the offering of the securities at that time shall be deemed
to be the initial bona fide offering of them.
(3) The undersigned registrant agrees that, if the Reorganization discussed
in the registration statement closes, the Registrant shall file with the
Securities and Exchange Commission by post-effective amendment an opinion of
counsel supporting the tax matters discussed in the registration statement.
C-4
SIGNATURES
As required by the Securities Act of 1933, this Registration Statement has
been signed on behalf of the Registrant in the City of New York and State of New
York, on the 30th day of June, 2004.
VAN KAMPEN EQUITY TRUST II
By: /s/ STEFANIE V. CHANG YU
------------------------------------
Stefanie V. Chang Yu
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on June 30, 2004.
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
Principal Executive Officer:
/s/ RONALD E. ROBISON* Executive Vice President and
------------------------------------------------------- Principal Executive Officer
Ronald E. Robison
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Treasurer and
------------------------------------------------------- Chief Financial Officer
John L. Sullivan
Trustees:
/s/ DAVID C. ARCH* Trustee
-------------------------------------------------------
David C. Arch
/s/ J. MILES BRANAGAN* Trustee
-------------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
-------------------------------------------------------
Jerry D. Choate
/s/ ROD DAMMEYER* Trustee
-------------------------------------------------------
Rod Dammeyer
/s/ LINDA HUTTON HEAGY* Trustee
-------------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
-------------------------------------------------------
R. Craig Kennedy
/s/ HOWARD J KERR* Trustee
-------------------------------------------------------
Howard J Kerr
/s/ MITCHELL M. MERIN* Trustee and President
-------------------------------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
-------------------------------------------------------
Jack E. Nelson
</Table>
C-5
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ RICHARD F. POWERS, III* Trustee
-------------------------------------------------------
Richard F. Powers, III
/s/ HUGO F. SONNENSCHEIN* Trustee
-------------------------------------------------------
Hugo F. Sonnenschein
/s/ WAYNE W. WHALEN* Trustee and Chairman
-------------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
-------------------------------------------------------
Suzanne H. Woolsey
---------------
* Signed by Stefanie V. Chang Yu pursuant to a Power of Attorney, filed herewith.
/s/ STEFANIE V. CHANG YU
-------------------------------------------------------
Stefanie V. Chang Yu June 30, 2004
Attorney-in-Fact
</Table>
C-6
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN EQUITY TRUST II
<Table>
<Caption>
EXHIBIT
- -------
4 Form of Agreement and Plan of Reorganization (included as
Appendix A to the Reorganization SAI)
10 (f) Second Amended and Restated Multi-Class Plan
11 (a) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP
17 (a) Form of Proxy Card for Target Fund
(b) Prospectus of Target Fund
</Table>