As filed with the Securities and Exchange Commission on September 9, 2005
Securities Act File No.
Investment Company Act File No. 811-9279
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[ ] PRE-EFFECTIVE AMENDMENT NO. _
[ ] POST-EFFECTIVE AMENDMENT NO. _
(CHECK APPROPRIATE BOX OR BOXES)
VAN KAMPEN EQUITY TRUST II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
(800) 341-2929
(AREA CODE AND TELEPHONE NUMBER)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
AMY R. DOBERMAN, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
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.
The Registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
Title of securities being registered: shares of beneficial interest, par value
$0.01 per share. The Registrant has registered an indefinite number of its
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.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
- - Questions and Answers to Shareholders of 1838 International Equity Fund
- - Notice of Special Meeting of Shareholders of 1838 International Equity Fund
- - Proxy Statement/Prospectus regarding the Proposed Reorganization of 1838
International Equity Fund into Van Kampen International Fund
- - Statement of Additional Information regarding the Reorganization of 1838
International Equity Fund into Van Kampen International Fund
- - Part C Information
- - Exhibits
-- NOVEMBER 2005 --
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IMPORTANT NOTICE
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TO 1838 INTERNATIONAL EQUITY FUND
SHAREHOLDERS
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QUESTIONS & ANSWERS
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We recommend that you read the complete Proxy Statement/Prospectus. For your
convenience, we have provided a brief overview of the issue to be voted on.
Q WHY IS A SHAREHOLDER
MEETING BEING HELD?
A You are being asked to
approve a reorganization (the "Reorganization") of 1838 International Equity
Fund (the "Target Fund") into Van Kampen International Fund (the "Acquiring
Fund"), a newly created series of Van Kampen Equity Trust II (the "VK Trust"), a
fund with the same investment objective, substantially similar principal
investment strategies and the same portfolio managers. 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 Class I Shares of Acquiring Fund, and
the Target Fund will be dissolved. Please refer to the Proxy
Statement/Prospectus for a detailed explanation of the proposed Reorganization
and for a more complete description of the Acquiring Fund.
The Target Fund recently announced its appointment of Van Kampen Asset
Management ("VK Asset Management") to serve as interim investment adviser for
the Target Fund as a result of the resignation of 1838 Investment Advisors, LP
as the investment adviser ("1838 Advisors"). VK Asset Management recently
employed the portfolio managers (from 1838 Advisors) to manage the Target Fund
(and, as discussed herein, the Acquiring Fund). In connection with these events,
the Board of Trustees of the VK Trust authorized the creation of a new
fund -- the Acquiring Fund -- with the same investment objective and
substantially similar principal investment strategies as the Target Fund. The
Acquiring Fund was created for the purpose of facilitating the Reorganization.
The proposed Reorganization reflects concerns about the lack of perceived growth
prospects for the current Target Fund and management's belief that this fund can
benefit by the Van Kampen fund family's broader distribution capacity and
capability, that joining the Van Kampen fund
family provides fund shareholders with access to a broader, diversified fund
group and compliments Van Kampen's fund family, and that growth in the fund can
lead to operational efficiencies and economies of scale that benefit
shareholders.
Q HOW DOES THE BOARD OF
TRUSTEES SUGGEST THAT I VOTE FOR THE REORGANIZATION?
A After careful consideration,
the Board of Trustees of the Target Fund (the "Target Fund Board") has
determined that the proposed Reorganization will benefit the Target Fund's
shareholders and recommends that you cast your vote "FOR" the proposed
Reorganization. The Target Fund Board anticipates that as a result of the
Reorganization, shareholders of the Target Fund will benefit from (i) the
continued management of the combined fund by the Target Fund's current portfolio
management team; (ii) the opportunity to be part of the significantly larger Van
Kampen fund complex, with additional product offerings, enhanced shareholder
servicing and exchange options; and (iii) the Van Kampen fund family's
significantly greater distribution capabilities, which could lead to higher
asset levels resulting in operational efficiencies and economies of scale.
Q WHO IS VAN KAMPEN?
A VK Asset Management is
the Acquiring Fund's investment adviser. VK Asset Management also currently
serves as interim investment adviser to the Target Fund pursuant to an interim
investment advisory agreement. VK Asset Management 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 $103 billion under management or
supervision as of August 31, 2005. Van Kampen Funds Inc. (the "Distributor"),
the distributor of the Acquiring Fund and other funds in the Van Kampen funds
family, is also a wholly owned subsidiary of Van Kampen Investments. Van Kampen
Investor Services Inc., the transfer agent of the Acquiring Fund and other funds
in the Van Kampen fund family, is also a wholly owned subsidiary of Van Kampen
Investments.
The current portfolio managers of the Target Fund, who were previously employed
by 1838 Investment Advisors, LP, have been retained as employees of VK Asset
Management, currently serve as portfolio managers for the Target Fund and the
Acquiring Fund and are expected to serve as portfolio managers to the Acquiring
Fund following the closing of the Reorganization.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the proposed Reorganization, the assets and stated
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 Class I Shares
of the Acquiring Fund. The aggregate net asset value of the Class I Shares of
the Acquiring Fund you receive in the Reorganization will equal the aggregate
net asset value of the shares of the Target Fund 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 No. You will pay no sales
loads or commissions in connection with the Reorganization.
Q HOW DO OPERATING
EXPENSES OF THE ACQUIRING FUND COMPARE TO THOSE OF THE TARGET FUND?
A The advisory fee rate and
other expenses of the Target Fund and Class I Shares of the Acquiring Fund are
expected to be substantially similar. The Target Fund's investment adviser
voluntarily has agreed to waive its advisory fees and/or reimburse the Target
Fund so that the Target Fund's total operating expenses do not exceed 1.25% of
average daily net assets of the Target Fund. The voluntary fee waiver and
reimbursement of Target Fund expenses by the Target Fund's investment adviser
may be rescinded at any time. Similarly the Acquiring Fund's investment adviser
voluntarily has agreed to waive its advisory fees and/or reimburse the Acquiring
Fund so that the Acquiring Fund's total operating expenses for the Acquiring
Fund's fiscal year ending August 31, 2006 do not exceed 1.25% of the average
daily net assets for Class I Shares of the Acquiring Fund. After August 31,
2006, the fee waivers and/or expense reimbursements can be terminated at any
time.
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 Class I Shares of the
Acquiring Fund, and we will send you written confirmation that this change has
taken place. No certificates for Class I Shares of the 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 for
Class I Shares 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 MY
SHARES OF THE TARGET FUND BEFORE THE REORGANIZATION TAKES PLACE?
A If you choose to redeem
your shares of the Target Fund before the Reorganization takes place, the
redemption will be treated as a normal redemption of shares and generally will
be a taxable transaction.
Q WHAT HAPPENS IF
SHAREHOLDERS OF THE TARGET FUND DO NOT APPROVE THE REORGANIZATION?
A In the event that the
Reorganization is not approved by Target Fund shareholders, the Target Fund
Board will determine what further action is appropriate, including the possible
liquidation of the Target Fund. Additionally, VK Asset Management anticipates
resigning as investment adviser to the Target Fund upon the expiration of the
interim period if the Reorganization is not approved by Target Fund
shareholders.
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 contact Van Kampen's
Client Relations Department, by calling 1-800-231-2808 (Telecommunication Device
for the Deaf users may call 1-800-421-2833) or visiting our website at
www.vankampen.com where you can send us an e-mail message by selecting "Contact
Us," or the Target Fund by calling (877) 367-1838.
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 THE 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
1838 INTERNATIONAL EQUITY 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
1838 INTERNATIONAL EQUITY FUND
C/O MBIA-MISC
113 KING STREET
ARMONK, NEW YORK 10504
(877) 367-1838
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON DECEMBER 5, 2005
A special meeting of shareholders of 1838 International Equity Fund, a series
of 1838 Investment Advisors Funds, will be held at the offices of Van Kampen
Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, on
December 5, 2005 at [time] (the "Special Meeting"), for the following purposes:
1. To approve an Agreement and Plan of Reorganization pursuant to which 1838
International Equity Fund would (i) transfer all of its assets and stated
liabilities to Van Kampen International Fund in exchange for Class I Shares
of Van Kampen International Fund (ii) distribute such shares to its
shareholders and (iii) dissolve;
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 [record date], 2005 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF 1838 INTERNATIONAL EQUITY 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, OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE
INTERNET.
THE BOARD OF TRUSTEES OF 1838 INTERNATIONAL EQUITY FUND RECOMMENDS THAT YOU
CAST YOUR VOTE:
- FOR THE REORGANIZATION AS DESCRIBED IN THE PROXY STATEMENT/PROSPECTUS
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD OR RECORD YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA
THE INTERNET.
For the Board of Trustees,
[Officer]
[Title]
November , 2005
THE INFORMATION IN THIS PROXY STATEMENT/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 PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE 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 SEPTEMBER 9, 2005
PROXY STATEMENT/PROSPECTUS
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
1838 INTERNATIONAL EQUITY FUND
C/O MBIA-MISC
113 KING STREET
ARMONK, NEW YORK 10504
(877) 367-1838
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN INTERNATIONAL FUND
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
This Proxy Statement/Prospectus is furnished to you as a shareholder of 1838
International Equity Fund (the "Target Fund"), a series of 1838 Investment
Advisors Funds (the "1838 Trust"). A special meeting of shareholders of the
Target Fund (the "Special Meeting") will be held at the offices of Van Kampen
Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555 on
December 5, 2005 at [time] to consider the item that is listed below and
discussed in greater detail elsewhere in this Proxy Statement/Prospectus. If
shareholders are unable to attend the Special Meeting or any adjournment
thereof, the Board of Trustees of the 1838 Trust (the "Target Fund Board")
requests that they vote their shares by completing and returning the enclosed
proxy card or by recording their voting instructions by telephone or via the
internet.
The purpose of the Special Meeting is:
1. To approve an Agreement and Plan of Reorganization pursuant to which 1838
International Equity Fund would (i) transfer all of its assets and stated
liabilities to Van Kampen International Fund in exchange solely for Class
I Shares of Van Kampen International Fund, (ii) distribute such shares to
its shareholders and (iii) dissolve; and
2. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Target Fund Board has approved a reorganization (the "Reorganization") by
which the Target Fund, an open-end investment company, would be reorganized into
Van Kampen International Fund (the "Acquiring Fund"), a newly created series of
Van Kampen Equity Trust II (the "VK Trust"), an open-end investment company,
with the same investment objective, substantially similar principal investment
strategies and the same portfolio managers pursuant to an Agreement and Plan of
Reorganization (the "Reorganization Agreement") between the Target Fund and the
Acquiring Fund. The Target Fund and the Acquiring Fund are sometimes referred to
herein each as a "Fund" and collectively as the "Funds."
If Target Fund shareholders approve the Reorganization, the Target Fund will
transfer all of its assets and stated liabilities to the Acquiring Fund. The
Acquiring Fund will simultaneously issue Class I Shares to the Target Fund in an
amount equal to the value of the outstanding shares of the Target Fund.
Immediately thereafter, the Target Fund will distribute these Class I Shares of
the Acquiring Fund to its shareholders. After distributing these shares, the
Target Fund will dissolve. When the Reorganization is complete, Target Fund
shareholders will hold Class I Shares of the Acquiring Fund. The aggregate net
asset value of the Class I Shares of the Acquiring Fund received in the
Reorganization will equal the aggregate net asset value of the shares of the
Target Fund held immediately prior to the Reorganization.
This Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Target Fund should know before voting on the Reorganization
and constitutes an offering of Class I Shares, par value $0.01 per share, of the
Acquiring Fund only. Please read it carefully and retain it for future
reference.
The following documents have been filed with the Securities and Exchange
Commission (the "SEC") and incorporated by reference into this Proxy
Statement/Prospectus: (i) the Prospectus and Statement of Additional
Information, each dated February 28, 2005, as supplemented, of the Target Fund
(File Nos. 33-87298 and 811-8902), which contain additional information about
the Target Fund; (ii) the Annual Report to Shareholders of 1838 Trust, which
includes information relating to the Target Fund for the fiscal year ended
October 31, 2004; (iii) the Semi-Annual Report to Shareholders of the 1838
Trust, which includes information relating to the Target Fund for the
semi-annual fiscal period ended April 30, 2005; and (iv) a Statement of
Additional Information dated , 2005, relating to this Proxy
Statement/Prospectus (the "Reorganization SAI"), which contains additional
information about the Reorganization and the Acquiring Fund. Free copies of any
of the above documents can be obtained by writing to or calling:
<Table>
Van Kampen 1838 International Equity Fund
Client Relations Department c/o MBIA-MISC
1 Parkview Plaza 113 King Street
P.O. Box 5555 Armonk, New York 10504
Oakbrook Terrace, Illinois 1-877-367-1838
60181-5555
1-800-231-2808
TDD: 1-800-421-2833
</Table>
2
If you wish to request the Reorganization SAI, please ask for the
"Reorganization SAI." The Target Fund will furnish, without charge, a copy of
its most recent annual report and semi-annual report to a shareholder upon
request.
The Funds are subject to certain federal securities laws and in accordance
therewith file reports and other information with the SEC. 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 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 Target Fund Board 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 Proxy Statement/Prospectus and, if so given
or made, such information or representation must not be relied upon as having
been authorized. This Proxy Statement/Prospectus 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 THE PROXY STATEMENT/PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Proxy Statement/Prospectus is November , 2005.
3
TABLE OF CONTENTS
<Table>
SUMMARY..................................................... 6
PROPOSAL 1: THE REORGANIZATION.............................. 9
COMPARISON OF THE TARGET FUND AND THE ACQUIRING FUND...... 9
Investment Objective and Principal Investment
Strategies............................................ 9
Principal Investment Risks.............................. 11
Investment Restrictions................................. 12
Management of the Funds................................. 16
Advisory Fees........................................... 18
Expenses................................................ 19
Purchase, Valuation, Redemption and Exchange of Share... 20
Capitalization.......................................... 23
Annual Performance Information.......................... 23
Comparative Performance Information..................... 24
Other Service Providers................................. 25
Governing Law........................................... 26
Certain Provisions of the Funds' Governing Documents.... 27
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION........... 27
General................................................. 27
Terms of the Reorganization Agreement................... 28
Reasons for the Proposed Reorganization................. 29
Material U.S. Federal Income Tax Consequences of the
Reorganization........................................ 30
Expenses of the Reorganization.......................... 32
Shareholder Accounts and Plans; Share Certificates...... 32
Shareholder Approval.................................... 33
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND........... 33
Purchase of Shares...................................... 33
Redemption of Shares.................................... 34
Distributions from the Acquiring Fund................... 36
Shareholder Services.................................... 36
Frequent Purchases and Redemptions of Shares............ 37
Federal Income Taxation................................. 38
Disclosure of Portfolio Holdings........................ 40
Financial Highlights.................................... 41
</Table>
4
<Table>
OTHER INFORMATION........................................... 42
Shareholder Information................................. 42
Shareholder Proposals................................... 42
Solicitation of Proxies................................. 42
Legal Matters........................................... 43
Other Matters to Come before the Meeting................ 43
Voting Information and Requirements..................... 43
</Table>
5
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SUMMARY
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The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus and is qualified in its entirety by reference to the
more complete information contained herein. Shareholders should read the entire
Proxy Statement/Prospectus carefully.
PROPOSAL 1: THE REORGANIZATION
THE PROPOSED REORGANIZATION. The Target Fund Board, including the trustees who
are not "interested persons" of the Target Fund (as defined in 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 stated liabilities of the Target Fund to
the Acquiring Fund in exchange for Class I 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 Class I Shares of the Acquiring Fund with an aggregate net asset value
equal to the aggregate net asset 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 the integration of the Target Fund
into the Van Kampen fund family to benefit the shareholders of the Target Fund.
The investment objective of each Fund is capital appreciation, with a secondary
objective of income. Each Fund seeks to achieve this investment objective by
investing primarily in a diversified portfolio of equity securities of foreign
issuers. Each Fund is managed by the same portfolio managers.
The Target Fund recently announced its appointment of Van Kampen Asset
Management ("VK Asset Management") to serve as investment adviser for the Target
Fund as a result of the resignation of 1838 Investment Advisors, LP as the
investment adviser ("1838 Advisors"). VK Asset Management recently employed the
portfolio managers (from 1838 Advisors) to manage the Target Fund (and, as
discussed herein, the Acquiring Fund). In connection with these events, the
Board of Trustees of the Van Kampen Trust (the "Acquiring Fund Board")
authorized the creation of a new fund -- the Acquiring Fund -- with the same
investment objective and substantially similar principal investment strategies
as the Target Fund. The Acquiring Fund was created for the purpose of
facilitating the Reorganization. The proposed Reorganization reflects concerns
about the lack of perceived growth prospects for the current Target Fund and
management's belief that this
6
fund can benefit by the Van Kampen fund family's broader distribution capacity
and capability, that joining the Van Kampen fund family provides fund
shareholders with access to a broader, diversified fund group and compliments
Van Kampen's fund family, and that growth in the fund can lead to operational
efficiencies and economies of scale that benefit shareholders.
The Target Fund Board, based upon its evaluation of all relevant information,
anticipates that as a result of the Reorganization Target Fund shareholders will
benefit from (i) the continued management of the combined fund by the Target
Fund's current portfolio management team; (ii) the opportunity to be part of the
significantly larger Van Kampen fund complex, with additional product offerings,
enhanced shareholder servicing and exchange options; and (iii) the Van Kampen
fund family's significantly greater distribution capabilities which could lead
to higher asset levels resulting in operational efficiencies and economies of
scale. The Target Fund Board has determined that the Reorganization is in the
best interests of shareholders of the Target Fund and that the interests of such
shareholders will not be diluted as a result of the Reorganization.
In determining whether to recommend approval of the proposed Reorganization to
shareholders of the Target Fund, the Target Fund Board received and evaluated
materials regarding the impact of the proposed Reorganization on shareholders of
the Target Fund. The Target Fund Board considered a number of factors,
including, but not limited to: (i) VK Asset Management currently serves as the
investment advisor of the Target Fund and the Acquiring Fund; (ii) the breadth,
depth and varied expertise of the investment management personnel employed by VK
Asset Management, including the retention of the Target Fund's portfolio
managers as employees of VK Asset Management; (iii) the enhanced potential
purchasing power, analyst coverage and market presence of the combined fund;
(iv) the future growth and performance prospects of the combined fund; (v) the
enhanced viability of the combined fund as a result of the perceived
distribution capabilities of Van Kampen Funds Inc., (the "Distributor"), the
distributor of the Acquiring Fund and other funds in the Van Kampen fund family;
(vi) the shareholder services, including exchange options, offered in the Van
Kampen fund family as serviced by Van Kampen Investor Services Inc. ("Investor
Services"), the transfer agent of the Acquiring Fund and other funds in the Van
Kampen fund family; (vii) the broader product array of the Van Kampen fund
family and the expanded range of investment options and shareholder services
available to shareholders of Van Kampen funds; (viii) the expenses and advisory
fees applicable to the Target Fund and the estimated expenses and advisory fees
applicable to the combined fund; (ix) the investment performance of the Target
Fund; (x) the terms and conditions of the Reorganization Agreement and whether
the proposed Reorganization would result in dilution of Target Fund shareholders
interests; (xi) the compatibility of the Funds' investment objectives, policies,
risks and restrictions; (xii) the possibility of improved operating efficiencies
of the combined fund;
7
(xiii) the anticipated tax consequences of the Reorganization; and (xiv) the
undertaking by VK Asset Management to pay all expenses 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 December 5,
2005. 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 12, 2005, but it may be at a
different time as described herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
In the event that the Reorganization is not approved by shareholders of the
Target Fund, the Target Fund Board will determine what further action is
appropriate, including the possible liquidation of the Target Fund.
Additionally, VK Asset Management anticipates resigning as investment adviser to
the Target Fund upon the expiration of the interim period if the Reorganization
is not approved by shareholders of the Target Fund.
8
- ------------------------------------------------------------------------------
PROPOSAL 1: THE REORGANIZATION
- ------------------------------------------------------------------------------
COMPARISON OF THE TARGET FUND AND THE ACQUIRING FUND
INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES
INVESTMENT OBJECTIVE. Each Fund's investment objective is capital
appreciation, with a secondary objective of income. There are risks inherent in
all investments in securities; accordingly, there can be no assurance that
either Fund will achieve its investment objective. The investment objective of
the Target Fund is fundamental, meaning it cannot be changed without shareholder
approval; the investment objective of the Acquiring Fund may be changed by the
Acquiring Fund's Board of Trustees without shareholder approval, but no change
is anticipated. If the Acquiring Fund's investment objective changes, the
Acquiring Fund will notify shareholders and shareholders should consider whether
the Acquiring Fund remains an appropriate investment in light of the changes.
PRINCIPAL INVESTMENT STRATEGIES. Under normal market conditions, each Fund
seeks to achieve its investment objective by investing in a diversified
portfolio of equity securities of issuers located in countries other than the
United States. Under normal market conditions, the Target Fund invests at least
80% of its total assets in the equity securities of issuers from at least three
different foreign countries. Under normal market conditions, the Acquiring Fund
invests at least 80% of its net assets (plus borrowings for investment purposes)
in securities of issuers from at least three different foreign countries.
Each Fund intends to diversify its portfolio among securities of foreign
companies located throughout the world other than the United States. Each Fund
anticipates that a substantial portion of its assets will be invested in the
developed countries of Europe and the Far East. The Target Fund may invest up to
20% of its assets in securities of issuers determined by its portfolio
management team to be in developing or emerging market countries. The Acquiring
Fund may invest up to 15% of its assets in securities of issuers determined by
its portfolio management team to be in developing or emerging market countries.
Each Fund may invest up to 25% of its assets in securities issued or guaranteed
by non-U.S. governments, but will invest only in securities issued or guaranteed
by the governments of countries which are members of the Organization for
Economic Co-operation and Development (OECD).
The portfolio management team of each Fund determines allocation of the Fund's
assets after examining the phases of the business cycles and long-term growth
potential of various foreign economies and taking into account valuation of
foreign currency, taxation and other pertinent financial, social, national and
political
9
factors. The portfolio management team of each Fund seeks to identify equity
investments in each market which are expected to provide long-term capital
appreciation that equals or exceeds the performance benchmark of such market as
a whole. The portfolio management team of the Target Fund seeks to identify
securities of issuers that it believes share the following characteristics: (1)
industry leaders in their country, their region or the world, (2) strong balance
sheets, (3) stocks widely followed by research analysis, (4) large market
capitalization (usually greater than $2 billion), and (5) attractive
price-to-earnings ratios compared with earnings growth potential (PEG ratio).
The portfolio management team of the Acquiring Fund seeks to identify securities
of issuers that it believes share the following characteristics: (1) industry
leaders in their country, their region or the world, (2) strong balance sheets,
(3) large market capitalization (usually greater than $1 billion), and (4)
attractive price-to-earnings ratios compared with earnings growth potential (PEG
ratio).
The portfolio management team of each Fund generally considers selling a
portfolio security when company fundamentals deteriorate, stock valuation
deteriorates due to a rise in the PEG ratio or the Fund's portfolio is
rebalanced to include a country or industry in which prospects for capital
appreciation are determined to be better than others.
The Target Fund ordinarily considers an issuer to be located in the country
under the laws of which it is organized or where the primary trading market for
its securities is located. The Target Fund, however, may consider a company to
be located in a country, without reference to its domicile or to the primary
trading market of its securities, if at least 50% of its non-current assets,
capitalization, gross revenues or profits in any one of the two most recent
fiscal years represents (directly of indirectly through subsidiaries) assets or
activities located in such country. The Acquiring 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 by the Acquiring Fund to be from more than one
country.
OTHER INVESTMENT POLICIES AND PRACTICES. Each 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 (collectively referred to in this Proxy
Statement/ Prospectus as strategic transactions) for various portfolio
management purposes, including to facilitate portfolio management and to
mitigate risks. Each Fund may invest up to 15% of its net assets in illiquid
securities and certain restricted securities.
10
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. An investment in the Funds is
subject to investment risks, and shareholders could lose money on investments in
the Funds.
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. During an overall stock
market decline, stock prices of small- or medium-sized companies (in which each
Fund may invest) may be more volatile than stock prices of larger companies.
FOREIGN RISKS. Because each Fund owns securities of foreign issuers, each Fund
is 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 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.
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, each 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.
11
INVESTMENT RESTRICTIONS
Each Fund has adopted certain fundamental investment restrictions, which are
policies of a fund that may be amended only with shareholder approval. The
fundamental investment restrictions of the Funds differ. It is not anticipated
that the differences in the fundamental investment restrictions of the Funds
will materially affect the way in which the Acquiring Fund is managed as
compared to the Target Fund. In some instances, however, the Acquiring Fund's
investment restrictions provide greater flexibility in managing the Fund.
The 1940 Act requires that certain investment policies of a fund be recited in
the fund's registration statement and be made fundamental. A particular fund's
fundamental investment restrictions may have been adopted based on the various
federal or state securities laws or regulations or business or industry
conditions at the time of adoption, and the specific wording of various policies
may reflect not only the laws at the time of the policies' adoption but also the
interpretation of the board of trustees that adopted the policies at such times.
Thus, a fund may have fundamental investment restrictions worded in a way that
do not reflect developments in market, legal, regulatory or industry practices
and/or do not provide the funds with ample flexibility to change in accordance
with developments in market, legal, regulatory or industry practices.
The Acquiring Fund's investment restrictions have been designed to provide
flexibility for the Acquiring Fund and consistency in administering the
investment restrictions among the Acquiring Fund and other Van Kampen funds. The
Van Kampen funds, including the Acquiring Fund, have sought to adopt fundamental
investment restrictions that simplify and standardize those investment policies
that are required to be fundamental under the 1940 Act and allow the Board of
Trustees to respond efficiently to changes in market, legal, regulatory or
industry practices without the delay and expense associated with a shareholder
meeting.
Each Fund's current fundamental investment restrictions are set forth below.
Such investment restrictions may not be changed without the approval of holders
of a majority of such Fund's outstanding voting securities (defined in lesser
the 1940 Act as the lesser of (i) more than 50% of a Fund's outstanding shares,
or (ii) 67% of a Fund's outstanding shares present at a meeting at which the
holders of more than 50% of the outstanding shares are present in person or by
proxy). All other investment policies or practices are considered by the Funds
not to be fundamental and accordingly may be changed without shareholder
approval.
INVESTMENT RESTRICTIONS OF THE TARGET FUND. The Target Fund may not:
1. As to 75% of its total assets, invest in the securities of any one issuer
if, immediately after and as a result of such investment, the value of the
holdings of the Fund in the securities of such issuer exceeds 5% of the
Fund's total assets, taken at market value, except that such restriction
shall not apply
12
to cash and cash items, or securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities.
2. Invest in the securities of any single issuer if, immediately after and as
a result of such investment, the Fund owns more than 10% of the
outstanding voting securities of such issuer.
3. Invest more than 25% of its total assets (taken at market value at the
time of each investment) in the securities of issuers in any particular
industry, except for temporary defensive purposes.
4. Issue senior securities.
5. Make investments for the purpose of exercising control or management of
another company.
6. Purchase securities of other investment companies, except in connection
with a merger, consolidation, acquisition or reorganization, or by
purchase in the open market of securities of closed-end investment
companies where no underwriter or dealer's commission or profit, other
than customary broker's commission, is involved and any investments in the
securities of other investment companies will be in compliance with the
Investment Company Act of 1940.
7. Purchase or sell real estate or interests therein; provided that the Fund
may invest in securities secured by real estate or interests therein or
issued by companies which invest in real estate or interests therein.
8. Purchase or sell commodities or commodity contracts, except that the Fund
may deal in forward foreign exchange between currencies of the different
countries in which it may invest and that the Fund may purchase or sell
stock index and currency options, stock index futures, financial futures
and currency futures contracts and related options on such futures.
9. Purchase any securities on margin, except that the Fund may obtain such
short-term credit as may be necessary for the clearance of purchases and
sales of portfolio securities, or make short sales of securities or
maintain a short position. The payment by the Fund of initial or variation
margin in connection with futures or related options transactions, if
applicable, shall not be considered the purchase of a security on margin.
Also, engaging in futures transactions and related options will not be
deemed a short sale or maintenance of a short position in securities.
10. Make loans to other persons (except as provided in (11) below); provided
that for purposes of this restriction the acquisition of bonds,
debentures, or other corporate debt securities and investment in
government obligations, short-term commercial paper, certificates of
deposit, bankers' acceptances,
13
repurchase agreements and any fixed-income obligations in which the Fund
may invest consistent with its investment objective and policies shall not
be deemed to be the making of a loan.
11. Lend its portfolio securities in excess of 33% of its total assets, taken
at market value; provided that such loans shall be made in accordance with
the guidelines set forth under "Securities Lending" in the Fund's
prospectus.
12. Borrow amounts in excess of 20% of its total assets, taken at market
value, and then only from banks as a temporary measure for extraordinary
or emergency purposes such as the redemption of Fund shares. Utilization
of borrowings may exaggerate increases or decreases in an investment
company's net asset value. However, the Fund will not purchase securities
while borrowings exceed 5% of its total assets, except to honor prior
commitments and to exercise subscription rights when outstanding
borrowings have been obtained exclusively for settlements of other
securities transactions.
13. Mortgage, pledge, hypothecate or in any manner transfer as security for
indebtedness, any securities owned or held by the Fund except as may be
necessary in connection with borrowings mentioned in (12) above, and then
such mortgaging, pledging or hypothecating may not exceed 10% of the
Fund's total assets, taken at market value. For the purpose of this
restriction and restriction (9) above, collateral arrangements with
respect to the writing of options, futures contracts, options on futures
contracts, and collateral arrangements with respect to initial and
variation margin are not deemed to be a pledge of assets, and neither such
arrangements nor the purchase and sale of options, futures or related
options are deemed to be the issuance of a senior security.
14. Invest in securities which cannot be readily resold because of legal or
contractual restrictions or which are not otherwise readily marketable if,
regarding all such securities, more than 15% of its total assets, taken at
market value, would be invested in such securities.
15. Underwrite securities of other issuers except insofar as the Fund may be
deemed an underwriter under the Securities Act of 1933, as amended, in
selling portfolio securities.
16. Purchase or sell interests in oil, gas or other mineral exploration or
development programs or leases, except that the Fund may invest in
securities of companies which invest in or sponsor such programs.
Notwithstanding the foregoing, the Target Fund may purchase securities
pursuant to the exercise of subscription rights, subject to the condition that
such purchase will not result in the Fund ceasing to be a diversified investment
company. The exception applies when investment limits would otherwise be
exceeded by
14
exercising rights or have already been exceeded as a result of fluctuations in
the market value of the Target Fund's portfolio securities, and the Target Fund
would otherwise be forced either to sell securities at a time when it might not
have done so, or to forego exercising the rights.
Changes in values of particular assets of the Target Fund will not cause a
violation of the foregoing investment restrictions so long as percentage
restrictions are observed by the Target Fund at the time it purchases a
security. Provided that a dealer or institutional trading market in such
securities exists, restricted securities are not treated as illiquid securities
for purposes of the Target Fund's investment limitations.
INVESTMENT RESTRICTIONS OF THE ACQUIRING FUND. The Acquiring Fund may 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 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
15
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.
The percentage limitations contained in the restrictions and policies of the
Acquiring Fund apply at the time of purchase of securities. With respect to the
Acquiring Fund's limitations on illiquid securities and borrowings, the
percentage limitations apply at the time of purchase and on an ongoing basis.
The Acquiring Fund has an operating policy, which may be changed by the
Acquiring Fund's Board of Trustees, 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 Acquiring Fund at the time the borrowing is made.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of Trustees of each Fund is each responsible for the
overall supervision of the operations of each of the Funds and performs the
various duties imposed on the directors/trustees of investment companies by the
1940 Act and under applicable state law. Following the Reorganization, the
combined fund will be overseen by the Board of Trustees of the Acquiring Fund,
which is
16
comprised of the same Board members that supervise other funds in the Van Kampen
fund family. Additional information regarding the Board of Trustees of the
Acquiring Fund is set forth in the Reorganization SAI.
INVESTMENT ADVISER. VK Asset Management serves as the investment adviser to
the Acquiring Fund. VK Asset Management also currently serves as interim
investment adviser to the Target Fund pursuant to an interim interest advisory
agreement (the "Interim Agreement"), which was recently approved by the Target
Fund Board as a result of the resignation of 1838 Advisors. Each Fund retains VK
Asset Management to manage the investment of its assets and to place orders for
the purchase and sale of its portfolio securities.
VK Asset Management 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 $103 billion under management or supervision as of August 31,
2005. 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 principal
business address of VK Asset Management and Van Kampen Investments is 1221
Avenue of the Americas, New York, New York 10020.
Prior to the Target Fund entering into the Interim Agreement with VK Asset
Management, 1838 Advisors acted as investment adviser to the Target Fund. 1838
Advisors resigned as investment adviser to the Target Fund on July 28, 2005.
Taking 1838 Advisors and its predecessor firm into account, 1838 Advisors has
over 10 years of investment advisory experiences. 1838 Advisors is owned and
operated by management of 1838 Advisors and Orca Bay Partners, a private equity
investment firm based in Seattle, Washington, and is an affiliate of Orca Bay
Capital. Before May 13, 2004, 1838 Advisors was 1838 Investment Advisors LLC,
which was an indirect wholly-owned subsidiary of MBIA, Inc. 1838 Investment
Advisors offices are located at 2701 Renaissance Boulevard, 4th Floor, King of
Prussia, PA 19406.
PORTFOLIO MANAGEMENT. Each Fund's assets are managed within VK Asset
Management's [ ] Team. The members of the team who are currently
responsible for the day-to-day management of each Fund are Johannes B. van den
Berg and David Sugimoto.
Johannes B. van den Berg, Managing Director of VK Asset Management, has worked
in an investment management capacity for VK Asset Management since 2005. Prior
to joining the Adviser, he was Managing Director and Chief Investment
17
Officer of Equity Investment Strategies of 1838 Advisors. Mr. van den Berg has
managed the Acquiring Fund since its inception in 2005. While with 1838
Advisors, Mr. van den Berg managed the Target Fund since its inception in 1995
and he has continued to manage the Target Fund since joining VK Asset
Management.
David Sugimoto, Executive Director, has worked in an investment management
capacity for VK Asset Management since 2005 and has been managing the Acquiring
Fund since 2005. Prior to joining VK Asset Management, he was a Director and
portfolio manager of 1838 Advisors. Mr. Sugimoto has managed the Acquiring Fund
since its inception in 2005. While with 1838 Advisors, Mr. Sugimoto began
managing the Target Fund in 2004 and he has continued to manage the Target Fund
since joining VK Asset Management.
Mr. van den Berg is the lead manager of the Fund. He has over 25 years'
investment experience. He is supported by Mr. Sugimoto. He has over 25 years'
investment experience. As lead portfolio manager, Mr. van den Berg has ultimate
responsibility for stock selection and portfolio construction.
The Reorganization SAI provides additional information about the portfolio
managers' compensation structure, other accounts managed by the portfolio
managers and the portfolio managers' ownership of securities in the Funds.
The composition of the team may change without notice from time to time.
ADVISORY FEES
Each Fund pays VK Asset Management (and the Target Fund had paid 1838 Advisors
prior to its resignation) a monthly fee computed based on an annual rate of
0.75% of the average daily net assets of the respective Fund.
The total operating expenses of the Target Fund for the twelve months ended
April 30, 2005 were 1.79%. The Target Fund's investment adviser has voluntarily
agreed to waive its fees and or reimburse the Target Fund so that the Target
Fund's total operating expenses do not exceed 1.25%. The voluntary fee waiver
and reimbursement of Target Fund expenses may be rescinded at any time.
The total operating expenses of the combined fund after the Reorganization are
not expected to exceed the total operating expenses of the Target Fund. The
Acquiring Fund's investment adviser has voluntarily agreed to waive its fees or
reimburse Acquiring Fund so that the Acquiring Fund's total operating expenses
to be paid for the Acquiring Fund's fiscal year ending August 31, 2006 do not
exceed 1.25% for Class I Shares. After August 31, 2006, the fee waiver and/or
reimbursement can be terminated at any time.
18
EXPENSES
The table below sets forth the fees and expenses that investors may pay to buy
and hold shares of the Target Fund and the Acquiring Fund Class I Shares pro
forma after the Reorganization, including (i) the fees and expenses paid by the
Target Fund for the 12-month period ended April 30, 2005 and (ii) pro forma fees
and expenses for the Acquiring Fund Class I Shares for the 12-month period ended
April 30, 2005 assuming the Reorganization had been completed as of the
beginning of such period. The Acquiring Fund is newly organized and has not had
any operations of its own as of the date of this Proxy Statement/Prospectus.
<Table>
<Caption>
PRO FORMA
ACQUIRING FUND
TARGET FUND CLASS I SHARES
----------- --------------
SHAREHOLDER FEES
(fees paid directly from your investment)
Maximum sales charge (load) imposed on
purchases................................... None None
Maximum deferred sales charge (load).......... None None
Maximum sales charge (load) imposed on
reinvested dividends........................ None None
Maximum sales charge (load) imposed on
reinvested dividends........................ None None
Redemption fee................................ 2.00%(1) 2.00%(2)
Exchange fee.................................. N/A 2.00%(2)
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund
assets)
Management Fees............................... 0.75%(3) 0.75%(3)
Other Expenses................................ 1.04%(3) 0.70%(4)(5)
Total annual fund operating expenses.......... 1.79%(3) 1.45%(4)(5)
</Table>
- ---------------
1 The redemption fee applies to the proceeds of Target Fund shares that are
redeemed within 60 days of purchase.
2 The redemption fee and the exchange fee apply to the proceeds of Acquiring
Fund shares that are redeemed or exchanged within 30 days of purchase. See
"Additional Information about the Acquiring Fund -- Redemption of Shares"
below for more information on when the fees apply.
3 The Target Fund's investment adviser voluntarily has agreed to waive its fees
and/or reimburse the Target Fund so that the Target Fund's total operating
expenses do not exceed 1.25% of average daily net assets of the Target Fund.
The voluntary fee waiver and reimbursement of Target Fund expenses by the
Target Fund's investment adviser may be rescinded at any time.
19
4 The Acquiring Fund's investment adviser has agreed to voluntarily waive or
reimburse all or a portion of the Fund's management fees or other expenses
such that the annualized actual total fund operating expenses to be paid for
the Acquiring Fund's fiscal year ending August 31, 2006 do not exceed 1.25%
for Class I Shares. After August 31, 2006, the fee waivers and/or expense
reimbursements can be terminated at any time.
5 Other expenses are based on estimated expenses for the current fiscal year.
EXAMPLE. The following examples are intended to help you compare the costs of
investing in the Acquiring Fund, 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. Although your actual returns may be higher
or lower, based on these assumptions your costs would be:
<Table>
<Caption>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
Target Fund.................... $182 $563 $970 $2,105
Pro Forma Acquiring Fund Class
I Shares..................... $148 $459 $792 $1,735
</Table>
PURCHASE, VALUATION, REDEMPTION AND EXCHANGE OF SHARE
In the Reorganization, the Acquiring Fund will issue Class I Shares to the
Target Fund. The Acquiring Fund may offer additional classes of shares pursuant
to a separate prospectus. The Acquiring Fund intends to offer Class A Shares,
Class B Shares and Class C Shares, each of which offers a distinct structure of
sales charges, distribution and service fees and other features that are
designed to address a variety of investor needs, in addition to Class I Shares.
However, no such shares are issued or outstanding as of the date of this Proxy
Statement/Prospectus.
Class I Shares of the Acquiring Fund are available for purchase only to a
limited group of investors. Similar to the Class I Shares of other Van Kampen
funds, the Acquiring Fund's Class I Shares are available to investors through
(i) tax-exempt retirement plans with assets of at least one million dollars
(including 401(k) plans, 457 plans, employer-sponsored 403(b) plans, profit
sharing and money purchase plans, defined benefit plans and non-qualified
deferred compensation plans), (ii) fee-based investment programs with assets of
at least one million dollars and (iii) institutional clients with assets of at
least one million dollars. Unlike the Class I Shares of other Van Kampen funds,
the Acquiring Fund's Class I Shares also may be held in shareholder accounts
opened in connection with the Reorganization of the Target Fund into the
Acquiring Fund ("Reorganization Shareholders").
20
Reorganization Shareholders may purchase additional Class I Shares of the Fund,
either directly or through the reinvestment of dividends.
Class I Shares of the Acquiring Fund are offered on a continuous basis through
the Distributor, the Acquiring Fund's distributor, as principal underwriter.
Shares of the Target Fund are offered through MBIA Capital Management
Corporation, Dept. TA, 113 King Street, Armonk, NY 10504, the Target Fund's
distributor. MBIA Capital Management Corp., is a wholly-owned subsidiary of MBIA
Inc. Target Fund shares and Class I Shares of the Acquiring Fund are offered
without any sales charges on purchases or sales and without any distribution
(12b-1) fee and service fee.
The offering price of Target Fund shares and Class I Shares of the Acquiring
Fund are based upon the next determined net asset value per share of such Fund
after an order is received. Each Fund's net asset value per share 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 such Fund's portfolio
securities such that such Fund's net asset value per share might be materially
affected. Each 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 is determined by dividing
the value of such Fund's portfolio securities, cash and other assets (including
accrued interest) less all liabilities (including accrued expenses) attributable
to such shares, by the total number of such shares 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 VK Asset Management 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.
21
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.
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 occur
between the time when their price is determined and the time when the Fund's net
asset value is calculated (for example, movements in certain U.S. securities
indices which demonstrate strong correlation to movements in certain foreign
securities markets), such securities may be valued at their fair value as
determined in good faith by VK Asset Management based in accordance with
procedures established by such Fund's Board of Trustees, an effect of which may
be to foreclose opportunities available to market timers or short-term traders.
For purposes of calculating net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars at the mean of the bid price and asked price of such currencies
against the U.S. dollar as quoted by a major bank.
Shareholders of each Fund may redeem their shares at the redemption price of
the next determined net asset value per share of such Fund, less any applicable
redemption fee or exchange fee. The Target Fund generally imposes a fee of 2.00%
of the proceeds of Target Fund shares that are redeemed within 60 days of
purchase. The Acquiring Fund generally imposes a fee of 2.00% of the proceeds of
Acquiring Fund shares that are redeemed or exchanged within 30 days of purchase.
The Target Fund does not offer its shareholders an exchange privilege. The
Acquiring Fund offers Reorganization Shareholders the opportunity to exchange
their Class I shares of the Acquiring Fund for Class A Shares of other
Participating Funds (as defined herein). Unlike other Class I shareholders (who
are eligible to exchange their Class I Shares of the Acquiring Fund for Class I
Shares of Participating Funds), Reorganization Shareholders of Class I Shares
may only exchange, without any sales charge and subject to certain limitations,
their Class I Shares of the Acquiring Fund for Class A Shares of other
Participating Funds. Class A Shares of Participating Funds may be subject to
distribution and services fees. Reorganization Shareholders seeking an exchange
into Class A Shares of a Participating Fund should obtain and read the current
prospectus offering Class A
22
Shares of such fund prior to implementing an exchange. Shares of the Acquiring
Fund will be assessed an exchange fee of 2.00% on the proceeds of the exchanged
shares held for less than 30 days from purchase.
As used herein, "Participating Funds" refers to Van Kampen investment
companies advised by VK Asset Management and distributed by the Distributor as
determined from time to time by the Acquiring Fund's Board of Trustees.
More detailed information regarding the purchase, valuation, redemption and
exchange of Class I Shares of the Acquiring Fund is set forth below under
"Additional Information of the Acquiring Fund."
CAPITALIZATION
The following table sets forth the capitalization of the Target Fund and the
pro forma capitalization of the combined fund as if the Reorganization had
occurred on that date. The Acquiring Fund is newly organized and has no assets,
operating history or performance information of its own as of the date of this
Proxy Statement/Prospectus. These numbers may differ as of the Closing Date.
CAPITALIZATION AS OF APRIL 30, 2005 (UNAUDITED)
<Table>
<Caption>
PRO FORMA
ACQUIRING FUND
TARGET FUND CLASS I SHARES
----------- --------------
NET ASSETS (IN THOUSANDS)..................... $ 22,840 $ 22,840
NET ASSET VALUE PER SHARE..................... $ 13.76 $ 13.76
SHARES OUTSTANDING............................ 1,659,570 1,659,570
SHARES AUTHORIZED............................. Unlimited Unlimited
</Table>
Reorganization expenses are being paid by VK Asset Management. The pro forma
shares outstanding reflect the issuance by the Acquiring Fund of approximately
[ ] Class I Shares of the Acquiring Fund reflecting the exchange of the
assets and stated liabilities of the Target Fund for newly issued Class I Shares
of the Acquiring Fund at the pro forma net asset value per share. The aggregate
net asset value of the Class I Shares of the Acquiring Fund that a Target Fund
shareholder receives in the Reorganization will equal the aggregate net asset
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.
ANNUAL PERFORMANCE INFORMATION
The Acquiring Fund is newly organized and has no assets, operating history or
performance information of its own as of the date of this Proxy Statement/
23
Prospectus. After the Reorganization, which is subject to shareholder approval,
the Acquiring Fund, as the successor to the Target Fund, will assume and publish
the operating history and performance record of the Target Fund.
The following chart shows the annual returns of shares of the Target Fund for
the calendar years indicated.
[BAR GRAPH]
<Table>
<Caption>
ANNUAL RETURN
-------------
1996 8.04
1997 9.99
1998 17.52
1999 41.35
2000 -14.24
2001 -19.20
2002 -17.58
2003 36.11
2004 21.02
</Table>
The Target Fund's return for the nine-month period ended September 30, 2005
was [ ]%.
During the nine-year period shown in the bar chart, the Target Fund's highest
quarterly return was 23.40% (for the quarter ended December 31, 1999) and its
lowest quarterly return was -20.31% (for the quarter ended September 30, 2002).
COMPARATIVE PERFORMANCE INFORMATION
As a basis for evaluating the Target Fund's performance and risks, the table
below shows how the Target Fund's performance compares with a broad-based market
index that VK Asset Management believes is an appropriate benchmark for the
Target Fund. The Acquiring Fund is newly organized and has no assets, operating
history or performance information of its own as of the date of this Proxy
Statement/Prospectus. After the Reorganization, which is subject to shareholder
approval, the Acquiring Fund, as the successor to the Target Fund, will assume
and publish the operating history and performance record of the Target Fund.
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. Average annual
total
24
returns are shown for the periods ended December 31, 2004. Remember that past
performance of the Target Fund is not indicative of its future performance.
In addition to before-tax returns of shares of the Target Fund, the tables
also show after-tax returns for the Target Fund's shares in two ways: (i) after
taxes on distributions and (ii) after taxes on distributions and sale of the
Target Fund's shares. 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 Target 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 Target Fund shares been sold at the end of the relevant period.
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIOD ENDED DECEMBER 31, 2004
<Table>
<Caption>
SINCE
PAST 1 YEAR PAST 5 YEARS INCEPTION
----------- ------------ ---------
TARGET FUND
Return Before Taxes................. 21.02% (1.22)% 7.01%(1)
Return After Taxes on
Distributions..................... 21.02% (1.71)% 6.16%(1)
Return After Taxes on Distributions
and Sale of Fund Shares........... 13.66% (1.22)% 5.73%(1)
MSCI EAFE Index*...................... 20.25% (1.14)% 5.01%(2)
</Table>
- ---------------
Return information is provided since: (1) 8/3/95, (2) [ ]
* The MSCI EAFE Index is a free float-adjusted market capitalization index that
is designed to measure developed market equity performance, excluding the US &
Canada.
OTHER SERVICE PROVIDERS
ADMINISTRATOR. Pursuant to an Administration Agreement dated November 1, 2004,
MBIA Municipal Investors Service Corporation ("MBIA-MISC"), Dept TA, 113 King
Street, Armonk, New Hampshire 10504 provides administrative services for the
Target Fund. MBIA-MISC also serves as Fund Accountant for the Target Fund.
TRANSFER AGENT. The transfer agent for the Target Fund is MBIA-MISC. The
transfer agent for the Acquiring Fund is Van Kampen Investor Services Inc., PO
25
Box 947, Jersey City, New Jersey 07303-0947, a wholly owned subsidiary of Van
Kampen Investments.
CUSTODIAN. The custodian for the Target Fund is Wachovia Bank, N.A., 123 S.
Broad Street, Philadelphia, Pennsylvania 19101. Wachovia Bank has sub-
contracted with Chase Manhattan Bank, New York, NY for the custody of the Target
Fund's foreign assets. The custodian for the Acquiring Fund is State Street Bank
and Trust Company, 225 West Franklin Street, PO Box 1713, Boston, Massachusetts
02110-1713.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM. The independent registered
public accounting firm for the Target Fund is , . The
independent registered public accounting firm for the Acquiring Fund is
, .
SHAREHOLDER SERVICING
DIVIDEND REINVESTMENT PLAN. Each Fund offers a Dividend Reinvestment Plan
(each a "Plan") pursuant to which distributions of dividends and all capital
gains on shares are reinvested in shares pursuant to such Plan. The Plans for
the Target Fund and the Acquiring Fund are similar, except that, unlike the
Target Fund's Plan, the Acquiring Fund's Plan provides for automatic
participation. Thus, dividends and distributions to holders of Class I Shares of
the Acquiring Fund will be automatically reinvested in additional Class I Shares
of the Acquiring Fund at the next determined net asset value unless the
shareholder instructs otherwise. Under the Target Fund's plan, unless Target
Fund shareholders elect to participate in the Plan, all common shareholders
receive distributions of dividends and capital gains in cash. [After the
Reorganization, Target Fund shareholders who currently receive dividends in cash
will continue to receive dividends in cash; and Target Fund shareholders who
have elected to participate in the Target Fund's Plan will continue to have
their dividends automatically reinvested in Class I Shares of the Acquiring
Fund.]
The Target Fund offers shareholders an Automatic Investment Plan and a
Systematic Withdrawal Plan. The Acquiring Fund offers similar plans, as well as
a variety of other shareholder servicing options described in more detail under
"Additional Information About the Acquiring Fund" and in the Reorganization SAI.
GOVERNING LAW
The Target Fund is a series of the 1838 Trust, a statutory trust organized
under the laws of the State of Delaware. The Acquiring Fund is a series of the
VK Trust, a statutory trust organized under the laws of the State of Delaware.
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.
26
Each Fund is registered as a diversified, open-end management investment company
under the 1940 Act.
CERTAIN PROVISIONS OF THE FUNDS' GOVERNING DOCUMENTS
ADDITIONAL INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement, the Target Fund will transfer
substantially all of its assets and stated liabilities to the Acquiring Fund in
exchange for Class I Shares of the Acquiring Fund. The Class I Shares of the
Acquiring Fund issued to the Target Fund will have an aggregate net asset value
equal to the aggregate net asset value of the Target Fund shares immediately
prior to the Reorganization. Upon receipt by the Target Fund of the Class I
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 dissolve in accordance with applicable state law.
The Target Fund will distribute pro rata the Class I Shares of the Acquiring
Fund received by it 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 I 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 I Shares of the Acquiring Fund due such
shareholder.
Accordingly, as a result of the Reorganization, each Target Fund shareholder
would own Class I Shares of the Acquiring Fund that would have an aggregate net
asset value immediately after the Closing Date equal to the aggregate net asset
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.
No sales charge or fee of any kind will be assessed to Target Fund
shareholders in connection with their receipt of Class I Shares of the Acquiring
Fund in the Reorganization.
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.
27
TERMS OF THE REORGANIZATION AGREEMENT
Pursuant to the Agreement, the Acquiring Fund will acquire substantially all
of the assets and the liabilities of the Target Fund on the date of the closing
in consideration for Class I 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
substantially all of its assets and stated liabilities. The Acquiring Fund will
in turn transfer to the Target Fund a number of its Class I 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. 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 I 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.
The Acquiring Fund and the Target Fund have made certain standard
representations and warranties to each other regarding their capitalization,
status and conduct of business.
Unless waived in accordance with the Agreement, the obligations of the parties
to the Agreement are conditioned upon, among other things:
- the approval of the Reorganization by the Target Fund's shareholders;
- the absence of any rule, regulation, order, injunction or proceeding
preventing or seeking to prevent the consummation of the transactions
contemplated by the Agreement;
- the receipt of all necessary approvals, registrations and exemptions under
federal and state laws;
- the truth in all material respects as of the closing date of the
representations and warranties of the parties and performance and compliance
in all material respects with the parties' agreements, obligations and
covenants required by the Agreement;
28
- the effectiveness under applicable law of the registration statement of the
Acquiring Fund of which this Proxy Statement/Prospectus 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.
REASONS FOR THE PROPOSED REORGANIZATION
In determining whether to recommend approval of the proposed Reorganization to
shareholders of the Target Fund, the Target Fund Board received and evaluated
materials regarding the impact of the proposed Reorganization on shareholders of
the Target Fund. The Target Fund Board considered a number of factors,
including, but not limited to: (i) VK Asset Management currently serves as the
investment advisor of the Target Fund and the Acquiring Fund; (ii) the breadth,
depth and varied expertise of the investment management personnel employed by VK
Asset Management, including the retention of the Target Fund's portfolio
managers as employees of VK Asset Management; (iii) the enhanced potential
purchasing power, analyst coverage and market presence of the combined fund;
(iv) the future growth and performance prospects of the combined fund; (v) the
enhanced viability of the combined fund as a result of the perceived
distribution capabilities of the Distributor; (vi) the shareholder services,
including the exchange options, offered in the Van Kampen fund family as
serviced by Investor Services; (vii) the broader product array of the Van Kampen
fund family, and the expanded range of investment options and shareholder
services available to shareholders of Van Kampen funds; (viii) the expenses and
advisory fees applicable to the Target Fund and the estimated expenses and
advisory fees applicable to the combined fund; (ix) the investment performance
of the Target Fund; (x) the terms and conditions of the Reorganization Agreement
and whether the proposed Reorganization would result in dilution of Target Fund
shareholders interests; (xi) the compatibility of the Funds' investment
objectives, policies, risks and restrictions; (xii) the possibility of improved
operating efficiencies of the combined fund; (xiii) the anticipated tax
consequences of the Reorganization; and (xiv) the undertaking by VK Asset
Management to pay all expenses of the Reorganization.
29
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:
- the continued management of the Fund by the Target Fund's current portfolio
management team;
- the opportunity to be part of the significantly larger Van Kampen fund
complex, with additional product offerings, enhanced shareholder servicing
and exchange options; and
- the Van Kampen fund family's significantly greater distribution capabilities
which could lead to higher asset levels resulting in operational
efficiencies and economies of scale.
The Target Fund Board has determined that the Reorganization is in the best
interests of shareholders of the Target Fund and that the interests of such
shareholders will not be diluted as a result of the Reorganization.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code of 1986, as amended (the "Code"), Treasury regulations,
court decisions, published positions of the Internal Revenue Service ("IRS") and
other applicable authorities, all as in effect on the date hereof and all of
which are subject to change or differing interpretations (possibly with
retroactive effect). The discussion is limited to U.S. persons who hold shares
of the Target Fund as capital assets for federal income tax purposes. This
summary does not address all of the federal income tax consequences that may be
relevant to a particular shareholder or to shareholders who may be subject to
special treatment under federal income tax laws. No ruling has been or will be
obtained from the IRS regarding any matter relating to the Reorganization. No
assurance can be given that the IRS would not assert a position contrary to any
of the tax aspects described below. Shareholders must consult their own tax
advisers as to the federal income tax consequences of the Reorganization, as
well as the effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion, dated as of the Closing Date, from
special counsel to each Fund, 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
30
exchange solely for the Class I 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 shares of the Target Fund solely for the
Class I Shares of the Acquiring Fund pursuant to the Reorganization.
- The aggregate tax basis of the Class I 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 shares of the Target Fund
surrendered in exchange therefor.
- The holding period of the Class I Shares of the Acquiring Fund received by a
shareholder of the Target Fund pursuant to the Reorganization will include
the holding period of the shares of the Target Fund surrendered in exchange
therefor.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will, in each instance, equal
the tax basis of such assets in the hands of the Target Fund immediately
prior to the Reorganization, and the Acquiring Fund's holding period of such
assets will, in each instance, include the period during which the assets
were held by the Target Fund.
The opinion of will be based on federal income tax law in effect on
the Closing Date. In rendering its opinion, 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 at any time prior to
the closing of the Reorganization. See "Comparison of the Target Fund and the
Acquiring Fund -- Purchase, Valuation, Redemption and Exchange of Shares" above.
Redemptions of shares 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
31
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 paid by VK Asset Management.
Management of the Target Fund estimates total costs of the Reorganization to be
approximately $ . The Target Fund Board and the Board of Trustees of the
Acquiring Fund have reviewed and approved the foregoing arrangements with
respect to expenses and other charges relating to the Reorganization.
Expenses incurred in connection with the Reorganization include, but are not
limited to: all costs related to the preparation and distribution of materials
distributed to each Fund's Board; all expenses incurred in connection with the
preparation of the Reorganization Agreement and a registration statement on Form
N-14; SEC and state securities commission filing fees and legal and audit fees
in connection with the Reorganization; the costs of printing and distributing
this Proxy Statement/Prospectus; 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.
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 Class I Shares Acquiring Fund. 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).
32
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
shares of the Target Fund voted. The Target Fund Board recommends voting "FOR"
the proposed Reorganization.
ADDITIONAL INFORMATION ABOUT THE ACQUIRING FUND
PURCHASE OF SHARES
Class I Shares of the Acquiring Fund are offered on a continuous basis through
the Distributor as principal underwriter, which is located at 1221 Avenue of the
Americas, New York, New York 10020. Class I Shares of the Acquiring Fund 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.
Class I Shares of the Acquiring Fund may be purchased on any business day by
completing the account application form and forwarding it, directly or through
an authorized dealer, administrator, custodian, trustee, record keeper or
financial adviser, to Investor Services.
VK Asset Management and/or the Distributor may pay compensation (out of their
own funds and not as an expense of the Acquiring Fund) to certain affiliated or
unaffiliated authorized dealers in connection with the sale or retention of
Acquiring Fund shares and/or shareholder servicing. Such compensation may be
significant in amount and the prospect of receiving, or the receipt of, such
compensation may provide both affiliated and unaffiliated entities, and their
representatives or employees, with an incentive to favor sales of shares of the
Acquiring Fund over other investment options. Any such payments will not change
the net asset value or the price of the Acquiring Fund's shares. For more
information, please see the Reorganization SAI and/or contact your authorized
dealer.
The offering price for Class I Shares of the Acquiring Fund is based upon the
next determined net asset value per share after an order is received timely by
VKIS. Purchases completed through an authorized dealer, administrator,
custodian, trustee, record keeper or financial adviser may involve additional
fees charged by such person. Orders received by Investor Services prior to the
close of the Exchange, and orders received by authorized dealers,
administrators, custodians, trustees, record keepers or financial advisers 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
33
Services after the close of the Exchange, and orders received by authorized
dealers, administrators, custodians, trustees, record keepers or financial
advisers after the close of the Exchange or orders received by such persons 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, administrators,
custodians, trustees, record keepers or financial advisers to transmit orders
received by them to Investor Services so they will be received in a timely
manner.
The Acquiring Fund and the Distributor reserve the right to reject or limit
any order to purchase Acquiring Fund shares through exchange or otherwise and to
close any shareholder account. Certain patterns of past exchanges and/or
purchase or sale transactions involving the Acquiring Fund or other
Participating Funds may result in the Acquiring Fund rejecting or limiting, in
the Acquiring Fund's or the Distributor's discretion, additional purchases
and/or exchanges or in an account being closed. Determinations in this regard
may be made based on the frequency or dollar amount of the previous exchanges or
purchase or sale transactions. The Acquiring Fund also reserves the right to
suspend the sale of the Acquiring 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
Acquiring Fund after any Acquiring Fund distributions, such as dividends and
capital gain dividends, unless the investor instructs the Acquiring Fund
otherwise. Investors wishing to receive cash instead of additional shares should
contact their authorized dealer, administrator or financial adviser.
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 Acquiring Fund and the Distributor reserve the right to not
open your account if this information is not provided. If the Acquiring Fund or
the Distributor is unable to verify your identity, the Acquiring 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 or take any other action required by law.
REDEMPTION OF SHARES
Generally, shareholders of Class I Shares of the Acquiring Fund may redeem for
cash some or all of their shares without charge by the Acquiring Fund (other
than any applicable redemption fee or exchange fee) at any time. Reorganization
Shareholders should contact the Acquiring Fund, Investor Services or the
shareholder's financial adviser. Participants in tax-exempt retirement plans
must
34
contact the plan's administrator to redeem shares. For plan administrator
contact information, participants should contact their respective employer's
human resources department. Participants in fee-based investment programs must
contact the program's administrator or their financial adviser to redeem shares.
Institutional clients may redeem shares either directly or through an authorized
dealer. Plan administrators, custodians, trustees, record keepers or financial
advisers may place redemption requests directly with Investor Services or
through an authorized dealer following procedures specified by such authorized
dealer.
The Acquiring Fund will assess a 2% redemption fee on the proceeds of
Acquiring Fund Class I Shares that are redeemed (either by sale or exchange)
within 30 days of purchase. The redemption fee is paid directly to the Acquiring
Fund and is intended to defray the costs associated with the sale of portfolio
securities to satisfy redemption and exchange requests made by such
shareholders, thereby reducing the impact on longer-term shareholders of such
costs. For purposes of determining whether the redemption fee applies, shares
that were held the longest will be redeemed first. For shares acquired by
exchange, the holding period prior to the exchange is not considered in
determining whether the redemption fee is applied. The redemption fee and
exchange fee are not imposed on redemptions and/or exchanges made (i) through
pre-approved asset allocation programs and (ii) on shares received by
reinvesting income dividends or capital gain distributions. In addition, the
redemption fee and exchange fee may not be imposed on transactions that occur
through certain omnibus accounts at financial intermediaries.
The redemption price will be the net asset value per share (less any
applicable redemption fee or exchange fee) next determined after the receipt by
Investor Services of a request in proper form from an administrator, custodian,
trustee, record keeper or financial adviser or by the Distributor from an
authorized dealer, provided such order is transmitted to Investor Services or
the Distributor by the time designated by Investor Services or the Distributor.
It is the responsibility of administrators, financial advisers, custodians,
trustees, record keepers and authorized dealers to transmit redemption requests
received by them to Investor Services or the Distributor so they will be
received prior to such time. Redemptions completed through an administrator,
custodian, trustee, record keeper, financial adviser or authorized dealer may
involve additional fees charged by such person.
Payment for shares redeemed generally will be mailed within seven days after
receipt by Investor Services of the redemption request in proper form. 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
35
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.
For those Class I Shareholders other than Reorganization Shareholders, upon
learning that a shareholder of Class I Shares has ceased his or her
participation in the plan or program, then the Acquiring Fund shall convert all
Class I Shares held by the shareholder to Class A Shares of the Acquiring Fund
(which are described and offered in a separate prospectus). The failure of
shareholder of a fee-based investment program to satisfy any minimum investment
requirement will not constitute a conversion event. Such conversion will be on
the basis of the relative net asset values of the shares, without imposition of
any sales load, fee or other charge.
DISTRIBUTIONS FROM THE ACQUIRING FUND
In addition to any increase in the value of shares which the Acquiring Fund
may achieve, shareholders may receive distributions from the Acquiring Fund of
dividends and capital gain dividends.
DIVIDENDS. Dividends from stocks and interest from other investments are the
Acquiring Fund's main sources of net investment income. The Acquiring Fund's
present policy, which may be changed at any time by the Acquiring Fund's Board,
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 Class I Shares of the Acquiring Fund at the next
determined net asset value unless the shareholder instructs otherwise.
CAPITAL GAIN DIVIDENDS. The Acquiring 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 Acquiring Fund
distributes any net capital gains to shareholders as capital gain dividends at
least annually. As in the case of dividends, capital gain dividends are
automatically reinvested in additional Class I Shares of the Acquiring Fund at
the next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
For those Class I Shareholders other than Reorganization Shareholders,
participants in tax-exempt retirement plans and fee-based investment programs
eligible to purchase the shares of the Acquiring Fund must contact the
administrator or their financial adviser to purchase, redeem or exchange shares.
Certain shareholder services may only be available to tax-exempt retirement plan
participants through a plan administrator. Participants should contact the
36
appropriate tax-exempt retirement plan administrator for information regarding
the administration of participants' investments in the shares.
FREQUENT PURCHASES AND REDEMPTIONS OF SHARES
Frequent purchases and redemptions of Acquiring Fund shares by Acquiring Fund
shareholders ("market-timing" or "short-term trading") may present risks for
other shareholders of the Acquiring Fund, which may include, among other things,
dilution in the value of Acquiring Fund shares held by long-term shareholders,
interference with the efficient management of the Acquiring Fund's portfolio,
increased trading and administrative costs, incurring unwanted taxable gains,
and forcing the Acquiring Fund to hold excess levels of cash.
Mutual funds that invest in securities that primarily are listed on foreign
exchanges are subject to the risk that market timers and/or short-term traders
may take advantage of time zone differences between the foreign markets on which
the mutual funds' portfolio securities trade and the U.S. markets, which
generally determine the time as of which the fund's net asset value is
calculation ("time-zone arbitrage"). For example, a market timer may purchase
shares of a mutual fund based on events occurring after foreign market closing
prices are established, but before the mutual fund's net asset value
calculation, that are likely to result in higher prices in foreign markets the
following day. The market timer would redeem the mutual fund's shares the next
day when the mutual fund's share price would reflect the increased prices in
foreign markets, for a quick profit at the expense of long-term fund
shareholders.
The Acquiring Fund discourages and does not accommodate frequent purchases and
redemptions of Acquiring Fund shares by Acquiring Fund shareholders and the
Acquiring Fund's Board has adopted policies and procedures to deter such
frequent purchases and redemptions. The Acquiring Fund's policies with respect
to purchases, redemptions and exchanges of Acquiring Fund shares are described
in sections of this Proxy Statement/Prospectus entitled "Comparison of the
Target Fund and the Acquiring Fund -- Expenses", "Comparison of the Target Fund
and Acquiring Fund Purchase, Valuation, Redemption and Exchange of Shares",
"Additional Information About the Acquiring Fund -- Purchase of Shares" and "
Additional Information About the Acquiring Fund -- Redemption of Shares". The
Acquiring Fund's policies with respect to valuing portfolio securities are
described in the section of this Proxy Statement/Prospectus entitled "Comparison
of the Target Fund and Acquiring Fund -- Purchase, Valuation, Redemption and
Exchange". Except as described in each of these sections and with respect to
omnibus accounts, the Acquiring Fund's policies regarding frequent trading of
Acquiring Fund shares are applied uniformly to all shareholders. With respect to
trades that occur through omnibus accounts at intermediaries, such as investment
advisers, broker dealers, transfer agents, third party administrators and
insurance companies, the Acquiring
37
Fund (i) has requested assurance that such intermediaries currently selling
Acquiring Fund shares have in place internal policies and procedures reasonably
designed to address market timing concerns and has instructed such
intermediaries to notify the Acquiring Fund immediately if they are unable to
comply with such policies and procedures and (ii) requires all prospective
intermediaries to agree to cooperate in enforcing the Acquiring Fund's policies
with respect to frequent purchases, exchanges and redemptions of Acquiring Fund
shares.
FEDERAL INCOME TAXATION
Distributions of the Acquiring 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 Acquiring Fund's earnings
and profits, whether paid in cash or reinvested in additional shares.
Distributions of the Acquiring 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 Acquiring Fund have been held by such shareholders.
The Acquiring Fund expects that its distributions will consist primarily of
ordinary income and capital gain dividends. Distributions in excess of the
Acquiring Fund's earnings and profits will first reduce the adjusted tax basis
of a shareholder's shares and, after such adjusted tax basis is reduced to zero,
will constitute capital gains to such shareholder (assuming such shares are held
as a capital asset).
Although distributions generally are treated as taxable in the year they are
paid, distributions declared in 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
Acquiring Fund and received by the shareholders on the December 31st prior to
the date of payment. The Acquiring 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 rates for capital gains generally apply to long-term capital gains
from sales or exchanges recognized on or after May 6, 2003, and cease 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. Acquiring Fund shareholders, as well as the
Acquiring Fund itself, must satisfy certain holding period and other
requirements in order for the reduced rate for dividends to apply. Because the
Acquiring Fund intends to invest
38
primarily in common stocks and other equity securities of domestic corporations,
a portion of the ordinary income dividends paid by the Acquiring Fund may be
eligible for the reduced rate applicable to "qualified dividend income." No
assurance can be given as to what percentage of the ordinary income dividends
paid by the Acquiring Fund will consist of "qualified dividend income." To the
extent that distributions from the Acquiring Fund are designated as capital gain
dividends, such distributions will be eligible for the reduced rate applicable
to long-term capital gains. No assurance can be given that Congress will not
repeal the reduced U.S. federal income tax rates on long-term capital gains and
"qualified dividend income" prior to the scheduled expiration of these rates
under the 2003 Tax Act.
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). No assurance can be given that Congress will not repeal the
reduced U.S. federal income tax rates on long-term capital gains prior to the
scheduled expiration of these rates under the 2003 Tax Act.
Backup withholding rules require the Acquiring Fund, in certain circumstances,
to withhold 28% (through 2010) of dividends and certain other payments,
including redemption proceeds, paid to shareholders who do not furnish to the
Acquiring 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. The American Jobs Creation Act of 2004 (the "2004 Tax Act")
permits the Acquiring Fund to pay "interest-related dividends" and "short-term
capital gain dividends" to its foreign shareholders without having to withhold
on such dividends at the 30% rate. Under the 2004 Tax Act, the amount of
"interest-related dividends" that the Acquiring Fund may pay each year is
limited to the amount of qualified interest income received by the Acquiring
Fund during that year, less the amount of the Acquiring Fund's expenses properly
allocable to such interest income. Under the 2004 Tax Act, the amount of
"short-term capital gain dividends" that the Acquiring Fund may pay each year
generally is limited to the excess of the Acquiring Fund's net short-term
capital gains over its net long-term
39
capital losses, without any reduction for the Acquiring Fund's expenses
allocable to such gains (with exceptions for certain gains). The exemption from
30% withholding tax for "short-term capital gain dividends" does not apply with
respect to foreign shareholders that are present in the United States for more
than 182 days during the taxable year. If the Acquiring Fund's income for a
taxable year includes "qualified interest income" or net short-term capital
gains, the Acquiring Fund intends to designate dividends as "interest-related
dividends" or "short-term capital gain dividends" by written notice mailed to
its foreign shareholders not later than 60 days after the close of the Acquiring
Fund's taxable year. Foreign shareholders must provide documentation to the
Acquiring Fund certifying their non-United States status. These new provisions
apply to dividends paid by the Acquiring Fund with respect to the Acquiring
Fund's taxable years beginning on or after January 1, 2005 and will cease to
apply to dividends paid by the Acquiring Fund with respect to the Acquiring
Fund's taxable years beginning after December 31, 2007. No assurance can be
given that Congress will not repeal these provisions prior to their scheduled
expiration under the 2004 Tax Act. Prospective foreign investors should consult
their advisers concerning the tax consequences to them of an investment in
shares of the Acquiring Fund. Because the Acquiring Fund intends to invest
primarily in common stocks and other equity securities of U.S. corporations, the
ordinary dividends paid by the Acquiring Fund generally will not be eligible for
the withholding exemption related to interest-related dividends.
The Acquiring Fund intends to elect and to qualify, and intends to continue to
qualify, as a regulated investment company under federal income tax law. If the
Acquiring Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income, the Acquiring Fund will not
be required to pay federal income taxes on any income it distributes to
shareholders. If the Acquiring 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 Acquiring Fund will be subject to a nondeductible 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 Acquiring Fund, as well as the effects of state,
local and foreign tax laws and any proposed tax law changes.
DISCLOSURE OF PORTFOLIO HOLDINGS
A description of the Acquiring Fund's policies and procedures with respect to
the disclosure of the Acquiring Fund's portfolio securities is available in the
Reorganization SAI.
40
FINANCIAL HIGHLIGHTS
The Acquiring Fund is newly organized and has no performance history or
operations of its own as of the date of this Proxy Statement/Prospectus. After
the Reorganization, which is subject to shareholder approval, the Acquiring
Fund, as the successor to the Target Fund, will assume and publish the operating
history and performance record of the Target Fund. Financial information for the
Target Fund is include in its current prospectus and its most recent Annual
Report to Shareholders, which are incorporated by reference into this Proxy
Statement/Prospectus.
41
------------------------------------------------------------------------------
OTHER INFORMATION
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SHAREHOLDER INFORMATION
As of the Record Date, there were [ ] shares of the Target Fund
outstanding. As of the Record Date, the trustees and officers of the Target Fund
as a group owned less than 1% of the outstanding 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 shares of the Target Fund except as follows:
As of the Record Date, no shares of the Acquiring Fund were issued or
outstanding. Accordingly, 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 Acquiring Fund and no person was known by the Acquiring Fund to own
beneficially or of record as much as 5% of the shares of the Acquiring Fund.
SHAREHOLDER PROPOSALS
The Funds do not hold regular annual meetings of shareholders. As a general
matter, the Acquiring Fund does not intend to hold future regular annual or
special meetings of its shareholders unless required by the 1940 Act. In the
event the Reorganization is not completed, the Target Fund does not intend to
hold future regular annual or special meetings of its shareholders unless
required by the 1940 Act. Any shareholder who wishes to submit proposals for
consideration at a meeting of shareholders of the Target Fund should send such
proposal to the Target Fund at the principal executive offices of the Target
Fund at 2701 Renaissance Boulevard, Fourth Floor, King of Prussia, Pennsylvania
19406. Any shareholder who wishes to submit proposals for consideration at a
meeting of shareholders of the Acquiring Fund should send such proposal to
Acquiring Fund at the principal executive offices of the Acquiring Fund at 1221
Avenue of the Americas, New York, New York 10020. 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 Proxy Statement/Prospectus with its enclosures on or about November ,
2005. 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 VK Asset Management and its
affiliates as well as dealers or their representatives may, without additional
42
compensation, solicit proxies in person or by mail, telephone, telegraph,
facsimile or oral communication. The Target Fund has retained Computershare Fund
Services ("Computershare") to make telephone calls to Target Fund Shareholders
to remind them to vote. Computershare will be paid a project management fee as
well as fees charged on a per call basis and certain other expenses. Management
estimates that the telephone solicitation by Computershare will cost
approximately $ . Proxy solicitation expenses are an expense of the
Reorganization which will be borne by VK Asset Management.
LEGAL MATTERS
Certain legal matters concerning the [federal income tax consequences of the
Reorganization and] issuance of Class I 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 Acquiring Fund. Wayne W.
Whalen, a partner of Skadden Arps, is a director of the Target Fund and a
trustee of the Acquiring Fund.
OTHER MATTERS TO COME BEFORE THE MEETING
The Target Fund Board knows of no business other than that described in the
Notice which will be presented for consideration at the Special Meeting. If any
other matters are properly presented, it is the intention of the persons named
on the enclosed proxy card to vote proxies in accordance with their best
judgment.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve the proposed Reorganization are not received, proxies
(including abstentions and broker non-votes) will be voted in favor of one or
more adjournments of the Special Meeting to permit further solicitation of
proxies on the proposed Reorganization, provided that the Target Fund Board
determines that such an adjournment and additional solicitation is reasonable
and in the interest of shareholders based on a consideration of all relevant
factors, including the nature of the particular proposals, the percentage of
votes then cast, the percentage of negative votes cast, the nature of the
proposed solicitation activities and the nature of the reasons for such further
solicitation. Any such adjournment will require the affirmative vote of the
holders of a majority of the outstanding shares voted at the session of the
Special Meeting to be adjourned.
VOTING INFORMATION AND REQUIREMENTS
The affirmative vote of shareholders representing a majority of the shares of
the Target Fund voted is required to approve the proposed Reorganization. The
Target Fund Board has fixed the close of business on [record date], 2005 as the
Record Date for the determination of shareholders entitled to notice of, and to
vote at, the
43
Special Meeting. Target Fund shareholders on the Record Date are entitled to one
vote for each share held, with no shares having cumulative voting rights.
Target Fund shareholders may vote by appearing in person at the Special
Meeting, by returning the enclosed proxy card or by casting their vote via
telephone or the internet using the instructions provided on the enclosed proxy
card. Any person giving a proxy may revoke it at any time prior to its exercise
by executing a superseding proxy, by giving written notice of the revocation to
the secretary of the Target Fund or by voting in person at the Special Meeting.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" the approval of the proposed Reorganization. Abstentions and
broker non-votes (i.e., where a nominee such as a broker holding shares for
beneficial owners votes on certain matters pursuant to discretionary authority
or instructions from beneficial owners, but with respect to one or more
proposals does not receive instructions from beneficial owners or does not
exercise discretionary authority) are not considered shares voted. A majority of
the outstanding shares entitled to vote on a proposal must be present in person
or by proxy to have a quorum to conduct business at the Special Meeting.
Abstentions and broker non-votes will be deemed present for quorum purposes.
Shareholders who execute proxies may revoke them at any time before they are
voted by filing with the Target Fund a written notice of revocation, by
delivering a duly executed proxy bearing a later date, by recording later-dated
voting instructions via the internet or automated telephone or by attending the
Special Meeting and voting in person. The giving of a proxy will not affect your
right to vote in person if you attend the Special Meeting and wish to do so.
If you cannot be present in person at the meeting, you are requested to fill
in, sign and return the enclosed proxy card promptly or record your voting
instructions via the internet or automated telephone. No postage is necessary if
the proxy card is mailed in the United States.
[Officer]
[Title]
, 2005
44
The information in this preliminary 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 becomes
effective. This preliminary statement of additional information is not an offer
to sell these 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 SEPTEMBER 9, 2005
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
1838 INTERNATIONAL EQUITY FUND
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN INTERNATIONAL FUND
DATED , 2005
---------------------
This Statement of Additional Information is available to the shareholders
of 1838 International Equity Fund (the "Target Fund"), a series of 1838
Investment Advisors Funds (the "1838 Trust"), in connection with a proposed
transaction (the "Reorganization") whereby substantially all of the assets and
stated liabilities of the Target Fund would be transferred to Van Kampen
International Fund (the "Acquiring Fund"), a newly created series of Van Kampen
Equity Trust II (the "VK Trust"), in exchange for Class I Shares of the
Acquiring Fund. A copy of the form of Agreement and Plan of Reorganization
between the Target Fund and the Acquiring Fund is included as Appendix A hereto.
This Statement of Additional Information is intended to provide shareholders of
the Target Fund with additional information about the Reorganization and the
Acquiring Fund, which is sometimes referred to herein as the "Fund." Unless
otherwise defined herein, capitalized terms have the meanings given to them in
the Proxy Statement/Prospectus.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Proxy Statement/Prospectus dated , 2005
relating to the reorganization of the Target Fund. A copy of the Proxy
Statement/Prospectus 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>
General Information......................................... B-2
Investment Objective, Investment Strategies and Risks....... B-3
Strategic Transactions...................................... B-14
Trustees and Officers....................................... B-26
Investment Advisory Agreement............................... B-40
Fund Management............................................. B-43
Other Agreements............................................ B-45
Distribution and Service.................................... B-45
Transfer Agent.............................................. B-50
Portfolio Transactions and Brokerage Accounts............... B-50
Shareholder Services........................................ B-51
Redemption of Shares........................................ B-54
Contingent Deferred Sales Charge -- Class A................. B-54
Waiver of Contingent Deferred Sales Charge.................. B-55
Taxation.................................................... B-57
Fund Performance............................................ B-63
Other Information........................................... B-65
Financial Statements........................................ B-72
Pro Forma Financial Statements.............................. B-72
Appendix A -- Form of Agreement and Plan of
Reorganization............................................ AA-1
Appendix B -- Annual Report of the Target Fund.............. BB-1
Appendix C -- Semiannual Report of the Target Fund.......... CC-1
Appendix D -- Proxy Voting Procedures....................... DD-1
Appendix E -- Pro Forma Financial Statements................ EE-1
</Table>
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"), Van Kampen Funds Inc. (the
"Distributor"), and Van Kampen Investor Services Inc. ("Investor Services") are
wholly owned subsidiaries of Van Kampen Investments Inc. ("Van Kampen
Investments"), which is an indirect wholly owned subsidiary of Morgan Stanley.
The principal office of each of the Trust, the Fund, the Adviser, the
Distributor and Van Kampen Investments is located at 1221 Avenue of the
Americas, New York, New York 10020. The principal office of Investor Services is
located at 2800 Post Oak Boulevard, Houston, Texas 77056.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers four classes of shares, designated as Class A
Shares, Class B Shares, Class C Shares and Class I 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 a 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").
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
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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.
INVESTMENT OBJECTIVE, INVESTMENT STRATEGIES AND RISKS
The following disclosure supplements the disclosure set forth under the
captions "Comparison of the Target Fund and the Acquiring Fund -- Investment
Objective and Principal Investment Strategies" and "Comparison of the Target
Fund and the Acquiring Fund -- Principal Investment Risks" in the Proxy
Statement/Prospectus and does not, standing alone, present a complete or
accurate explanation of the matters disclosed. Readers must refer also to the
Proxy Statement/Prospectus for a complete presentation of the matters disclosed
below.
INVESTMENT STRATEGIES
The Fund invests primarily in common stocks and also may invest in other
equity securities, including preferred stocks, convertible securities, warrants
or rights to purchase equity securities and depositary receipts.
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.
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
B-3
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.
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.
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
B-4
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.
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
B-5
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 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
B-6
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.
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 securities of foreign issuers present
certain risks not ordinarily associated with investments in securities of U.S.
issuers. These risks include fluctuations in foreign currency exchange rates,
political, economic or legal developments (including war or other instability,
expropriation of assets, nationalization and confiscatory taxation), the
imposition of foreign exchange limitations (including currency blockage),
withholding taxes on income or capital transactions or other restrictions,
higher transaction costs (including higher brokerage, custodial and settlement
costs and currency conversion costs) and possible difficulty in enforcing
contractual obligations or taking judicial action. Securities of foreign issuers
may not be as liquid and may be more volatile than comparable securities of
domestic issuers.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of exchanges, brokers and listed companies abroad than in
the United States and, with respect to certain foreign countries, there is a
possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in securities of foreign issuers 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.
B-7
The Fund may invest up to 15% of its assets 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.
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.
B-8
Depositary Receipts. 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 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.
B-9
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 economically 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
B-10
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 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
B-11
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 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.
B-12
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 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.
PORTFOLIO TURNOVER
The Fund may sell securities without regard to the length of time they have
been held to take advantage of new investment opportunities, 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 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.
B-13
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below ("Strategic Transactions") to earn income, to facilitate
portfolio management and to mitigate risks. Techniques and instruments may
change over time as new instruments and strategies are developed or as
regulatory changes occur. Although the Fund's portfolio management team 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. The
Fund's activities involving Strategic Transactions may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code" or "Code"), for qualification as a regulated investment company.
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.
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 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
B-14
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.
SELLING CALL AND PUT OPTIONS
Purpose. The principal reason for selling options is to obtain, through
receipt of premiums, a greater current return than would be realized on the
underlying securities alone. Such current return could be expected to fluctuate
because premiums earned from an option selling program and dividend or interest
income yields on portfolio securities vary as economic and market conditions
change. Selling options on portfolio securities is likely to result in a higher
portfolio turnover rate.
Selling Options. The purchaser of a call option pays a premium to the
seller (i.e., the writer) for the right to buy the underlying security from the
seller at a specified price during a certain period. The Fund would write call
options only on a covered basis or for cross-hedging purposes. A call option is
covered if, at all times during the option period, the Fund owns or has the
right to acquire securities of the type that it would be obligated to deliver if
any outstanding option were exercised. An option is for cross-hedging purposes
if it is not covered by the security subject to the option, but is designed to
provide a hedge against another security which the Fund owns or has the right to
acquire. In such circumstances, the Fund collateralizes the option by
segregating cash and/or liquid securities in an amount at least equal to the
market value of the underlying security, marked to market daily, while the
option is outstanding.
The purchaser of a put option pays a premium to the seller (i.e., the
writer) for the right to sell the underlying security to the writer at a
specified price during a certain period. The Fund would sell put options only on
a secured basis, which means that, at all times during the option period, the
Fund would segregate cash and/or liquid securities in an amount at least equal
to the exercise price of the option, or would hold a put on the same underlying
security at an equal or greater exercise price.
Closing Purchase Transactions and Offsetting Transactions. To terminate its
position as a writer of a call or put option, the Fund could enter into a
"closing purchase transaction," which is the purchase of a call (put) on the
same underlying security and having the same exercise price and expiration date
as the call (put) previously sold by the Fund. The Fund would realize a gain
(loss) if the premium plus commission paid in the
B-15
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.
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.
B-16
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.
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
B-17
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.
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
B-18
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 contract transactions is
different from that of margin in securities transactions in that futures
contract margin does not involve the borrowing of funds by the customer to
finance the transaction. Rather, the initial margin is in the nature of a
performance bond or good faith deposit on the contract, which is returned to the
Fund upon termination of the futures contract and satisfaction of its
contractual obligations. Subsequent payments to and from the initial margin
account, called variation margin, are made on a daily basis as the price of the
underlying securities or index fluctuates, making the long and short positions
in the futures contract more or less valuable, a process known as marking to
market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives a variation margin payment equal to that increase in value.
Conversely, where the Fund
B-19
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 requirements,
investors may close futures contracts through offsetting transactions, which
B-20
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 Fund's portfolio management
team 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 Fund's portfolio
management team'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, the sum of its initial margin and premiums on open
futures contracts and options exceed
B-21
5% of the fair market value of the Fund's assets; however, in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in calculating the 5% limitation. To prevent leverage in connection
with the purchase of futures contracts by the Fund, the Fund will segregate cash
and/or liquid securities in an amount at least equal to the market value of the
obligation under the futures contracts (less any related margin deposits).
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put) at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included as initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures contract position is accompanied by cash representing the difference
between the current market price of the futures contract and the exercise price
of the option. The Fund could purchase put options on futures contracts in lieu
of, and for the same purposes as, the sale of a futures contract; at the same
time, it could write put options at a lower strike price (a "put bear spread")
to offset part of the cost of the strategy to the Fund. The purchase of call
options on futures contracts is intended to serve the same purpose as the actual
purchase of the futures contracts.
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 Fund's portfolio
management team will not purchase options on futures contracts on any exchange
unless in the Fund's portfolio management team'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 Fund's Adviser and the Subadviser 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-22
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 Fund's portfolio management team.
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-23
(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.
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 Fund 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, the 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 the 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 Fund 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 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
B-24
documentation has not yet been fully developed and, accordingly, they are less
liquid than swaps.
The Fund 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. The Fund 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 Board of Trustees. 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 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. 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.
B-25
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 (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 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 (60) Trustee + Chairman and Chief Executive 78 Trustee/Director/
Blistex Inc. Officer of Blistex Inc., a Managing General
1800 Swift Drive consumer health care products Partner of funds in
Oak Brook, IL 60523 manufacturer. Director of the the Fund Complex.
Heartland Alliance, a
nonprofit organization serving
human needs based in Chicago.
Director of St. Vincent de
Paul Center, a Chicago based
day care facility serving the
children of low income
families. Board member of the
Illinois Manufacturers'
Association.
Jerry D. Choate (66) Trustee + Prior to January 1999, 76 Trustee/Director/
33971 Selva Road Chairman and Chief Executive Managing General
Suite 130 Officer of the Allstate Partner of funds in
Dana Point, CA 92629 Corporation ("Allstate") and the Fund Complex.
Allstate Insurance Company. Director of Amgen
Prior to January 1995, Inc., a
President and Chief Executive biotechnological
Officer of Allstate. Prior to company, and Director
August 1994, various of Valero Energy
management positions at Corporation, an
Allstate. independent refining
company.
</Table>
B-26
<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 (64) Trustee + President of CAC, L.L.C., a 78 Trustee/Director/Managing
CAC, L.L.C. private company offering General Partner of
4350 LaJolla Village Drive capital investment and funds in the Fund
Suite 980 management advisory services. Complex. Director of
San Diego, CA 92122-6223 Prior to February 2001, Vice Stericycle, Inc.,
Chairmen and Director of Ventana Medical
Anixter International, Inc., a Systems, Inc. and
global distributor of wire, GATX Corporation and
cable and communications Trustee of The
connectivity products. Prior Scripps Research
to July 2000, Managing Partner Institute. Prior to
of Equity Group Corporate January 2005,
Investment (EGI), a company Director of the
that makes private investments University of Chicago
in other companies. Hospitals and Health
Systems. Prior to
January 2004,
Director of TeleTech
Holdings Inc. and
Arris Group, Inc.
Prior to May 2002,
Director of Peregrine
Systems Inc. Prior to
February 2001,
Director of IMC
Global Inc. Prior to
July 2000, Director
of Allied Riser
Communications Corp.,
Matria Healthcare
Inc., Transmedia
Networks, Inc., CNA
Surety, Corp. and
Grupo Azcarero Mexico
(GAM).
Linda Hutton Heagy (56) Trustee + Managing Partner of Heidrick & 76 Trustee/Director/
Heidrick & Struggles Struggles, an executive search Managing General
233 South Wacker Drive firm. Trustee on the Partner of funds in
Suite 7000 University of Chicago the Fund Complex.
Chicago, IL 60606 Hospitals Board, Vice Chair of
the Board of the YMCA of
Metropolitan Chicago and a
member of the Women's Board of
the University of Chicago.
Prior to 1997, Partner of Ray
& Berndtson, Inc., an
executive recruiting firm.
Prior to 1996, Trustee of The
International House Board, a
fellowship and housing
organization for international
graduate students. Prior to
1995, Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice President
of La Salle National Bank.
</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 INDEPENDENT TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (53) Trustee + Director and President of the 76 Trustee/Director/
1744 R Street, NW German Marshall Fund of the Managing General
Washington, DC 20009 United States, an independent Partner of funds in
U.S. foundation created to the Fund Complex.
deepen understanding, promote
collaboration and stimulate
exchanges of practical
experience between Americans
and Europeans. Formerly,
advisor to the Dennis Trading
Group Inc., a managed futures
and option company that
invests money for individuals
and institutions. Prior to
1992, President and Chief
Executive Officer, Director
and member of the Investment
Committee of the Joyce
Foundation, a private
foundation.
Howard J Kerr (69) Trustee + Prior to 1998, President and 78 Trustee/Director/
736 North Western Avenue Chief Executive Officer of Managing General
P.O. Box 317 Pocklington Corporation, Inc., Partner of funds in
Lake Forest, IL 60045 an investment holding company. the Fund Complex.
Director of the Marrow Director of the Lake
Foundation. Forest Bank & Trust.
Jack E. Nelson (69) Trustee + President of Nelson Investment 76 Trustee/Director/
423 Country Club Drive Planning Services, Inc., a Managing General
Winter Park, FL 32789 financial planning company and Partner of funds in
registered investment adviser the Fund Complex.
in the State of Florida.
President of Nelson Ivest
Brokerage Services Inc., a
member of the NASD, Securities
Investors Protection Corp. and
the Municipal Securities
Rulemaking Board. President of
Nelson Sales and Services
Corporation, a marketing and
services company to support
affiliated companies.
Hugo F. Sonnenschein (64) Trustee + President Emeritus and 78 Trustee/Director/
1126 E. 59th Street Honorary Trustee of the Managing General
Chicago, IL 60637 University of Chicago and the Partner of funds in
Adam Smith Distinguished the Fund Complex.
Service Professor in the Director of Winston
Department of Economics at the Laboratories, Inc.
University of Chicago. Prior
to July 2000, President of the
University of Chicago. Trustee
of the University of Rochester
and a member of its investment
committee. Member of the
National Academy of Sciences,
the American Philosophical
Society and a fellow of the
American Academy of Arts and
Sciences.
</Table>
B-28
<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, Ph.D. (63) Trustee + Chief Communications Officer 76 Trustee/Director/
815 Cumberstone Road of the National Academy of Managing General
Harwood, MD 20776 Sciences/National Research Partner of funds in
Council, an independent, the Fund Complex.
federally chartered policy Director of Fluor
institution, from 2001 to Corp., an
November 2003 and Chief engineering,
Operating Officer from 1993 to procurement and
2001. Director of the construction
Institute for Defense organization, since
Analyses, a federally funded January 2004 and
research and development Director of Neurogen
center, Director of the German Corporation, a
Marshall Fund of the United pharmaceutical
States, Director of the Rocky company, since
Mountain Institute and Trustee January 1998.
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-29
INTERESTED TRUSTEES*
<Table>
<Caption>
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUND SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, +; President and Chief Executive 76 Trustee/Director/
1221 Avenue of the President President Officer of funds in the Fund Managing General
Americas and Chief and Chief Complex. Chairman, President, Partner of funds in
New York, NY 10020 Executive Executive Chief Executive Officer and the Fund Complex.
Officer Officer Director of the Adviser and Van
since 2002 Kampen Advisors Inc. since
December 2002. Chairman,
President and Chief Executive
Officer of Van Kampen Investments
since December 2002. Director of
Van Kampen Investments since
December 1999. Chairman and
Director of Van Kampen Funds Inc.
since December 2002. President,
Director and Chief Operating
Officer of Morgan Stanley
Investment Management since
December 1998. President and
Director since April 1997 and
Chief Executive Officer since
June 1998 of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. Chairman, Chief Executive
Officer and Director of Morgan
Stanley Distributors Inc. since
June 1998. Chairman since June
1998, and Director since January
1998 of Morgan Stanley Trust.
Director of various Morgan
Stanley subsidiaries. President
of the Morgan Stanley Funds since
May 1999. Previously Chief
Executive Officer of Van Kampen
Funds Inc. from December 2002 to
July 2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. and Executive Vice President
of Morgan Stanley Distributors
Inc. from April 1997 to June
1998. Chief Executive Officer
from September 2002 to April 2003
and Vice President from May 1997
to April 1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* Trustee + Advisory Director of Morgan 78 Trustee/Director/
(59) Stanley. Prior to December 2002, Managing General
1221 Avenue of the Chairman, Director, President, Partner of funds in
Americas Chief Executive Officer and the Fund Complex.
New York, NY 10020 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-30
<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* (65) Trustee + Partner in the law firm of 78 Trustee/Director/
333 West Wacker Drive Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 Flom LLP, legal counsel to funds Partner of funds in
in the Fund Complex. the Fund Complex.
Director of the
Abraham Lincoln
Presidential Library
Foundation.
</Table>
- ------------------------------------
+ See Table D below.
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). 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. Mr. Whalen is an interested
person of certain funds in the Fund Complex by reason of he and his firm
currently providing legal services as legal counsel to such funds in the Fund
Complex.
B-31
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
Ronald E. Robison (66) Executive Vice ++ Executive Vice President and Principal Executive Officer of
1221 Avenue of the Americas President and funds in the Fund Complex. Chief Executive Officer and
New York, NY 10020 Principal Chairman of Investor Services. Managing Director of Morgan
Executive Stanley. Chief Administrative Officer, Managing Director and
Officer Director of Morgan Stanley Investment Advisors Inc., Morgan
Stanley Services Company Inc. and Managing Director and
Director of Morgan Stanley Distributors Inc. Chief Executive
Officer and Director of Morgan Stanley Trust. Executive Vice
President and Principal Executive Officer of the
Institutional and Retail Morgan Stanley Funds; Director of
Morgan Stanley SICAV; previously Chief Global Operations
Officer and Managing Director of Morgan Stanley Investment
Management Inc.
Joseph J. McAlinden (62) Executive Vice ++ Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Stanley Investment Advisors Inc. and Morgan Stanley
New York, NY 10020 Chief Investment Investment Management Inc. and Director of Morgan Stanley
Officer 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.
Amy R. Doberman (43) Vice President ++ Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisors Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeitus Investment Management,
Inc from January 1997 to July 2000.
Stefanie V. Chang (38) Vice President ++ Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary Vice President and Secretary of funds in the Fund Complex.
New York, NY 10020
John L. Sullivan (49) Chief Compliance ++ Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer August 2004. Prior to August 2004, Director and Managing
Oakbrook Terrace, IL 60181 Director of Van Kampen Investments, the Adviser, Van Kampen
Advisors Inc. and certain other subsidiaries of Van Kampen
Investments, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
Phillip G. Goff (41) Chief Financial ++ Executive Director of Morgan Stanley Investment Management
1 Parkview Plaza Officer and since June 2005. Chief Financial Officer and Treasurer of
Oakbrook Terrace, IL 60181 Treasurer funds in the Fund Complex since August 2005. Prior to June
2005, Vice President and Chief Financial Officer of
Enterprise Capital Management, Inc., an investment holding
company.
</Table>
- ------------------------------------
++ See Table E below.
B-32
COMPENSATION
Each trustee/director/managing general partner (hereinafter referred to in
this section as "trustee") 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 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 10
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-33
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)
------- ------------ ----------- ------------- -------------
INDEPENDENT TRUSTEES
David C. Arch $ 35,237 $147,500 $192,530
Jerry D. Choate 82,527 126,000 200,002
Rod Dammeyer 63,782 147,500 208,000
Linda Hutton Heagy 24,465 142,500 184,784
R. Craig Kennedy 16,911 142,500 200,002
Howard J. Kerr 140,743 146,250 208,000
Jack E. Nelson 97,294 109,500 200,002
Hugo F. Sonnenschein 64,476 147,500 208,002
Suzanne H. Woolsey 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1) 72,001 147,500 208,000
</Table>
- ------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Whalen is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act) of the Fund and certain other funds in the Fund
Complex. J. Miles Branagan retired as a member of the Board of Trustees of
the Fund and other funds in the Fund Complex on December 31, 2004.
(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, 2005. The details of aggregate compensation before deferral for
each operating series of the Trust during the fiscal year ended August 31,
2005 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,
2005 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, 2005 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 2004. The
retirement plan is described above the Compensation Table.
(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
B-34
the year of such trustee's anticipated retirement. The retirement plan is
described above the Compensation Table. Each trustee has served as a member
of the Board of Trustees since the year set forth in Table D below.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2004 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.
TABLE A
2005 AGGREGATE COMPENSATION FROM
THE TRUST AND EACH SERIES
<Table>
<Caption>
INDEPENDENT TRUSTEES
FISCAL ------------------------------------------------------------------------------------------
FUND NAME YEAR-END ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
- --------- -------- ---- ------ -------- ----- ------- ---- ------ ------------ -------
American Franchise Fund... 8/31
International Advantage
Fund..................... 8/31
International Fund*....... 8/31
Technology Fund........... 8/31
------ ------- -------- ------ ------- ------ ------- ------------ -------
Trust Total..............
------ ------- -------- ------ ------- ------ ------- ------------ -------
<Caption>
INTERESTED
TRUSTEE
----------
FUND NAME WHALEN
- --------- ------
American Franchise Fund...
International Advantage
Fund.....................
International Fund*.......
Technology Fund...........
----------
Trust Total..............
----------
</Table>
- ------------------------------------
* The International Fund had not commenced investment operations as of the date
of this Statement of Additional Information.
TABLE B
2005 AGGREGATE COMPENSATION DEFERRED FROM
THE TRUST AND EACH SERIES
<Table>
<Caption>
INTERESTED
INDEPENDENT TRUSTEES TRUSTEE
FISCAL -------------------------------------------------- ----------
FUND NAME YEAR-END CHOATE DAMMEYER HEAGY NELSON SONNENSCHEIN WHALEN
- --------- -------- ------ -------- ----- ------ ------------ ------
American Franchise Fund.......... 8/31
International Advantage Fund..... 8/31
International Fund*.............. 8/31..
Technology Fund.................. 8/31
------ ------ ------ ------ ------ ------
Trust Total....................
------ ------ ------ ------ ------ ------
</Table>
- ------------------------------------
* The International Fund had not commenced investment operations as of the date
of this Statement of Additional Information.
B-35
TABLE C
2005 CUMULATIVE COMPENSATION DEFERRED
(PLUS INTEREST) FROM THE TRUST AND EACH SERIES
<Table>
<Caption>
CURRENT INDEPENDENT TRUSTEES
FISCAL ---------------------------------------------------------------
FUND NAME YEAR-END CHOATE DAMMEYER HEAGY KENNEDY NELSON SONNENSCHEIN
- --------- -------- ------ -------- ----- ------- ------ ------------
American Franchise
Fund*................ 8/31
International
Advantage Fund....... 8/31
International Fund*... 8/31
Technology Fund....... 8/31
------- -------- ------- ------- ------- ------------
Trust Total..........
------- -------- ------- ------- ------- ------------
<Caption>
CURRENT
FORMER INDEPENDENT INTERESTED
TRUSTEES TRUSTEE
--------------------------- ----------
FUND NAME BRANAGAN ROONEY SISTO WHALEN
- --------- -------- ------ ----- ------
American Franchise
Fund*................
International
Advantage Fund.......
International Fund*...
Technology Fund.......
-------- ------- ------ ----------
Trust Total..........
-------- ------- ------ ----------
</Table>
- ------------------------------------
* The International Fund had not commenced investment operations as of the date
of this Statement of Additional Information.
N/A -- Not applicable
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<Table>
<Caption>
INDEPENDENT TRUSTEES
------------------------------------------------------------------------------------
FUND NAME ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
- --------- ---- ------ -------- ----- ------- ---- ------ ------------ -------
American Franchise
Fund................... 2005 2005 2005 2005 2005 2005 2005 2005 2005
International Advantage
Fund................... 2003 2001 2003 2001 2001 2003 2001 2003 2001
International Fund...... 2005 2005 2005 2005 2005 2005 2005 2005 2005
Technology Fund......... 2003 1999 2003 1999 1999 2003 1999 2003 1999
<Caption>
INTERESTED TRUSTEES
-----------------------
FUND NAME MERIN POWERS WHALEN
- --------- ----- ------ ------
American Franchise
Fund................... 2005 2005 2005
International Advantage
Fund................... 2001 2001 2001
International Fund...... 2005 2005 2005
Technology Fund......... 1999 1999 1999
</Table>
TABLE E
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<Table>
<Caption>
OFFICERS
--------------------------------------------------------
FUND NAME CHANG DOBERMAN GOFF MCALINDEN ROBISON SULLIVAN
- --------- ----- -------- ---- --------- ------- --------
American Franchise Fund.................... 2005 2005 2005 2005 2005 2005
International Advantage Fund............... 2003 2004 2005 2002 2003 2001
International Fund......................... 2005 2005 2005 2005 2005 2005
Technology Fund............................ 2003 2004 2005 2002 2003 1999
</Table>
BOARD COMMITTEES
The Board of Trustees has three standing committees (an audit committee, a
brokerage and services committee and a governance committee). Each committee is
comprised solely of "Independent Trustees", which is defined for purposes herein
as trustees who: (1) are not "interested persons" of the Fund as defined by the
1940 Act and
B-36
(2) are "independent" of the Fund as defined by the New York Stock Exchange,
American Stock Exchange and Chicago Stock Exchange listing standards.
The Board's audit committee consists of Jerry D. Choate, Rod Dammeyer and
R. Craig Kennedy. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
audit committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The audit committee
makes recommendations to the Board of Trustees concerning the selection of the
Fund's independent registered public accounting firm, reviews with such
independent registered public accounting firm the scope and results of the
Fund's annual audit and considers any comments which the independent registered
public accounting firm may have regarding the Fund's financial statements, books
of account or internal controls. The Board of Trustees has adopted a formal
written charter for the audit committee which sets forth the audit committee's
responsibilities. The audit committee has reviewed and discussed the financial
statements of the Fund with management as well as with the independent
registered public accounting firm of the Fund, and discussed with the
independent registered public accounting firm the matters required to be
discussed under the Statement of Auditing Standards No. 61. The audit committee
has received the written disclosures and the letter from the independent
registered public accounting firm required under Independence Standards Board
Standard No. 1 and has discussed with the independent registered public
accounting firm its independence. Based on this review, the audit committee
recommended to the Board of Trustees of the Fund that the Fund's audited
financial statements be included in the Fund's annual report to shareholders for
the most recent fiscal year for filing with the SEC.
The Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews the Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
The Board's governance committee consists of David C. Arch, Howard J Kerr
and Jack E. Nelson. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
nominating committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The governance
committee identifies individuals qualified to serve as Independent Trustees on
the Board and on committees of the Board, advises the Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to the Fund, monitors
corporate governance matters and makes recommendations to the Board, and acts as
the administrative committee with respect to Board policies and procedures,
committee policies and procedures and codes of ethics. The Independent Trustees
of the Fund select and nominate any other nominee Independent Trustees for the
Fund. While the Independent Trustees of the Fund expect to be able to continue
to identify from their own resources an ample number of qualified candidates for
the Board of Trustees as they deem appropriate, they will consider nominations
from shareholders to the Board. Nominations from shareholders should be in
writing and sent to the Independent Trustees as described below.
B-37
SHAREHOLDER COMMUNICATIONS
Shareholders may send communications to the Board of Trustees. Shareholders
should send communications intended for the Board by addressing the
communication directly to the Board (or individual Board members) and/or
otherwise clearly indicating in the salutation that the communication is for the
Board (or individual Board members) and by sending the communication to either
the Fund's office or directly to such Board member(s) at the address specified
for such trustee above. Other shareholder communications received by the Fund
not directly addressed and sent to the Board will be reviewed and generally
responded to by management, and will be forwarded to the Board only at
management's discretion based on the matters contained therein.
SHARE OWNERSHIP
Excluding deferred compensation balances as described in the Compensation
Table, as of December 31, 2004, the most recently completed calendar year prior
to the date of this Statement of Additional Information, each trustee of the
Fund beneficially owned equity securities of each series of the Trust and of all
of the funds in the Fund Complex overseen by the trustee in the dollar range
amounts specified below.
2004 TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
<Table>
<Caption>
TRUSTEE
----------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON
-------- ---------- -------- -------- ---------- ---------- ----------
DOLLAR RANGE OF EQUITY SECURITIES IN
EACH SERIES OF THE TRUST
American Franchise Fund.............. N/A N/A N/A N/A N/A N/A N/A
International Advantage
Fund................................ none none none none $1-$10,000 none none
International Fund................... N/A N/A N/A N/A N/A N/A N/A
Technology Fund...................... 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 FUND COMPLEX......... $50,001- $1-$10,000 over $50,001- over $1-$10,000 $1-$10,000
$100,000 $100,000 $100,000 $100,000
<Caption>
TRUSTEE
------------------------
SONNENSCHEIN WOOLSEY
------------ ----------
DOLLAR RANGE OF EQUITY SECURITIES IN
EACH SERIES OF THE TRUST
American Franchise Fund.............. N/A N/A
International Advantage
Fund................................ none none
International Fund................... N/A N/A
Technology Fund...................... none none
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN BY
TRUSTEE IN THE FUND COMPLEX......... $10,001- $10,001-
$50,000 $50,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
--------------------------------
MERIN POWERS WHALEN
-------- -------- ----------
DOLLAR RANGE OF EQUITY SECURITIES IN EACH SERIES OF THE
TRUST
American Franchise Fund..................................... N/A N/A N/A
International Advantage Fund................................ none none none
International Fund.......................................... N/A N/A N/A
Technology Fund............................................. none none none
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL
REGISTERED INVESTMENT COMPANIES OVERSEEN BY TRUSTEE IN THE
FUND COMPLEX.............................................. over over over
$100,000 $100,000 $100,000
</Table>
N/A - Not applicable, as the American Franchise Fund and the International Fund
had not commenced investment operations as of December 31, 2004.
B-38
Including deferred compensation balances (which are amounts deferred and
thus retained by each Fund as described in the Compensation Table), as of
December 31, 2004, the most recently completed calendar year prior to the date
of this Statement of Additional Information, each trustee of the Trust had in
the aggregate, combining beneficially owned equity securities and deferred
compensation of each series of the Trust and of all of the funds in the Fund
Complex overseen by the trustee, the dollar range amounts specified below.
2004 TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
<Table>
<Caption>
TRUSTEE
-------------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- -------- -------- -------- ------- -------- -------- ------------ --------
DOLLAR RANGE OF EQUITY SECURITIES
AND DEFERRED COMPENSATION IN EACH
SERIES OF THE TRUST
American Franchise Fund............. N/A N/A N/A N/A N/A N/A N/A N/A N/A
International Advantage Fund........ none none none none $1- none none none none
$10,000
International Fund.................. N/A N/A N/A N/A N/A N/A N/A N/A N/A
Technology Fund..................... none none none none $1- none none none none
$10,000
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES AND DEFERRED
COMPENSATION IN ALL REGISTERED
INVESTMENT COMPANIES OVERSEEN BY
TRUSTEE IN THE FUND COMPLEX........ $50,001- over over over over over over over $10,001-
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $50,000
</Table>
INTERESTED TRUSTEES
<Table>
<Caption>
TRUSTEE
--------------------------------
MERIN POWERS WHALEN
-------- -------- ----------
DOLLAR RANGE OF EQUITY SECURITIES AND DEFERRED COMPENSATION
IN EACH SERIES OF THE TRUST
American Franchise Fund..................................... N/A N/A N/A
International Advantage Fund................................ none none none
International Fund.......................................... N/A N/A N/A
Technology Fund............................................. none none none
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES AND DEFERRED
COMPENSATION IN ALL REGISTERED INVESTMENT COMPANIES
OVERSEEN BY TRUSTEE IN THE FUND COMPLEX................... over over over
$100,000 $100,000 $100,000
</Table>
N/A - Not applicable, as the American Franchise Fund and the International Fund
had not commenced investment operations as of December 31, 2004.
As of , 2005, the trustees and officers of the Fund as a group
owned less than 1% of the shares of the Fund.
CODE OF ETHICS
The Fund, the Adviser and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by the Fund, but is intended to ensure that all employees conduct their personal
transactions in a manner that does not interfere
B-39
with the portfolio transactions of the Fund or other Van Kampen funds, or that
such employees take unfair advantage of their relationship with the Fund. Among
other things, the Code of Ethics prohibits certain types of transactions absent
prior approval, imposes various trading restrictions (such as time periods
during which personal transactions may or may not be made) and requires
quarterly reporting of securities transactions and other reporting matters. All
reportable securities transactions and other required reports are to be reviewed
by appropriate personnel for compliance with the Code of Ethics. Additional
restrictions apply to portfolio managers, traders, research analysts and others
who may have access to nonpublic information about the trading activities of the
Fund or other Van Kampen funds or who otherwise are involved in the investment
advisory process. Exceptions to these and other provisions of the Code of Ethics
may be granted in particular circumstances after review by appropriate
personnel.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment 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
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 registered public accounting firm
fees, the costs of reports and proxies to shareholders, compensation of trustees
of the Fund (other than those who are affiliated persons of the Adviser,
Distributor or Van Kampen Investments) and all other ordinary business expenses
not specifically assumed by the Adviser. The Advisory Agreement also provides
that the Adviser shall not be liable to the Fund for any error of 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 will continue for an initial term of two years and
may be continued thereafter 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
B-40
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
[Disclosure regarding approval of the Advisory Agreement to be filed by
further amendment.]
LITIGATION INVOLVING THE ADVISER
The Adviser, certain affiliates of the Adviser, and certain investment
companies advised by the Adviser or its affiliates were named as defendants in a
number of similar class action complaints which were consolidated. The amended
complaint also names as defendants certain individual trustees and directors of
certain investment companies advised by affiliates of the Adviser; the complaint
does not, however, name the individual trustees of any Van Kampen funds. The
complaint generally alleges that defendants violated their statutory disclosure
obligations and fiduciary duties by failing properly to disclose (i) that the
Adviser and certain affiliates of the Adviser allegedly offered economic
incentives to brokers and others to steer investors to the funds advised by the
Adviser or its affiliates rather than funds managed by other companies, and (ii)
that the funds advised by the Adviser or its affiliates allegedly paid excessive
commissions to brokers in return for their alleged efforts to steer investors to
these funds. The complaint seeks, among other things, unspecified compensatory
damages, rescissionary damages, fees and costs. The defendants' motion to
dismiss this action is pending. After defendants moved to dismiss, the
plaintiffs filed a motion for leave to amend the complaint, which is also
pending. The proposed amendment drops all claims against the named investment
companies, which are listed only as nominal defendants. The proposed amendment
raises similar claims against the Adviser and its affiliates with respect to the
investment companies advised by the Adviser or its affiliates, and, in addition,
alleges that affiliates of the Adviser received undisclosed compensation for
steering investors into thirteen non-affiliated fund families. The defendants
intend to continue to defend this action vigorously. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and certain affiliates of the Adviser are also named as
defendants in a derivative suit which additionally names as defendants
individual trustees of certain Van Kampen funds; the named investment companies
are listed as nominal defendants. The complaint alleges that defendants caused
the Van Kampen funds to pay economic incentives to a proprietary sales force to
promote the sale of Van Kampen funds. The complaint also alleges that the Van
Kampen funds paid excessive commissions to Morgan Stanley and its affiliates in
connection with the sales of the funds. The complaint seeks, among other things,
the removal of the current trustees of the funds, rescission of the management
contracts for the funds, disgorgement of profits by Morgan Stanley and its
affiliates and monetary damages. This complaint has been coordinated with the
action described in the preceding paragraph. The defendants have moved to
dismiss this action and otherwise intend to defend it vigorously. This action is
currently stayed until the later of (i) a ruling on the motion to dismiss the
action described in the preceding paragraph or (ii) a ruling on a motion to
dismiss the action described in the next paragraph. While the defendants believe
that they have meritorious defenses, the ultimate outcome of this matter is not
presently determinable at this early stage of litigation.
B-41
The plaintiff in the action described in the preceding paragraph filed a
separate derivative action against the Adviser, certain affiliates of the
Adviser, the individual trustees of certain Van Kampen funds, and certain
unaffiliated entities. The named investment companies are listed as nominal
defendants. The complaint alleges that certain unaffiliated entities engaged in
or facilitated market timing and late trading in the Van Kampen funds, and that
the Adviser, certain affiliates of the Adviser, and the trustees failed to
prevent and/or detect such market timing and late trading. The complaint seeks,
among other things, the removal of the current trustees of the funds, rescission
of the management contracts and distribution plans for the funds, disgorgement
of fees and profits from the Adviser and its affiliates, and monetary damages.
The defendants' motion to dismiss this action is pending. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and one of the investment companies advised by the Adviser were
named as defendants in a class action complaint generally alleging that the
defendants breached their duties of care to long-term shareholders of the
investment company by valuing portfolio securities at the closing prices of the
foreign exchanges on which they trade without accounting for significant market
information that became available after the close of the foreign exchanges but
before calculation of net asset value. As a result, the complaint alleged,
short-term traders were able to exploit stale pricing information to capture
arbitrage profits that diluted the value of shares held by long-term investors.
The complaint sought unspecified compensatory damages, punitive damages, fees
and costs. The case was recently dismissed with prejudice but remains subject to
appeals.
The Adviser, an affiliate of the Adviser and the individual trustees of
certain Van Kampen funds are named as defendants in a recently filed class
action complaint that alleges the defendants breached various fiduciary and
statutory duties to investors by failing to ensure that the funds participated
in securities class action settlements involving securities held in the funds'
portfolios. The complaint seeks, among other things, compensatory and punitive
damages. None of the funds are named as defendants, and no claims are asserted
against them. The court recently granted the Adviser and its affiliate's motion
to dismiss the complaint, subject to plaintiffs' right to amend. The trustees'
motion to dismiss is pending.
The Adviser, one of the investment companies advised by the Adviser, and
certain officers and directors of the investment company are defendants in a
class action filed in 2001 alleging that the defendants issued a series of
prospectuses and registration statements that were materially false and
misleading. Among other things, the complaint alleges that the prospectuses and
registration statements contained misleading descriptions of the method
defendants used to value senior loan interests in the fund's portfolio, and that
defendants materially overstated the net asset value of the fund. The court has
preliminarily approved a settlement agreement, subject to a later hearing on the
fairness of the settlement agreement.
B-42
FUND MANAGEMENT
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
As of , 2005, Johannes B. Vanden Berg managed mutual funds with a
total of approximately $ billion in assets; pooled investment vehicles
other than mutual funds with a total of approximately $ billion in assets;
and other accounts with a total of approximately $ billion in assets.
As of , 2005, David Sugimoto managed mutual funds with a
total of approximately $ billion in assets; pooled investment vehicles
other than mutual funds with a total of approximately $ billion in assets; and
other accounts with a total of approximately $ billion in assets.
Because the portfolio managers manage assets for other investment
companies, pooled investment vehicles, and/or other accounts (including
institutional clients, pension plans and certain high net worth individuals),
there may be an incentive to favor one client over another resulting in
conflicts of interest. For instance, the Adviser may receive fees from certain
accounts that are higher than the fee it receives from the Fund, or it may
receive a performance-based fee on certain accounts. In those instances, the
portfolio managers may have an incentive to favor the higher and/or
performance-based fee accounts over the Fund. The portfolio managers of the Fund
do not currently manage assets for other investment companies, pooled investment
vehicles or other accounts that charge a performance fee. The Adviser has
adopted trade allocation and other policies and procedures that it believes are
reasonably designed to address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION STRUCTURE
Portfolio managers receive a combination of base compensation and
discretionary compensation, comprising a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all accounts managed by the
portfolio manager.
Base salary compensation. Generally, portfolio managers receive base salary
compensation based on the level of their position with the Adviser.
Discretionary compensation. In addition to base compensation, portfolio
managers may receive discretionary compensation.
Discretionary compensation can include:
- Cash Bonus;
- Morgan Stanley's Equity Incentive Compensation Program (EICP) awards -- a
mandatory program that defers a portion of discretionary year-end
compensation into restricted stock units or other awards based on Morgan
Stanley common stock that are subject to vesting and other conditions;
- Investment Management Deferred Compensation Plan (IMDCP) awards -- a
mandatory program that defers a portion of discretionary year-end
compensation and notionally invests it in designated funds advised by the
Investment Adviser or
B-43
its affiliates. The award is subject to vesting and other conditions.
Portfolio Managers must notionally invest a minimum of 25% to a maximum
of 50% of the IMDCP deferral into a combination of the designated funds
they manage that are included in the IMDCP fund menu, which may or may
not include the Fund;
- Select Employees' Capital Accumulation Program (SECAP) awards -- a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation and notionally invest the deferred
amount across a range of designated investment funds, including funds
advised by the Investment Adviser or its affiliates; and
- Voluntary Equity Incentive Compensation Program (VEICP) awards -- a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation to invest in Morgan Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:
- Investment performance. A portfolio manager's compensation is linked to
the pre-tax investment performance of the accounts managed by the
portfolio manager. Investment performance is calculated for one-, three-
and five-year periods measured against a fund's primary benchmark (as set
forth in the fund's prospectus), indices and/or peer groups. Generally,
the greatest weight is placed on the three- and five-year periods.
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager.
- Contribution to the business objectives of the Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market compensation survey research by independent third parties.
- Other qualitative factors, such as contributions to client objectives.
- Performance of Morgan Stanley and Morgan Stanley Investment Management,
and the overall performance of the Global Investor Group, a department
within Morgan Stanley Investment Management that includes all investment
professionals.
Occasionally, to attract new hires or to retain key employees, the total
amount of compensation will be guaranteed in advance of the fiscal year end
based on current market levels. In limited circumstances, the guarantee may
continue for more than one year. The guaranteed compensation is based on the
same factors as those comprising overall compensation described above.
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
None of the portfolio managers beneficially own shares of the Fund as of
the date of this Statement of Additional Information.
B-44
OTHER AGREEMENTS
ACCOUNTING SERVICES AGREEMENT
The Fund has entered into an accounting services agreement pursuant to
which the Adviser 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.
LEGAL SERVICES AGREEMENT
The Fund and certain other Van Kampen funds have entered into legal
services agreements pursuant to which Van Kampen Investments provides legal
services, including without limitation: accurate maintenance of each fund's
minute books and records, preparation and oversight of each fund's regulatory
reports, and other information provided to shareholders, as well as responding
to day-to-day legal issues on behalf of the funds. Payment by the funds for such
services is made on a cost basis for the salary and salary-related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel. Other funds distributed by the Distributor also
receive legal services from Van Kampen Investments. Of the total costs for legal
services provided to 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.
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.
B-45
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 eighteen months of the
purchase. The eighteen-month period ends on the first business day of the
nineteenth 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 of $1 million to $2 million, plus 0.75% on the next $1 million, plus
0.50% on the next $2 million, and 0.25% on the excess over $5 million.
Authorized dealers will be eligible to receive the ongoing service fee with
respect to such shares commencing in the second year following purchase.
Proceeds from the distribution and service fees paid by the Fund during the
first twelve months are paid to the Distributor and are used by the
Distributor to defray its distribution and service related expenses.
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 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.
With respect to Class I Shares, there are no sales charges paid by
investors. Commissions or transaction fees may be paid by the Distributor to
authorized dealers.
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
B-46
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.
There is no distribution or service plan in effect for Class I 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 such class of shares in connection
with the distribution of the respective class of shares and in connection with
the provision of ongoing services to shareholders of such class, respectively.
The Distribution Plan and the Service Plan are being implemented through the
Distribution and Service Agreement with the Distributor of each such class of
the Fund's shares, sub-agreements between the Distributor and members of the
NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and financial intermediaries who are acting as brokers (collectively,
"Selling Agreements") that may provide for their customers or clients certain
services or assistance, which may include, but not be limited to, processing
purchase and redemption transactions, establishing and maintaining shareholder
accounts regarding the Fund, and such other services as may be agreed to from
time to time and as may be permitted by applicable statute, rule or regulation.
Brokers, dealers and financial intermediaries that have entered into sub-
agreements with the Distributor and sell shares of the Fund are referred to
herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary was
prohibited from acting in any capacity or providing any of the described
services, the Distributor would consider what action, if any, would be
appropriate. The Distributor does not believe that termination of a relationship
with a financial intermediary would result in any material adverse consequences
to the Fund.
The Distributor must submit quarterly reports to the Fund's Board of
Trustees setting forth separately by class of shares all amounts paid under the
Distribution Plan and the purposes for which such expenditures were made,
together with such other information as from time to time is reasonably
requested by the trustees. The Plans provide that they will continue in full
force and effect from year to year so long as such continuance is specifically
approved by a vote of the trustees, and also by a vote of the disinterested
trustees, cast in person at a meeting called for the purpose of voting on the
Plans. Each of the Plans may not be amended to increase materially the amount to
be spent for the services described therein with respect to any class of shares
without approval by a vote of a majority of the outstanding voting shares of
such class, and all material amendments to either of the Plans must be approved
by the trustees and also by the disinterested trustees. Each of the Plans may be
terminated with respect to any class of shares at any time by a vote of a
majority of the disinterested trustees or by a vote of a majority of the
outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Class A Shares, Class B Shares and Class C Shares Prospectus (the "plan
fees"). Therefore, to the extent the Distributor's actual net
B-47
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.
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.
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.
The Adviser and/or the Distributor may pay compensation, out of their own
funds and not as an expense of the Fund, to Morgan Stanley DW and certain other
authorized dealers in connection with the sale or retention of Fund shares
and/or shareholder
B-48
servicing. For example, the Adviser or the Distributor may pay additional
compensation to Morgan Stanley DW and to other authorized dealers for the
purpose of promoting the sale of Fund shares, providing the Fund and other Van
Kampen Funds with "shelf space" or a higher profile with the authorized dealer's
financial advisors and consultants, placing the Fund and other Van Kampen Funds
on the authorized dealer's preferred or recommended fund list, granting the
Distributor access to the authorized dealer's financial advisors and
consultants, providing assistance in training and educating the authorized
dealer's personnel, furnishing marketing support and other specified services,
maintaining share balances and/or for sub-accounting, administrative or
transaction processing services. Such payments are in addition to any
distribution fees, service fees and/or transfer agency fees that may be payable
by the Fund. The additional payments may be based on factors, including level of
sales (based on gross or net sales or some specified minimum sales or some other
similar criteria related to sales of the Fund and/or some or all other Van
Kampen funds), amount of assets invested by the authorized dealer's customers
(which could include current or aged assets of the Fund and/or some or all other
Van Kampen funds), the Fund's advisory fees, some other agreed upon amount, or
other measures as determined from time to time by the Adviser and/or
Distributor. The amount of these payments, as determined from time to time by
the Adviser or the Distributor, may be different for different authorized
dealers.
With respect to Morgan Stanley DW financial advisors and intermediaries,
these payments currently include the following amounts: (1) for shares sold
through Morgan Stanley DW's Mutual Fund Network (excluding sales through Morgan
Stanley DW 401(k) platforms), (a) an amount equal to 0.20% of value (at the time
of sale) of gross sales of Fund shares and (b) for those shares purchased on or
after January 1, 2001, an ongoing annual fee in an amount up to 0.05% of the
value of such Fund shares held for a one-year period or more; and (2) for shares
sold through Morgan Stanley DW 401(k) platforms, an ongoing annual fee in an
amount up to 0.20% of the value of such Fund shares held.
With respect to other authorized dealers, these payments currently include
the following amounts: (1) other than sales through 401(k) platforms, (a) an
amount up to 0.25% of the value (at the time of sale) of gross sales of Fund
shares and (b) an ongoing annual fee in an amount up to 0.10% of the value of
such Fund shares; and (2) for shares sold through 401(k) platforms, an ongoing
annual fee in an amount up to 0.20% of the value of such Fund shares held. You
should review carefully any disclosure by your authorized dealer as to its
compensation.
The prospect of receiving, or the receipt of, such compensation, as
described above, by Morgan Stanley DW or other authorized dealers may provide
Morgan Stanley DW or other authorized dealers, and their representatives or
employees, with an incentive to favor sales of shares of the Fund over other
investment options with respect to which Morgan Stanley DW or an authorized
dealer does not receive additional compensation (or receives lower levels of
additional compensation). These payment arrangements, however, will not change
the price that an investor pays for shares of the Fund. Investors may wish to
take such payment arrangements into account when considering and evaluating any
recommendations relating to Fund shares.
From time to time, the Distributor may enter into agreements with
broker-dealers to offer the Fund through retirement plan alliance programs that
offer multiple fund families.
B-49
These programs may have special investment minimums and operational
requirements. For more information, trustees and other fiduciaries should
contact the Distributor.
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.
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
B-50
firms participating in the distribution of the Fund's shares if it reasonably
believes that the quality of execution and the commission are comparable to that
available from other qualified firms. Similarly, to the extent permitted by law
and subject to the same considerations on quality of execution and comparable
commission rates, the Adviser may direct an executing broker to pay a portion or
all of any commissions, concessions or discounts to a firm supplying research or
other services.
The Adviser may place portfolio transactions at or about the same time for
other advisory accounts, including other investment companies. The Adviser seeks
to allocate portfolio transactions equitably whenever concurrent decisions are
made to purchase or sell securities for the Fund and another advisory account.
In some cases, this procedure could have an adverse effect on the price or the
amount of securities available to the Fund. In making such allocations among the
Fund and other advisory accounts, the main factors considered by the Adviser are
the respective sizes of the Fund and other advisory accounts, the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which the Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of the Fund or
affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. The Fund's Board of Trustees has adopted certain policies
incorporating the standards of Rule 17e-1 issued by the SEC under the 1940 Act
which require that the commissions paid to affiliates of the Fund must be
reasonable and fair compared to the commissions, fees or other remuneration
received or to be received by other brokers in connection with comparable
transactions involving similar securities during a comparable period of time.
The rule and procedures also contain review requirements and require the Adviser
to furnish reports to the trustees and to maintain records in connection with
such reviews. After consideration of all factors deemed relevant, the trustees
will consider from time to time whether the advisory fee for the Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
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 Prospectuses 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 Prospectuses 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
B-51
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, New Jersey 07303-0947, requesting an
"Affidavit of Loss" and obtain a Surety Bond in a form acceptable to Investor
Services. On the date the letter is received, Investor Services will calculate
the fee for replacing the lost certificate equal to no more than 1.50% of the
net asset value of the issued shares, and bill the party to whom the replacement
certificate was mailed.
RETIREMENT PLANS
Eligible investors may establish individual retirement accounts ("IRAs");
SEP; 401(k) plans; 403(b)(7) plans in the case of employees of public school
systems and certain non-profit organizations; or other pension or profit sharing
plans. Documents and forms containing detailed information regarding these plans
are available from the Distributor.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds up to $50,000
deposited electronically into their bank accounts. Redemption proceeds
transferred to a bank account via the ACH plan are available to be credited to
the account on the second business day following normal payment. To utilize this
option, the shareholder's bank must be a member of ACH. In addition, the
shareholder must fill out the appropriate section of the account application
form. The shareholder must also include a voided check or deposit slip from the
bank account into which redemption proceeds are to be deposited together with
the completed application. Once Investor Services has received the application
and the voided check or deposit slip, such shareholder's designated bank
account, following any redemption, will be credited with the proceeds of such
redemption. Once enrolled in the ACH plan, a shareholder may terminate
participation at any time by writing Investor Services or by calling (800)
847-2424 ((800) 421-2833 for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may elect, by completing the appropriate section of the
account application form or by calling (800) 847-2424 ((800) 421-2833 for the
hearing impaired), to have all dividends and capital gain dividends paid on a
class of shares of the Fund invested into shares of the same class of any of the
Participating Funds (as defined in the
B-52
Prospectuses) 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 plan holder may arrange for periodic checks in any
amount not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan and may be
established on a form made available by the Fund. See "Shareholder
Services -- Retirement Plans."
Class B Shareholders and Class C Shareholders who establish a systematic
withdrawal plan may redeem up to 12% annually of the shareholder's initial
account balance without incurring a contingent deferred sales charge. Initial
account balance means the amount of the shareholder's investment at the time the
election to participate in the plan is made.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gain dividends
on shares held in accounts with systematic withdrawal plans are reinvested in
additional shares at the next determined net asset value per share. If periodic
withdrawals continuously exceed reinvested dividends and capital gain dividends,
the shareholder's original investment will be correspondingly reduced and
ultimately exhausted. Redemptions made concurrently with the purchase of
additional shares ordinarily will be disadvantageous to the shareholder because
of the duplication of sales charges. Any gain or loss realized by the
shareholder upon redemption of shares is a taxable event. The Fund reserves the
right to amend or terminate the systematic withdrawal program upon 30 days'
notice to its shareholders.
REINSTATEMENT PRIVILEGE
A Class A Shareholder or Class B Shareholder who has redeemed shares of the
Fund may reinstate any portion or all of the net proceeds of such redemption
(and may include that amount necessary to acquire a fractional share to round
off his or her purchase to the next full share) in Class A Shares of the Fund. A
Class C Shareholder who has redeemed shares of the Fund may reinstate any
portion or all of the net proceeds of such redemption
B-53
(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 B and 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. There is no reinstatement privilege for Class I Shares of the Fund. Any
gain or loss realized by the shareholder upon redemption of shares is a taxable
event regardless of whether the shareholder reinstates all or any portion of the
net proceeds of the redemption. Any such loss may be disallowed, to the extent
of the reinstatement, under the so-called "wash sale" rules if the reinstatement
occurs within 30 days after such redemption. In that event, the shareholder's
tax basis in the shares acquired pursuant to the reinstatement will be increased
by the amount of the disallowed loss, and the shareholder's holding period for
such shares will include the holding period for the redeemed shares.
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 Class A Shares, Class B Shares and Class C
Shares 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
B-54
redemptions made within eighteen months of purchase. For purposes of the CDSC-
Class A, when shares of a Participating Fund are exchanged for shares of another
Participating Fund, the purchase date for the shares acquired by exchange will
be assumed to be the date on which shares were purchased in the fund from which
the exchange was made. If the exchanged shares themselves are acquired through
an exchange, the purchase date is assumed to carry over from the date of the
original election to purchase shares subject to a CDSC-Class A rather than a
front-end load sales charge. In determining whether a CDSC-Class A is payable,
it is assumed that shares being redeemed first are any shares in the
shareholder's account not subject to a contingent deferred sales charge followed
by shares held the longest in the shareholder's account. The contingent deferred
sales charge is assessed on an amount equal to the lesser of the then current
market value or the cost of the shares being redeemed. Accordingly, no sales
charge is imposed on increases in net asset value above the initial purchase
price. In addition, no sales charge is assessed on shares derived from
reinvestment of dividends or capital gain dividends.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES
As described in the Fund's Class A Shares, Class B Shares and Class C
Shares 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 A (defined above) and the CDSC-Class B
and C are waived on redemptions 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, 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
B-55
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 Internal Revenue Code Section 408(d)(4) or (5), the return of excess
contributions or excess deferral amounts pursuant to Code Section 401(k)(8) or
402(g)(2), the financial hardship of the employee pursuant to U.S. Treasury
regulation Section 1.401(k)-(1)(d)(2) or the death or disability of the employee
(see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition, the charge will be
waived on any minimum distribution required to be distributed in accordance with
Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other retirement plans not specifically described
above.
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." If the
initial account balance is $1 million or more and the shareholder purchased
Class A Shares without a sales charge, those Class A shares will, in most
instances, be subject to a CDSC-Class A if redeemed within eighteen months of
their date of purchase. However, if the shareholder participates in a systematic
withdrawal program as described herein, any applicable CDSC-Class A will be
waived on those Class A Shares. 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 Class A Shares, Class B Shares and Class C Shares
Prospectus.
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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 Class A Shares, Class B
Shares and Class C Shares Prospectus. Prior to such redemptions, shareholders
will be notified in writing and allowed a specified period of time to purchase
additional shares to bring the value of the account up to the required minimum
balance. The Fund will waive the CDSC-Class B and C upon such involuntary
redemption.
REDEMPTION BY ADVISER
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
TAXATION
FEDERAL INCOME TAXATION OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for federal income tax purposes. The Fund intends to elect
and to qualify, and intends to continue to qualify each year, to be treated as a
regulated investment company under Subchapter M of the Internal Revenue 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 nondeductible 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.
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Some of the Fund's investment practices are subject to special provisions
of the Code that, among other things, may (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and/or (iv) cause the Fund to recognize
income or gain without a corresponding receipt of cash with which to make
distributions in amounts necessary to satisfy the 90% distribution requirement
and the distribution requirements for avoiding income and excise taxes. The Fund
will monitor its transactions and may make certain tax elections to mitigate the
effect of these rules and prevent disqualification of the Fund as a regulated
investment company.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may invest in non-U.S. corporations that could be classified as
"passive foreign investment companies" as defined for federal income tax
purposes. For federal income tax purposes, such an investment may, among other
things, cause the Fund to recognize income or gain without a corresponding
receipt of cash, to incur an interest charge on taxable income that is deemed to
have been deferred and/or to recognize ordinary income that would otherwise have
been treated as capital gain.
DISTRIBUTIONS TO SHAREHOLDERS
Distributions of the Fund's investment company taxable income are taxable
to shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gains designated as capital gain dividends, if any,
are taxable to shareholders as long-term capital gains regardless of the length
of time shares of the Fund have been held by such shareholders. 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 rates for capital gains generally apply to long-term capital gains
from sales or exchanges recognized on or after May 6, 2003, and cease 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. Fund shareholders, as well as the Fund
itself, must satisfy certain holding period and other requirements in order for
the reduced rate for dividends to apply. 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." No assurance can be
given as to what percentage of the ordinary income dividends paid by the Fund
will consist of "qualified dividend income." To the extent that distributions
from the Fund are designated as capital gains dividends, such distributions will
be eligible for the reduced rates applicable to long-term capital gains. No
assurance
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can be given that Congress will not repeal the reduced federal income tax rates
on long-term capital gains and "qualified dividend income" prior to the
scheduled expiration of these rates under the 2003 Tax Act. For a summary of the
maximum tax rates applicable to capital gains (including capital gain
dividends), see "Capital Gains Rates" below.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an 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. A portion of the
distributors from the Fund generally will be eligible for the corporate
dividends received deduction.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Because the Fund can only invest up
to 20% of its assets in foreign securities, the Fund will not be eligible to
pass through the foreign tax credit to investors.
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-59
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). No assurance can be given that Congress will not repeal the
reduced federal income tax rates on long-term capital gains prior to the
scheduled expiration of these rates under the 2003 Tax Act. The maximum
long-term capital gains rate for corporations is 35%.
WITHHOLDING ON PAYMENTS TO NON-U.S. SHAREHOLDERS
For purposes of this and the following paragraphs, a "Non-U.S. Shareholder"
shall include any shareholder who is not:
- an individual who is a citizen or resident of the United States;
- a corporation or partnership created or organized under the laws of the
United States or any state or political subdivision thereof;
- an estate, the income of which is subject to U.S. federal income taxation
regardless of its source; or
- a trust that (i) is subject to the primary supervision of a U.S. court
and which has one or more U.S. fiduciaries who have the authority to
control all substantial decisions of the trust, or (ii) has a valid
election in effect under applicable U.S. Treasury regulations to be
treated as a U.S. person.
A Non-U.S. Shareholder generally will be subject to withholding of U.S.
federal income tax at a 30% rate (or lower applicable treaty rate), rather than
backup withholding (discussed below), on dividends from the Fund (other than
capital gain dividends, interest-related dividends and short-term 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.
The American Jobs Creation Act of 2004 (the "2004 Tax Act") permits the
Fund to pay "interest-related dividends" and "short-term capital gain dividends"
to Non-U.S. Shareholders without having to withhold on such dividends at the 30%
rate. Under the 2004 Tax Act, the amount of "interest-related dividends" that
the Fund may pay each year is limited to the amount of "qualified interest
income" received by the Fund during that year, less the amount of the Fund's
expenses properly allocable to such interest income. "Qualified interest income"
includes, among other items, interest paid on debt obligations
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of a U.S. issuer and interest paid on deposits with U.S. banks, subject to
certain exceptions. Under the 2004 Tax Act, the amount of "short-term capital
gain dividends" that the Fund may pay each year generally is limited to the
excess of the Fund's net short-term capital gains over its net long-term capital
losses, without any reduction for the Fund's expenses allocable to such gains
(with exceptions for certain gains). The exemption from 30% withholding tax for
"short-term capital gain dividends" does not apply with respect to Non-U.S.
Shareholders that are present in the United States for more than 182 days during
the taxable year. If the Fund's income for a taxable year includes "qualified
interest income" or net short-term capital gains, the Fund may designate
dividends as "interest-related dividends" or "short-term capital gain dividends"
by written notice mailed to Non-U.S. Shareholders not later than 60 days after
the close of the Fund's taxable year. These provisions apply to dividends paid
by the Fund with respect to the Fund's taxable years beginning on or after
January 1, 2005 and will cease to apply to dividends paid by the Fund with
respect to the Fund's taxable years beginning after December 31, 2007. No
assurance can be given that Congress will not repeal these provisions prior to
their scheduled expiration under the 2004 Tax Act. Because the Fund intends to
invest primarily in common stocks and other equity securities of U.S.
corporations, the ordinary dividends paid by the Fund generally will not be
eligible for the withholding exemption related to interest-related dividends.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to U.S. federal income tax in the case of
(i) a Non-U.S. Shareholder that is a corporation and (ii) an individual Non-U.S.
Shareholder who is not present in the United States for more than 182 days
during the taxable year (assuming that certain other conditions are met).
However, certain Non-U.S. Shareholders may nonetheless be subject to backup
withholding and information reporting on capital gain dividends and redemption
proceeds paid to them upon the sale of their shares. See "Backup Withholding"
and "Information Reporting" below.
If income from the Fund or gains realized from the sale of shares are
effectively connected with a Non-U.S. Shareholder's U.S. trade or business, then
such amounts will not be subject to the 30% withholding described above, but
rather will be subject to U.S. federal income tax on a net basis at the tax
rates applicable to U.S. citizens and residents or domestic corporations. To
establish that income from the Fund or gains realized from the sale of shares
are effectively connected with a U.S. trade or business, a Non-U.S. Shareholder
must provide the Fund with a properly completed IRS Form W-8ECI certifying that
such amounts are effectively connected with the Non-U.S. Shareholder's U.S.
trade or business. Non-U.S. Shareholders that are corporations may also be
subject to an additional "branch profits tax" with respect to income from the
Fund that is effectively connected with a U.S. trade or business.
The tax consequences to a Non-U.S. Shareholder entitled to claim the
benefits of an applicable tax treaty may be different from those described in
this section. To claim tax treaty benefits, Non-U.S. Shareholders will be
required to provide the Fund with a properly completed IRS Form W-8BEN
certifying their entitlement to the benefits. In addition, in certain cases
where payments are made to a Non-U.S. Shareholder that is a partnership or other
pass-through entity, both the entity and the persons holding an interest in the
entity will need to provide certification. For example, an individual Non-U.S.
Shareholder who holds shares in the Fund through a non-U.S. partnership must
provide an
B-61
IRS Form W-8BEN to claim the benefits of an applicable tax treaty. Non-U.S.
Shareholders are advised to consult their advisers with respect to the tax
implications of purchasing, holding and disposing of shares of the Fund.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 28%
(through 2010) ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends paid
to a shareholder (other than a Non-U.S. Shareholder) if (i) the shareholder
fails to properly furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder fails
to certify that the taxpayer identification number provided is correct, that the
shareholder is not subject to backup withholding and that the shareholder is a
U.S. person (as defined for U.S. federal income tax purposes). Redemption
proceeds may be subject to backup withholding under the circumstances described
in (i) above.
Generally, dividends paid to Non-U.S. Shareholders that are subject to the
30% federal income tax withholding described above under "Withholding on
Payments to Non-U.S. Shareholders" are not subject to backup withholding. To
avoid backup withholding on capital gain dividends, interest-related dividends,
short-term capital gain dividends and redemption proceeds from the sale of
shares, Non-U.S. Shareholders must provide a properly completed IRS Form W-8BEN
certifying their non-United States status.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules from payments made to a shareholder may be refunded or
credited against such shareholder's U.S. federal income tax liability, if any,
provided that the required information is furnished to the IRS.
INFORMATION REPORTING
The Fund must report annually to the IRS and to each shareholder (other
than a Non-U.S. Shareholder) the amount of dividends, capital gain dividends or
redemption proceeds paid to such shareholder and the amount, if any, of tax
withheld pursuant to backup withholding rules with respect to such amounts. In
the case of a Non-U.S. Shareholder, the Fund must report to the IRS and such
shareholder the amount of dividends, capital gain dividends, interest-related
dividends, short-term capital gain dividends or redemption proceeds paid that
are subject to withholding (including backup withholding, if any) and the amount
of tax withheld, if any, 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.
B-62
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,
Class C Shares and Class I 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.
The after-tax returns of the Fund may also be advertised or otherwise
reported. This is generally calculated in a manner similar to the computation of
average annual total returns discussed above, except that the calculation also
reflects the effect of taxes on returns.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative non-standardized total return is calculated by measuring the value of
an initial investment in a given class of shares of the Fund at a given time,
deducting the maximum initial sales charge, if any, determining the value of all
subsequent reinvested distributions, and dividing 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.
B-63
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, the Fund's marketing materials may include an update
from the portfolio manager or the Adviser and a discussion of 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.
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.
B-64
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge from our web site at www.vankampen.com or by calling or
writing the Fund at the telephone number or address printed on the cover of this
Statement of Additional Information.
The Acquiring Fund is newly organized and has no assets, operating history
or performance information of its own as of the date of this Proxy
Statement/Prospectus. After the Reorganization, which is subject to shareholder
approval, the Acquiring Fund, as the successor to the Target Fund, will assume
and publish the operating history and performance record of the Target Fund.
OTHER INFORMATION
DISCLOSURE OF PORTFOLIO HOLDINGS
The Fund's Board of Trustees and the Adviser have adopted policies and
procedures regarding disclosure of portfolio holdings information (the
"Policy"). Pursuant to the Policy, information concerning the Fund's portfolio
holdings may be disclosed only if such disclosure is consistent with the
antifraud provisions of the federal securities laws and the fiduciary duties
owed by the Fund and the Adviser to the Fund's shareholders. The Fund and the
Adviser may not receive compensation or any other consideration (which includes
any agreement to maintain assets in the Fund or in other investment companies or
accounts managed by the Adviser or any affiliated person of the Adviser) in
connection with the disclosure of portfolio holdings information of the Fund.
The Fund's Policy is implemented and overseen by the Portfolio Holdings Review
Committee (the "PHRC"), which is described in more detail below.
Public Portfolio Holdings Information Disclosure Policy. The Fund provides
a complete schedule of portfolio holdings for the second and fourth fiscal
quarters in its semiannual and annual reports, and for the first and third
fiscal quarter in its filings with the SEC on Form N-Q.
Non-Public Portfolio Holdings Information Policy. All portfolio holdings
information that has not been disseminated in a manner making it available to
investors generally as described above is considered non-public portfolio
holdings information for the purposes of the Policy. Pursuant to the Policy,
disclosing non-public portfolio holdings information to third parties may occur
only when the Fund has a legitimate business purpose for doing so and the
recipients of such information are subject to a duty of confidentiality which
prohibits such recipients from disclosing or trading on the basis of the
non-public holdings
B-65
information. Any disclosure of non-public portfolio holdings information made to
third parties must be approved by both the Fund's Board of Trustees (or a
designated committee thereof) and the PHRC. The Policy provides for disclosure
of non-public portfolio holdings information to certain pre-authorized
categories of entities, executing broker-dealers and shareholders, in each case
under specific restrictions and limitations described below, and the Policy
provides a process for approving any other entities.
Pre-Authorized Categories. Pursuant to the Policy, the Fund may disclose
non-public portfolio holdings information to certain third parties who fall
within pre-authorized categories. These third parties include fund rating
agencies, information exchange subscribers, consultants and analysts, portfolio
analytics providers, and service providers, provided that the third party
expressly agrees to maintain the non-public portfolio holdings information in
confidence and not to trade portfolio securities based on the non-public
portfolio holdings information. Subject to the terms and conditions of any
agreement between the Adviser or the Fund and the third party, if these
conditions for disclosure are satisfied, there shall be no restriction on the
frequency with which Fund non-public portfolio holdings information is released,
and no lag period shall apply. In addition, persons who owe a duty of trust or
confidence to the Fund or the Adviser (including legal counsel) may receive
non-public portfolio holdings information without entering into a non-disclosure
agreement. The PHRC is responsible for monitoring and reporting on such entities
to the Fund's Board of Trustees. Procedures to monitor the use of such
non-public portfolio holdings information may include requiring annual
certifications that the recipients have utilized such information only pursuant
to the terms of the agreement between the recipient and the Adviser and, for
those recipients receiving information electronically, acceptance of the
information will constitute reaffirmation that the third party expressly agrees
to maintain the disclosed information in confidence and not to trade portfolio
securities based on the material non-public portfolio holdings information.
Broker-Dealer Interest Lists. Pursuant to the Policy, the Adviser may
provide "interest lists" to broker-dealers who execute securities transactions
for the Fund. Interest lists may specify only the CUSIP numbers and/or ticker
symbols of the securities held in all registered management investment companies
advised by the Adviser or affiliates of the Adviser on an aggregate basis.
Interest lists will not disclose portfolio holdings on a fund by fund basis and
will not contain information about the number or value of shares owned by a
specified fund. The interest lists may identify the investment strategy to which
the list relates, but will not identify particular Funds or portfolio
managers/management teams. Broker-dealers need not execute a non-disclosure
agreement to receive interest lists.
Shareholders In-Kind Distributions. The Fund's shareholders may, in some
circumstances, elect to redeem their shares of the Fund in exchange for their
pro rata share of the securities held by the Fund. In such circumstances,
pursuant to the Policy, such Fund shareholders may receive a complete listing of
the portfolio holdings of the Fund up to seven (7) calendar days prior to making
the redemption request provided that they represent orally or in writing that
they agree to maintain the confidentiality of the portfolio holdings
information.
Attribution Analyses. Pursuant to the Policy, the Fund may discuss or
otherwise disclose performance attribution analyses (i.e., mention the effects
of having a particular security in the portfolio(s)) where such discussion is
not contemporaneously made public,
B-66
provided that the particular holding had been disclosed publicly. Any discussion
of the analyses may not be more current than the date the holding was disclosed
publicly.
Transition Managers. Pursuant to the Policy, the Fund may disclose
portfolio holdings to transition managers, provided that the Fund has entered
into a non-disclosure or confidentiality agreement with the party requesting
that the information be provided to the transition manager and the party to the
non-disclosure agreement has, in turn, entered into a non-disclosure or
confidentiality agreement with the transition manager.
Other Entities. Pursuant to the Policy, the Fund or the Adviser may
disclose non-public portfolio holdings information to a third party who does not
fall within the pre-approved categories, and who are not executing
broker-dealers, or shareholders receiving in-kind distributions, persons
receiving attribution analysis or transition managers; however, prior to the
receipt of any non-public portfolio holdings information by such third party,
the recipient must have entered into a non-disclosure agreement and the
disclosure arrangement must have been approved by the PHRC and the Fund's Board
of Trustees (or a designated committee thereof). The PHRC will report to the
Board of Trustees of the Fund on a quarterly basis regarding any other approved
recipients of non-public portfolio holdings information.
PHRC and Board of Trustees Oversight. The PHRC, which consists of executive
officers of the Fund and the Adviser, is responsible for overseeing and
implementing the Policy and determining how portfolio holdings information will
be disclosed on an ongoing basis. The PHRC will periodically review and has the
authority to amend the Policy as necessary. The PHRC will meet at least
quarterly to (among other matters):
- address any outstanding issues relating to the Policy;
- monitor the use of information and compliance with non-disclosure
agreements by current recipients of portfolio holdings information;
- review non-disclosure agreements that have been executed with prospective
third parties and determine whether the third parties will receive
portfolio holdings information;
- generally review the procedures to ensure that disclosure of portfolio
holdings information is in the best interests of Fund shareholders; and
- monitor potential conflicts of interest between Fund shareholders, on the
one hand, and those of the Adviser, the Distributor or affiliated persons
of the Fund, the Adviser or the Distributor, on the other hand, regarding
disclosure of portfolio holdings information.
The PHRC will regularly report to the Board of Trustees on the Fund's disclosure
of portfolio holdings information and the proceedings of PHRC meetings.
B-67
Ongoing Arrangements of Portfolio Holdings Information. The Adviser and/or
the Fund have entered into ongoing arrangements to make available public and/or
non-public information about the Fund's portfolio holdings. The Fund currently
may disclose portfolio holdings information based on ongoing arrangements to the
following pre-authorized parties:
<Table>
<Caption>
NAME INFORMATION DISCLOSED FREQUENCY (1) LAG TIME
---- --------------------- ------------------- -------------------
FUND RATING AGENCIES
Morningstar (*)...... Full portfolio Quarterly basis Approximately 30
holdings days after quarter
end
CONSULTANTS AND
ANALYSTS
Bloomberg (*)........ Full portfolio Quarterly basis Approximately 30
holdings days after quarter
end
CTC Consulting, Inc.
(*)................ Top Ten and Full Quarterly basis Approximately 15
portfolio holdings days after quarter
end and
approximately 30
days after quarter
end, respectively
Fund Evaluation Group
(*)................ Top Ten portfolio Quarterly basis At least 15 days
holdings (4) after quarter end
Hammond Associates
(*)................ Full portfolio Quarterly basis At least 30 days
holdings(5) after quarter end
Hartland &
Co. (*)............ Full portfolio Quarterly basis At least 30 days
holdings(5) after quarter end
Mobius (*)........... Top Ten portfolio Monthly basis At least 15 days
holdings (4) after month end
Nelsons (*).......... Top Ten holdings (4) Quarterly basis At least 15 days
after quarter end
Prime Buchholz &
Associates,
Inc. (*)........... Full portfolio Quarterly basis At least 30 days
holdings (5) after quarter end
PSN (*).............. Top Ten holdings (4) Quarterly basis At least 15 days
after quarter end
</Table>
B-68
<Table>
<Caption>
NAME INFORMATION DISCLOSED FREQUENCY (1) LAG TIME
---- --------------------- ------------------- -------------------
Russell Investment
Group/Russell/
Mellon Analytical
Services,
Inc. (*)........... Top Ten and Full Monthly and At least 15 days
portfolio holdings quarterly basis after month end and
at least 30 days
after quarter end,
respectively
Thompson Financial
(*)................ Full portfolio Quarterly basis At least 30 days
holdings (5) after quarter end
Yanni
Partners (*)....... Top Ten portfolio Quarterly basis At least 15 days
holdings (4) after quarter end
</Table>
- ------------------------------------
(*) The Fund does not currently have a non-disclosure agreement in place with
this entity and therefore this entity can only receive publicly available
information.
(1) Dissemination of portfolio holdings information to entities listed above may
occur less frequently than indicated (or not at all).
(2) Information will typically be provided on a real time basis or as soon
thereafter as possible.
(3) Full portfolio holdings will also be provided upon request from time to time
on a quarterly basis, with at least a 30 day lag.
(4) Top Ten portfolio holdings will also be provided upon request from time to
time, with at least a 15 day lag.
The Fund may also provide Fund portfolio holdings information, as part of
its normal business activities, to persons who owe a duty of trust or confidence
to the Fund or the Adviser. These persons currently are (i) the Fund's
independent registered public accounting firm (as of the Fund's fiscal year end
and on an as needed basis), (ii) counsel to the Fund (on an as needed basis),
(iii) counsel to the independent trustees (on an as needed basis) and (iv)
members of the Board of Trustees (on an as needed basis).
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Fund.
B-69
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent registered public accounting firm.
PROXY VOTING POLICY AND PROXY VOTING RECORD
The Board of Trustees believes that the voting of proxies on securities
held by the Fund is an important element of the overall investment process. As
such, the Board has delegated the responsibility to vote such proxies to the
Adviser. The following is a summary of the Adviser's Proxy Voting Policy
("Policy").
The Adviser uses its best efforts to vote proxies on securities held in the
Fund as part of its authority to manage, acquire and dispose of Fund assets. In
this regard, the Adviser has formed a Proxy Review Committee ("Committee")
comprised of senior investment professionals that is responsible for creating
and implementing the Policy. The Committee meets monthly but may meet more
frequently as conditions warrant. The Policy provides that the Adviser will vote
proxies in the best interests of clients consistent with the objective of
maximizing long-term investment returns. The Policy provides that the Adviser
will generally vote proxies in accordance with pre-determined guidelines
contained in the Policy. The Adviser may vote in a manner that is not consistent
with the pre-determined guidelines, provided that the vote is approved by the
Committee.
The Policy provides that, unless otherwise determined by the Committee,
votes will be cast in the manner described below:
- Routine proposals will be voted in support of management.
- With regard to the election of directors, where no conflict exists and
where no specific governance deficiency has been noted, votes will be
cast in support of management's nominees.
- The Adviser will vote in accordance with management's recommendation with
respect to certain non-routine proposals (i.e., reasonable capitalization
changes, stock repurchase programs, stock splits, certain
compensation-related matters, certain anti-takeover measures, etc.) which
potentially may have a substantive financial or best interest impact on a
shareholder.
- The Adviser will vote against certain non-routine proposals (i.e.,
unreasonable capitalization changes, establishment of cumulative voting
rights for the election of directors, requiring supermajority shareholder
votes to amend by-laws, indemnification of auditors, etc.) which
potentially may have a substantive financial or best interest impact on a
shareholder (notwithstanding management support).
- The Adviser will vote in its discretion with respect to certain
non-routine proposals (i.e., mergers, acquisitions, take-overs,
spin-offs, etc.) which may have a substantive financial or best interest
impact on an issuer.
- The Adviser will vote for certain shareholder proposals it believes call
for reasonable charter provisions or corporate governance practices
(i.e., requiring auditors to attend annual shareholder meetings,
requiring that members of compensation, nominating and audit committees
be independent, requiring diversity of board
B-70
membership relating to broad based social, religious or ethnic groups,
reducing or eliminating supermajority voting requirements, etc).
- The Adviser will vote against certain shareholder proposals it believes
call for unreasonable charter provisions or corporate governance
practices (i.e., proposals to declassify boards, proposals to require a
company to prepare reports that are costly to provide or that would
require duplicative efforts or expenditure that are of a non-business
nature or would provide no pertinent information from the perspective of
institutional shareholders, proposals requiring inappropriate
endorsements or corporate actions, etc.)
- Certain other shareholder proposals (i.e., proposals that limit the
tenure of directors, proposals that limit golden parachutes, proposals
requiring directors to own large amounts of company stock to be eligible
for election, proposals that limit retirement benefits or executive
compensation, etc.) generally are evaluated by the Committee based on the
nature of the proposal and the likely impact on shareholders.
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-U.S. companies located in certain
jurisdictions, particularly emerging markets, may involve a number of problems
that may restrict or prevent the Adviser's ability to vote such proxies. As a
result, non-U.S. proxies will be voted on a best efforts basis only, after
weighing the costs and benefits to the Fund of voting such proxies.
Conflicts of Interest. If the Committee determines that an issue raises a
material conflict of interest, or gives rise to a potential material conflict of
interest, the Committee will request a special committee to review, and
recommend a course of action with respect to, the conflict in question and that
the Committee will have sole discretion to cast a vote.
Third Parties. To assist the Adviser in its responsibility for voting
proxies, Institutional Shareholder Services ("ISS") has been retained as experts
in the proxy voting and corporate governance area. The services provided to the
Adviser include in-depth research, global issuer analysis, and voting
recommendations. While the Adviser may review and utilize the ISS
recommendations in making proxy voting decisions, it is in no way obligated to
follow the ISS recommendations. In addition to research, ISS provides vote
execution, reporting, and recordkeeping. The Committee carefully monitors and
supervises the services provided by the proxy research services.
Further Information. A copy of the Policy, as well as the Fund's proxy
voting record for the most recent twelve-month period ended June 30, are
available (i) without charge on our web site at www.vankampen.com and (ii) on
the SEC's web site at www.sec.gov.
B-71
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom LLP.
FINANCIAL STATEMENTS
Incorporated herein by reference and included in their respective
entireties are (i) the audited financial statements of the Target Fund for the
fiscal year ended October 31, 2004, as included in Appendix C hereto, and (ii)
the unaudited semi-annual financial statements of the Target Fund for the period
ended April 30, 2005, as included in Appendix D hereto. The Acquiring Fund is
newly organized and has no assets, operating history or performance information
of its own as of the date of this Proxy Statement/Prospectus. After the
Reorganization, which is subject to shareholder approval, the Acquiring Fund, as
the successor to the Target Fund, will assume and publish the operating history
and performance record of the Target Fund.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix F hereto are unaudited pro forma financial statements
of the Acquiring Fund giving effect to the Reorganization which include: (i) Pro
Forma Condensed Statements of Assets and Liabilities at April 30, 2005, (ii) Pro
Forma Condensed Statement of Operations for the one year period ended April 30,
2005 and (iii) Pro Forma Portfolio of Investments at April 30, 2005.
B-72
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
[TO COME BY AMENDMENT]
AA-1
APPENDIX B
ANNUAL REPORT OF THE TARGET FUND
[TO COME BY AMENDMENT]
BB-1
APPENDIX C
SEMIANNUAL REPORT OF THE TARGET FUND
[TO COME BY AMENDMENT]
CC-1
APPENDIX D
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
IV. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policy
and procedures for voting proxies ("Proxy Voting Policy and Procedures") with
respect to securities held in the accounts of clients apply to those MSIM
entities that provide discretionary investment management services and for which
a MSIM entity has authority to vote proxies. The policies and procedures and
general guidelines in this section will be reviewed and updated, as necessary,
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 AIP GP LP, Morgan Stanley Investment
Management 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 Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Asset Management, and Van Kampen Advisors Inc. (each a "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will use its best efforts to 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 Affiliate will vote proxies pursuant to authority granted under its
applicable investment advisory agreement or, in the absence of such authority,
as authorized by the Boards of Directors or Trustees of the MSIM Funds. 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 or Investment Advisory 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 the
MSIM Affiliates 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 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. While the
MSIM Affiliates may review and utilize the ISS and IRRC recommendations in
making proxy voting decisions, they are in no way obligated to follow the ISS
and IRRC 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.
DD-1
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, after weighing the costs and
benefits of voting such proxies, 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.
III. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may, pursuant to the procedures set forth in Section IV. below, vote in a manner
that is not in accordance with the following general guidelines, provided the
vote is approved by the Proxy Review Committee and is consistent with the Client
Proxy Standard.
VI. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items, unless otherwise
determined by the Proxy Review Committee, the following
proposals will be voted in support of management.
o Selection or ratification of auditors.
o Approval of financial statements, director and auditor
reports.
o General updating/corrective amendments to the chatter.
o Approval of the payment of a dividend.
o Proposals to limit Directors' liability and/or broaden
indemnification of Directors.
o Proposals requiring that a certain percentage (up to
66%) of the company's Board members be independent
Directors.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
DD-2
o Proposals recommending set retirement ages or requiring
specific levels of stock ownership by Directors.
o Proposals to eliminate cumulative voting.
o Proposals to eliminate preemptive rights.
o Proposals for confidential voting and independent
tabulation of voting results.
o 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. Election of Directors. In situations where no conflict exists,
and where no specific governance deficiency has been noted,
unless otherwise determined by the Proxy Review Committee,
will be voted in support of nominees of management.
Unless otherwise determined by the Proxy Review
Committee, a withhold vote will be made where:
(i) A nominee has, or any time during the previous
three years had, a relationship with the issuer
(e.g., investment banker, counsel or other
professional service provider, or familial
relationship with a senior officer of the
issuer) that may impair his or her independence;
(ii) A direct conflict exists between the interests
of the nominee and the public shareholders; or
(iii) Where the nominees standing for election have
not taken action to implement generally accepted
governance practices for which there is a
"bright line" test. These would include
elimination of dead hand or slow hand poison
pills, requiring Audit, Compensation or
Nominating Committees to be composed of
independent directors and requiring a majority
independent board.
3. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on a
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted in support of management.
CAPITALIZATION CHANGES
o Proposals relating to capitalization changes that
eliminate other classes of stock and voting rights.
o 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
DD-3
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.
o Proposals to create a new class of preferred stock or
for issuances of preferred stock up to 50% of issued
capital.
o Proposals for share repurchase plans.
o Proposals to reduce the number of authorized shares of
common or preferred stock, or to eliminate classes of
preferred stock.
o Proposals to effect stock splits.
o 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
o Proposals relating to Director fees, provided the
amounts are not excessive relative to outer companies in
the country or industry.
o Proposals for 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.
o Proposals for the establishment of Employee Stock Option
Plans and other employee ownership plans.
ANTI-TAKEOVER MATTERS
o Proposals to modify or rescind existing supermajority
vote requirements to amend the charters or bylaws.
o Proposals relating to the 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.
4. The following non-routine proposals, which potentially may
have a substantive financial or best interest impact on the
shareholder, unless otherwise determined by the Proxy Review
Committee, will be voted against (notwithstanding management
support).
DD-4
o Proposals to establish cumulative voting rights in the
election of directors.
o Proposals relating to capitalization changes that add
classes of stock which substantially dilute the voting
interests of existing shareholders.
o Proposals to increase the authorized number of shares of
existing classes of stock that carry preemptive rights
or super-voting rights.
o Proposals to create "blank check" preferred stock.
o Proposals relating to changes in capitalization by 100%
or more.
o Compensation proposals that allow for discounted stock
options that have not been offered to employees in
general.
o Proposals to amend bylaws to require a supermajority
shareholder vote to pass or repeal certain provisions.
o Proposals to indemnify auditors.
5. The following types of non-routine proposals, which
potentially may have a substantive financial or best interest
impact on an issuer, will be voted as determined by the Proxy
Review Committee.
CORPORATE TRANSACTIONS
o Proposals relating to 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, including, among
other things, MSM internal company-specific knowledge.
o Proposals relating to 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.
o Proposals relating to shareholders rights plans that
allow appropriate offers to shareholders to be blocked
by the board or trigger provisions that prevent
legitimate offers from proceeding.
o Proposals relating to 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;
DD-5
(iii) For growth companies, should be no more than 10%
of the issued capital at the time of approval.
ANTI-TAKEOVER PROVISIONS
o Proposals requiring shareholder ratification of poison
pills.
o Proposals relating to 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 will be supported, unless
otherwise determined by the Proxy Review Committee:
o Proposals requiring auditors to attend the annual
meeting of shareholders.
o Proposals requiring non-U.S. companies to have a
separate Chairman and CEO.
o Proposals requiring that members of the company's
compensation, nominating and audit committees be
comprised of independent or unaffiliated Directors.
o Proposals requiring that a certain percentage of the
company's members be comprised of independent and
unaffiliated Directors.
o Proposals requiring confidential voting.
o Proposals to reduce or eliminate of supermajority voting
requirements.
o Proposals requiring shareholder approval for shareholder
rights plan or poison pill.
o Proposals to require the company to expense stock
options.
2. The following shareholder proposals will be voted as
determined by the Proxy Review Committee.
o Proposals that limit tenure of directors.
o Proposals to limit golden parachutes.
o Proposals requiring directors to own large amounts of
stock to be eligible for election.
o Proposals that request or require disclosure of
executive compensation in addition to the disclosure
required by the Securities and Exchange Commission
("SEC") regulations.
DD-6
o Proposals that limit retirement benefits or executive
compensation.
o Proposals requiring shareholder approval for bylaw or
charter amendments.
o Proposals requiring shareholder approval of executive
compensation.
o Proposals requiring shareholder approval of golden
parachutes.
o Proposals to eliminate certain anti-takeover related
provisions.
o Proposals to prohibit payment of greenmail.
3. The following shareholder proposals will not be supported,
unless otherwise determined by the Proxy Review Committee.
o Proposals to declassify the Board of Directors (if
management supports a classified board).
o Proposals requiring a U.S. company to have a separate
Chairman and CEO.
o Proposals requiring that the company 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.
o Proposals to add 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.
o Proposals that require inappropriate endorsements or
corporate actions.
VII. 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.
(a) The Committee, which is appointed by MSIM's Chief
Investment Officer ("CIO"), consists of senior
investment professionals who represent the different
investment disciplines and geographic locations of the
firm. The Committee is responsible for establishing
MSIM's proxy voting policy and guidelines and
determining how MSIM will vote proxies on an ongoing
basis.
DD-7
(b) The Committee will periodically review and have the
authority to amend, as necessary, 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)
review proposals at upcoming shareholder meetings of
MSIM portfolio companies in accordance with this Policy
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 Proxy
Voting Policy and Procedures); (2) review and approve
upcoming votes, as appropriate, for matters for which
specific direction has been provided in these Policy and
Procedures; and (3) determine how to vote matters for
which specific direction has not been provided in these
Policy and Procedures. Split votes will generally not be
approved within a single Global Investor Group team. The
Committee may take into account ISS and IRRC
recommendations and the research 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 request a special committee to
review, and recommend a course of action with respect
to, the conflict(s) in question ("Special Committee").
The Special Committee shall be comprised of the Chairman
of the Proxy Review Committee, the Compliance Director
for the area of the firm involved or his/her designee, a
senior portfolio manager (if practicable, one who is a
member of the Proxy Review Committee) designated by the
Proxy Review Committee and MSIM's Chief Investment
Officer or his/her designee. The Special Committee may
request the assistance of MSIM's General Counsel or
his/her designee 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
DD-8
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
portfolio managers, the Compliance Departments and, as
necessary, ISS, decisions of the Committee and Special
Committee so that, among other things, ISS will vote
proxies consistent with their decisions.
B. IDENTIFICATION OF MATERIAL CONFLICTS OF INTEREST
1. If there is a possibility that a vote may involve a material
conflict of interest, the vote must be decided by the Special
Committee in consultation with MSIM's General Counsel or
his/her designee.
2. A material conflict of interest could exist in the following
situations, among others:
(a) The issuer soliciting the vote is a client of MSIM or an
affiliate of MSIM and the vote is on a material matter
affecting the issuer;
(b) The proxy relates to Morgan Stanley common stock or any
other security issued by Morgan Stanley or its
affiliates; or
(c) Morgan Stanley has a material pecuniary interest in the
matter submitted for a vote (e.g., acting as a financial
advisor to a merger or acquisition for which Morgan
Stanley will be paid a success fee if completed).
C. PROXY VOTING REPORTS
1. MSIM will promptly provide a copy of these Policy and
Procedures to any client requesting it. MSIM will also, upon
client request, promptly provide a report indicating how each
proxy was voted with respect to securities held in that
client's account.
2. MSIM's legal department is responsible for filing an annual
Form N-PX on behalf of each registered management investment
company for which such filing is required, indicating how all
proxies were voted with respect to such investment company's
holdings.
DD-9
APPENDIX E
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the combination of
the 1838 International Equity Fund and the Van Kampen International Fund. The
statements are presented as of April 30, 2005, the most recent interim period
for which financial information is currently available. The unaudited Pro Forma
Portfolio of Investments and Pro Forma Statement of Assets and Liabilities
reflect the financial position as if the transaction occurred on April 30, 2005.
The Pro Forma Statement of Operations reflects the expenses for the twelve
months ended April 30, 2005. The pro forma statements give effect to the
proposed exchange of Van Kampen International Fund shares for the assets and
liabilities of the 1838 International Equity Fund, with Van Kampen International
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 Fund will sell any securities of 1838 International Equity Fund
acquired in the reorganization other than in the ordinary course of business.
EE-1
1838 INTERNATIONAL EQUITY FUND - VAN KAMPEN INTERNATIONAL FUND
PRO FORMA SCHEDULE OF INVESTMENTS
APRIL 30, 2005
(UNAUDITED)
1838 VAN KAMPEN 1838 VAN KAMPEN
INTERNATIONAL INTERNATIONAL PRO INTERNATIONAL INTERNATIONAL PRO
EQUITY FUND FUND FORMA EQUITY FUND FUND FORMA
DESCRIPTION INDUSTRY SHARES SHARES SHARES VALUE VALUE VALUE
- ------------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK-- 97.50%
AUSTRIA -- 1.97%
Erste Bank Der Oester Spark Banks 9,300 9,300 $450,101 $450,101
--------------------------------------
AUSTRALIA -- 1.94%
BHP Billiton Ltd. Metal & Mining 35,300 35,300 442,098 442,098
--------------------------------------
CANADA -- 1.66%
Encana Corporation Oil & Gas 5,900 5,900 378,649 378,649
--------------------------------------
FINLAND -- 1.78%
Fortum OYJ Electric-Intergrated 19,500 19,500 296,294 296,294
Neste Oil OYJ* Oil & Gas 4,875 4,875 109,254 109,254
--------------------------------------
405,548 405,548
--------------------------------------
FRANCE -- 8.20%
AXA, Inc. Insurance 16,100 16,100 394,695 394,695
BNP Paribas Banks 4,500 4,500 295,693 295,693
Essilor International Health Care Equipment &
Supplies 5,800 5,800 413,687 413,687
LVMH Moet-Hennessy L. Vuitton SA Consumer Durables &
Apparel 3,960 3,960 278,614 278,614
Total SA (B Shares) Oil & Gas 2,200 2,200 489,918 489,918
--------------------------------------
1,872,607 1,872,607
--------------------------------------
GERMANY -- 11.14%
Continental AG Automobiles & Components 6,700 6,700 493,881 493,881
Deutsche Bank AG Banks 3,400 3,400 278,059 278,059
E. ON AG Utility 5,400 5,400 454,868 454,868
Puma AG Consumer Durables &
Apparel 1,550 1,550 357,775 357,775
SAP AG Software 1,730 1,730 271,129 271,129
Siemens AG Industrial Conglomerate 4,560 4,560 334,250 334,250
Celesio AG Pharmaceuticals 4,450 4,450 354,911 354,911
--------------------------------------
2,544,873 2,544,873
--------------------------------------
GREECE -- 2.77%
National Bank of Greece - Cstock Banks 8,200 8,200 276,079 276,079
Coca-Cola Hellenic Bottling SA Beverages 13,100 13,100 355,480 355,480
--------------------------------------
631,559 631,559
--------------------------------------
HONG KONG -- 5.09%
CNOOC Ltd. Oil & Gas 806,800 806,800 437,252 437,252
Esprit Holdings Ltd. Retailing 56,494 56,494 420,310 420,310
China Resources Power Holdings Electric-Generation 548,000 548,000 304,023 304,023
--------------------------------------
1,161,585 1,161,585
--------------------------------------
INDIA -- 1.61%
ICICI Bank Ltd. - Sponsored ADR Banks 20,390 20,390 368,651 368,651
--------------------------------------
IRELAND -- 4.90%
Anglo Irish Bank Corp. Banks 39,900 39,900 471,309 471,309
Allied Irish Bank PLC. Banks 17,770 17,770 361,768 361,768
CRH PLC Construction Materials 11,520 11,520 286,728 286,728
--------------------------------------
1,119,805 1,119,805
--------------------------------------
INDONESIA -- 0.91%
PT Indonesian Satellite - ADR Telecommunication
Services 9,200 9,200 207,276 207,276
--------------------------------------
ISRAEL -- 1.35%
TEVA Pharmaceutical Ind. - ADR Pharmaceuticals 9,900 9,900 309,276 309,276
--------------------------------------
JAPAN -- 17.63%
Canon Inc. Office Electronics 6,400 6,400 334,290 334,290
Casio Computer CO Ltd Electronic Equipment &
Instruments 20,400 20,400 279,415 279,415
Daiwa Securities Group Diversified Financial
Services 39,000 39,000 247,200 247,200
Hoya Corp. Health Care Equipment &
Services 3,000 3,000 313,683 313,683
JSR Corp. Rubber & Vinyl 13,700 13,700 276,834 276,834
Kobe Steel Ltd. Steel Producers 185,000 185,000 335,033 335,033
Kubota Corp. Machinery 65,000 65,000 335,795 335,795
Sharp Corp. Electric Products 20,000 20,000 312,253 312,253
EE-2
SMC Corp. Machinery 2,700 2,700 284,373 284,373
Sumitomo Realty & Dev. Co., Ltd. Real Estate 25,000 25,000 284,992 284,992
Terumo Corp. Hospital Supplies 11,100 11,100 330,096 330,096
Toray Industries Inc. Industrial Materials 70,000 70,000 312,253 312,253
Toyota Motor Corp. Automobiles & Components 10,400 10,400 380,651 380,651
--------------------------------------
4,026,868 4,026,868
--------------------------------------
MEXICO -- 3.15%
America Movil SA (L Shares) - ADR Wireless
Telecommunication
Services 8,600 8,600 426,990 426,990
Wal-Mart De Mexico - Sponsored ADR Retail-Hypermarkets 8,100 8,100 292,815 292,815
--------------------------------------
719,805 719,805
--------------------------------------
NETHERLANDS -- 4.79%
ING Groep NV Diversified Financial
Services 14,800 14,800 403,140 403,140
Koninklijke Numico NV Food Products 9,100 9,100 375,926 375,926
Reed Elsevier NV Media 22,000 22,000 316,103 316,103
--------------------------------------
1,095,169 1,095,169
--------------------------------------
NORWAY -- 1.38%
Telenor ASA Telecommunication
Services 37,700 37,700 314,486 314,486
--------------------------------------
SINGAPORE -- 3.04%
DBS Group Holdings Ltd. Banks 32,255 32,255 282,194 282,194
Keppel Corp. Ltd. Construction &
Engineering 62,900 62,900 411,765 411,765
--------------------------------------
693,959 693,959
--------------------------------------
SPAIN -- 2.79%
Banco Popular Espanol SA Banks 4,750 4,750 296,177 296,177
Grupo Ferrovial SA Construction &
Engineering 6,000 6,000 341,200 341,200
--------------------------------------
637,377 637,377
--------------------------------------
SWEDEN -- 2.84%
Ericsson (LM) Tel - Sponsored ADR Telecommunications
Equipment 10,300 10,300 303,335 303,335
Getinge AB (B Shares) Health Care Equipment &
Services 24,200 24,200 346,452 346,452
--------------------------------------
649,787 649,787
--------------------------------------
SWITZERLAND -- 4.27%
Nestle SA - Sponsored ADR Food Products 4,600 4,600 301,300 301,300
Novartis AG - Registered Shares Pharmaceuticals 8,040 8,040 391,042 391,042
SGS SA Commercial Services 420 420 284,010 284,010
--------------------------------------
976,352 976,352
--------------------------------------
UNITED KINGDOM -- 14.29%
Barclays PLC Banks 32,400 32,400 332,298 332,298
BP PLC Oil & Gas 59,900 59,900 611,481 611,481
Capita Group PLC Commercial Services &
Supplies 38,400 38,400 276,124 276,124
HSBC Holdings PLC Banks 19,600 19,600 312,760 312,760
Reckitt Benckiser PLC Household Products 10,700 10,700 345,979 345,979
Royal Bank of Scotland Group PLC Banks 11,593 11,593 348,727 348,727
Sabmiller PLC Brewery 21,950 21,950 324,268 324,268
Tesco PLC Food & Drug Retailing 58,032 58,032 340,540 340,540
Vodafone Airtouch PLC Wireless
Telecommunication
Services 142,721 142,721 371,392 371,392
--------------------------------
3,263,569 3,263,569
--------------------------------
TOTAL COMMON STOCK (COST $16,703,805) 22,269,400 0 22,269,400
SHORT-TERM INVESTMENT -- 2.01 %
Evergreen Institutional Money Market Fund - I Shares
(Cost $460,637) 460,367 460,367 460,367 460,367
------------------------------
TOTAL INVESTMENTS (COST $17,164,172) -- 99.51% 22,729,767 0 22,729,767
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.49% 111,070 0 111,070
-------------------------------
NET ASSETS -- 100.00% $22,840,837 $0 $22,840,837
===============================
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Investments
Consumer Discretionary -- 12.37% Information Technology -- 6.62%
Consumer Staples -- 11.03% Materials -- 7.27%
Energy -- 8.92% Other -- 2.02%
Financials -- 25.59% Telecommunication Services -- 5.81%
Health Care -- 6.18% Utilities -- 4.64%
Industrials -- 9.55%
* Non-income producing security
ADR -- American Depositary Receipt
EE-3
<Table>
<Caption>
Construction &
Engineering 6,000 6,000 341,200 341,200
Grupo Ferrovial SA
--------------------------------------
637,377 637,377
--------------------------------------
SWEDEN -- 2.84%
Ericsson (LM) Tel - Sponsored ADR Telecommunications
Equipment 10,300 10,300 303,335 303,335
Getinge AB (B Shares) Health Care Equipment &
Services 24,200 24,200 346,452 346,452
--------------------------------------
649,787 649,787
--------------------------------------
SWITZERLAND -- 4.27%
Nestle SA - Sponsored ADR Food Products 4,600 4,600 301,300 301,300
Novartis AG - Registered Shares Pharmaceuticals 8,040 8,040 391,042 391,042
SGS SA Commercial Services 420 420 284,010 284,010
--------------------------------------
976,352 976,352
--------------------------------------
UNITED KINGDOM -- 14.29%
Barclays PLC Banks 32,400 32,400 332,298 332,298
BP PLC Oil & Gas 59,900 59,900 611,481 611,481
Capita Group PLC Commercial Services &
Supplies 38,400 38,400 276,124 276,124
HSBC Holdings PLC Banks 19,600 19,600 312,760 312,760
Reckitt Benckiser PLC Household Products 10,700 10,700 345,979 345,979
Royal Bank of Scotland Group PLC Banks 11,593 11,593 348,727 348,727
Sabmiller PLC Brewery 21,950 21,950 324,268 324,268
Tesco PLC Food & Drug Retailing 58,032 58,032 340,540 340,540
Vodafone Airtouch PLC Wireless
Telecommunication
Services 142,721 142,721 371,392 371,392
--------------------------------
3,263,569 3,263,569
--------------------------------
TOTAL COMMON STOCK (COST $16,703,805) 22,269,400 0 22,269,400
SHORT-TERM INVESTMENT -- 2.01 %
Evergreen Institutional Money Market Fund - I Shares
(Cost $460,637) 460,367 460,367 460,367 460,367
------------------------------
TOTAL INVESTMENTS (COST $17,164,172) -- 99.51% 22,729,767 0 22,729,767
OTHER ASSETS IN EXCESS OF LIABILITIES -- 0.49% 111,070 0 111,070
-------------------------------
NET ASSETS -- 100.00% $22,840,837 $0 $22,840,837
===============================
MARKET SECTOR DIVERSIFICATION
As a Percentage of Total Investments
Consumer Discretionary -- 12.37% Information Technology -- 6.62%
Consumer Staples -- 11.03% Materials -- 7.27%
Energy -- 8.92% Other -- 2.02%
Financials -- 25.59% Telecommunication Services -- 5.81%
Health Care -- 6.18% Utilities -- 4.64%
Industrials -- 9.55%
* Non-income producing security
ADR -- American Depositary Receipt
EE-4
1838 INTERNATIONAL EQUITY FUND - VAN KAMPEN INTERNATIONAL FUND
PRO FORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
April 30, 2005
(Unaudited)
1838 Van Kampen
International International
Equity Fund Fund Adjustments Pro Forma
------------- ------------- ----------- ------------
Total Investments (Cost of $17,164,172, $0 and $17,164,172,
respectively)...................................................... $22,729,767 $22,729,767
Receivables:
Dividends and Interest........................................ 136,011 136,011
Reimbursement due from Advisor................................. 1,759 1,759
------------- ------------- ----------- -----------
Total Assets................................................ 22,867,537 -0- -0- 22,867,537
------------- ------------- ----------- -----------
Accrued Expenses................................................... 26,700 26,700
------------- ------------- ----------- -----------
Total Liabilities.......................................... 26,700 -0- -0- 26,700
------------- ------------- ----------- -----------
NET Assets......................................................... $22,840,837 $0 $0 $22,840,837
============= ============= =========== ===========
NET ASSETS CONSIST OF:
Capital (Par value of $.001, $.01 and $.01 per share, respectively,
with an unlimited number of shares authorized)..................... $23,654,649 $23,654,649
Net Unrealized Appreciation........................................ 5,595,743 5,595,743
Accumulated Undistributed Net Investment Loss...................... 73,382 73,382
Accumulated Net Realized Loss...................................... (6,482,937) (6,482,937)
------------- ------------- ----------- -----------
NET Assets......................................................... $22,840,837 $0 $0 $22,840,837
============= ============= =========== ===========
SHARES OF BENEFICIAL INTEREST ISSUED AND OUTSTANDING............... 1,659,570 1,659,570
------------- ------------- ----------- -----------
NET ASSET VALUE, OFFERING PRICE AND REDEMPTION PRICE PER SHARE..... $13.76 $ 13.76
============= ============= =========== ===========
EE-5
1838 INTERNATIONAL EQUITY FUND - VAN KAMPEN INTERNATIONAL FUND
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
For the Twelve Months Ended April 30, 2005
(Unaudited)
1838 Van Kampen
International International
Equity Fund Fund Adjustments Pro Forma
------------- ------------- ----------- ------------
INVESTMENT INCOME:
Dividends (Net of foreign withholding taxes of $74,342)........ $565,741 $565,741
Interest....................................................... 5,444 5,444
------------- ------------- ----------- ------------
Total Income............................................ 571,185 0 0 571,185
------------- ------------- ----------- ------------
EXPENSES:
Investment Advisory Fee........................................ 233,039 233,039
Accounting Fees................................................ 59,692 (36,762) 22,930
Legal ......................................................... 34,005 (27,005) 7,000
Trustees' Fees ................................................ 40,008 (15,008) 25,000
Custody ....................................................... 34,926 (24,676) 10,250
Transfer Agency Fees........................................... 19,917 (1,167) 18,750
Administration Fees............................................ 18,532 (18,532) 0
All Other Expenses ............................................ 117,967 15,033 133,000
------------- ------------- ----------- ------------
Total Expense................................................ 558,086 0 (108,117) 449,969
Investment Advisory Fee Reduction............................ 169,687 (108,117) 61,570
------------- ------------- ----------- ------------
Net Expenses................................................. 388,399 0 0 388,399
------------- ------------- ----------- ------------
NET INVESTMENT INCOME.............................................. $182,786 $0 $0 $182,786
============= ============= =========== ============
REALIZED AND UNREALIZED GAIN/LOSS :
Net Realized Gain.............................................. $7,099,539 $7,099,539
Net Unrealized Depreciation During the Period.................. (2,115,705) (2,115,705)
------------- ------------- ----------- ------------
NET REALIZED AND UNREALIZED GAIN................................... $4,983,834 $0 $0 $4,983,834
============= ============= =========== ============
NET INCREASE IN NET ASSETS FROM OPERATIONS......................... $5,166,620 $0 $0 $5,166,620
============= ============= =========== ============
EE-6
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.
C-1
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
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.
C-2
(2) reliance by Investor Services on, or reasonable use by,
Investor Services of information, records and documents which
have been prepared on behalf of, or have been furnished by,
the Fund, or the carrying out by Investor Services of any
instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any
federal or state law or regulation or ruling by any federal
agency unless such violation results from any failure by
Investor Services to comply with written instructions from the
Fund that such offers or sales were not permitted under such
law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement,
or the Fund's lack of good faith, negligence or willful
misconduct or breach of any representation or warranty made by
the Fund under the agreement provided that if the reason for
such failure is attributable to any action of the Fund's
investment adviser or distributor or any person providing
accounting or legal services to the Fund, Investor Services
only will be entitled to indemnification if such entity is
otherwise entitled to the indemnification from the Fund.
ITEM 16. EXHIBITS
(1) (a) Agreement and Declaration of Trust(*)
(b) Certificate of Designation++
(2) Bylaws(*)
(3) Not Applicable
(4) Form of Agreement and Plan of Reorganization (included as
Appendix A to the Reorganization SAI)+
(5) Specimen Share Certificates++
(6) Investment Advisory Agreement++
(7) (a) Distribution and Service Agreement++
(b) Form of Dealer Agreement(9)
(8) (a) Form of Trustee Deferred Compensation Plan(1)
(b) Form of the Trustee Retirement Plan(1)
(9) (a) (i) Custodian Contract(**)
(ii) Amendment to Custodian Contract(7)
(b) Transfer Agency and Service Agreement(**)
(10) (a) Plan of Distribution pursuant to Rule 12b-1++
(b) Form of Shareholder Assistance Agreement(**)
(c) Form of Shareholder Servicing Agreement (8)
C-3
(c) Form of Administrative Service Agreement(**)
(d) Service Plan++
(e) Third Amended and Restated Multi-Class Plan(11)
(11) (a) Consent of Skadden, Arps, Slate, Meagher & Flom LLP+
(12) Tax Opinion of [ ]
relating to the Reorganization+++
(13) (a) Data Access Services Agreement(**)
(b) (i) Fund Accounting Agreement(3)
(ii) Amendments to Fund Accounting Agreement(9)(13)
(c) Amended and Restated Legal Services Agreement(8)
(14) (a) Consent of Independent Registered Public Accounting Firm of
the Target Fund++
(b) Consent of Independent Registered Public Accounting Firm of
the Acquiring Fund++
(15) Not Applicable
(16) Power of Attorney+
(17) Form of Proxy Card for Target Fund+
- -------------------------------------
(*) Incorporated herein by reference to Registrant's Registration Statement
on Form N-1A, File No. 333-75493, filed April 1, 1999.
(**) 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.
(1) 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.
(3) 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.
(7) 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.
(8) 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.
C-4
(9) 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.
(11) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493,
filed December 29, 2004.
(13) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File No. 333-75493,
filed December 29, 2004.
+ Filed herewith.
++ To be filed by further amendment.
+++ To be filed by post-effective 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 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-5
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 9th day of September, 2005.
VAN KAMPEN EQUITY TRUST II
By: /s/ STEFANIE CHANG YU
-----------------------------------
Stefanie Chang Yu
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on September 9, 2005.
<Table>
<Caption>
SIGNATURES TITLES
---------- ------
Principal Executive Officer:
/s/ RONALD E. ROBISON* Executive Vice President and Principal Executive
- ----------------------------------------------------- Officer
Ronald E. Robison
Principal Financial Officer:
/s/ PHILLIP G. GOFF* Chief Financial Officer and Treasurer
- -----------------------------------------------------
Phillip G. Goff
Trustees:
/s/ DAVID C. ARCH* Trustee
- -----------------------------------------------------
David C. Arch
/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
/s/ RICHARD F. POWERS, III* Trustee
- -----------------------------------------------------
Richard F. Powers, III
</Table>
C-6
<Table>
<Caption>
SIGNATURES TITLES
---------- ------
/s/ HUGO F. SONNENSCHEIN* Trustee
- -----------------------------------------------------
Hugo F. Sonnenschein
/s/ WAYNE W. WHALEN* Trustee
- -----------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
- -----------------------------------------------------
Suzanne H. Woolsey
- ---------------
* Signed by Stefanie Chang Yu pursuant to a power of attorney filed herewith.
/s/ STEFANIE CHANG YU
- -----------------------------------------------------
Stefanie Chang Yu
Attorney-in-Fact September 9, 2005
</Table>
SCHEDULE OF EXHIBITS TO FORM N-14
VAN KAMPEN EQUITY TRUST II
(11) (a) Consent of Skadden, Arps, Slate, Meagher & Flom LLP
(16) Power of Attorney
(17) Form of Proxy Card for Target Fund
C-7