<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 2000
REGISTRATION NOS. 33-4410
811-4629
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 [X]
Post-Effective Amendment No. 47 [X]
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 48 [X]
</TABLE>
VAN KAMPEN TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
1 Parkview Plaza, PO Box 5555, Oakbrook Terrace, Illinois 60181-5555
(Address of Principal Executive Offices) (Zip Code)
(630) 684-6000
Registrant's Telephone Number, Including Area Code
A. THOMAS SMITH III
Executive Vice President,
General Counsel and Secretary
Van Kampen Investments Inc.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, Illinois 60181-5555
(Name and Address of Agent for Service)
------------------------
Copies to:
WAYNE W. WHALEN, ESQ.
THOMAS A. HALE, ESQ.
Skadden, Arps, Slate, Meagher & Flom (Illinois)
333 W. Wacker Drive
Chicago, Illinois 60606
(312) 407-0700
------------------------
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
It is proposed that this filing will become effective:
[ ] immediately upon filing pursuant to paragraph (b)
[X] on July 28, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of Rule 485
If appropriate check the following box:
[ ] this post-effective amendment designates a new effective date for
a previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Beneficial Interest, par value
$0.01 per share
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Post-Effective Amendment No. 47 to the Registrant's Registration
Statement contains two Prospectuses and two Statements of Additional Information
describing the Van Kampen High Yield Fund and Van Kampen Strategic Income Fund
(collectively the "Applicable Series"). This amendment is not intended to amend
the prospectus and statement of additional information of other series of the
Registrant. The Registration Statement is organized as follow:
Facing Page
Prospectuses relating to each Applicable Series
Statements of Additional Information relating to each Applicable Series
Part C Information
Exhibits
No changes are being made to the prospectus and statement of additional
information of the Van Kampen Managed Short Term Income Fund of the Registrant
included in Post-Effective No. 45 under the Securities Act of 1933, as amended,
which was filed with the Commission on July 21, 1999.
<PAGE> 3
VAN KAMPEN
HIGH YIELD FUND
Van Kampen High Yield Fund's primary investment objective is to seek to provide
a high level of current income. As a secondary investment objective, the Fund
seeks capital appreciation. The Fund's investment adviser seeks to achieve the
Fund's investment objectives primarily through investment in a portfolio of
medium- and lower-grade domestic corporate debt securities.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JULY 28, 2000.
[VAN KAMPEN FUNDS LOGO]
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary............................... 3
Fees and Expenses of the Fund..................... 6
Investment Objectives, Policies and Risks......... 7
Investment Advisory Services...................... 13
Purchase of Shares................................ 14
Redemption of Shares.............................. 20
Distributions from the Fund....................... 22
Shareholder Services.............................. 22
Federal Income Taxation........................... 24
Financial Highlights.............................. 26
Appendix -- Description of Securities Ratings..... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 5
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVES
The Fund's primary investment objective to seek to provide a high level of
current income. As a secondary investment objective, the Fund seeks capital
appreciation.
INVESTMENT STRATEGIES
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objectives by investing primarily in a portfolio of
medium- and lower-grade domestic corporate debt securities. The Fund also may
invest up to 35% of its total assets in debt securities of similar quality
issued by foreign governments or foreign corporations. The Fund invests in a
broad range of debt securities represented by various companies and industries
and traded on various markets. The Fund buys and sells securities with a view to
seeking a high level of current income and capital appreciation over the
long-term. Lower-grade securities are commonly referred to as "junk bonds". The
Fund's investments in medium- and lower-grade securities involve greater risks
as compared to higher-grade securities. The Fund may purchase and sell
securities on a when-issued or delayed delivery basis. The Fund may purchase and
sell certain derivative instruments (such as options, futures and options on
futures, and interest rate swaps or other interest rate-related transactions)
for various portfolio management purposes.
INVESTMENT RISKS
An investment in the Fund is subject to investment risks, and you could lose
money on your investment in the Fund. There can be no assurance that the Fund
will achieve its investment objectives.
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. The Fund invests primarily in securities with medium-
and lower-grade credit quality. Therefore, the Fund is subject to a higher level
of credit risk than a fund that invests solely in investment-grade securities.
The credit quality of "noninvestment-grade" securities is considered speculative
by recognized rating agencies with respect to the issuer's continuing ability to
pay interest and principal. Lower-grade securities may have less liquidity and a
higher incidence of default than higher-grade securities. The Fund may incur
higher expenses to protect the Fund's interest in such securities. The credit
risks and market prices of lower-grade securities generally are more sensitive
to negative issuer developments, such as reduced revenues or increased
expenditures, or adverse economic conditions, such as a recession, than are
higher-grade securities.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of debt securities tend to fall as
interest rates rise, and such declines tend to be greater among securities with
longer maturities. The Fund has no policy limiting the maturities of its
investments. To the extent that the Fund invests in securities with longer
maturities, the Fund will be subject to greater market risk than a fund
investing solely in shorter-term securities. Lower-grade securities may be more
volatile and decline more in price in response to negative issuer or general
economic news than higher-grade securities.
Market risk is often greater among certain types of debt securities, such as
zero-coupon bonds or pay-in-kind securities. As interest rates change, these
securities often fluctuate more in price than traditional debt securities and
may subject the Fund to greater market risk than a fund that does not own these
types of securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuations.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates and credit risk, which can vary widely over the short- and long-term. If
interest rates drop, your income from the Fund may drop as well.
CALL RISK. If interest rates fall, it is possible that issuers of debt
securities with high interest rates will prepay or "call" their securities
before their maturity dates. In this event, the proceeds from the called
securities would likely be reinvested by the Fund in securities bearing the new,
lower interest rates,
3
<PAGE> 6
resulting in a possible decline in the Fund's income and distributions to
shareholders.
FOREIGN RISKS. Because the Fund may own securities of foreign issuers, it may be
subject to risks not usually associated with owning securities of U.S. issuers.
These risks can include fluctuations in foreign currencies, foreign currency
exchange controls, political and economic instability, differences in financial
reporting, differences in securities regulation and trading, and foreign
taxation issues.
RISKS OF USING DERIVATIVE INSTRUMENTS. In general terms, a derivative instrument
is one whose value depends on (or is derived from) the value of an underlying
asset, interest rate or index. Options, futures, options on futures and interest
rate swaps or other interest-rate related transactions are examples of
derivative instruments. Derivative instruments involve risks different from
direct investments in underlying securities. These risks include imperfect
correlation between the value of the instruments and the underlying assets;
risks of default by the other party to certain transactions; risks that the
transactions may result in losses that partially or completely offset gains in
portfolio positions; and risks that the transactions may not be liquid.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objectives and strategies, the Fund may be
appropriate for investors who:
- Seek a high level of current income and, secondarily, capital appreciation
- Are willing to take on the substantially increased risks of medium- and
lower-grade securities in exchange for potentially higher income
- Wish to add to their investment portfolio a fund that invests primarily in
medium- and lower-grade domestic corporate debt securities
An investment in the Fund is not a deposit of any bank or other insured
depository institution. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Investors should carefully consider the additional risks associated with
investments in medium- and lower-grade securities. An investment in the Fund may
not be appropriate for all investors. The Fund is not intended to be a complete
investment program, and investors should consider their long-term investment
goals and financial needs when making an investment decision about the Fund. An
investment in the Fund is intended to be a long-term investment, and the Fund
should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the ten calendar years prior to the
date of this prospectus. Sales loads are not reflected in this chart. If these
sales loads had been included, the returns shown below would have been lower.
Remember that the past performance of the Fund is not indicative of its future
performance.
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1990 -11.59
1991 35.13
1992 17.01
1993 17.73
1994 -3.34
1995 17.52
1996 12.48
1997 10.97
1998 -1.45
1999 6.29
</TABLE>
The Fund's return for the six-month period ended June 30, 2000 was - 0.10%.
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
4
<PAGE> 7
During the ten-year period shown in the bar chart, the highest quarterly return
for Class A Shares was 15.17% (for the quarter ended March 31, 1991) and the
lowest quarterly return for Class A Shares was -8.36% (for the quarter ended
September 30, 1998).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with the Credit Suisse First Boston
High Yield Index*, a broad-based market index that the Fund's investment adviser
believes is an appropriate benchmark for the Fund. The Fund's performance
figures include the maximum sales charges paid by investors. The index
performance figures do not include any commissions or sales charges that would
be paid by investors purchasing the securities represented by the index. An
investment can not be made directly in an index. Average annual total returns
are shown for the periods ended December 31, 1999 (the most recently completed
calendar year prior to the date of this prospectus). Remember that the past
performance of the Fund is not indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns Past 10
for the Years or
Periods Ended Past Past Since
December 31, 1999 1 Year 5 Years Inception
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen High
Yield Fund--
Class A Shares 6.29% 8.97% 9.35%
Credit Suisse
First Boston High
Yield Index 3.28% 8.16% 11.06%
.......................................................
Van Kampen High
Yield Fund--
Class B Shares 5.55% 8.15% 6.75%(1)**)
Credit Suisse
First Boston High
Yield Index 3.28% 8.16% 11.50%(2)
.......................................................
Van Kampen High
Yield Fund--
Class C Shares 5.43% 8.10% 6.24%(3)
Credit Suisse
First Boston High
Yield Index 3.28% 8.16% 12.06%(4)
.......................................................
</TABLE>
Inception dates: (1) 5/17/93, (2) 5/1/93, (3) 8/13/93, (4) 8/1/93.
*This broad-based, unmanaged index reflects the general performance of a wide
range of selected bonds within the public high-yield debt market.
**The "Since Inception" performance for Class B Shares reflects the conversion
of such shares into Class A Shares six years after purchase. Class B Shares
purchased on or after June 1, 1996 will convert eight years after purchase.
See "Purchase of Shares."
The current yield for the thirty-day period ended March 31, 2000 is 10.50% for
Class A Shares, 10.24% for Class B Shares and 10.24% for Class C Shares.
Investors can obtain the current yield of the Fund for each class of shares by
calling (800) 341-2911 or through the internet at www.vankampen.com.
5
<PAGE> 8
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
------------------------------------------------------------
Maximum sales charge
(load) imposed on
purchases (as a
percentage of 4.75%(1) None None
offering price)
............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
............................................................
Maximum sales charge
(load) imposed on
reinvested dividends
(as a percentage of
offering price) None None None
............................................................
Redemption fees (as a
percentage of amount
redeemed) None None None
............................................................
Exchange fee None None None
............................................................
</TABLE>
------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
<TABLE>
<S> <C> <C> <C> <C>
--------------------------------------------------------------
Management fees(5) 0.75% 0.75% 0.75%
..............................................................
Distribution and/or
service (12b-1)
fees(6) 0.24% 1.00%(7) 1.00%(7)
..............................................................
Other expenses(5) 0.26% 0.28% 0.28%
..............................................................
Total annual fund
operating expenses(5)
1.25% 2.03% 2.03%
..............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) The Fund's investment adviser is currently waiving or reimbursing a portion
of the Fund's management fees or other expenses such that the actual total
annual fund operating expenses for the fiscal year ended March 31, 2000 were
1.15%, 1.93% and 1.93% for Class A Shares, Class B Shares and Class C
Shares, respectively. The fee waivers or expense reimbursements can be
terminated at any time.
(6) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(7) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $596 $853 $1,129 $1,915
......................................................................
Class B Shares $606 $987 $1,243 $2,158*
......................................................................
Class C Shares $306 $637 $1,093 $2,358
......................................................................
</TABLE>
6
<PAGE> 9
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $596 $853 $1,129 $1,915
.......................................................................
Class B Shares $206 $637 $1,093 $2,158*
.......................................................................
Class C Shares $206 $637 $1,093 $2,358
.......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund's primary investment objective to seek to provide a high level of
current income. As a secondary investment objective, the Fund seeks capital
appreciation. The Fund's investment objectives are fundamental policies and may
not be changed without shareholder approval by a majority of the Fund's
outstanding voting securities, as defined in the Investment Company Act of 1940,
as amended (the "1940 Act"). There are risks inherent in all investments in
securities; accordingly there can be no assurance that the Fund will achieve its
investment objectives.
Under normal market conditions, the Fund's investment adviser seeks to achieve
the Fund's investment objectives by investing primarily in a portfolio of
medium- and lower-grade domestic corporate debt securities. The Fund also may
invest up to 35% of its total assets in debt securities of similar quality
issued by foreign governments and foreign corporations. Under normal market
conditions, the Fund invests primarily in securities rated at the time of
purchase BBB or lower by Standard & Poor's ("S&P") or rated Baa or lower by
Moody's Investors Service, Inc. ("Moody's") or comparably rated short-term
securities and unrated securities determined by the Fund's investment adviser to
be of comparable quality at the time of purchase. With respect to such
investments, the Fund has not established any limit on the percentage of its
portfolio which may be invested in securities in any one rating category.
Securities rated BB or lower by S&P or rated Ba or lower by Moody's or
comparably rated short-term securities and unrated securities of comparable
quality are commonly referred to as "junk bonds" and involve special risks as
compared to investments in higher-grade securities. See "Risks of Investing in
Medium- and Lower-Grade Securities" below.
UNDERSTANDING
QUALITY RATINGS
Debt securities ratings are based on the issuer's ability to pay interest
and repay the principal. Debt securities with ratings above the line are
considered "investment-grade," while those with ratings below the line are
regarded as "noninvestment-grade," or "junk bonds." A detailed explanation
of these ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
S&P Moody's Meaning
------------------------------------------------------
<C> <S> <C>
AAA Aaa Highest quality
......................................................
AA Aa High quality
......................................................
A A Above-average quality
......................................................
BBB Baa Average quality
------------------------------------------------------
BB Ba Below-average quality
......................................................
B B Marginal quality
......................................................
CCC Caa Poor quality
......................................................
CC Ca Highly speculative
......................................................
C C Lowest quality
......................................................
D -- In default
......................................................
</TABLE>
The Fund invests in a broad range of debt securities represented by various
companies and industries and traded in various markets. The Fund buys and sells
securities with in view to seeking a high level of current income and capital
appreciation over the long-term. The higher yields for current income and the
potential for capital appreciation sought by the Fund are generally obtainable
from securities in the medium- and lower-grade credit quality range. Such
securities tend to offer higher yields than higher-grade securities with the
same maturities because the historical conditions of the issuers of such
securities may not have been as strong as those of other issuers. These
securities may be issued in connection with corporate restructurings such as
leveraged buyouts, mergers, acquisitions, debt recapitalization or similar
events. These securities are often issued by less creditworthy companies or
companies with substantial debt and may include financially troubled companies
or companies in default or in restructuring. Such securities often are
subordinated to the prior claims of banks and other senior lenders. Lower-grade
securities are regarded by the rating agencies as predominantly speculative with
respect to
7
<PAGE> 10
the issuer's continuing ability to meet principal and interest payments. The
ratings of S&P and Moody's represent their opinions of the quality of the debt
securities they undertake to rate, but not the market risk of such securities.
It should be emphasized however, that ratings are general and are not absolute
standards of quality.
The Fund's investment adviser seeks to minimize the risks involved in investing
in medium- and lower-grade securities through diversification, careful
investment analysis and attention to current developments and trends in the
economy and financial and credit markets. In purchasing and selling securities,
the Fund's investment adviser evaluates the issuers of such securities based on
a number of factors, including but not limited to the issuers's financial
resources, its sensitivity to changing economic conditions and trends, its
revenues or earnings potential, its operating history, its current borrowing
requirements and debt maturities, the quality of its management, regulatory
matters and its potential for capital appreciation. The Fund's investment
adviser may consider the ratings from S&P and Moody's in evaluating securities
but it does not rely primarily on such ratings. The investment adviser
continuously monitors the issuers of debt securities held by the Fund.
The Fund may invest in preferred stocks, convertible securities, zero coupon
securities and payment-in-kind securities. The Fund also may invest up to 5% of
its assets in warrants and common stocks. For more information on these types of
investments, see "Investment Objectives and Policies" in the Fund's Statement of
Additional Information. The Fund's Statement of Additional Information may be
obtained by investors free of charge as described on the back cover of this
prospectus.
RISKS OF INVESTING IN
MEDIUM- AND LOWER-GRADE SECURITIES
Securities which are in the medium- or lower-grade categories generally offer
higher yields than are offered by higher-grade securities of similar maturities,
but they also generally involve greater risks, such as greater credit risk,
greater market risk and volatility, greater liquidity concerns and potentially
greater manager risk. Investors should carefully consider the risks of owning
shares of a portfolio which invests in medium- or lower-grade securities before
investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Medium- and lower-grade securities are considered more
susceptible to nonpayment of interest and principal or default than higher-grade
securities. Increases in interest rates or changes in the economy may
significantly affect the ability of issuers of medium- or lower-grade debt
securities to pay interest and to repay principal, to meet projected financial
goals or to obtain additional financing. In the event that an issuer of
securities held by the Fund experiences difficulties in the timely payment of
principal and interest and such issuer seeks to restructure the terms of its
borrowings, the Fund may incur additional expenses and may determine to invest
additional assets with respect to such issuer or the project or projects to
which the Fund's securities relate. Further, the Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of interest or the repayment of principal on its portfolio holdings,
and the Fund may be unable to obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the debt securities market and as a result of real or perceived
changes in credit risk. The value of the Fund's investments can be expected to
fluctuate over time. When interest rates decline, the value of a portfolio
invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Debt securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than debt securities with shorter maturities. However, the secondary
market prices of medium- or lower-grade securities generally are less sensitive
to changes in interest rate and are more sensitive to general adverse economic
changes or specific developments with respect to the particular issuers than are
the secondary market prices of higher-grade securities. A significant increase
in interest rates or a general economic downturn could severely disrupt the
market for medium- or lower-grade securities and adversely affect the market
value of such securities. Such events also could lead to a higher incidence of
default by issuers of medium- or lower-grade securities as compared with
higher-grade securities. In addition, changes in credit risks, interest rates,
the credit markets or periods of general economic uncertainty
8
<PAGE> 11
can be expected to result in increased volatility in the market price of the
medium- or lower-grade securities in the Fund and thus in the net asset value of
the Fund. Adverse publicity and investor perceptions, whether or not based on
rational analysis, may affect the value, volatility and liquidity of medium- or
lower-grade securities.
The markets for medium- or lower-grade securities may be less liquid than the
markets for higher-grade securities. Liquidity relates to the ability of a fund
to sell a security in a timely manner at a price which reflects the value of
that security. To the extent that there is no established retail market for some
of the medium- or lower-grade securities in which the Fund may invest, trading
in such securities may be relatively inactive. Prices of medium- or lower-grade
securities may decline rapidly in the event a significant number of holders
decide to sell. Changes in expectations regarding an individual issuer of
medium- or lower-grade securities generally could reduce market liquidity for
such securities and make their sale by the Fund more difficult, at least in the
absence of price concessions. The effects of adverse publicity and investor
perceptions may be more pronounced for securities for which no established
retail market exists as compared with the effects on securities for which such a
market does exist. An economic downturn or an increase in interest rates could
severely disrupt the market for such securities and adversely affect the value
of outstanding securities or the ability of the issuers to repay principal and
interest. Further, the Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for medium- or lower-grade securities held in the Fund's
portfolio, the ability of the Fund's investment adviser to value the Fund's
securities becomes more difficult and the judgment of the Fund's investment
adviser may play a greater role in the valuation of the Fund's securities due to
the reduced availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
securities in default, zero coupon securities or pay-in-kind securities. Prices
on non-cash-paying instruments may be more sensitive to changes in the issuer's
financial condition, fluctuation in interest rates and market demand/supply
imbalances than cash-paying securities with similar credit ratings, and thus may
be more speculative. In addition, the accrued interest income earned on such
instruments is included in investment company taxable income, and thereby is
included in the required minimum distributions to shareholders without providing
the corresponding cash flow with which to pay such distributions. The Fund must
distribute substantially all of its investment company taxable income to its
shareholders to qualify for pass-through treatment under federal income tax law
and may, therefore, have to dispose of portfolio securities to satisfy
distribution requirements. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments.
The Fund's investments in lower-grade securities may include securities rated D
by S&P or C by Moody's (the lowest-grade assigned) and unrated securities of
comparable quality. Securities assigned such ratings include those of companies
that are in default or are in bankruptcy or reorganization. Securities of such
companies are regarded by the rating agencies as having extremely poor prospects
of ever attaining any real investment standing and are usually available at deep
discounts from the face values of the instruments. A security purchased at a
deep discount may currently pay a very high effective yield. In addition, if the
financial condition of the issuer improves, the underlying value of the security
may increase, resulting in capital appreciation. If the company defaults on its
obligations or remains in default, or if the plan of reorganization does not
provide sufficient payments for debtholders, the deep discount securities may
stop generating income and lose value or become worthless. The Fund's investment
adviser will balance the benefits of deep discount securities with their risks.
While a diversified portfolio may reduce the overall impact of a deep discount
security that is in default or loses its value, the risk cannot be eliminated.
Many medium- and lower-grade debt securities are not listed for trading on any
national securities exchange, and issuers of medium- and lower-grade debt
securities may choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, the Fund's
portfolio may consist of a higher portion of unlisted or unrated securities as
compared with an investment company that invests primarily in higher-grade
securities. Unrated securities are usually not as
9
<PAGE> 12
attractive to as many buyers as are rated securities, a factor which may make
unrated securities less marketable. These factors may have the effect of
limiting the availability of the securities for purchase by the Fund and may
also limit the ability of the Fund to sell such securities at their fair value
either to meet redemption requests or in response to changes in the economy or
the financial markets. Further, to the extent the Fund owns or may acquire
illiquid or restricted medium- or lower-grade securities, these securities may
involve special registration responsibilities, liabilities and costs, and
liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain medium- or lower-grade
issuers may be less extensive than other issuers. In its analysis, the Fund's
investment adviser may consider the credit ratings of S&P and Moody's in
evaluating securities although the investment adviser does not rely primarily on
these ratings. Credit ratings of securities rating organization evaluate only
the safety of principal and interest payments, not the market risk. In addition,
ratings are general and not absolute standards of quality, and credit ratings
are subject to the risk that the creditworthiness of an issuer may change and
the rating agencies may fail to change such ratings in a timely fashion. A
rating downgrade does not require the Fund to dispose of a security. The Fund's
investment adviser continuously monitors the issuers of securities held in the
Fund. Additionally, since most foreign debt securities are not rated, the Fund
will invest in such securities based on the Fund's investment adviser's analysis
without any guidance from published ratings. Because of the number of investment
considerations involved in investing in medium- or lower-grade securities and
foreign debt securities, achievement of the Fund's investment objectives may be
more dependent upon the investment adviser's credit analysis than is the case
with investing in higher-grade securities.
New or proposed laws may have an impact on the market for medium- or lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for medium- or lower-grade
securities.
Special tax considerations are associated with investing in certain medium- or
lower-grade securities, such as zero coupon or pay-in-kind securities. The Fund
accrues income on these securities prior to the receipt of cash payments. The
Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under federal income tax law and may,
therefore, have to dispose of its portfolio securities to satisfy distribution
requirements.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended March 31, 2000 in the various S&P and Moody's rating
categories and in unrated securities determined by the Fund's investment adviser
to be of comparable quality. The percentages are based on the dollar-weighted
average of credit ratings of all debt securities held by the Fund during the
fiscal period computed on a monthly basis.
<TABLE>
<CAPTION>
Period Ended March 31, 2000
Unrated Securities of
Rated Securities Comparable Quality
(As a Percentage of (As a Percentage of
Rating Category Portfolio Value) Portfolio Value)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
AAA/Aaa 0.20% 0.00%
.....................................................................
AA/Aa 0.20% 0.00%
.....................................................................
A/A 0.40% 0.10%
.....................................................................
BBB/Baa 2.10% 0.00%
.....................................................................
BB/Ba 12.90% 1.00%
.....................................................................
B/B 71.00% 4.50%
.....................................................................
CCC/Caa 4.60% 1.30%
.....................................................................
CC/Ca 0.60% 1.00%
.....................................................................
C/C 0.10% 0.00%
.....................................................................
D 0.00% 0.00%
.....................................................................
Percentage of
Rated and
Unrated
Securities 92.10% 7.90%
.....................................................................
</TABLE>
The percentage of the Fund's assets invested in securities of various grades may
vary from time to time from those listed above.
RISKS OF INVESTING IN
SECURITIES OF FOREIGN ISSUERS
The Fund may invest up to 35% of its total assets in debt securities of similar
quality as the securities described above issued by foreign governments and
foreign corporations. Securities of foreign issuers may be denominated in U.S.
dollars or in currencies other than U.S. dollars.
10
<PAGE> 13
Investments in foreign securities present certain risks not ordinarily
associated with investments in securities of U.S. issuers. These risks include
fluctuations in foreign currency exchange rates, political, economic or legal
developments (including war or other instability, expropriation of assets,
nationalization and confiscatory taxation), the imposition of foreign exchange
limitations (including currency blockage), withholding taxes on dividend or
interest payments or capital transactions or other restrictions, higher
transaction costs (including higher brokerage, custodial and settlement costs
and currency conversion costs) and possible difficulty in enforcing contractual
obligations or taking judicial action. Also, foreign securities may not be as
liquid and may be more volatile than comparable domestic securities.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact yields and result in temporary periods when assets are not fully
invested or attractive investment opportunities are foregone.
The Fund may invest in securities of issuers 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.
In addition to the increased risks of investing in foreign issuers, there are
often increased transactions costs associated with investing in foreign
securities including the costs incurred in connection with converting
currencies, higher foreign brokerage or dealer costs, and higher settlement
costs or custodial costs.
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 unrealized 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.
Many European countries have adopted or are in the process of adopting a single
European currency, commonly referred to as the "euro". The long-term
consequences of the euro conversion on foreign exchange rates, interest rates
and the value of European securities, all of which may adversely affect the
Fund, are still uncertain.
The risks of foreign investments should be considered carefully by an investor
in the Fund.
OTHER INVESTMENTS
AND RISK FACTORS
WHEN-ISSUED AND DELAYED DELIVERY. The Fund may purchase and sell securities on a
"when-issued" and "delayed delivery" basis. The Fund accrues no income on such
securities until 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. The yields generally
available on comparable securities when delivery occurs may be higher than
yields on the securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller to consummate the transaction, failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will engage in when-issued and delayed delivery transactions for the
purpose of acquiring securities consistent with the Fund's
11
<PAGE> 14
investment objectives and policies and not for the purpose of investment
leverage.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, use various
investment strategic transactions described below to earn income, facilitate
portfolio management and mitigate risks. Although the Fund's investment adviser
seeks to use the practices to further the Fund's investment objective, no
assurance can be given that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
equity, fixed-income and interest rate indices, and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars, and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currency or currency
futures. Collectively, all of the above are referred to as "Strategic
Transactions." The Fund generally seeks to use Strategic Transactions as a
portfolio management or hedging technique to seek to protect against possible
adverse changes in the market value of securities held in or to be purchased for
the Fund's portfolio, protect the Fund's unrealized gains, facilitate the sale
of certain securities for investment purposes, manage the effective interest
rate exposure of the Fund, protect against changes in currency exchange rates,
manage the effective maturity or duration 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 sell options on securities it owns
or has the right to acquire without additional payments in an amount up to 25%
of the Fund's total assets for non-hedging purposes.
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 Fund's investment adviser's ability 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 realize
on an investment, or may cause the Fund to hold a security that it might
otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements or the inability to deliver or receive a specified currency. The
use of currency transactions can result in the Fund incurring losses as a result
of the imposition of exchange controls, suspension of settlements or the
inability of the Fund to deliver or receive a specified currency. Additionally,
amounts paid by the Fund as premium and cash or other assets held in margin
accounts with respect to Strategic Transactions are not otherwise available to
the Fund for investment purposes.
A more complete discussion of Strategic Transactions and their risks is
contained in the Fund's Statement of Additional Information.
OTHER PRACTICES. For cash management purposes, the Fund may engage in repurchase
agreements with broker-dealers, banks and other financial institutions. Such
transactions are subject to the risk of default by the other party.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund may lend its portfolio securities in an amount up to 25% of its net
assets to broker-dealers, banks or other institutional borrowers of securities.
Such loans must be callable at any time and the borrower at all times during the
loan must maintain cash or U.S. government securities as collateral equal in
value to at least 100% of the value of the securities loaned (including accrued
interest). During the time portfolio securities are on loan, the Fund receives
any dividends or interest paid on such securities and receives the interest
earned on collateral which is invested in short-term investments and receives
the proceeds from such investment or receives an agreed-upon amount of interest
income from the borrower who has delivered the collateral. As with any
extensions of credit there are risks of delay in recovery and in some cases even
loss of rights in the
12
<PAGE> 15
collateral should the borrower of the securities fail financially.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities or when the
Fund's investment adviser believes the potential for income or capital
appreciation has lessened or for other reasons. The portfolio turnover rate may
vary from year to year. A high portfolio turnover rate (100% or more) increases
a fund's transactions costs (including brokerage commissions or dealer costs)
and high portfolio turnover may result in the realization of more short-term
capital gains than if a fund had a lower portfolio turnover. Increases in a
fund's transaction costs would adversely impact that fund's performance. The
turnover rate will not be a limiting factor, however, if the Fund's investment
adviser considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may, on a temporary basis, hold cash or invest a
portion or all of its assets in cash, higher-grade debt securities, securities
issued or guaranteed by the U.S. government, its agencies or instrumentalities
and money market instruments. Under normal market conditions, the potential for
current income or capital appreciation on these securities will tend to be lower
than the potential for current income or capital appreciation on other
securities that could be owned by the Fund. In taking such a defensive position,
the Fund would not be pursuing and may not achieve its investment objectives.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than three
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $100 billion under management or
supervision June 30, 2000. Van Kampen Investments' more than 50 open-end and 39
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading authorized dealers nationwide. Van Kampen Funds Inc., the
distributor of the Fund (the "Distributor") and the sponsor of the funds
mentioned above, is also a wholly owned subsidiary of Van Kampen Investments.
Van Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley
Dean Witter & Co. The Adviser's principal office is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily net assets of
the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Net Assets % Per Annum
-----------------------------------------------
<S> <C> <C> <C>
First $500 million 0.75%
...............................................
Over $500 million 0.65%
...............................................
</TABLE>
Applying this fee schedule, the effective advisory fee rate was 0.75% of the
Fund's average daily net assets for the Fund's fiscal year ended March 31, 2000.
The Fund's average daily net assets are determined by taking the average of all
of the determinations of the net assets during a given calendar month. Such fee
is payable for each calendar month as soon as practicable after the end of that
month.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodian fees, legal and independent
accountant fees, the cost of reports and proxies to shareholders, the
compensation of trustees of the Trust (other than those who are affiliated
persons of the Adviser, Distributor or Van Kampen Investments), and all other
ordinary business expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's
13
<PAGE> 16
expenses by reducing the fees payable to them or by reducing other expenses of
the Fund in accordance with such limitations as the Adviser or Distributor may
establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund, the Adviser and the Distributor have
adopted Codes of Ethics designed to recognize the fiduciary relationship among
the Fund, the Adviser, the Distributor and their employees. The Codes of Ethics
permit directors, trustees, officers and employees to buy and sell securities
for their personal accounts subject to certain restrictions. Persons with access
to certain sensitive information are subject to pre-clearance and other
procedures designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. The Fund is managed by a management team led by Robert J.
Hickey, a Senior Vice President of the Adviser. Mr. Hickey joined the Adviser in
1988 and became Assistant Vice President in January 1993. Mr. Hickey has been a
Vice President of the Adviser and Asset Management since June 1995.
Peter Ehret has assisted in the Fund's portfolio management since June 1999. Mr.
Ehret has been working for the Adviser since July 1992, and became an Assistant
Vice President of the Adviser in January 1999 and Asset Management in 1994 and
became a Vice President of the Adviser and Asset Management in February 1999.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments generally must be at least $1,000 for each class of shares,
and subsequent investments must be at least $25 for each class of shares.
Minimum investment amounts may be waived by the Distributor for plans involving
periodic investments and for certain retirement accounts.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares generally bear the sales charge expenses at the time of
redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described below)
under which the class's distribution fee and/or the service fee is paid, (iii)
each class of shares has different exchange privileges, (iv) certain classes of
shares are subject to a conversion feature and (v) certain classes of shares
have different shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund generally is
determined once daily as of the close of trading on the New York Stock Exchange
(the "Exchange") (currently 4:00 p.m., New York time) each day the Exchange is
open for trading except on any day on which no purchase or redemption orders are
received or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund's Board of Trustees reserves the right to calculate the net
asset value per share and adjust the offering price more frequently than once
daily if deemed desirable. Net asset value per share for each class is
determined by dividing the value of the Fund's portfolio securities, cash and
other assets (including accrued interest) attributable to such class, less all
liabilities (including accrued expenses) attributable to such class, by the
total number of shares of the class
14
<PAGE> 17
outstanding. Portfolio securities are valued by using market quotations, prices
provided by market makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established by the Fund's Board of Trustees. Securities for
which market quotations are not readily available and other assets are valued at
a fair value as determined in good faith by the Adviser in accordance with
procedures established by the Fund's Board of Trustees. Short-term investments
with a maturity of 60 days or less when purchased are valued at cost plus
interest earned (amortized cost) which approximates market value.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the 1940 Act. The Fund
also has adopted a service plan (the "Service Plan") with respect to each class
of its shares. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders and the maintenance of shareholder accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
that class of shares. To assist investors in comparing classes of shares, the
tables under the Prospectus heading "Fees and Expenses of the Fund" provide a
summary of sales charges and expenses and an example of the sales charges and
expenses of the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the account
application form and forwarding the account application, directly or through an
authorized dealer, to the Fund's shareholder service agent, Van Kampen Investor
Services Inc. ("Investor Services"), a wholly owned subsidiary of Van Kampen
Investments. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers prior to
the close of the Exchange are priced based on the date of receipt, provided such
order is transmitted to Investor Services prior to Investor Services' close of
business on such date. Orders received by authorized dealers after the close of
the Exchange or transmitted to Investor Services after its close of business are
priced based on the date of the next determined net asset value per share
provided they are received by Investor Services prior to Investor Services'
close of business on such date. It is the responsibility of authorized dealers
to transmit orders received by them to Investor Services so they will be
received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead
15
<PAGE> 18
of additional shares should contact the Fund by telephone at (800) 341-2911 or
by writing to the Fund, c/o Van Kampen Investors Services Inc., PO Box 218256,
Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and the Service Plan, the Fund may spend up to a
total of 0.25% per year of the Fund's average daily net assets with respect to
the Class A Shares of the Fund. From such amount, under the Service Plan, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund. The rates in this paragraph are 0.00%
per year of the Fund's average daily net assets with respect to Class A Shares
for accounts existing from July 1, 1987.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for each purchase of Class B Shares
until the time of redemption of such shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average
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<PAGE> 19
daily net assets with respect to the Class B Shares of the Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that shares being redeemed first are any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, including Class B Shares
received from reinvestment of distributions through the dividend reinvestment
plan on such shares automatically convert to Class A Shares eight years after
the end of the calendar month in which the shares were purchased. Class B Shares
purchased before June 1, 1996, including Class B Shares received from
reinvestment of distributions through the dividend reinvestment plan on such
shares, automatically convert to Class A Shares six years after the end of the
calendar month in which the shares were purchased. Class C Shares purchased
before January 1, 1997, including Class C Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares ten years after the end of the calendar
month in which such shares were purchased. Such conversion will be on the basis
of the relative net asset values per share, without the imposition of any sales
load, fee or other charge. The conversion schedule applicable to a share of the
Fund acquired through the exchange privilege from another Van Kampen fund
participating in the exchange program is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by the
Fund's involuntary liquidation by the Fund of a shareholder's account as
described under the Prospectus heading "Redemption of Shares." Subject to
certain limitations, a shareholder who has redeemed Class C Shares of the Fund
may reinvest in Class C Shares at net asset value with credit for any contingent
deferred sales charge if the reinvestment is made within 180 days after the
redemption. For a more complete description of contingent deferred sales charge
waivers, please refer to the Fund's Statement of Additional Information or
contact your authorized dealer.
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<PAGE> 20
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares. The Fund initially
will escrow shares totaling 5% of the dollar amount of the Letter of Intent to
be held by Investor Services in the name of the shareholder. In the event the
Letter of Intent goal is not achieved within the specified period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the reduced sales charges previously paid. Such payments may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment requirement, if the administrator of an investor's unit
investment trust program meets certain uniform criteria relating to cost savings
by the Fund and the Distributor. The total sales charge for all other
investments made from unit investment trust distributions will be 1.00% of the
offering price (1.01% of net asset value). Of this amount, the Distributor will
pay to the authorized dealer, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the terms and conditions that apply to the program,
should contact their authorized dealer or the Distributor.
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<PAGE> 21
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
To obtain these special benefits, all dividends and other distributions from the
Fund must be reinvested in additional shares and there can not be any systematic
withdrawal program. There will be no minimum for reinvestments from unit
investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, generally upon written assurance that the purchase is made for
investment purposes and that the shares will not be resold except through
redemption by the Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which such purchases are made an amount up to 0.50% of the amount invested,
over a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Fund's Statement of
Additional Information for further details with respect to such alliance
programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by nonprofit organizations
defined under Section 501(c)(3) of the Code and assets held by an employer
or trustee in connection with an eligible deferred compensation plan under
Section 457 of the Code. Such plans will qualify for purchases at net asset
value provided, for plans initially establishing accounts with the
Distributor in the Participating Funds after January 1, 2000, that (1) the
total plan assets are at least $1 million or (2) such shares are purchased
by an employer sponsored plan with more than 100 eligible employees. Such
plans that have been established with a Participating Fund or have received
proposals from the Distributor prior to January 1, 2000 based on net asset
value purchase privileges previously in
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<PAGE> 22
effect will be qualified to purchase shares of the Participating Funds at net
asset value. Section 403(b) and similar accounts for which Van Kampen Trust
Company serves as custodian will not be eligible for net asset value purchases
based on the aggregate investment made by the plan or the number of eligible
employees, except under certain uniform criteria established by the
Distributor from time to time. For purchases on February 1, 1997 and
thereafter, a commission will be paid on purchases as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the
next $47 million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren under
21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the Prospectus heading "Purchase of Shares," redemptions of
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge. In addition, certain redemptions of Class A Shares for shareholder
accounts of $1 million or more may be subject to a contingent deferred sales
charge. Redemptions completed through an authorized dealer or a
custodian/trustee of a retirement plan account may involve additional fees
charged by the dealer or custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of the redemption request and any other necessary
documents in proper form as described below. Such payment may be postponed or
the right of redemption suspended as provided by the rules of the SEC. Such
payment may, under certain circumstances, be paid wholly or in part by a
distribution-in-kind of portfolio securities. A distribution-in-kind will result
in recognition by the shareholder of a gain or loss for federal income tax
purposes when such securities are distributed, and shareholder may have
brokerage costs and a gain or loss for federal income tax purposes upon the
shareholder's subsequent disposition of such shares. 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
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<PAGE> 23
check has cleared, which may take up to 15 days. A taxable gain or loss may be
recognized by the shareholder upon redemption of shares. Certificated shares
must be properly endorsed for transfer and must accompany a written redemption
request.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares or dollar amount to be redeemed, the Fund
name and class designation of such shares and the shareholder's account number.
The redemption request must be signed by all persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption exceed $50,000, or if the proceeds are not to be
paid to the record owner at the record address, or if the record address has
changed within the previous 30 days, signature(s) must be guaranteed by one of
the following: a bank or trust company; a broker-dealer; a credit union; a
national securities exchange, registered securities association or clearing
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. Certificated
shares may be redeemed only by written request. The certificates for the shares
being redeemed must be properly endorsed for transfer and must accompany the
written redemption request. Generally, in the event a redemption is requested by
and registered to a corporation, partnership, trust, fiduciary, estate or other
legal entity owning shares of the Fund, a copy of the corporate resolution or
other legal documentation appointing the authorized signer and certified within
the prior 120 days must accompany the redemption request. Retirement plan
distribution requests should be sent to the plan custodian/trustee to be
forwarded to Investor Services. Contact the plan custodian/trustee for further
information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the account application
form. For accounts that are not established with telephone redemption
privileges, a shareholder may call the Fund at (800) 341-2911 to request that a
copy of the Telephone Redemption Authorization form be sent to the shareholder
for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Shares may also be redeemed by phone through FundInfo(R)
(automated telephone system), which is accessible 24 hours a day, seven days a
week at (800) 849-2424. Van Kampen Investments and its subsidiaries, including
Investor Services, and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape-recording telephone
communications and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, none of Van Kampen
Investments, Investor Services or the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Telephone
redemptions may not be available if the shareholder cannot reach Investor
Services by telephone, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's other
redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for most
accounts
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<PAGE> 24
other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to the shareholder(s)
predesignated bank account. This privilege is not available if the address of
record has been changed within 30 days prior to a telephone redemption request.
Proceeds from redemptions payable by wire transfer are expected to be wired on
the next business day following the date of redemption. The Fund reserves the
right at any time to terminate, limit or otherwise modify this redemption
privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees, is to declare daily and distribute monthly all
or substantially all of its net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Fund's Statement of Additional Information or contact your
authorized dealer.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by telephone by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired) or by writing to Investor Services. The
investor may, on the initial account application or prior to any declaration,
instruct that dividends and/or capital gain dividends be paid in cash, be
reinvested in the Fund at the next determined at net asset value, or be invested
in another Participating Fund at next determined net asset value.
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<PAGE> 25
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are not in escrow may write
checks against such shareholder's account by completing the Authorization for
Redemption by Check form and the appropriate section of the account application
and returning the form and the account application to Investor Services. Once
the form is properly completed, signed and returned, a supply of checks
(redemption drafts) will be sent to the Class A shareholder. Checks can be
written to the order of any person in any amount of $100 or more.
When a check is presented to the custodian bank, State Street Bank and Trust
Company (the "Bank"), for payment, full and fractional Class A Shares required
to cover the amount of the check are redeemed from the shareholder's Class A
Share account by Investor Services at the next determined net asset value per
share. Check writing redemptions represent the sale of Class A Shares. Any gain
or loss realized on the redemption of shares is a taxable event.
Checks will not be honored for redemption of Class A Shares held less than
15-calendar days, unless such Class A Shares have been paid for by bank wire.
Any Class A Shares for which there are outstanding certificates may not be
redeemed by check. If the amount of the check is greater than the proceeds of
all uncertificated shares held in the shareholder's account, the check will be
returned and the shareholder may be subject to additional charges. A shareholder
may not liquidate the entire account by means of a check. The check writing
privilege may be terminated or suspended at any time by the Fund or by the Bank
and neither shall incur any liabilities for such amendment or termination or for
effecting redemptions to pay checks reasonably believed to be genuine or for
returning or not paying on checks which have not been accepted for any reason.
Retirement plans and accounts that are subject to backup withholding are not
eligible for the privilege.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next determined net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from any authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of Participating Fund and purchases of
shares of another Participating Fund. The sale may result in a gain or loss for
federal income tax purposes. If the shares sold have been held for less than 91
days, the sales charge paid on such shares is carried over and included in the
tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated telephone system) at (800)847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has these
exchange privileges unless the shareholder indicates otherwise by checking the
applicable box on the account application form.
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<PAGE> 26
Van Kampen Investments and its subsidiaries, including Investor Services, and
the Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape-recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, none of Van Kampen Investments, Investor Services or
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. If the exchanging shareholder does not have an account
in the fund whose shares are being acquired, a new account will be established
with the same registration, dividend and capital gain dividend options (except
dividend diversification) and authorized dealer of record as the account from
which shares are exchanged, unless otherwise specified by the shareholder. In
order to establish a systematic withdrawal plan for the new account or reinvest
dividends from the new account into another fund, however, an exchanging
shareholder must submit a specific request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
and other Participating Funds may restrict exchanges by shareholders engaged in
excessive trading by limiting or disallowing the exchange privilege to such
shareholders. For further information on these restrictions see the Fund's
Statement of Additional Information. The Fund may modify, restrict or terminate
the exchange privilege at any time on 60 days' notice to its shareholders of any
termination or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or capital gain dividend
was paid. If a shareholder exchanges less than all of such shareholder's
securities, the security upon which the highest sales charge rate was previously
paid is deemed exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written instruction or by telephone, you may also perform certain
transactions through the internet. Please refer to our web site at
www.vankampen.com for further instruction regarding internet transactions. Van
Kampen Investments and its subsidiaries, including Investor Services and the
Fund employ procedures considered by them to be reasonable to confirm that
instructions communicated through the internet are genuine. Such procedures
include requiring use of a personal identification number prior to acting upon
internet instructions and providing written confirmation of instructions
communicated through the internet. If reasonable procedures are employed, none
of Van Kampen Investments, Investor Services or the Fund will be liable for
following instructions received through the internet which it reasonably
believes to be genuine. If an account has multiple owners, Investor Services may
rely on the instructions of any one owner.
FEDERAL INCOME TAXATION
Distributions of the Fund's investment company taxable income (consisting
generally of taxable income and net short-term capital gain) are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gain (which is the excess of net long-term capital
gain over net short-term capital losses) as capital gain dividends, if any, are
taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in additional shares, and regardless of how long the shares of the
Fund have been held by such shareholders. The Fund expects that its
distributions will consist primarily of ordinary
24
<PAGE> 27
income and capital gain dividends. Distributions in excess of the Fund's
earnings and profits will first reduce the adjusted tax basis of a shareholder's
shares and, after such adjusted tax basis is reduced to zero, will constitute
capital gains to such shareholder (assuming such shares are held as a capital
asset). Although distributions generally are treated as taxable in the year they
are paid, distributions declared in October, November or December, payable to
shareholders of record on a specified date in such month and paid during January
of the following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
The 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.
Any recognized capital gains may be taxed at different rates depending on how
long the shareholder held such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other payments, including redemptions, paid to shareholders who do not
furnish to the Fund their correct taxpayer identification number (in the case of
individuals, their social security number) and certain required certifications
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. Accordingly, investment in the Fund is likely to be
appropriate for a foreign shareholder only if such person can utilize a foreign
tax credit or corresponding tax benefit in respect of such U.S. withholding tax.
Prospective foreign investors should consult their tax advisers concerning the
tax consequences to them of an investment in shares.
The Fund intends to qualify as a regulated investment company under federal tax
law. If the Fund so qualifies and distributes each year to its shareholders at
least 90% of its investment company taxable income, the Fund will not be
required to pay federal income taxes on any income it distributes to
shareholders. If the Fund distributes less than an amount equal to the sum of
98% of its ordinary income and 98% of its capital gain net income, then the Fund
will be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax advisers regarding the
specific federal tax consequences of purchasing, holding, and disposing of
shares of the Fund, as well as the effect of state, local and foreign tax law
and any proposed tax law changes.
25
<PAGE> 28
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods shown. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information for the year ended March 31, 2000 has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's most recent
financial statements, is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the back cover of this prospectus. The information for the nine-month period
ended March 31, 1999 and for the years ended June 30, 1998, 1997, 1996 and 1995
has been audited by KPMG LLP. This information should be read in conjunction
with the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A Shares Class B Shares
Nine Nine
Year Months Year Months
Ended Ended Ended Ended
March 31, March 31, Year Ended June 30, March 31, March 31,
2000 1999 1998 1997 1996 1995 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................. $9.034 $9.893 $9.854 $9.493 $9.398 $9.643 $9.032 $9.890
------ ------ ------ ------- ------- ------- ------ ------
Net Investment Income...... 0.848 0.619 0.857 0.857 0.878 0.844 0.803 0.560
Net Realized and Unrealized
Gain/Loss................ (0.560) (0.848) 0.037 0.384 0.147 (0.099) (0.582) (0.842)
------ ------ ------ ------- ------- ------- ------ ------
Total from Investment
Operations................. 0.288 (0.229) 0.894 1.241 1.025 0.745 0.221 (0.282)
------ ------ ------ ------- ------- ------- ------ ------
Less:
Distributions from and in
Excess of Net Investment
Income................... 0.828 0.617 0.855 0.865 0.880 0.815 0.757 0.564
Return of Capital
Distributions............ 0.012 0.013 0.000 0.015 0.050 0.175 0.011 0.012
------ ------ ------ ------- ------- ------- ------ ------
Total Distributions.......... 0.840 0.630 0.855 0.880 0.930 0.990 0.768 0.576
------ ------ ------ ------- ------- ------- ------ ------
Net Asset Value, End of the
Period..................... $8.482 $9.034 $9.893 $9.854 $9.493 $9.398 $8.485 $9.032
====== ====== ====== ======= ======= ======= ====== ======
Total Return*................ 3.50%(a) (2.13%)** 9.36% 13.60% 11.26% 8.50% 2.65%(b) (2.71%)**
Net Assets at End of the
Period (In millions)....... $230.6 $277.9 $280.6 $288.0 $271.1 $253.3 $109.2 $135.4
Ratio of Expenses to Average
Net Assets*................ 1.15% 1.17% 1.14% 1.17% 1.31% 1.31% 1.93% 1.93%
Ratio of Net Investment
Income to Average Net
Assets*.................... 9.96% 8.98% 8.61% 8.83% 9.16% 9.13% 9.17% 8.19%
Portfolio Turnover........... 109% 104%** 154% 125% 102% 152% 109% 104%**
* If certain expenses had not
been waived or reimbursed
by the Adviser, total
return would have been
lower and the ratios would
have been as follows:
Ratio of Expenses to
Average Net Assets....... 1.25% 1.27% 1.24% 1.26% 1.31% N/A 2.03% 2.03%
Ratio of Net Investment
Income to Average Net
Assets................... 9.86% 8.88% 8.51% 8.73% 9.15% N/A 9.07% 8.09%
<CAPTION>
Class B Shares
Year Ended June 30,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................. $9.855 $9.497 $9.398 $9.638
------ ------- -------- --------
Net Investment Income...... 0.782 0.777 0.797 0.788
Net Realized and Unrealized
Gain/Loss................ 0.036 0.389 0.160 (0.115)
------ ------- -------- --------
Total from Investment
Operations................. 0.818 1.166 0.957 0.673
------ ------- -------- --------
Less:
Distributions from and in
Excess of Net Investment
Income................... 0.783 0.794 0.812 0.751
Return of Capital
Distributions............ 0.000 0.014 0.046 0.162
------ ------- -------- --------
Total Distributions.......... 0.783 0.808 0.858 0.913
------ ------- -------- --------
Net Asset Value, End of the
Period..................... $9.890 $9.855 $9.497 $9.398
====== ======= ======== ========
Total Return*................ 8.58% 12.64% 10.55% 7.61%
Net Assets at End of the
Period (In millions)....... $145.0 $128.7 $97.1 $55.9
Ratio of Expenses to Average
Net Assets*................ 1.91% 1.93% 2.07% 2.04%
Ratio of Net Investment
Income to Average Net
Assets*.................... 7.84% 8.03% 8.39% 8.35%
Portfolio Turnover........... 154% 125% 102% 152%
* If certain expenses had not
been waived or reimbursed
by the Adviser, total
return would have been
lower and the ratios would
have been as follows:
Ratio of Expenses to
Average Net Assets....... 2.01% 2.02% 2.07% N/A
Ratio of Net Investment
Income to Average Net
Assets................... 7.74% 7.94% 8.38% N/A
<CAPTION>
Class C Shares
Nine
Year Months
Ended Ended
March 31, March 31, Year Ended June 30,
2000 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
the Period................. $9.023 $9.884 $9.851 $9.495 $9.396 $9.643
------ ------ ------ ------- -------- --------
Net Investment Income...... 0.795 0.562 0.780 0.780 0.828 0.745
Net Realized and Unrealized
Gain/Loss................ (0.576) (0.847) 0.036 0.384 0.129 (0.079)
------ ------ ------ ------- -------- --------
Total from Investment
Operations................. 0.219 (0.285) 0.816 1.164 0.957 0.666
------ ------ ------ ------- -------- --------
Less:
Distributions from and in
Excess of Net Investment
Income................... 0.757 0.564 0.783 0.794 0.812 0.751
Return of Capital
Distributions............ 0.011 0.012 0.000 0.014 0.046 0.162
------ ------ ------ ------- -------- --------
Total Distributions.......... 0.768 0.576 0.783 0.808 0.858 0.913
------ ------ ------ ------- -------- --------
Net Asset Value, End of the
Period..................... $8.474 $9.023 $9.884 $9.851 $9.495 $9.396
====== ====== ======
Total Return*................ 2.65%(c) (2.71%)** 8.47% 12.65% 10.55% 7.61%
Net Assets at End of the
Period (In millions)....... $13.0 $14.7 $11.5 $8.1 $7.0 $2.0
Ratio of Expenses to Average
Net Assets*................ 1.93% 1.93% 1.91% 1.93% 2.06% 2.12%
Ratio of Net Investment
Income to Average Net
Assets*.................... 9.17% 8.25% 7.83% 8.08% 8.38% 8.13%
Portfolio Turnover........... 109% 104%** 154% 125% 102% 152%
* If certain expenses had not
been waived or reimbursed
by the Adviser, total
return would have been
lower and the ratios would
have been as follows:
Ratio of Expenses to
Average Net Assets....... 2.03% 2.03% 2.01% 2.03% 2.07% N/A
Ratio of Net Investment
Income to Average Net
Assets................... 9.07% 8.15% 7.73% 7.99% 8.38% N/A
</TABLE>
** Non-annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a CDSC of 1% may
be imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 4%,
charged on certain redemptions made within one year of purchase and
declining thereafter to 0% after the sixth year. If the sales charge was
included, total returns would be lower.
(c) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 1%,
charged on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower.
See Financial Statements and Notes thereto
26
<PAGE> 29
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follow:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a financial obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the obligor or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
1. LONG-TERM DEBT -- INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 30
C: The "C" rating may be used to cover a situation where a bankruptcy petition
has been filed or similar action has been taken, but payments on this obligation
are being continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
PLUS (+) OR MINUS (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; Certain swaps and options; and
interest-only and principal-only mortgage securities.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain ratings or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: The highest category indicates that the obligor's capacity to meet its
financial commitment on the obligation is strong. Those issues determined to
possess extremely strong safety characteristics are denoted with a plus sign (+)
designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the obligor is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than obligations in
higher ratings. Degree of safety is not as high as for issues designated "A-1".
A-3: Issues carrying this designation exhibit adequate protective parameters.
However adverse economic conditions or changing circumstances are more likely to
lead to a weakening capacity of the obligor to meet its financial commitment on
the obligation. More vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having significant speculative
characteristics. The obligor currently has the capacity to meet its financial
commitment on the obligation; however, it faces major ongoing uncertainties
which could lead to the obligor's inadequate capacity to meet its financial
commitment on the obligation.
C: This rating is assigned to short-term debt obligations currently vulnerable
to nonpayment and is dependent upon favorable business, financial, and economic
conditions for the obligor to meet its financial commitment on the obligation.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The "D" rating also will be used
upon the filing of a bankruptcy petition or the taking of a similar action if
payments on an obligation are jeopardized.
A commercial paper rating is not a recommendation to purchase, sell or hold a
financial obligation inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are
A- 2
<PAGE> 31
based on current information furnished to S&P by the issuer or obtained from
other sources it considers reliable. S&P does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
3. PREFERRED STOCK
A S&P preferred stock rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
is assigned to an equity issue, which issue is intrinsically different from, and
subordinated to, a debt issue. Therefore, to reflect this difference, the
preferred stock rating symbol will normally not be higher than the bond rating
symbol assigned to, or that would be assigned to, the senior debt of the same
issuer.
The preferred stock ratings are based on the following considerations:
i. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
ii. Nature of, and provisions of, the issuer.
iii. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality, fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA".
A: An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB, B and CCC: Preferred stock rated "B", "B", and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations.
"BB" indicates the lowest degree of speculation and "CCC" the highest. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC: The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C: A preferred stock rated "C" is a nonpaying issue.
D: A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
NR: This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy. PLUS (+) or MINUS (-): To provide more
detailed indications of preferred stock quality, ratings from "AA" to "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE -- a brief description of the applicable Moody's
Investors Service (Moody's)
A- 3
<PAGE> 32
rating symbols and their meanings (as published by Moody's Investors Service)
follows:
1. LONG-TERM DEBT
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long- term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated a possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa to B. The modifier 1 indicates that the issue ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year unless explicitly noted.
A- 4
<PAGE> 33
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issues:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
-- Broad margins is earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes of the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
AAA: As issue which is rated "AAA" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
AA: An issue which is rated "AA" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
A: An issue which is rated "A" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "AAA"
and "AA" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
BAA: An issue which is rated "BAA" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
BA: An issue which is rated "BA" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
B: An issue which is rated "B" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
CAA: An issue which is rated "CAA" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
CA: An issue which is rated "CA" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
C: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
A- 5
<PAGE> 34
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*, Chairman
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Stephen L. Boyd*
Executive Vice President and Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
John H. Zimmermann, III*
Vice President
Michael H. Santo*
Vice President
Richard A. Ciccarone*
Vice President
John R. Reynoldson*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer and Treasurer
* "Interested persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN HIGH YIELD FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen High Yield Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen High Yield Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
<PAGE> 35
VAN KAMPEN
HIGH YIELD FUND
PROSPECTUS
JULY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]), or by writing
the Public Reference Section of the SEC,
Washington DC, 20549-6009.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act File No. is 811-4629.
HYF PRO 7/00
<PAGE> 36
VAN KAMPEN
STRATEGIC INCOME FUND
Van Kampen Strategic Income Fund's primary investment objective to seek to
provide its shareholders with high current income. The Fund has a secondary
investment objective of seeking capital appreciation. The Fund's investment
adviser seeks to achieve the Fund's investment objectives by investing primarily
in a portfolio of income securities selected from the following market sectors:
U.S. government securities; domestic investment-grade income securities;
domestic lower-grade income securities; foreign investment-grade income
securities; and foreign lower-grade income securities. Investments are allocated
among these sectors based on evaluations of the relative investment
opportunities and investment risks presented by each sector as determined from
time to time by the Fund's investment adviser.
Shares of the Fund have not been approved or disapproved by the Securities and
Exchange Commission (SEC) or any state regulator, and neither the SEC nor any
state regulator has passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
This prospectus is dated JULY 28, 2000
[VAN KAMPEN FUNDS LOGO]
<PAGE> 37
TABLE OF CONTENTS
<TABLE>
<S> <C>
Risk/Return Summary.............................. 3
Fees and Expenses of the Fund.................... 7
Investment Objectives, Policies and Risks........ 8
Investment Advisory Services..................... 21
Purchase of Shares............................... 22
Redemption of Shares............................. 28
Distributions from the Fund...................... 30
Shareholder Services............................. 30
Federal Income Taxation.......................... 32
Financial Highlights............................. 34
Appendix -- Description of Securities Ratings.... A-1
</TABLE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations, other than those contained in this
prospectus, in connection with the offer contained in this prospectus and, if
given or made, such other information or representations must not be relied upon
as having been authorized by the Fund, the Fund's investment adviser or the
Fund's distributor. This prospectus does not constitute an offer by the Fund or
by the Fund's distributor to sell or a solicitation of an offer to buy any of
the securities offered hereby in any jurisdiction to any person to whom it is
unlawful for the Fund to make such an offer in such jurisdiction.
<PAGE> 38
RISK/RETURN SUMMARY
INVESTMENT OBJECTIVES
The Fund is a mutual fund with the primary investment objective to seek to
provide its shareholders with high current income. The Fund has a secondary
investment objective of seeking capital appreciation.
INVESTMENT STRATEGIES
The Fund's investment adviser seeks to achieve the Fund's investment objectives
by investing primarily in a portfolio of income securities selected from the
following market sectors: U.S. government securities; domestic investment-grade
income securities; domestic lower-grade income securities; foreign
investment-grade income securities; and foreign lower-grade income securities.
Investments are allocated among these sectors based on evaluations of the
relative investment opportunities and investment risks presented by each sector
as determined from time to time by the Fund's investment adviser. Under normal
market conditions, at least 65% of the Fund's total assets are invested in U.S.
dollar-denominated income securities and at least 40% of the Fund's total assets
are invested in U.S. government securities and investment-grade income
securities. Although the Fund is not required to invest a minimum amount of its
assets in issuers of any one market sector, under normal market conditions, at
least 10% of the Fund's total assets are invested in each of at least three of
these sectors. A substantial portion of the Fund's total assets may be invested
in lower-grade securities, commonly referred to as "junk bonds" and including
securities in default, and in securities of foreign issuers, including
securities of issuers from emerging markets countries. Investments in such
securities involve significant risks. The Fund may invest in mortgage-backed and
asset-backed securities, stripped securities, and adjustable, variable or
floating rate securities. The Fund may invest up to 20% of its assets in
defaulted bank loans. The Fund may purchase and sell securities on a when-issued
or delayed delivery basis. The Fund may borrow money for investment purposes,
which creates the opportunity for increased return but also involves special
risks. The Fund may purchase or sell certain derivative instruments (such as
options, futures and options on futures, and interest rate swaps or other
interest rate-related transactions) for various risk management and hedging
purposes. Portfolio securities are sold when the Fund's investment adviser's
assessment of the income or growth potential of such securities changes
materially.
INVESTMENT RISKS
An investment in the Fund is subject to risks, and you could lose money on your
investment in the Fund. There can be no assurance that the Fund will achieve its
investment objectives.
MARKET RISK. Market risk is the possibility that the market values of securities
owned by the Fund will decline. The prices of income securities tend to fall as
interest rates rise, and such declines tend to be greater among income
securities with longer maturities. The Fund has no policy limiting the
maturities of its investments. To the extent that the Fund invests in securities
with longer maturities, the Fund will be subject to greater market risk than a
fund investing solely in shorter-term securities. Lower-grade securities,
especially those with long maturities or that do not make regular interest
payments, may be more volatile and may decline more in price in response to
negative issuer or general economic news than higher-grade securities. Foreign
markets may, but often do not, move in tandem with U.S. markets, and foreign
markets may have more price volatility than U.S. markets.
Market risk is often greater among certain types of income securities, such as
mortgage-backed or asset-backed securities, stripped securities, zero-coupon
bonds or pay-in-kind securities. As interest rates change, these securities
often fluctuate more in price than traditional income securities and may subject
the Fund to greater market risk than a fund that does not own these types of
securities.
When-issued and delayed delivery transactions are subject to changes in market
conditions from the time of the commitment until settlement. This may adversely
affect the prices or yields of the securities being purchased, as well as any
portfolio securities held for payment of such commitments. The greater the
Fund's outstanding commitments for these securities, the greater the Fund's
exposure to market price fluctuations.
3
<PAGE> 39
CREDIT RISK. Credit risk refers to an issuer's ability to make timely payments
of interest and principal. Because the Fund may invest in securities with
low-credit quality, the Fund is subject to a higher level of credit risk than a
fund that buys only investment-grade securities. The credit quality of
"noninvestment-grade" securities is considered speculative by recognized rating
agencies with respect to the issuer's continuing ability to pay interest and
principal. Lower-grade securities may have less liquidity and a higher incidence
of default than higher-grade securities. The Fund may incur higher expenses to
protect the Fund's interest in such securities. The credit risks and market
prices of lower-grade securities generally are more sensitive to negative issuer
developments, such as reduced revenues or increased expenditures, or adverse
economic conditions, such as a recession, than are higher-grade securities.
INCOME RISK. The income you receive from the Fund is based primarily on interest
rates, which can vary widely over the short- and long-term. If interest rates
drop, your income from the Fund may drop as well. The more the Fund invests in
adjustable, variable or floating rate securities or in securities susceptible to
prepayment risk, the greater the Fund's income risk.
PREPAYMENT OR CALL RISK. If interest rates fall, the principal on income
securities held by the Fund may be prepaid, or "called," earlier than expected.
If this happens, the proceeds from a prepaid security would likely be reinvested
by the Fund in securities bearing the new, lower interest rates, resulting in a
possible decline in the Fund's income and distributions to shareholders.
The Fund may invest in pools of mortgages or other assets issued or guaranteed
by private organizations or U.S. government agencies or instrumentalities. These
securities are especially sensitive to prepayment risk because borrowers often
refinance or prepay such debt obligations when interest rates decline.
EXTENSION RISK. The value of income securities tends to fall as interest rates
rise. For mortgage-backed securities or other similar securities, if interest
rates rise, borrowers may prepay the principal underlying the income security
more slowly than originally expected, which may further reduce the market value
of such security and lengthen its duration.
FOREIGN RISKS. Because the Fund will own securities of foreign issuers, it will
be subject to risks not usually associated with owning securities of U.S.
issuers. These risks can include fluctuations in foreign currencies, foreign
currency exchange controls, political and economic instability, differences in
financial reporting, differences in securities regulation and trading, and
foreign taxation issues. The risks of investing in developing or emerging
markets (in which the Fund may invest) are greater than the risks generally
associated with foreign investments, including greater political uncertainties,
an economy's dependence on international development assistance, currency
transfer restrictions, and greater delays and disruptions in settlement
transactions.
BORROWING RISKS. The Fund may borrow money for investment purposes, which is
known as "leverage." The Fund may use leverage to seek to enhance the income to
shareholders, but the use of leverage creates the likelihood of greater
volatility in the net asset value of the Fund's shares. Leverage also creates
the risk that fluctuations in interest rates on leverage may adversely affect
the return to shareholders and the Fund's ability to make dividend payments. To
the extent that income from investments made with such borrowed money exceeds
the interest payable and other expenses of the leverage, the Fund's net income
will be less than if the Fund did not use leverage and the amount available for
distributions to shareholders of the Fund will be reduced. The Fund's use of
leverage also may impair the ability of the Fund to maintain its qualification
for federal income tax purposes as a regulated investment company.
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, options on futures, and
interest rate swaps or other interest-rate related transactions 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.
NON-DIVERSIFICATION RISKS. The Fund is classified as a "non-diversified" fund,
which means the Fund may invest a greater portion of its assets in a more
limited number of issuers than a "diversified" fund. As a result, the Fund may
be subject to greater risk than a
4
<PAGE> 40
diversified fund because changes in the financial condition or market assessment
of a single issuer may cause greater fluctuations in the value of the Fund's
shares.
MANAGER RISK. As with any managed fund, the Fund's investment adviser may not be
successful in selecting the best-performing securities or investment techniques,
and the Fund's performance may lag behind that of similar funds.
INVESTOR PROFILE
In light of the Fund's investment objectives and strategies, the Fund may be
appropriate for investors who:
- Seek high current income and, secondarily, seek capital appreciation over the
long term
- Are willing to take on the substantially increased risks of lower-grade
securities in exchange for potentially higher income
- Are willing to take on the increased risks associated with investing in
foreign securities
- Wish to add to their investment portfolio a fund that invests primarily in
domestic and foreign issuers of income securities of any credit quality
An investment in the Fund is not a deposit of any bank or other insured
depository institution. An investment in the Fund is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
An investment in the Fund may not be appropriate for all investors. The Fund is
not intended to be a complete investment program, and investors should consider
their long-term investment goals and financial needs when making an investment
decision about the Fund. An investment in the Fund is intended to be a long-term
investment, and the Fund should not be used as a trading vehicle.
ANNUAL PERFORMANCE
One way to measure the risks of investing in the Fund is to look at how its
performance has varied from year-to-year. The following chart shows the annual
returns of the Fund's Class A Shares over the past six calendar years prior to
the date of this prospectus. Sales loads are not reflected in this chart. If
these sales loads had been included, the returns shown below would have been
lower. Remember that the past performance of the Fund is not indicative of its
future performance.
<TABLE>
<CAPTION>
ANNUAL RETURN
-------------
<S> <C>
1994 -16.19
1995 23.42
1996 12.83
1997 6.13
1998 -1.50
1999 0.20
</TABLE>
The Fund's return for the six-month period ended June 30, 2000 was 5.37%.
The annual return variability of the Fund's Class B Shares and Class C Shares
would be substantially similar to that shown for the Class A Shares because all
of the Fund's shares are invested in the same portfolio of securities; however,
the actual annual returns of the Class B Shares and Class C Shares would be
lower than the annual returns shown for the Fund's Class A Shares because of
differences in the expenses borne by each class of shares.
During the six-year period shown in the bar chart, the highest quarterly return
for Class A Shares was 11.48% (for the quarter ended June 30, 1995) and the
lowest quarterly return for Class A Shares was -9.55% (for the quarter ended
March 31, 1994).
COMPARATIVE PERFORMANCE
As a basis for evaluating the Fund's performance and risks, the table below
shows how the Fund's performance compares with two broad-based market indices
that the Fund's investment adviser believes are appropriate benchmarks for the
Fund: the Lehman Brothers Aggregate Bond Index(1) and a Composite of Salomon
Brothers Indices.(2) The Fund's performance figures include the maximum sales
charges paid by investors. The indices' performance figures do not include any
commissions or sales charges that would be paid by investors purchasing the
securities represented by the indices. An investment can not be made directly in
an index. Average annual total returns are shown for the periods ended
5
<PAGE> 41
December 31, 1999 (the most recently completed calendar year prior to the date
of this prospectus). Remember that the past performance of the Fund is not
indicative of its future performance.
<TABLE>
<CAPTION>
Average Annual
Total Returns
for the
Periods Ended Past Past 5 Since
December 31, 1999 1 Year Years Inception
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Van Kampen
Strategic Income
Fund -- Class A
Shares -4.56% 6.79% 2.57%(1)
Lehman Brothers
Aggregate Bond
Index -0.82% 7.92% 7.88%(1)
Composite of
Salomon Brothers
Indices 3.56% 9.83% 7.43%(1)
.......................................................
Van Kampen
Strategic Income
Fund -- Class B
Shares -4.15% 6.81% 2.50%(1)*)
Lehman Brothers
Aggregate Bond
Index -0.82% 7.92% 7.88%(1)
Composite of
Salomon Brothers
Indices 3.56% 9.83% 7.43%(1)
.......................................................
Van Kampen
Strategic Income
Fund -- Class C
Shares -1.47% 6.97% 2.58%(1)
Lehman Brothers
Aggregate Bond
Index -0.82% 7.92% 7.88%(1)
Composite of
Salomon Brothers
Indices 3.56% 9.83% 7.43%(1)
.......................................................
</TABLE>
Inception date: (1) 12/31/93.
------------------
(1)This index is a dollar-denominated fixed income index comprised of U.S.
government, corporate, mortgage and asset-backed securities rated investment
grade.
(2)This index is a composite reflecting 20% of each of the following Salomon
Brothers Indices: Mortgage Index, High Yield Market Index, Corporate Index,
Non-U.S. Dollar World Government Index and Brady Bond Index.
*The "Since Inception" performance for Class B Shares reflects the conversion of
such shares into Class A Shares six years after purchase. Class B Shares
purchased on or after June 1, 1996 will convert to Class A Shares eight years
after purchase. See "Purchase of Shares."
The current yield for the thirty-day period ended March 31, 2000 is 8.70% for
Class A Shares, 8.36% for Class B Shares and 8.36% for Class C Shares. Investors
can obtain the current yield of the Fund for each class of shares by calling
(800) 341-2911.
6
<PAGE> 42
FEES AND EXPENSES
OF THE FUND
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund.
<TABLE>
<CAPTION>
Class A Class B Class C
Shares Shares Shares
------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDER FEES
(fees paid directly from your investment)
------------------------------------------------------------
Maximum sales charge
(load) imposed on
purchases (as a
percentage of
offering price) 4.75%(1) None None
............................................................
Maximum deferred
sales charge (load)
(as a percentage of
the lesser of
original purchase
price or redemption
proceeds) None(2) 4.00%(3) 1.00%(4)
............................................................
Maximum sales charge
(load) imposed on
reinvested dividends None None None
............................................................
Redemption fee None None None
............................................................
Exchange fee None None None
............................................................
ANNUAL FUND OPERATING EXPENSES
(expenses that are deducted from Fund assets)
------------------------------------------------------------
Management fees(5)(6) 1.03% 1.03% 1.03%
............................................................
Distribution and/or
service (12b-1)
fees(7) 0.25% 1.00%(8) 1.00%(8)
............................................................
Other expenses:
Miscellaneous other
expenses(6) 0.52% 0.53% 0.54%
Interest
expenses(9) 2.08% 2.08% 2.08%
............................................................
Total annual fund
operating expenses(6) 3.88% 4.64% 4.65%
............................................................
</TABLE>
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a deferred sales charge of 1.00% may be imposed on
certain redemptions made within one year of the purchase. See "Purchase of
Shares -- Class A Shares."
(3) The maximum deferred sales charge is 4.00% in the first year after purchase,
declining thereafter as follows:
Year 1-4.00%
Year 2-3.75%
Year 3-3.50%
Year 4-2.50%
Year 5-1.50%
Year 6-1.00%
After-None
See "Purchase of Shares -- Class B Shares."
(4) The maximum deferred sales charge is 1.00% in the first year after purchase
and 0.00% thereafter. See "Purchase of Shares -- Class C Shares."
(5) The rate shown represents the effective management fees as a percentage of
average daily net assets. Management fees are calculated based on a
percentage of average daily managed assets. For purposes of determining
management fees, "daily managed assets" is the sum of the Fund's assets
minus accrued liabilities other than the aggregate amount of any borrowings
undertaken by the Fund. See "Investment Advisory Services."
(6) The Fund's investment adviser is currently waiving or reimbursing a portion
of the Fund's management fees or other expenses -- miscellaneous other
expenses such that actual total annual fund operating expenses for the
fiscal year ended March 31, 2000 were 3.60%, 4.36% and 4.37% for Class A
Shares, Class B Shares and Class C Shares, respectively. The fee waivers or
expense reimbursements can be terminated at any time.
(7) Class A Shares are subject to an annual service fee of up to 0.25% of the
average daily net assets attributable to such class of shares. Class B
Shares and Class C Shares are each subject to a combined annual distribution
and service fee of up to 1.00% of the average daily net assets attributable
to such class of shares. See "Purchase of Shares."
(8) Because distribution and/or service (12b-1) fees are paid out of the Fund's
assets on an ongoing basis, over time these fees will increase the cost of
your investment and may cost you more than paying other types of sales
charges.
(9) The Fund incurred financing expenses related to borrowings for investment
purposes. Borrowings provide the opportunity for increased net income, but
may increase the Fund's investment risk. Total annual fund operating
expenses without regard to the interest expenses would have been 1.80%,
2.56% and 2.57% for Class A Shares, Class B Shares and Class C Shares,
respectively. See "Financial Highlights" and "Investment Objectives,
Policies and Risks."
Example:
The following example is intended to help you compare the cost of investing in
the Fund with the costs of investing in other mutual funds.
The example assumes that you invest $10,000 in the Fund for the time periods
indicated and then redeem all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same each year (except for the ten-year
amounts for Class B Shares which reflect the conversion of Class B Shares to
Class A Shares after eight years). Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $847 $1,602 $2,375 $4,384
.......................................................................
Class B Shares $865 $1,750 $2,491 $4,573*
.......................................................................
Class C Shares $566 $1,402 $2,345 $4,732
.......................................................................
</TABLE>
7
<PAGE> 43
You would pay the following expenses if you did not redeem your shares:
<TABLE>
<CAPTION>
One Three Five Ten
Year Years Years Years
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Class A Shares $847 $1,602 $2,375 $4,384
.......................................................................
Class B Shares $465 $1,400 $2,341 $4,573*
.......................................................................
Class C Shares $466 $1,402 $2,345 $4,732
.......................................................................
</TABLE>
* Based on conversion to Class A Shares after eight years.
INVESTMENT OBJECTIVES,
POLICIES AND RISKS
The Fund's primary investment objective is to seek to provide its shareholders
with high current income. The Fund has a secondary investment objective of
seeking capital appreciation. The Fund's investment objectives are fundamental
policies and may not be changed without shareholder approval by a majority of
the Fund's outstanding voting securities, as defined in the Investment Company
Act of 1940, as amended (the "1940 Act"). There are risks inherent in all
investments in securities; accordingly there can be no assurance that the Fund
will achieve its investment objectives.
The Fund's investment adviser seeks to achieve the Fund's investment objectives
by investing primarily in a portfolio of income securities selected from the
following market sectors: U.S. government securities; domestic investment-grade
income securities; domestic lower-grade income securities; foreign
investment-grade income securities; and foreign lower-grade income securities.
Under normal market conditions, at least 65% of the Fund's total assets are
invested in U.S. dollar-denominated income securities. Under normal market
conditions, at least 40% of the Fund's total assets are invested in U.S.
government securities and investment-grade income securities of U.S. and foreign
issuers. Although the Fund is not required to invest a minimum amount of its
assets in issuers of any one market sector, under normal market conditions, at
least 10% of the Fund's total assets are invested in each of at least three of
these sectors. The Fund does not intend to invest more than 25% of its total
assets in any one industry or in securities of issuers (including foreign
governments) located in any single country other than the U.S. The Fund may
invest a substantial portion of its total assets (up to 60%) in lower-grade
income securities, including securities in default. The Fund may invest a
substantial portion of its total assets in securities of foreign issuers,
including securities of issuers from emerging markets countries.
The Fund's investment adviser allocates the Fund's assets among various market
sectors based on its evaluations of the relative investment opportunities and
investment risks presented by income securities in such sectors from time to
time. The Fund's investment adviser believes that, over time, market sectors
become undervalued relative to the risks of investing in such sectors due to
actual or perceived changes in interest rate cycles, business or economic
conditions, rates of inflation, currency relationships, political factors,
investor demand, new issue or secondary market supply and other factors.
Accordingly, the relative investment performance of the various market sectors
change over time, with the best performing sectors frequently changing from
year-to-year. The Fund's investment adviser seeks to take advantage of these
changes by allocating a greater proportion of the Fund's assets to those market
sectors that it believes are undervalued. If successful, this strategy may
enable the Fund to achieve a higher level of investment return over time than if
the Fund invested exclusively in one market sector or if the Fund allocated a
fixed proportion of its assets to each market sector. In addition, the Fund has
a policy of investing, under normal market conditions, at least 10% of its total
assets in each of at least three market sectors. This policy may, over time,
enable the Fund to experience less volatility in income and net asset value than
if the Fund invested exclusively in one market sector. The Fund is, however,
more dependent on the Fund's investment adviser's ability to successfully
evaluate the relative values of various market sectors as compared to a fund
that does not seek to adjust sector allocations over time.
The Fund may invest in income securities of any maturity and denominated in any
currency. The types of income securities in which the Fund may invest include
the following: fixed or variable rate bonds, notes, bills or debentures;
mortgage-backed and asset-backed securities; stripped income securities;
discount, zero coupon or payment-in-kind securities; convertible securities;
income-producing equity securities such as dividend paying common stock;
preferred stock, convertible preferred stock and warrants or other equity
securities acquired as units together with other income securities; bank debt
obligations; short-term commercial paper; loan
8
<PAGE> 44
participations and assignments; assignments and interests issued by entities
organized and operated for the purpose of restructuring the investment
characteristics of other income securities and securities whose principal or
interest payments are indexed to changes in the values of currencies, interest
rates, commodities or an index.
The value of income securities generally varies inversely with changes in
prevailing interest rates. If interest rates rise, income security prices
generally fall; if interest rates fall, income security prices generally rise.
Shorter-term securities are generally less sensitive to interest rate changes
than longer-term securities; thus, for a given change in interest rates, the
market prices of shorter-maturity income securities generally fluctuate less
than the market prices of longer-maturity income securities. Income securities
with shorter maturities generally offer lesser yields than debt securities with
longer maturities assuming all other factors, including credit quality, being
equal. The Fund has no policy limiting the maturities of the individual income
securities in which it may invest. Certain income securities are subject to
additional market risks, see "Additional Information Regarding Certain Income
Securities" below.
Credit risk refers to an issuer's ability to make timely payments of interest
and principal. Under normal market conditions, the Fund invests at least 40% of
its net assets in U.S. government securities and investment-grade income
securities. Investment-grade income securities include securities rated at the
time of investment BBB or higher by Standard & Poor's ("S&P"), rated Baa or
higher by Moody's Investors Service, Inc. ("Moody's") or comparably rated by any
other nationally recognized statistical rating organization ("NRSRO") or, if
unrated, considered by the Fund's investment adviser to be of comparable
quality. Credit quality at the time of purchase determines which securities may
be acquired, and a subsequent reduction in ratings does not require the Fund to
dispose of a security. Under normal market conditions, the Fund may invest up to
60% of it net assets in lower-grade securities, which are securities rated BB or
lower by S&P or rated Ba or lower by Moody's or comparably rated by any other
NRSRO or unrated securities of comparable quality. The Fund may purchase
lower-grade securities with no minimum rating or quality standard limitation,
including securities that are in default. The Fund will not, however, invest in
any security that does not provide for, or that is not current in the payment of
periodic interest or dividend distributions if as a result of such investment
more than 20% of the Fund's total assets would at the time of investment be
invested in such securities. Lower-grade securities tend to offer higher yields
than higher-grade securities with the same maturities, but generally involve
greater risks than higher-grade securities. Lower-grade securities are regarded
by recognized rating agencies as predominantly speculative with respect to the
issuer's continuing ability to pay interest and principal. The ratings assigned
by the ratings agencies represent their opinions of the quality of the income
securities they undertake to rate, but not the market value risk of such
securities. It should be emphasized that ratings are general and are not
absolute standards of quality. See "Risks of Investing in Lower-Grade
Securities" below. For further description of securities ratings, see the
appendix to this prospectus.
UNDERSTANDING
QUALITY RATINGS
Income securities ratings are based on the issuer's ability to pay interest
and repay the principal. Securities with ratings above the line are
considered "investment-grade," while those with ratings below the line are
regarded as "noninvestment-grade," or "junk bonds." A detailed explanation
of these ratings can be found in the appendix to this prospectus.
<TABLE>
<CAPTION>
S&P Moody's Meaning
------------------------------------------------------
<C> <S> <C>
AAA Aaa Highest quality
......................................................
AA Aa High quality
......................................................
A A Above-average quality
......................................................
BBB Baa Average quality
------------------------------------------------------
BB Ba Below-average quality
......................................................
B B Marginal quality
......................................................
CCC Caa Poor quality
......................................................
CC Ca Highly speculative
......................................................
C C Lowest quality
......................................................
D -- In default
......................................................
</TABLE>
The Fund invests in securities of U.S. and foreign issuers. Investments in
securities of foreign entities and securities denominated in foreign currencies
involve risks not typically involved in domestic investment. Since the Fund may
invest in securities denominated or quoted in currencies other than the U.S.
dollar, changes in foreign currency exchange
9
<PAGE> 45
rates will affect the value of investments in the portfolio and accrued income
thereon. 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 yield on such assets. The Fund may engage in various
foreign currency transactions (such as transactions in instruments such as
forward foreign currency contracts, options on foreign currencies, foreign
currency swap agreements, financial futures contracts and options thereon) for
risk management or hedging purposes to seek to minimize adverse foreign currency
exchange fluctuations. There can, however, be no assurance that the Fund will
not be adversely affected by fluctuations in foreign currency exchange rates,
and such risk management or hedging transactions also entail risks. See also
"Risk of Investing in Securities of Foreign Issuers" below, "Other Investments
and Risk Factors" below and the Fund's Statement of Additional Information.
MARKET SECTORS
U.S. GOVERNMENT SECURITIES. U.S. government securities are obligations issued or
guaranteed by the U.S. government or its agencies or instrumentalities. These
obligations may be either direct obligations of the U.S. Treasury (such as U.S.
Treasury bills, U.S. Treasury notes, U.S. Treasury bonds, U.S. government
created strips under the Separate Trading of Registered Interest and Principal
of Securities program (i.e. "STRIPS") or U.S. Treasury inflation-protected
securities) or obligations issued or guaranteed by U.S. government agencies or
instrumentalities (including government issued or guaranteed mortgage-backed
securities, which are described in more detail under "Additional Information
Regarding Certain Income Securities"). Of the obligations issued or guaranteed
by agencies or instrumentalities, some are backed by the full faith and credit
of the U.S. government and others are backed only by the right of the issuer to
borrow from the U.S. Treasury. U.S. government securities generally are not
rated, but are generally considered to be of at least the same credit quality as
privately issued securities rated in the highest investment grade rating
categories.
DOMESTIC INVESTMENT-GRADE INCOME SECURITIES. Domestic investment-grade income
securities are income securities of domestic issuers rated investment-grade or,
if not rated, determined by the Fund's investment adviser to be of comparable
quality to investment-grade rated securities. Such securities are issued
primarily by domestic corporations.
DOMESTIC LOWER-GRADE INCOME SECURITIES. Domestic lower-grade income securities
are income securities of domestic issuers rated below investment-grade or, if
not rated, determined by the Fund's investment adviser to be of comparable
quality to securities rated below investment-grade. Lower-grade income
securities commonly are referred to as "junk bonds." Such securities are issued
primarily by domestic corporations. Investment in this sector may include
interests or assignments in defaulted, non-performing or restructured income
securities. See "Risks of Investing in Lower-Grade Securities" below.
FOREIGN INVESTMENT- GRADE INCOME SECURITIES. Foreign investment-grade income
securities are income securities issued by non-domestic issuers and rated
investment-grade or, if not rated, determined by the Fund's investment adviser
to be of comparable quality to income securities rated investment-grade. Such
securities may include income securities issued or guaranteed by foreign
governments or their agencies or instrumentalities, central banks of foreign
countries, supranational entities and corporations or other business entities.
Such securities may be denominated in any currency. See "Risks of Investing in
Foreign Securities" below.
FOREIGN LOWER-GRADE INCOME SECURITIES. Foreign lower-grade income securities are
income securities issued by non-domestic issuers and rated below
investment-grade or, if not rated, determined by the Fund's investment adviser
to be of comparable quality to income securities rated below investment-grade.
Lower-grade income securities commonly are referred to as "junk bonds". Such
securities may include income securities issued or guaranteed by foreign
governments or their agencies or instrumentalities, central banks of foreign
countries, supranational entities and corporations or other business entities.
Such securities may be denominated in any currency. Investments in this sector
may include interests or assignments in defaulted, non-performing or
restructured income securities. Issuers of foreign lower-grade income securities
frequently will be located in emerging market countries. See "Risks of Investing
in Lower-Grade Securities" below and "Risks of Investing in Foreign Securities"
below.
10
<PAGE> 46
RISKS OF INVESTING IN
LOWER-GRADE INCOME SECURITIES
The Fund may invest in lower-grade income securities, which securities are
commonly known as "junk bonds." Securities which are in the lower-grade
categories generally offer higher current yields than higher-grade securities of
similar maturities, but they also generally involve greater risks, such as
greater credit risk, greater market risk and volatility, greater liquidity
concerns and potentially greater manager risk. The historical conditions of the
issuers of such securities may not have been as strong as those of other
issuers. These securities may be issued in connection with corporate
restructuring such as leveraged buyouts, mergers, acquisitions, debt
recapitalization or similar events. These securities are often issued by
smaller, less creditworthy companies or companies with substantial debt and may
include financially troubled companies or companies in default or in
restructuring. Such securities often are subordinated to the prior claims of
banks and other senior lenders. Investors should carefully consider the risks of
owning shares of a portfolio which invests in lower-grade securities before
investing in the Fund.
Credit risk relates to the issuer's ability to make timely payment of interest
and principal when due. Lower-grade securities are considered more susceptible
to nonpayment of interest and principal or default than higher-grade securities.
Increases in interest rates or changes in the economy may significantly affect
the ability of issuers of lower-grade income securities to pay interest and to
repay principal, to meet projected financial goals or to obtain additional
financing. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal and interest and
such issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional assets with respect
to such issuer or the project or projects to which the Fund's securities relate.
Further, the Fund may incur additional expenses to the extent that it is
required to seek recovery upon a default in the payment of interest or the
repayment of principal on its portfolio holdings, and the Fund may be unable to
obtain full recovery on such amounts.
Market risk relates to changes in market value of a security that occur as a
result of variation in the level of prevailing interest rates and yield
relationships in the income securities market and as a result of real or
perceived changes in credit risk. The value of the Fund's investments can be
expected to fluctuate over time. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Income securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than income securities with shorter maturities. However, the
secondary market prices of lower-grade income securities generally are less
sensitive to changes in interest rate and are more sensitive to general adverse
economic changes or specific developments with respect to the particular issuers
than are the secondary market prices of higher-grade income securities. A
significant increase in interest rates or a general economic downturn could
severely disrupt the market for lower-grade securities and adversely affect the
market value of such securities. Such events also could lead to a higher
incidence of default by issuers of lower-grade securities as compared with
higher-grade securities. In addition, changes in credit risks, interest rates,
the credit markets or periods of general economic uncertainty can be expected to
result in increased volatility in the market price of the lower-grade securities
in the Fund and thus in the net asset value of the Fund. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may affect the
value, volatility and liquidity of lower-grade securities.
The markets for lower-grade securities may be less liquid than the markets for
higher-grade securities. Liquidity relates to the ability of a fund to sell a
security in a timely manner at a price which reflects the value of that
security. To the extent that there is no established retail market for some of
the lower-grade securities in which the Fund may invest, trading in such
securities may be relatively inactive. Prices of lower-grade securities may
decline rapidly in the event a significant number of holders decide to sell.
Changes in expectations regarding an individual issuer of lower-grade securities
generally could reduce market liquidity for such securities and make their sale
by the Fund more difficult, at least in the absence of price concessions. The
effects of adverse publicity and investor perceptions may be more pronounced for
securities for which no established retail market exists as compared with the
effects on securities for which such a market does exist. An economic downturn
or an increase in interest rates could severely disrupt the market for such
securities and adversely affect the value of outstanding securities or the
ability of the issuers to repay principal and
11
<PAGE> 47
interest. Further, the Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist.
The Fund's investment adviser is responsible for determining the net asset value
of the Fund, subject to the supervision of the Fund's Board of Trustees. During
periods of reduced market liquidity or in the absence of readily available
market quotations for lower-grade securities held in the Fund's portfolio, the
ability of the Fund's investment adviser to value the Fund's securities becomes
more difficult and the judgment of the Fund's investment adviser may play a
greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data.
The Fund may invest in securities not producing immediate cash income, including
securities in default, zero-coupon securities or pay-in-kind securities, when
their effective yield over comparable instruments producing cash income make
these investments attractive. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. In addition, the
amount of non-cash interest income earned on such instruments is included, for
federal income tax purposes, in the Fund's calculation of income that is
required to be distributed to shareholders for the Fund to maintain its desired
federal income tax status (even though such non-cash paying securities do not
provide the Fund with the cash flow with which to pay such distributions).
Accordingly, the Fund may be required to borrow or to liquidate portfolio
securities at a time when it otherwise would not have done so in order to make
such distributions. The Fund's investment adviser will weigh these concerns
against the expected total returns from such instruments.
The Fund's investments in lower-grade securities may include securities rated D
by S&P or C by Moody's (the lowest-grade assigned) and unrated securities of
comparable quality. Securities assigned such ratings include those of companies
that are in default or are in bankruptcy or reorganization. Securities of such
companies are regarded by the rating agencies as having extremely poor prospects
of ever attaining any real investment standing and are usually available at deep
discounts from the face values of the instruments. A security purchased at a
deep discount may currently pay a very high effective yield. In addition, if the
financial condition of the issuer improves, the underlying value of the security
may increase, resulting in capital appreciation. If the company defaults on its
obligations or remains in default, or if the plan of reorganization does not
provide sufficient payments for debtholders, the deep discount securities may
stop generating income and lose value or become worthless. The Fund's investment
adviser will balance the benefits of deep discount securities with their risks.
While a diversified portfolio may reduce the overall impact of a deep discount
security that is in default or loses its value, the risk cannot be eliminated.
The Fund will not, however, invest in any security that does not provide for, or
that is not current in the payment of, periodic interest or dividend
distributions if, as a result of such investment, more than 20% of the Fund's
total assets would, at the time of investment, be invested in such securities.
Many lower-grade securities are not listed for trading on any national
securities exchange, and many issuers of lower-grade securities choose not to
have a rating assigned to their obligations by any nationally recognized
statistical rating organization. As a result, the Fund's portfolio may consist
of a higher portion of unlisted or unrated securities as compared with an
investment company that invests primarily in higher-grade securities. Unrated
securities are usually not as attractive to as many buyers as are rated
securities, a factor which may make unrated securities less marketable. These
factors may have the effect of limiting the availability of the securities for
purchase by the Fund and may also limit the ability of the Fund to sell such
securities at their fair value either to meet redemption requests or in response
to changes in the economy or the financial markets. Further, to the extent the
Fund owns or may acquire illiquid or restricted lower-grade securities, these
securities may involve special registration responsibilities, liabilities and
costs, and liquidity and valuation difficulties.
The Fund will rely on its investment adviser's judgment, analysis and experience
in evaluating the creditworthiness of an issue. The amount of available
information about the financial condition of certain lower-grade issuers may be
less extensive than other issuers. In its analysis, the Fund's investment
adviser may consider the credit ratings of S&P and Moody's in evaluating
securities although the investment adviser does not rely primarily on these
ratings. Credit ratings of securities rating organizations
12
<PAGE> 48
evaluate only the safety of principal and interest payments, not the market
risk. In addition, ratings are general and not absolute standards of quality,
and credit ratings are subject to the risk that the creditworthiness of an
issuer may change and the rating agencies may fail to change such ratings in a
timely fashion. A rating downgrade does not require the Fund to dispose of a
security. The Fund's investment adviser continuously monitors the issuers of
securities held in the Fund. Additionally, since most foreign income securities
are not rated, the Fund will invest in such securities based on the Fund's
investment adviser's analysis without any guidance from published ratings.
Because of the number of investment considerations involved in investing in
lower-grade securities and foreign income securities, achievement of the Fund's
investment objectives may be more dependent upon the investment adviser's credit
analysis than is the case with investing in higher-grade securities.
New or proposed laws may have an impact on the market for lower-grade
securities. The Fund's investment adviser is unable at this time to predict what
effect, if any, legislation may have on the market for lower-grade securities.
Special tax considerations are associated with investing in certain lower-grade
securities, such as zero coupon or pay-in-kind securities. The Fund accrues
income on these securities prior to the receipt of cash payments. The Fund must
distribute substantially all of its income to its shareholders to qualify for
pass-through treatment under federal income tax law and may, therefore, have to
dispose of its portfolio securities to satisfy distribution requirements.
The table below sets forth the percentages of the Fund's assets invested during
the fiscal period ended March 31, 2000 in the various S&P and Moody's rating
categories and in unrated securities determined by the Fund's investment adviser
to be of comparable quality. The percentages are based on the dollar-weighted
average of credit ratings of all income securities held by the Fund during the
fiscal period ended March 31, 2000 computed on a monthly basis.
<TABLE>
<CAPTION>
Unrated Securities
Rated Securities of Comparable
(as a Quality (as a
Percentage of Percentage of
Rating Category Portfolio Value) Portfolio Value)
-----------------------------------------------------------------------
<S> <C> <C> <C>
AAA/Aaa 35.10% 0.20%
.......................................................................
AA/Aa 5.00% 0.00%
.......................................................................
A/A 3.60% 0.10%
.......................................................................
BBB/Baa 13.50% 0.00%
.......................................................................
BB/Ba 16.20% 1.30%
.......................................................................
B/B 19.20% 1.30%
.......................................................................
CCC/Caa 1.50% 0.00%
.......................................................................
CC/Ca 0.00% 1.60%
.......................................................................
C/C 0.30% 0.00%
.......................................................................
D 0.00% 0.00%
.......................................................................
N/A* 0.00% 1.10%
.......................................................................
Percentage of Rated
and Unrated
Securities 94.40% 5.60%
.......................................................................
</TABLE>
*The 1.10% designated "N/A" are equity securities held by the Fund. Unlike debt
securities, equity securities are not subject to ratings categorization and the
ratings are therefore not applicable to these securities.
The percentage of the Fund's assets invested in securities of various grades
may vary from time to time from those set forth above.
RISKS OF INVESTING IN
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers. Securities of foreign
issuers may be denominated in U.S. dollars and in currencies other than U.S.
dollars. Under normal market conditions, the Fund invests at least 65% of its
total assets in U.S. dollar-denominated securities. The percentage of assets
invested in securities of a particular country or denominated in a particular
currency will vary in accordance with the investment adviser's assessment of the
relative yield, appreciation potential and relationship of a country's currency
to the U.S. dollar, which is based upon such factors as fundamental economic
strength, credit quality and interest rate trends. Investments in foreign
securities present certain risks not ordinarily associated with investments in
securities of U.S. issuers. These risks include fluctuations in foreign currency
exchange rates, political, economic or legal developments (including war or
other instability, expropriation of assets, nationalization and confiscatory
taxation), the imposition of foreign exchange limitations (including
13
<PAGE> 49
currency blockage), withholding taxes on dividend or interest payments or
capital transactions or other restrictions, higher transaction costs (including
higher brokerage, custodial and settlement costs and currency conversion costs)
and possible difficulty in enforcing contractual obligations or taking judicial
action. Also, foreign securities may not be as liquid and may be more volatile
than comparable domestic securities.
In addition, there often is less publicly available information about many
foreign issuers, and issuers of foreign securities are subject to different,
often less comprehensive, auditing, accounting and financial reporting
disclosure requirements than domestic issuers. There is generally less
government regulation of stock exchanges, brokers and listed companies abroad
than in the United States, and, with respect to certain foreign countries, there
is a possibility of expropriation or confiscatory taxation, or diplomatic
developments which could affect investment in those countries. Because there is
usually less supervision and governmental regulation of foreign exchanges,
brokers and dealers than there is in the United States, the Fund may experience
settlement difficulties or delays not usually encountered in the United States.
Delays in making trades in foreign securities relating to volume constraints,
limitations or restrictions, clearance or settlement procedures, or otherwise
could impact yields and result in temporary periods when assets are not fully
invested or attractive investment opportunities are foregone.
The Fund may invest in securities of issuers 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.
In addition to the increased risks of investing in foreign issuers, there are
often increased transactions costs associated with investing in foreign
securities including the costs incurred in connection with converting
currencies, higher foreign brokerage or dealer costs, and higher settlement
costs or custodial costs.
Many European countries have adopted or are in the process of adopting a single
European currency, commonly referred to as the "euro." The long-term
consequences of the euro conversion on foreign exchange rates, interest rates
and the value of European securities, all of which may adversely affect the
Fund, are still uncertain.
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 unrealized 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 purchases and sells
foreign currency on a spot 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 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 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
14
<PAGE> 50
the value of the currency should move in the direction opposite to the position
taken. Unanticipated changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts.
The risks of foreign investments should be considered carefully by an investor
in the Fund.
ADDITIONAL INFORMATION REGARDING
CERTAIN INCOME SECURITIES
The Fund may invest in certain income securities that involve additional or
special risks to those described above.
MORTGAGE-BACKED AND ASSET-BACKED SECURITIES. The Fund may invest in
mortgage-backed and asset-backed securities. A mortgage-backed security is a
general obligation of the issuer, which generally is secured by mortgages or
mortgage-backed collateral. Mortgage-backed securities may include securities
issued or guaranteed by U.S. government agencies or instrumentalities or issued
by private entities such as banks, savings and loans, mortgage bankers and other
nongovernmental issuers. Mortgage-backed securities may directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. Mortgage-backed securities include mortgage
pass-through certificates representing participation interests in pools of
mortgage loans originated by the U.S. government or by private lenders and
guaranteed directly or indirectly by U.S. government agencies or by private
lenders without government guarantees. The underlying collateral may include
whole mortgage loans or pass-through certificates secured by mortgage loans.
The yield and payment characteristics of mortgage-backed securities differ from
traditional debt securities. Interest and principal prepayments are made more
frequently, usually monthly, over the life of the mortgage loans and principal
may be prepaid at any time because the underlying mortgages may be prepaid at
any time. Faster or slower prepayments than expected on underlying mortgage
loans can dramatically alter the yield to maturity of a mortgage-backed
security. The value of most mortgage-backed securities, like traditional debt
securities, tends to vary inversely with changes in interest rates (i.e., as
interest rates increase, the value of such securities decrease). Mortgage-backed
securities, however, may benefit less than traditional debt securities from
declining interest rates because prepayment of mortgages tends to accelerate
during periods of declining interest rates. Prepayments shorten the life of the
security and shorten the time over which the Fund receives income at the higher
rate. Additionally, when mortgage loans underlying mortgage-backed securities
held by the Fund are prepaid, the Fund then reinvests the prepaid amounts in
other income securities, the yields of which will reflect interest rate
prevailing at the time. Therefore, the Fund's ability to maintain a portfolio of
higher-yielding mortgage-backed securities will be adversely affected by
decreasing interest rates and the extent that prepayments occur which must be
reinvested in securities which have lower yields. Any decline in the Fund's
income in turn adversely affects the Fund's dividend payments and distribution
to shareholders. Alternatively, during periods of rising interest rates,
mortgage-backed securities are often more susceptible extension risk (i.e.
rising interest rates could cause property owners to prepay their mortgages more
slowly than expected when the security was purchased by the Fund which may
further reduce the market value of such security and lengthen the duration of
the security) than traditional debt securities.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities, but have underlying assets such as automobile and
credit card receivables and home equity loans. Asset-backed securities generally
do not have the benefit of a security interest in such collateral like mortgage-
backed securities. Although the assets underlying asset-backed securities
generally are of a shorter maturity than mortgage loans and historically have
been less likely to experience substantial prepayments, no assurance can be
given as to the actual maturity of an asset-backed security because prepayments
of principal may be made at any time.
The Fund may invest in real estate mortgage investment conduits ("REMICs") and
collateralized mortgage obligations ("CMOs"). REMICs are private entities formed
for the purpose of holding a fixed pool of mortgages secured by an interest in
real property. CMOs are debt obligations collateralized by whole mortgage loans
or mortgage pass-through securities held under an indenture issued by financial
institutions or other mortgage lenders or issued or guaranteed by agencies or
instrumentalities of the U.S. government. REMICs and CMOs generally are issued
in a number of classes or series with different payment characteristics and
maturities. The classes or series are retired in sequence as the underlying
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<PAGE> 51
mortgages are repaid. Such securities are subject to market risk, prepayment
risk and extension risk; and certain classes or series may have more or less
volatility depending upon the predictability of cash flow for such class or
series. Certain of these securities may have variable or floating interest rates
and others may be stripped (securities which provide only the principal or
interest feature of the underlying security).
Additional information regarding, mortgage-backed and asset-backed securities,
REMICs and CMOs is contained in the Fund's Statement of Additional Information.
STRIPPED INCOME SECURITIES. Stripped income securities are derivative
obligations representing an interest in all or a portion of the interest or
principal components of an underlying security or pool of securities or other
assets. The Fund may invest in stripped income securities issued by agencies or
instrumentalities of the U.S. government or by private originators, including
stripped mortgage-backed related securities. Stripped securities are often
structured with two classes that receive different proportions of the interest
and principal distributions on a pool of underlying assets. In the most extreme
case, one class will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). The yield to maturity on an IO class is extremely
sensitive to the rate of principal payments (including prepayments) on the
related underlying assets, and a rapid rate of principal payments may have a
material adverse effect on such security's yield to maturity. If the underlying
assets experience greater than anticipated prepayments of principal, the Fund
may fail to fully recoup its initial investment in these securities. PO
securities usually trade at a deep discount from their face or par value and are
subject to greater fluctuations of market value in response to changing interest
rates than debt obligations of comparable maturities which make current
distributions of interest. Furthermore, if the underlying assets experience
slower than anticipated prepayments of principal, the yield of POs could be
materially adversely affected. The market values of IOs and POs are subject to
greater risk of fluctuation in response to changes in market rates of interest
than many other types of government securities and, to the extent the Fund
invests in IOs and POs, such investments increase the risk of fluctuations in
the net asset value of the Fund. Although the market for stripped securities is
increasingly liquid, certain of such securities may not be readily marketable
and will be considered illiquid for purposes of the Fund's limitation on
investments in illiquid securities.
VARIABLE AND FLOATING RATE SECURITIES. In addition to traditional fixed-income
securities, the Fund may invest in income securities with variable or floating
rate interest or dividend payments. Variable or floating rate securities bear
rates of interest that are adjusted periodically according to formula intended
to reflect market rates of interest. Variable or floating rate securities allow
the Fund to participate in increase in interest rate through upward adjustments
of the coupon rates on such securities. However, during periods of increasing
interest rates, changes in the coupon rates may lag the change in market rates
or may have limits on the maximum increase in coupon rates. Alternative, during
period of declining interest rates, the coupon rates on such securities readjust
downward resulting in lower yield to the Fund. The Fund also may invest in
derivative variable rate securities, such as inverse floaters, whose rates vary
inversely with market rates of interest, or range floaters or capped floaters,
whose rates are subject to periodic or lifetime caps, or in securities that pay
a rate of interest determined by applying a multiple to the variable rate.
Investment in such securities involve special risks as compared to a fixed-rate
security. The extent of increases and decreases in the value of derivative
variable rate securities and the corresponding change to the net asset value of
the Fund in response to changes in market rates of interest generally will be
larger than comparable changes in the value of an equal principal amount of a
fixed-rate security having similar credit quality, redemption provisions and
maturity. The markets for such securities may be less developed and have less
liquidity than the markets for conventional securities.
DISCOUNT, ZERO-COUPON AND PAYMENT-IN-KIND SECURITIES. The Fund may invest in
securities sold at a substantial discount from their value at maturity, such as
zero coupon and payment-in-kind securities, when the Fund's investment adviser
believes the effective yield on such securities over comparable instruments
paying current cash income makes these investments attractive. Zero coupon
securities are debt obligations that do not entitle the holder to any periodic
payment of interest prior to maturity or a specified date when the securities
begin paying current interest. They are issued and traded at a discount from
their face amounts or par value, which discount varies depending on the time
remaining until cash payments begin, prevailing interest rates, liquidity of the
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<PAGE> 52
security and the perceived credit quality of the issuer. Because such securities
do not entitle the holder to any periodic payments of interest prior to
maturity, this prevents the reinvestment of such interest payments if prevailing
interest rates rise. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, "zero coupon" securities eliminate
the reinvestment risk and may lock in a favorable rate of return to maturity if
interest rates drop. Payment-in-kind securities are securities that pay interest
through the issuance of additional securities. Prices on non-cash-paying
instruments may be more sensitive to changes in the issuer's financial
condition, fluctuations in interest rates and market demand/supply imbalances
than cash-paying securities with similar credit ratings, and thus may be more
speculative than are securities that pay interest periodically in cash. In
addition, the amount of non-cash interest income earned on such instruments is
included, for federal income tax purposes, in the Fund's calculation of income
that is required to be distributed to shareholders for the Fund to maintain its
desired federal income tax status (even though such non-cash paying securities
do not provide the Fund with the cash flow with which to pay such
distributions). Accordingly, the Fund may be required to borrow or to liquidate
portfolio securities at a time when it otherwise would not have done so in order
to make such distributions. The Fund's investment adviser will weigh these
concerns against the expected total returns from such instruments.
PREMIUM SECURITIES. The Fund may purchase income securities at a premium over
the principal or face value in order to obtain higher current income. The amount
of any premium declines during the term of the security to zero at maturity.
Such decline generally is reflected in the market price of the security and thus
in the Fund's net asset value. Any such decline is realized for accounting
purposes as a capital loss at maturity or upon resale. Prior to maturity or
resale, such decline in value could be offset, in whole or part, or increased by
changes in the value of the security due to changes in interest rate levels.
CONVERTIBLE SECURITIES. A convertible security is a bond, debenture, note,
preferred stock, warrant or other income security that may be converted into or
exchanged for a specified amount of common stock or other security of the same
or a different issuer or into cash within a particular period of time and at a
specified price or formula. A convertible security entitles the holder to
receive interest income on debt securities or dividends paid on preferred stock
until the convertible security matures or is redeemed, converted or exchanged.
EQUITY FEATURES. Income securities may involve equity features, such as
contingent interest or participations based on revenues, sales or profits (i.e.,
interest or other payments, often in addition to a fixed rate of return, that
are based on the borrower's attainment of specified levels of revenues, sales or
profits). At times, the Fund may also acquire warrants and other equity
securities in connection with the purchase of income securities.
BRADY BONDS. The Fund may invest in Brady Bonds and other sovereign debt of
countries that have restructured or are in the process of restructuring
sovereign debt pursuant to the Brady Plan. Brady Bonds are typically from a
debtor nation restructuring outstanding external commercial bank indebtedness.
Brady Bonds generally are based on issuers with a history of defaults with
respect to commercial bank loans and therefore are often viewed as speculative.
A more complete description of Brady Bonds is contained in the Fund's Statement
of Additional Information.
SOVEREIGN DEBT. In addition to Brady Bonds, the Fund may invest in sovereign or
sovereign-related debt obligations, including obligations of supranational
entities. Sovereign debt differs from debt obligations of private entities in
that, generally, remedies for defaults for defaults must be pursued in the
courts of the defaulting party and the legal recourse in enforcing a sovereign
debt is often limited. At certain times, certain countries (particularly
emerging market countries) have declared moratoria on the payment of principal
and interest on external debt. Such investments may include participations and
assignments of sovereign bank debt, restructured external debt that has not
undergone a Brady-style debt exchange, and internal government debt.
LOANS. The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer and one or more financial
institutions ("Lenders"). The Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
Participations typically will result in the Fund having a contractual
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<PAGE> 53
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Fund generally has no direct
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan ("Loan Agreement"), nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an Assignment may differ from, and be more limited than, those held
by the assigning Lender.
STRUCTURED INVESTMENTS. The Fund may invest a portion of its assets in
"structured investments" which are interests in entities organized and operated
for the purpose of restructuring the investment characteristics of other
securities. This type of restructuring involves the deposit with or purchase by
an entity of debt securities (such as mortgages, bank loans or Brady Bonds) and
the issuance by that entity of one or more classes of securities, backed by, or
representing interests in, the underlying instruments. The cash flow on the
underlying instruments may be apportioned among the newly issued securities to
create different investment characteristics such as varying maturities, payment
priorities and interest rate provisions.
PRIVATE PLACEMENTS. The Fund may invest in income securities that are sold in
private placement transactions between their issuers and their purchasers and
that are neither listed on an exchange nor traded in the over-the-counter
secondary market. A significant portion of the high yield, high risk bond market
is privately placed securities or restricted securities sold to qualified
institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as
amended. In many cases, privately placed securities will be subject to
contractual or legal restrictions on transfer. As a result of the absence of a
public trading market, privately placed securities may in turn be less liquid
and more difficult to value than publicly traded securities. In addition,
issuers whose securities are not publicly traded may not be subject to the
disclosure and other investor protection requirements that may be applicable if
their securities were publicly traded. The Fund monitors the liquidity of such
securities and securities not considered liquid are subject to the Fund's
limitation on illiquid securities. Certain of the Fund's direct investments,
particularly in emerging foreign markets, may include investments in smaller,
less seasoned companies, which may involve greater risks. These companies may
have limited product lines, markets or financial resources, or they may be
dependent on a limited management group.
INDEXED INCOME SECURITIES. The Fund may invest in income securities that are
indexed to certain specific foreign currency exchange rates, interest rates or
other reference rates. The terms of such securities provide that their principal
or income amounts may be adjusted upwards or downwards (but ordinarily not below
zero) at maturity to reflect changes in the exchange rate between two currencies
(or other rates) while the obligations are outstanding.
OTHER INVESTMENTS
AND RISK FACTORS
WHEN-ISSUED AND DELAYED DELIVERY. The Fund may purchase and sell securities on a
"when-issued" or "delayed delivery" basis. The Fund accrues no income on such
securities until 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. The yields generally
available on comparable securities when delivery occurs may be higher than
yields on the securities obtained pursuant to such transactions. Because the
Fund relies on the buyer or seller to consummate the transaction, failure by the
other party to complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be advantageous. The
Fund will engage in when-issued and delayed delivery transactions for the
purpose of acquiring securities consistent with the Fund's investment objectives
and policies and not for the purpose of investment leverage.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, use various
investment strategic transactions described below to earn income, facilitate
portfolio management and mitigate risks. Although the investment adviser seeks
to use the practices to further the Fund's investment objective, no assurance
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<PAGE> 54
can be given that these practices will achieve this result.
The Fund may purchase and sell derivative instruments such as exchange-listed
and over-the-counter put and call options on securities, financial futures,
equity, fixed-income and interest rate indices, and other financial instruments,
purchase and sell financial futures contracts and options thereon, enter into
various interest rate transactions such as swaps, caps, floors or collars and
enter into various currency transactions such as currency forward contracts,
currency futures contracts, currency swaps or options on currency or currency
futures. Collectively, all of the above are referred to as "Strategic
Transactions." Strategic Transactions may be used 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, manage the effective interest rate exposure of the Fund,
protect against changes in currency exchange rates, manage the effective
maturity or duration 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 to enhance
potential gain, although no more than 5% of the Fund's total assets will be
committed to certain Strategic Transactions for non-hedging purposes.
Strategic Transactions have risks associated with them 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 Fund's investment adviser's ability 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 realize on an investment, or may cause the Fund to
hold a security that it might otherwise sell. The use of currency transactions
can result in the Fund incurring losses as a result 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 by the Fund
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.
A more complete discussion of Strategic Transactions and their risks is
contained in the Fund's Statement of Additional Information. The Statement of
Additional Information can be obtained by investors free of charge as described
on the back cover of this prospectus.
OTHER PRACTICES. For cash management and investment purposes, the Fund may
engage in repurchase agreements with broker-dealers, banks and other financial
institutions in an amount up to 20% of the Fund's total assets. Such
transactions are subject to the risk of default by the other party.
The Fund may invest up to 15% of the Fund's net assets in illiquid securities
and certain restricted securities. Such securities may be difficult or
impossible to sell at the time and the price that the Fund would like. Thus, the
Fund may have to sell such securities at a lower price, sell other securities
instead to obtain cash or forego other investment opportunities.
The Fund is authorized to borrow money from banks and engage in reverse
repurchase agreements and dollar rolls in an aggregate amount up to 33 1/3% of
the Fund's total assets (including the amount borrowed) for investment purposes.
The use of such transactions to purchase additional securities is known as
"leverage." Leverage transactions create an opportunity for increased net income
but, at the same time, may increase the volatility of the Fund's net asset value
as a result of fluctuations in market interest rates and increase the risk of
the Fund's portfolio. The principal amount of these transactions is fixed when
the transaction is opened, but the Fund's assets may change in value during the
time these transactions are outstanding. As a result, interest expenses and
other costs from these transactions may exceed the interest income and other
revenues earned from portfolio assets, and the net income of the Fund may be
less than if these transactions were not used. Bank borrowing may be done on a
secured or unsecured basis. The Fund may pay various fees and expenses in
connection with the borrowing, and the loan agreements may contain covenants or
restrictions on certain investment practices in which the Fund may otherwise be
permitted to engage. During periods in which the Fund is utilizing leverage, the
fees paid to the Fund's
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<PAGE> 55
investment adviser will be higher than if the Fund did not utilize leverage
because the fees paid will be calculated on the basis of the average daily
managed assets of the Fund, including proceeds from leverage transactions.
Reverse repurchase agreements are transactions in which the Fund sells certain
securities concurrently with an agreement to repurchase the same securities at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on such securities.
Dollar rolls are transactions in which the Fund sells securities for delivery in
the current month and simultaneously contracts to repurchase substantially
similar securities on a specified future date. During the roll period, the Fund
forgoes principal and interest paid on such securities. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement.
The Fund may lend its portfolio securities in an amount up to 50% of its total
assets to broker-dealers, banks or other institutional borrowers of securities.
Such loans must be callable at any time and the borrower at all times during the
loan must maintain cash or liquid securities as collateral or provide the Fund
an irrevocable letter of credit equal to at least 100% of the value of the
securities loaned (including accrued interest). During the time portfolio
securities are on loan, the Fund receives any dividends or interest paid on such
securities and receives the interest earned on the collateral which is invested
in short-term instruments or receives an agreed-upon amount of interest income
from the borrower who has delivered the collateral or letter of credit. As with
any extensions or credit, there are risks of delay in recovery and in some cases
even loss of rights in the collateral should the borrower of the securities fail
financially.
The Fund may, from time to time, make short sales of securities it owns or has
the right to acquire through conversion or exchange of other securities it owns.
A short sale is a transaction in which the Fund sells a security it does not own
in anticipation that the market price of that security will decline. 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. When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale in
order to satisfy its obligation to deliver the security upon conclusion of the
sale. The Fund is obligated to collateralize its obligation to replace the
borrowed security with cash or other liquid securities. The Fund may have to pay
a fee to borrow particular securities and is often obligated to pay over any
payments received on such borrowed securities. If the price of the security sold
short increases between the time of the short sale and the time the Fund
replaces the borrowed security, the Fund will incur a loss; conversely, if the
price declines, the Fund will realize a capital gain. Although the Fund's gain
is limited to the price at which it sold the security short, its potential loss
is theoretically unlimited. The short sale of a security is considered a
speculative investment technique. The market value of the security sold short of
any one issuer will not exceed either 5% of the Fund's total assets or 5% of
such issuer's voting securities. The Fund will not make a short sale, if, after
giving effect to such sale, the market value of all securities sold short
exceeds 25% of the value of its assets or the Fund's aggregate short sales of a
particular class of securities exceeds 25% of the outstanding securities of that
class. The Fund may also make short sales "against the box" without respect to
such limitations.
Further information about these types of investments and other investment
practices that may be used by the Fund is contained in the Fund's Statement of
Additional Information.
The Fund may sell securities without regard to the length of time they have been
held in order to take advantage of new investment opportunities or yield
differentials or otherwise. The portfolio turnover rate may vary from year to
year. A high portfolio turnover rate (100% or more) increases a fund's
transactions costs (including brokerage commissions or dealer costs) and a high
portfolio turnover may result in the realization of more short-term capital
gains than if a fund had lower portfolio turnover. Increases in a fund's
transaction costs would adversely impact the fund's performance. The turnover
rate will not be a limiting factor, however, if the Fund's investment adviser
considers portfolio changes appropriate.
TEMPORARY DEFENSIVE STRATEGY. When market conditions dictate a more "defensive"
investment strategy, the Fund may on a temporary basis hold cash or invest a
portion or all of its assets in securities issued
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<PAGE> 56
or guaranteed by the U.S. government, its agencies or instrumentalities, prime
commercial paper, certificates of deposit, bankers' acceptances and other
obligations of domestic banks having total assets of at least $500 million,
repurchase agreements and in investment grade corporate debt securities. Under
normal market conditions, the potential for current income or capital
appreciation on these securities will tend to be lower than the potential for
current income or capital appreciation on other securities that may be owned by
the Fund. In taking such a defensive position, the Fund would not be pursuing
and may not achieve its investment objectives.
INVESTMENT ADVISORY SERVICES
THE ADVISER. Van Kampen Investment Advisory Corp. is the Fund's investment
adviser (the "Adviser" or "Advisory Corp."). The Adviser is a wholly owned
subsidiary of Van Kampen Investments Inc. ("Van Kampen Investments"). Van Kampen
Investments is a diversified asset management company with more than three
million retail investor accounts, extensive capabilities for managing
institutional portfolios, and more than $100 billion under management or
supervision as of June 30, 2000. Van Kampen Investments' more than 50 open-end
and 39 closed-end funds and more than 2,700 unit investment trusts are
professionally distributed by leading authorized dealers nationwide. Van Kampen
Funds Inc., the distributor of the Fund (the "Distributor") and the sponsor of
the funds mentioned above, is also a wholly owned subsidiary of Van Kampen
Investments. Van Kampen Investments is an indirect wholly owned subsidiary of
Morgan Stanley Dean Witter & Co. The Adviser's principal office is located at 1
Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of its
assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser a monthly fee
computed based upon an annual rate applied to the average daily managed assets
of the Fund as follows:
<TABLE>
<CAPTION>
Average Daily Managed Assets % Per Annum
---------------------------------------------------
<S> <C> <C> <C>
First $500 million 0.75%
...................................................
Next $500 million 0.70%
...................................................
Over $1 billion 0.65%
...................................................
</TABLE>
For purposes of determining the investment advisory fee, "daily managed assets"
shall mean the sum of the Fund's assets minus the accrued liabilities other than
the aggregate amount of any borrowings (whether from banks, reverse repurchase
agreement, dollar rolls or otherwise) undertaken by the Fund.
Applying this fee schedule, the effective advisory fee rate was 0.75% of the
Fund's average daily managed assets (or 1.03% of the Fund's average daily net
assets) for the Fund's fiscal year ended March 31, 2000. The Fund's average
daily managed assets are determined by taking the average of all of the
determinations of the managed assets during a given calendar month. Such fee is
payable for each calendar month as soon as practicable after the end of that
month.
Under the Advisory Agreement, the Adviser furnishes offices, necessary
facilities and equipment, and provides administrative services to the Fund. The
Fund pays all charges and expenses of its day-to-day operations, including
service fees, distribution fees, custodian fees, legal and independent
accountant fees, the costs of reports and proxies to shareholders, compensation
of trustees of the Trust (other than those who are affiliated persons of the
Adviser, Distributor or Van Kampen Investments), and all other ordinary business
expenses not specifically assumed by the Adviser.
From time to time, the Adviser or the Distributor may voluntarily undertake to
reduce the Fund's expenses by reducing the fees payable to them or by reducing
other expenses of the Fund in accordance with such limitations as the Adviser or
Distributor may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen Asset Management
Inc. ("Asset Management").
PERSONAL INVESTMENT POLICIES. The Fund, the Adviser and the Distributor have
adopted Codes of Ethics
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<PAGE> 57
designed to recognize the fiduciary relationships among the Fund, the Adviser,
the Distributor and their respective employees. The Codes of Ethics permit
directors, trustees, officers and employees to buy and sell securities for their
personal accounts subject to certain restrictions. Persons with access to
certain sensitive information are subject to pre-clearance and other procedures
designed to prevent conflicts of interest.
PORTFOLIO MANAGEMENT. Robert J. Hickey, Thomas J. Slefinger and Ted V. Mundy are
co-managers responsible for the day-to-day management of the Fund's investment
portfolio.
Robert J. Hickey is a Vice President of the Adviser and Asset Management. Mr.
Hickey has been employed by the Adviser since January 1988 and Asset Management
since June 1995. Mr. Hickey has been a co-manager of the Fund since January
1995.
Thomas J. Slefinger is a Senior Vice President of the Adviser and Asset
Management. Mr. Slefinger has been employed by the Adviser since July 1989 and
Asset Management since June 1995. Mr. Slefinger has been a co-manager of the
Fund since July 1999.
Ted V. Mundy is a Vice President of the Adviser since June 1995, and a Vice
President of Asset Management since June 1994. From September 1990 to June 1994,
Mr. Mundy was a portfolio manager with AMR Investment Services, Inc. Mr. Mundy
has been a co-manager of the Fund since June 2000.
PURCHASE OF SHARES
GENERAL
The Fund offers three classes of shares designated as Class A Shares, Class B
Shares and Class C Shares. By offering three classes of shares, the Fund permits
each investor to choose the class of shares that is most beneficial given the
amount to be invested and the length of time the investor expects to hold the
shares.
Initial investments generally must be at least $1,000 for each class of shares,
and subsequent investments must be at least $25 for each class of shares.
Minimum investment amounts may be waived by the Distributor for plans involving
periodic investments and for certain retirement accounts.
Each class of shares represents an interest in the same portfolio of investments
of the Fund and has the same rights except that (i) Class A Shares generally
bear the sales charge expenses at the time of purchase while Class B Shares and
Class C Shares generally bear the sales charge expenses at the time of
redemption and any expenses (including higher distribution fees and transfer
agency costs) resulting from such deferred sales charge arrangement, (ii) each
class of shares has exclusive voting rights with respect to approvals of the
Rule 12b-1 distribution plan and the service plan (each as described below)
under which its distribution fee and/or the service fee is paid, (iii) each
class of shares has different exchange privileges, (iv) certain classes of
shares are subject to a conversion feature and (v) certain classes of shares
have different shareholder service options available.
The offering price of the Fund's shares is based upon the Fund's net asset value
per share (plus sales charges, where applicable). The net asset values per share
of the Class A Shares, Class B Shares and Class C Shares are generally expected
to be substantially the same. In certain circumstances, however, the per share
net asset values of the classes of shares may differ from one another,
reflecting the daily expense accruals of the higher distribution fees and
transfer agency costs applicable to the Class B Shares and Class C Shares and
the differential in the dividends that may be paid on each class of shares.
The net asset value per share for each class of shares of the Fund is determined
once daily as of the close of trading on the New York Stock Exchange (the
"Exchange") (currently 4:00 p.m., New York time) each day the Exchange is open
for trading except on any day on which no purchase or redemption orders are
received or there is not a sufficient degree of trading in the Fund's portfolio
securities such that the Fund's net asset value per share might be materially
affected. The Fund's Board of Trustees reserves the right to calculate the net
asset values per share and adjust the offering price more frequently than once
daily if deemed desirable. Net asset value per share for each class is
determined by dividing the value of the Fund's portfolio securities, cash and
other assets (including accrued interest) attributable to such class, less all
liabilities (including accrued expenses) attributable to such class, by the
total number of shares of the class outstanding. Portfolio securities are valued
by using market quotations, prices provided by market makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics in accordance with procedures established by the
Fund's Board of
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<PAGE> 58
Trustees. Securities for which market quotations are not readily available are
valued at a fair value as determined in good faith by the Adviser in accordance
with procedures established by the Fund's Board of Trustees. Short-term
securities with remaining maturities of 60 days or less are valued at amortized
cost, which approximates market value.
Trading in securities on many foreign securities exchanges (including European
and Far Eastern securities exchanges) and over-the-counter markets is normally
completed before the close of business on each U.S. business day. In addition,
securities trading in a particular country or countries may not take place on
all U.S. business days or may take place on days which are not U.S. business
days. Changes in valuations on certain securities may occur at times or on days
on which the Fund's net asset value is not calculated and on which the Fund does
not effect sales, redemptions and exchanges of its shares.
The Fund calculates net asset value per share, and therefore effects sales,
redemptions and exchanges of its shares, once daily as of the close of trading
on the Exchange on each U.S. business day. Such calculation does not take place
contemporaneously with the determination of the prices of certain foreign
portfolio securities used in such calculation.
If events materially affecting the value of foreign portfolio securities or
other portfolio securities occur between the time when their price is determined
and the time when the Fund's net asset value is calculated, such securities may
be valued at fair value as determined in good faith by the Adviser based in
accordance with procedures established by the Fund's Board of Trustees.
The Fund has adopted a distribution plan (the "Distribution Plan") with respect
to each class of its shares pursuant to Rule 12b-1 under the 1940 Act. The Fund
also has adopted a service plan (the "Service Plan") with respect to each class
of its shares. Under the Distribution Plan and the Service Plan, the Fund pays
distribution fees in connection with the sale and distribution of its shares and
service fees in connection with the provision of ongoing services to
shareholders of each class and the maintenance of the shareholders' accounts.
The amount of distribution and service fees varies among the classes offered by
the Fund. Because these fees are paid out of the Fund's assets on an ongoing
basis, these fees will increase the cost of your investment in the Fund. By
purchasing a class of shares subject to higher distribution and service fees,
you may pay more over time than on a class of shares with other types of sales
charge arrangements. Long-term shareholders may pay more than the economic
equivalent of the maximum front-end sales charges permitted by the rules of the
National Association of Securities Dealers, Inc. ("NASD"). The net income
attributable to a class of shares will be reduced by the amount of the
distribution and service fees and other expenses of the Fund associated with
that class of shares. To assist investors in comparing classes of shares, the
tables under the Prospectus heading "Fees and Expenses of the Fund" provide a
summary of sales charges and expenses and an example of the sales charges and
expenses of the Fund applicable to each class of shares.
The shares are offered to the public on a continuous basis through the
Distributor as principal underwriter, which is located at 1 Parkview Plaza,
Oakbrook Terrace, Illinois 60181-5555. Shares also are offered through members
of the NASD who are acting as securities dealers ("dealers") and NASD members or
eligible non-NASD members who are acting as brokers or agents for investors
("brokers"). "Dealers" and "brokers" are sometimes referred to herein as
"authorized dealers."
Shares may be purchased on any business day by completing the account
application form and forwarding the account application, directly or through an
authorized dealer, to the Fund's shareholder service agent, Van Kampen Investor
Services Inc. ("Investor Services"), a wholly owned subsidiary of Van Kampen
Investments. When purchasing shares of the Fund, investors must specify whether
the purchase is for Class A Shares, Class B Shares or Class C Shares by
selecting the correct Fund number on the account application. Sales personnel of
authorized dealers distributing the Fund's shares are entitled to receive
compensation for selling such shares and may receive differing compensation for
selling Class A Shares, Class B Shares or Class C Shares.
The offering price for shares is based upon the next calculation of net asset
value per share (plus sales charges, where applicable) after an order is
received by Investor Services. Orders received by authorized dealers prior to
the close of the Exchange are priced based on the date of receipt, provided such
order is transmitted to Investor Services prior to Investor Services' close of
business on such date. Orders received by authorized dealers after the close of
the Exchange or transmitted to Investor Services after its close of business are
priced based on the date of the
23
<PAGE> 59
next determined net asset value per share provided they are received by Investor
Services prior to Investor Services' close of business on such date. It is the
responsibility of authorized dealers to transmit orders received by them to
Investor Services so they will be received in a timely manner.
The Fund and the Distributor reserve the right to refuse any order for the
purchase of shares. The Fund also reserves the right to suspend the sale of the
Fund's shares in response to conditions in the securities markets or for other
reasons. Shares of the Fund may be sold in foreign countries where permissible.
Investor accounts will automatically be credited with additional shares of the
Fund after any Fund distributions, such as dividends and capital gain dividends,
unless the investor instructs the Fund otherwise. Investors wishing to receive
cash instead of additional shares should contact the Fund by telephone at (800)
341-2911 or by writing to the Fund, c/o Van Kampen Investor Services Inc., PO
Box 218256, Kansas City, MO 64121-8256.
CLASS A SHARES
Class A Shares of the Fund are sold at net asset value plus an initial maximum
sales charge of up to 4.75% of the offering price (or 4.99% of the net amount
invested), reduced on investments of $100,000 or more as follows:
CLASS A SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
As % of As % of
Size of Offering Net Amount
Investment Price Invested
----------------------------------------------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.75% 4.99%
..........................................................
$100,000 but less than
$250,000 3.75% 3.90%
..........................................................
$250,000 but less than
$500,000 2.75% 2.83%
..........................................................
$500,000 but less than
$1,000,000 2.00% 2.04%
..........................................................
$1,000,000 or more * *
..........................................................
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund may impose a
contingent deferred sales charge of 1.00% on certain redemptions made within
one year of the purchase. The contingent deferred sales charge is assessed on
an amount equal to the lesser of the then current market value or the cost of
the shares being redeemed. Accordingly, no sales charge is imposed on
increases in net asset value above the initial purchase price.
No sales charge is imposed on Class A Shares received from reinvestment of
dividends or capital gain dividends.
Under the Distribution Plan and the Service Plan, the Fund may spend up to a
total of 0.25% per year of the Fund's average daily net assets with respect to
the Class A Shares of the Fund. From such amount, under the Service Plan, the
Fund may spend up to 0.25% per year of the Fund's average daily net assets with
respect to the Class A Shares of the Fund.
CLASS B SHARES
Class B Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge if redeemed within six years of purchase as
shown in the table as follows:
CLASS B SHARES
SALES CHARGE SCHEDULE
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
as a Percentage of
Dollar Amount
Year Since Purchase Subject to Charge
------------------------------------------------
<S> <C> <C> <C>
First 4.00%
................................................
Second 3.75%
................................................
Third 3.50%
................................................
Fourth 2.50%
................................................
Fifth 1.50%
................................................
Sixth 1.00%
................................................
Seventh and After None
................................................
</TABLE>
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class B
Shares in an amount of $500,000 or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
The amount of the contingent deferred sales charge, if any, varies depending on
the number of years from the time of payment for each purchase of Class B Shares
until the time of redemption of such shares.
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<PAGE> 60
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class B Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class B Shares of the
Fund.
CLASS C SHARES
Class C Shares of the Fund are sold at net asset value and are subject to a
contingent deferred sales charge of 1.00% of the dollar amount subject to charge
if redeemed within one year of purchase.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends. It
is presently the policy of the Distributor not to accept any order for Class C
Shares in an amount of $1 million or more because it ordinarily will be more
advantageous for an investor making such an investment to purchase Class A
Shares.
In determining whether a contingent deferred sales charge applies to a
redemption, it is assumed that the shares being redeemed first are any shares in
the shareholder's Fund account that are not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
Under the Distribution Plan, the Fund may spend up to 0.75% per year of the
Fund's average daily net assets with respect to the Class C Shares of the Fund.
In addition, under the Service Plan, the Fund may spend up to 0.25% per year of
the Fund's average daily net assets with respect to the Class C Shares of the
Fund.
CONVERSION FEATURE
Class B Shares purchased on or after June 1, 1996, including Class B Shares
received from reinvestment of distributions through the dividend reinvestment
plan on such shares, automatically convert to Class A Shares eight years after
the end of the calendar month in which the shares were purchased. Class B Shares
purchased before June 1, 1996, including Class B Shares received from
reinvestment of distributions through the dividend reinvestment plan on such
shares, automatically convert to Class A Shares six years after the end of the
calendar month in which the shares were purchased. Class C Shares purchased
before January 1, 1997, including Class C Shares received from reinvestment of
distributions through the dividend reinvestment plan on such shares,
automatically convert to Class A Shares ten years after the end of the calendar
month in which such shares were purchased. Such conversion will be on the basis
of the relative net asset values per share, without the imposition of any sales
load, fee or other charge. The conversion schedule applicable to a share of the
Fund acquired through the exchange privilege from another Van Kampen fund
participating in the exchange program is determined by reference to the Van
Kampen fund from which such share was originally purchased.
The conversion of such shares to Class A Shares is subject to the continuing
availability of an opinion of counsel to the effect that (i) the assessment of
the higher distribution fee and transfer agency costs with respect to such
shares does not result in the Fund's dividends or capital gain dividends
constituting "preferential dividends" under the federal income tax law and (ii)
the conversion of shares does not constitute a taxable event under federal
income tax law. The conversion may be suspended if such an opinion is no longer
available and such shares might continue to be subject to the higher aggregate
fees applicable to such shares for an indefinite period.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B Shares
and Class C Shares (i) within one year following the death or disability (as
disability is defined by federal income tax law) of a shareholder, (ii) for
required minimum distributions from an individual retirement account ("IRA") or
certain other retirement plan distributions, (iii) for withdrawals under the
Fund's systematic withdrawal plan but limited to 12% annually of the initial
value of the account, (iv) if no commission or transaction fee is paid to
authorized dealers at the time of purchase of such shares and (v) if made by the
Fund's
25
<PAGE> 61
involuntary liquidation of a shareholder's account as described under the
Prospectus heading "Redemption of Shares." Subject to certain limitations, a
shareholder who has redeemed Class C Shares of the Fund may reinvest in Class C
Shares at net asset value with credit for any contingent deferred sales charge
if the reinvestment is made within 180 days after the redemption. For a more
complete description of contingent deferred sales charge waivers, please refer
to the Fund's Statement of Additional Information or contact your authorized
dealer.
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances described
below, be entitled to pay reduced or no sales charges. Investors, or their
authorized dealers, must notify the Fund at the time of the purchase order
whenever a quantity discount is applicable to purchases. Upon such notification,
an investor will pay the lowest applicable sales charge. Quantity discounts may
be modified or terminated at any time. For more information about quantity
discounts, investors should contact their authorized dealer or the Distributor.
A person eligible for a reduced sales charge includes an individual, his or her
spouse and children under 21 years of age and any corporation, partnership or
sole proprietorship which is 100% owned, either alone or in combination, by any
of the foregoing; a trustee or other fiduciary purchasing for a single trust or
for a single fiduciary account, or a "company" as defined in Section 2(a)(8) of
the 1940 Act.
As used herein, "Participating Funds" refers to certain open-end investment
companies advised by Asset Management or Advisory Corp. and distributed by the
Distributor as determined from time to time by the Fund's Board of Trustees.
VOLUME DISCOUNTS. The size of investment shown in the Class A Shares sales
charge table applies to the total dollar amount being invested by any person in
shares of the Fund, or in any combination of shares of the Fund and shares of
other Participating Funds, although other Participating Funds may have different
sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the Class A Shares
sales charge table may also be determined by combining the amount being invested
in shares of the Participating Funds plus the current offering price of all
shares of the Participating Funds currently owned.
LETTER OF INTENT. A Letter of Intent provides an opportunity for an investor to
obtain a reduced sales charge by aggregating investments over a 13-month period
to determine the sales charge as outlined in the Class A Shares sales charge
table. The size of investment shown in the Class A Shares sales charge table
includes purchases of shares of the Participating Funds over a 13-month period
based on the total amount of intended purchases plus the value of all shares of
the Participating Funds previously purchased and still owned. An investor may
elect to compute the 13-month period starting up to 90 days before the date of
execution of a Letter of Intent. Each investment made during the period receives
the reduced sales charge applicable to the total amount of the investment goal.
The initial purchase must be for an amount equal to at least 5% of the minimum
total purchase amount of the level selected. If trades not initially made under
a Letter of Intent subsequently qualify for a lower sales charge through the
90-day backdating provisions, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower sales charge. Such adjustment
in sales charge will be used to purchase additional shares. The Fund initially
will escrow shares totaling 5% of the dollar amount of the Letter of Intent to
be held by Investor Services in the name of the shareholder. In the event the
Letter of Intent goal is not achieved within the specified period, the investor
must pay the difference between the sales charge applicable to the purchases
made and the reduced sales charges previously paid. Such payments may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain the difference.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced or no initial sales
charges in connection with the unit investment trust reinvestment program and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Fund or the Distributor. The Fund reserves the right to
modify or terminate these arrangements at any time.
UNIT INVESTMENT TRUST REINVESTMENT PROGRAM. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund at net asset value per share and with no minimum initial or
subsequent investment
26
<PAGE> 62
requirement, if the administrator of an investor's unit investment trust program
meets certain uniform criteria relating to cost savings by the Fund and the
Distributor. The total sales charge for all other investments made from unit
investment trust distributions will be 1.00% of the offering price (1.01% of net
asset value). Of this amount, the Distributor will pay to the authorized dealer,
if any, through which such participation in the qualifying program was initiated
0.50% of the offering price as a dealer concession or agency commission. Persons
desiring more information with respect to this program, including the terms and
conditions that apply to the program, should contact their authorized dealer or
the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide Investor Services with appropriate
backup data for each investor participating in the program in a computerized
format fully compatible with Investor Services' processing system.
To obtain these special benefits, all dividends and other distributions from the
Fund must be reinvested in additional shares and there can not be any systematic
withdrawal program. There will be no minimum for reinvestments from unit
investment trusts. The Fund will send account activity statements to such
participants on a quarterly basis only, even if their investments are made more
frequently. The Fund reserves the right to modify or terminate this program at
any time.
NET ASSET VALUE PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at
net asset value, generally upon written assurance that the purchase is made for
investment purposes and that the shares will not be resold except through
redemption by the Fund, by:
(1) Current or retired trustees or directors of funds advised by Morgan Stanley
Dean Witter & Co. and any of its subsidiaries and such persons' families and
their beneficial accounts.
(2) Current or retired directors, officers and employees of Morgan Stanley Dean
Witter & Co. and any of its subsidiaries; employees of an investment
subadviser to any fund described in (1) above or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(3) Directors, officers, employees and, when permitted, registered
representatives, of financial institutions that have a selling group
agreement with the Distributor and their spouses and children under 21 years
of age when purchasing for any accounts they beneficially own, or, in the
case of any such financial institution, when purchasing for retirement plans
for such institution's employees; provided that such purchases are otherwise
permitted by such institutions.
(4) Registered investment advisers who charge a fee for their services, trust
companies and bank trust departments investing on their own behalf or on
behalf of their clients. The Distributor may pay authorized dealers through
which purchases are made an amount up to 0.50% of the amount invested, over
a 12-month period.
(5) Trustees and other fiduciaries purchasing shares for retirement plans which
invest in multiple fund families through broker-dealer retirement plan
alliance programs that have entered into agreements with the Distributor and
which are subject to certain minimum size and operational requirements.
Trustees and other fiduciaries should refer to the Fund's Statement of
Additional Information for further details with respect to such alliance
programs.
(6) Beneficial owners of shares of Participating Funds held by a retirement plan
or held in a tax-advantaged retirement account who purchase shares of the
Fund with proceeds from distributions from such a plan or retirement account
other than distributions taken to correct an excess contribution.
(7) Accounts as to which a bank or broker-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(8) Trusts created under pension, profit sharing or other employee benefit plans
qualified under Section 401(a) of the Internal Revenue Code of 1986, as
amended (the "Code"), or custodial accounts held by a bank created pursuant
to Section 403(b) of the Code and sponsored by
27
<PAGE> 63
nonprofit organizations defined under Section 501(c)(3) of the Code and
assets held by an employer or trustee in connection with an eligible
deferred compensation plan under Section 457 of the Code. Such plans will
qualify for purchases at net asset value provided, for plans initially
establishing accounts with the Distributor in the Participating Funds after
January 1, 2000, that (1) the total plan assets are at least $1 million or
(2) such shares are purchased by an employer sponsored plan with more than
100 eligible employees. Such plans that have been established with a
Participating Fund or have received proposals from the Distributor prior to
January 1, 2000 based on net asset value purchase privileges previously in
effect will be qualified to purchase shares of the Participating Funds at
net asset value. Section 403(b) and similar accounts for which Van Kampen
Trust Company serves as custodian will not be eligible for net asset value
purchases based on the aggregate investment made by the plan or the number
of eligible employees, except under certain uniform criteria established by
the Distributor from time to time. For purchases on February 1, 1997 and
thereafter, a commission will be paid on purchases as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million, plus 0.50% on the
next $47 million, plus 0.25% on the excess over $50 million.
(9) Individuals who are members of a "qualified group." For this purpose, a
qualified group is one which (i) has been in existence for more than six
months, (ii) has a purpose other than to acquire shares of the Fund or
similar investments, (iii) has given and continues to give its endorsement
or authorization, on behalf of the group, for purchase of shares of the Fund
and Participating Funds, (iv) has a membership that the authorized dealer
can certify as to the group's members and (v) satisfies other uniform
criteria established by the Distributor for the purpose of realizing
economies of scale in distributing such shares. A qualified group does not
include one whose sole organizational nexus, for example, is that its
participants are credit card holders of the same institution, policy holders
of an insurance company, customers of a bank or broker-dealer, clients of an
investment adviser or other similar groups. Shares purchased in each group's
participants account in connection with this privilege will be subject to a
contingent deferred sales charge of 1.00% in the event of redemption within
one year of purchase, and a commission will be paid to authorized dealers
who initiate and are responsible for such sales to each individual as
follows: 1.00% on sales to $2 million, plus 0.80% on the next $1 million and
0.50% on the excess over $3 million.
The term "families" includes a person's spouse, children and grandchildren under
21 years of age, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with Investor Services by the
investment adviser, trust company or bank trust department, provided that
Investor Services receives federal funds for the purchase by the close of
business on the next business day following acceptance of the order. An
authorized dealer may charge a transaction fee for placing an order to purchase
shares pursuant to this provision or for placing a redemption order with respect
to such shares. Authorized dealers will be paid a service fee as described above
on purchases made under options (3) through (9) above. The Fund may terminate,
or amend the terms of, offering shares of the Fund at net asset value to such
groups at any time.
REDEMPTION OF
SHARES
Generally shareholders may redeem for cash some or all of their shares without
charge by the Fund (other than applicable sales charge) at any time. As
described under the Prospectus heading "Purchase of Shares," redemptions of
Class B Shares and Class C Shares may be subject to a contingent deferred sales
charge. In addition, certain redemptions of Class A Shares for shareholder
accounts of $1 million or more may be subject to a contingent deferred sales
charge. Redemptions completed through an authorized dealer or a
custodian/trustee of a retirement plan account may involve additional fees
charged by the dealer or custodian/trustee.
Except as specified below under "Telephone Redemption Requests," payment for
shares redeemed generally will be made by check mailed within seven days after
receipt by Investor Services of
28
<PAGE> 64
the redemption request and any other necessary documents in proper form as
described below. Such payment may be postponed or the right of redemption
suspended as provided by the rules of the SEC. Such payment may, under certain
circumstances, be paid wholly or in part by a distribution-in-kind of portfolio
securities. A distribution-in-kind will 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 a shareholder's subsequent 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
the purchase check has cleared, which may take up to 15 days. A taxable gain or
loss may be recognized by the shareholder upon redemption of shares.
Certificated shares must be properly endorsed for transfer and must accompany a
written redemption request.
WRITTEN REDEMPTION REQUESTS. Shareholders may request a redemption of shares by
written request in proper form sent directly to Van Kampen Investor Services
Inc., PO Box 218256, Kansas City, MO 64121-8256. The request for redemption
should indicate the number of shares or dollar amount to be redeemed, the Fund
name and class designation of such shares and the shareholder's account number.
The redemption request must be signed by all persons in whose names the shares
are registered. Signatures must conform exactly to the account registration. If
the proceeds of the redemption exceed $50,000, or if the proceeds are not to be
paid to the record owner at the record address, or if the record address has
changed within the previous 30 days, signature(s) must be guaranteed by one of
the following: a bank or trust company; a broker-dealer; a credit union; a
national securities exchange, registered securities association or clearing
agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption request to be in proper form.
In some cases, however, additional documents may be necessary. Certificated
shares may be redeemed only by written request. The certificates for the shares
being redeemed must be properly endorsed for transfer and must accompany the
redemption request. Generally, in the event a redemption is requested by and
registered to a corporation, partnership, trust, fiduciary, estate or other
legal entity owning shares of the Fund, a copy of the corporate resolution or
other legal documentation appointing the authorized signer and certified within
the prior 120 days must accompany the redemption request. Retirement plan
distribution requests should be sent to the plan custodian/trustee to be
forwarded to Investor Services. Contact the plan custodian/trustee for further
information.
In the case of written redemption requests sent directly to Investor Services,
the redemption price is the net asset value per share next determined after the
request in proper form is received by Investor Services.
AUTHORIZED DEALER REDEMPTION REQUESTS. Shareholders may place redemption
requests through an authorized dealer. The redemption price for such shares is
the net asset value per share next calculated after an order in proper form is
received by an authorized dealer provided such order is transmitted to the
Distributor prior to the Distributor's close of business on such day. It is the
responsibility of authorized dealers to transmit redemption requests received by
them to the Distributor so they will be received prior to such time. Redemptions
completed through an authorized dealer may involve additional fees charged by
the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. A shareholder
automatically has telephone redemption privileges unless the shareholder
indicates otherwise by checking the applicable box on the account application
form. For accounts that are not established with telephone redemption
privileges, a shareholder may call the Fund at (800) 341-2911 to request that a
copy of the Telephone Redemption Authorization form be sent to the shareholder
for completion. To redeem shares, contact the telephone transaction line at
(800) 421-5684. Shares may also be redeemed by telephone through FundInfo(R)
(automated telephone system), which is accessible 24 hours a day, seven days a
week at (800) 847-2424. Van Kampen Investments and its subsidiaries, including
Investor Services, and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape-recording telephone
29
<PAGE> 65
communications and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, none of Van Kampen
Investments, Investor Services or the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Telephone
redemptions may not be available if the shareholder cannot reach Investor
Services by telephone, whether because all telephone lines are busy or for any
other reason; in such case, a shareholder would have to use the Fund's other
redemption procedure previously described. Requests received by Investor
Services prior to 4:00 p.m., New York time, will be processed at the next
determined net asset value per share. These privileges are available for most
accounts other than retirement accounts or accounts with shares represented by
certificates. If an account has multiple owners, Investor Services may rely on
the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions payable by wire transfer are expected to be wired on the next
business day following the date of redemption. The Fund reserves the right at
any time to terminate, limit or otherwise modify this redemption privilege.
OTHER REDEMPTION INFORMATION. The Fund may redeem any shareholder account that
has a value on the date of the notice of redemption less than the minimum
initial investment as specified in this prospectus. At least 60 days' advance
written notice of any such involuntary redemption will be provided to the
shareholder and such shareholder will be given an opportunity to purchase the
required value of additional shares at the next determined net asset value
without sales charge. Any involuntary redemption may only occur if the
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
DISTRIBUTIONS FROM THE FUND
In addition to any increase in the value of shares which the Fund may achieve,
shareholders may receive distributions from the Fund of dividends and capital
gain dividends.
DIVIDENDS. Interest earned from investments is the Fund's main source of net
investment income. The Fund's present policy, which may be changed at any time
by the Fund's Board of Trustees is to declare daily and distribute monthly all
or substantially all of this net investment income as dividends to shareholders.
Dividends are automatically applied to purchase additional shares of the Fund at
the next determined net asset value unless the shareholder instructs otherwise.
The per share dividends on Class B Shares and Class C Shares may be lower than
the per share dividends on Class A Shares as a result of the higher distribution
fees and transfer agency costs applicable to such classes of shares.
CAPITAL GAIN DIVIDENDS. The Fund may realize capital gains or losses when it
sells securities, depending on whether the sales prices for the securities are
higher or lower than purchase prices. The Fund distributes any capital gains to
shareholders at least annually. As in the case of dividends, capital gain
dividends are automatically reinvested in additional shares of the Fund at the
next determined net asset value unless the shareholder instructs otherwise.
SHAREHOLDER SERVICES
Listed below are some of the shareholder services the Fund offers to investors.
For a more complete description of the Fund's shareholder services, such as
investment accounts, share certificates, retirement plans, automated clearing
house deposits, dividend diversification and the systematic withdrawal plan,
please refer to the Fund's Statement of Additional Information or contact your
authorized dealer.
INTERNET TRANSACTIONS. In addition to performing transactions on your account
through written
30
<PAGE> 66
instruction or by telephone, you may also perform certain transactions through
the internet. Please refer to our web site at www.vankampen.com for further
instruction regarding internet transactions. Van Kampen Investments and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated
through the internet are genuine. Such procedures include requiring use of a
personal identification number prior to acting upon internet instructions and
providing written confirmation of instructions communicated through the
internet. If reasonable procedures are employed, none of Van Kampen Investments,
Investor Services or the Fund will be liable for following instructions received
through the internet which it reasonably believes to be genuine. If an account
has multiple owners, Investor Services may rely on the instructions of any one
owner.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gain dividends in shares of the
Fund. Such shares are acquired at net asset value per share (without sales
charge) on the applicable payable date of the dividend or capital gain dividend.
Unless the shareholder instructs otherwise, the reinvestment plan is automatic.
This instruction may be made by telephone by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired) or by writing to Investor Services. The
investor may, on the initial account application or prior to any declaration,
instruct that dividends and/or capital gain dividends be paid in cash, be
reinvested in the Fund at the next determined net asset value, or be invested in
another Van Kampen fund at the next determined net asset value.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under which
a shareholder can authorize Investor Services to debit the shareholder's bank
account on a regular basis to invest predetermined amounts in the Fund.
Additional information is available from the Distributor or your authorized
dealer.
EXCHANGE PRIVILEGE. Shares of the Fund may be exchanged for shares of the same
class of any Participating Fund based on the next determined net asset value per
share of each fund after requesting the exchange without any sales charge,
subject to certain limitations. Shares of the Fund may be exchanged for shares
of any Participating Fund only if shares of that Participating Fund are
available for sale; however, during periods of suspension of sales, shares of a
Participating Fund may be available for sale only to existing shareholders of a
Participating Fund. Shareholders seeking an exchange into a Participating Fund
should obtain and read the current prospectus for such fund prior to
implementing an exchange. A prospectus of any of the Participating Funds may be
obtained from an authorized dealer or the Distributor.
To be eligible for exchange, shares of the Fund must have been registered in the
shareholder's name for at least 30 days prior to an exchange. Shares of the Fund
registered in a shareholder's name for less than 30 days may only be exchanged
upon receipt of prior approval of the Adviser. It is the policy of the Adviser,
under normal circumstances, not to approve such requests.
When shares that are subject to a contingent deferred sales charge are exchanged
among Participating Funds, the holding period for purposes of computing the
contingent deferred sales charge is based upon the date of the initial purchase
of such shares from a Participating Fund. When such shares are redeemed and not
exchanged for shares of another Participating Fund, the shares are subject to
the contingent deferred sales charge schedule imposed by the Participating Fund
from which such shares were originally purchased.
Exchanges of shares are sales of shares of one Participating Fund and purchases
of shares of another Participating Fund. The sale may result in a gain or loss
for federal income tax purposes. If the shares sold have been held for less than
91 days, the sales charge paid on such shares is carried over and included in
the tax basis of the shares acquired.
A shareholder wishing to make an exchange may do so by sending a written request
to Investor Services, by contacting the telephone transaction line at (800)
421-5684, through FundInfo(R) (automated telephone system) at (800) 847-2424 or
through the internet at www.vankampen.com. A shareholder automatically has
exchange privileges unless the shareholder indicates otherwise by checking the
applicable box on the account application form. Van Kampen Investment and its
subsidiaries, including Investor Services, and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions,
tape-recording telephone communications, and providing written confirmation
31
<PAGE> 67
of instructions communicated by telephone. If reasonable procedures are
employed, none of Van Kampen Investments, Investor Services or the Fund will be
liable for following telephone instructions which it reasonably believes to be
genuine. If the exchanging shareholder does not have an account in the fund
whose shares are being acquired, a new account will be established with the same
registration, dividend and capital gain dividend options (except dividend
diversification) and authorized dealer of record as the account from which
shares are exchanged, unless otherwise specified by the shareholder. In order to
establish a systematic withdrawal plan for the new account or reinvest dividends
from the new account into another fund, however, an exchanging shareholder must
submit a specific request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund and other
Participating Funds may restrict exchanges by shareholders engaged in excessive
trading by limiting or disallowing the exchange privilege to such shareholders.
For further information on these restrictions, see the Fund's Statement of
Additional Information. The Fund may modify, restrict or terminate the exchange
privilege at any time on 60 days' notice to its shareholders of any termination
or material amendment.
For purposes of determining the sales charge rate previously paid on Class A
Shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of such shareholder's securities, the
security upon which the highest sales charge rate was previously paid is deemed
exchanged first.
Exchange requests received on a business day prior to the time shares of the
funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares of the fund which the
shareholder is redeeming will be redeemed at the net asset value per share next
determined on the date of receipt. Shares of the fund that the shareholder is
purchasing will also normally be purchased at the net asset value per share,
plus any applicable sales charge, next determined on the date of receipt.
Exchange requests received on a business day after the time shares of the funds
involved in the request are priced will be processed on the next business day in
the manner described herein.
FEDERAL INCOME TAXATION
Distributions of the Fund's investment company taxable income (consisting
generally of taxable income and net short-term capital gain) are taxable to
shareholders as ordinary income to the extent of the Fund's earnings and
profits, whether paid in cash or reinvested in additional shares. Distributions
of the Fund's net capital gain (which is the excess of net long-term capital
gain over net short-term capital loss) as capital gain dividends, if any, are
taxable to shareholders as long-term capital gains, whether paid in cash or
reinvested in additional shares, and regardless of how long the shares of the
Fund have been held by such shareholders. The Fund expects that its
distributions will consist primarily of ordinary income and capital gain
dividends. Distributions in excess of the Fund's earnings and profits will first
reduce the adjusted tax basis of a holder's shares and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such holder (assuming
such shares are held as a capital asset). Although distributions generally are
treated as taxable in the year they are paid, distributions declared in October,
November or December, payable to shareholders of record on a specified date in
such month and paid during January of the following year will be treated as
having been distributed by the Fund and received by the shareholders on the
December 31st prior to the date of payment. The Fund will inform shareholders of
the source and tax status of all distributions promptly after the close of each
calendar year.
The 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.
Any recognized capital gains may be taxed at different rates depending on how
long the shareholder held such shares.
The Fund is required, in certain circumstances, to withhold 31% of dividends and
certain other
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<PAGE> 68
payments, including redemptions, paid to shareholders who do not furnish to the
Fund their correct taxpayer identification number (in the case of individuals,
their social security number) and certain required certifications 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. Accordingly, investment in the Fund is likely to be
appropriate for a foreign shareholder only if such person can utilize a foreign
tax credit or corresponding tax benefit in respect to such U.S. withholding tax.
Prospective foreign investors should consult their own tax advisers concerning
the tax consequences to them of an investment in shares.
The Fund intends to qualify as a regulated investment company under federal
income tax law. If the Fund so qualifies and distributes each year to its
shareholders at least 90% of its investment company taxable income, the Fund
will not be required to pay federal income taxes on any income it distributes to
shareholders. If the Fund distributes less than an amount equal to the sum of
98% of its ordinary income and 98% of its capital gain net income, then the Fund
will be subject to a 4% excise tax on the undistributed amounts.
The federal income tax discussion set forth above is for general information
only. Prospective investors should consult their own tax 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 law and any
proposed tax law changes.
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<PAGE> 69
FINANCIAL HIGHLIGHTS
The financial highlights table is intended to help you understand the Fund's
financial performance for the periods indicated. Certain information reflects
financial results for a single Fund share. The total returns in the table
represent the rate that an investor would have earned (or lost) on an investment
in the Fund (assuming reinvestment of all dividends and distributions). This
information for the year ended March 31, 2000 has been audited by
PricewaterhouseCoopers LLP, whose report, along with the Fund's most recent
financial statements, is included in the Statement of Additional Information and
may be obtained by shareholders without charge by calling the telephone number
on the back cover of this prospectus. The information for the nine-month period
ended March 31, 1999 and the years ended June 30, 1998, 1997, 1996 and 1995 has
been audited by KPMG LLP. This information should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
Class A Shares
Nine
Year Months
Ended Ended Year Ended June 30,
March 31, March 31, -------------------------------------------------------
2000(a) 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $11.018 $12.286 $12.778 $12.065 $11.704 $11.975
------- ------- ------- ------- ------- -------
Net Investment Income................... .843 .679 .973 1.019 1.013 .657
Net Realized and Unrealized Gain/Loss... (.574) (1.236) (.489) .714 .446 .272
------- ------- ------- ------- ------- -------
Total from Investment Operations......... .269 (.557) .484 1.733 1.459 .929
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income..................... .598 .587 .976 1.020 1.098 .793
Return of Capital Distribution.......... .320 .124 -0- -0- -0- .407
------- ------- ------- ------- ------- -------
Total Distributions...................... .918 .711 .976 1.020 1.098 1.200
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period....... $10.369 $11.018 $12.286 $12.778 $12.065 $11.704
======= ======= ======= ======= ======= =======
Total Return*............................ 2.66%(b) (4.47%)**(b) 3.89%(b) 14.92%(b) 12.92%(b) 8.46%(b)
Net Assets at End of the Period (In
millions)............................... $33.9 $41.8 $45.3 $43.8 $33.8 $29.6
Ratio of Expenses to Average Net
Assets.................................. 3.60% 3.32% 3.37% 3.80% 4.11% 4.36%
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets*......... 1.52% 1.53% 1.68% 1.81% 1.84% 1.98%
Ratio of Net Investment Income to Average
Net Assets*............................. 8.00% 8.06% 7.72% 8.12% 8.34% 5.88%
Portfolio Turnover....................... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been
assumed by the Adviser, Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets...... 1.80% 1.82% 1.78% 1.86% 1.92% N/A
Ratio of Net Investment Income to
Average Net Assets.................. 7.71% 7.78% 7.63% 8.07% 8.26% N/A
<CAPTION>
Class B Shares
Nine
Year Months
Ended Ended Year Ended June 30,
March 31, March 31, -------------------------------------------------------------
2000(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $11.026 $12.286 $12.779 $12.069 $11.706 $11.968
------- ------- ------- ------- ------- -------
Net Investment Income................... .771 .622 .878 .920 .926 .585
Net Realized and Unrealized Gain/Loss... (.579) (1.243) (.491) .717 .443 .245
------- ------- ------- ------- ------- -------
Total from Investment Operations......... .192 (.621) .387 1.637 1.369 .830
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income..................... .536 .528 .880 .927 1.006 .722
Return of Capital Distribution.......... .297 .111 -0- -0- -0- .370
------- ------- ------- ------- ------- -------
Total Distributions...................... .833 .639 .880 .927 1.006 1.092
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period....... $10.385 $11.026 $12.286 $12.779 $12.069 $11.706
======= ======= ======= ======= ======= =======
Total Return*............................ 1.93%(c) (4.99%)**(c) 3.11%(c) 13.98%(c) 12.06%(c) 7.62%(c)
Net Assets at End of the Period (In
millions)............................... $45.1 $62.8 $76.2 $76.2 $61.9 $52.6
Ratio of Expenses to Average Net
Assets.................................. 4.36% 4.09% 4.13% 4.55% 4.85% 5.06%
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets*......... 2.28% 2.29% 2.44% 2.57% 2.59% 2.68%
Ratio of Net Investment Income to Average
Net Assets*............................. 7.25% 7.30% 6.96% 7.33% 7.58% 5.30%
Portfolio Turnover....................... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been
assumed by the Adviser, Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets...... 2.56% 2.58% 2.54% 2.61% 2.67% N/A
Ratio of Net Investment Income to
Average Net Assets.................. 6.97% 7.02% 6.86% 7.28% 7.50% N/A
<CAPTION>
Class C Shares
Nine
Year Months
Ended Ended Year Ended June 30,
March 31, March 31, -------------------------------------------------------
2000(a) 1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of the
Period.................................. $11.013 $12.274 $12.768 $12.059 $11.699 $11.966
------- ------- ------- ------- ------- -------
Net Investment Income................... .760 .607 .876 .913 0.944 .598
Net Realized and Unrealized Gain/Loss... (.572) (1.229) (.490) .723 .422 .227
------- ------- ------- ------- ------- -------
Total from Investment Operations......... .188 (.622) .386 1.636 1.366 .825
------- ------- ------- ------- ------- -------
Less:
Distributions from and in Excess of Net
Investment Income..................... .544 .528 .880 .927 1.006 .722
Return of Capital Distribution.......... .289 .111 -0- -0- -0- .370
------- ------- ------- ------- ------- -------
Total Distributions...................... .833 .639 .880 .927 1.006 1.092
------- ------- ------- ------- ------- -------
Net Asset Value, End of the Period....... $10.368 $11.013 $12.274 $12.768 $12.059 $11.699
======= ======= ======= ======= ======= =======
Total Return*............................ 1.93%(d) (5.01%)**(d) 3.03%(d) 13.99%(d) 12.07%(d) 7.53%(d)
Net Assets at End of the Period (In
millions)............................... $3.4 $4.0 $3.9 $3.8 $3.1 $1.7
Ratio of Expenses to Average Net
Assets.................................. 4.37% 4.05% 4.13% 4.54% 4.80% 5.07%
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets*......... 2.29% 2.28% 2.44% 2.56% 2.58% 2.69%
Ratio of Net Investment Income to Average
Net Assets*............................. 7.22% 7.29% 6.96% 7.31% 7.49% 5.92%
Portfolio Turnover....................... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been
assumed by the Adviser, Total Return
would have been lower and the ratios
would have been as follows:
Ratio of Expenses, excluding Interest
Expense, to Average Net Assets...... 2.57% 2.57% 2.54% 2.61% 2.66% N/A
Ratio of Net Investment Income to
Average Net Assets.................. 6.93% 7.01% 6.87% 7.27% 7.41% N/A
</TABLE>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a contingent
deferred sales charge of 1% may be imposed on certain redemptions made
within one year of purchase. If the sales charges were included, total
returns would be lower.
(c ) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 4%,
charged on certain redemptions made within one year of purchase and
declining thereafter to 0% after the sixth year. If the sales charge was
included, total returns would be lower.
(d ) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 1%,
charged on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower.
N/A = Not Applicable See Notes to Financial Statements.
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<PAGE> 70
APPENDIX -- DESCRIPTION
OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P corporate or municipal debt rating is a current opinion of the
creditworthiness of an obligor with respect to a specific financial obligation.
This assessment may take into consideration obligors such as guarantors,
insurers, or lessees.
The debt rating is not a recommendation to purchase, sell, or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the obligor or
obtained by S&P from other sources it considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or based on other
circumstances.
The ratings are based, in varying degrees, on the following considerations:
1. Likelihood of payment--capacity and willingness of the obligor to meet its
financial commitment on an obligation in accordance with the terms of the
obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in the event
of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditor's rights.
1. LONG-TERM DEBT
INVESTMENT GRADE
AAA: Debt rated "AAA" has the highest rating assigned by S&P. Capacity to meet
its financial commitment on the obligation is extremely strong.
AA: Debt rated "AA" differs from the highest rated issues only in small degree.
Capacity to meet its financial commitment on the obligation is very strong.
A: Debt rated "A" is somewhat more susceptible to the adverse effects of changes
in circumstances and economic conditions than obligations in higher rated
categories. Capacity to meet its financial commitment on the obligation is still
strong.
BBB: Debt rated "BBB" exhibits adequate protection parameters. However, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet its financial commitment on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Debts rated "BB", "B", "CCC", "CC" and "C" are regarded as
having significant speculative characteristics. "BB" indicates the least degree
of speculation and "C" the highest. While such obligations will likely have some
quality and protective characteristics, these may be outweighed by large
uncertainties or major exposures to adverse conditions.
BB: Debt rated "BB" is less vulnerable to nonpayment than other speculative
issues. However, it faces major ongoing uncertainties or exposure to adverse
business, financial, or economic conditions which could lead to the obligor's
inadequate capacity to meet its financial commitment on the obligation.
B: Debt rated "B" is more vulnerable to nonpayment than obligations rated "BB",
but the obligor currently has the capacity to meet its financial commitment on
the obligation. Adverse business, financial, or economic conditions will likely
impair the obligor's capacity or willingness to meet its financial commitment on
the obligation.
CCC: Debt rated "CCC" is currently vulnerable to nonpayment, and is dependent
upon favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. In the event of adverse
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: Debt rated "CC" is currently highly vulnerable to nonpayment.
A- 1
<PAGE> 71
C: Debt rated "C" is currently highly vulnerable to nonpayment. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed or
similar action has been taken, but payments on this obligation are being
continued.
D: Debt rated "D" is in payment default. The "D" rating category is used when
payments on an obligation are not made on the date due even if the applicable
grace period has not expired, unless S&P believes that such payments will be
made during such grace period. The 'D' rating also will be used upon the filing
of a bankruptcy petition or the taking of a similar action if payments on an
obligation are jeopardized.
r: This symbol highlights derivative, hybrid and certain other obligations that
S&P believes may experience high volatility or high variability in expected
returns as a result of noncredit risks. Examples include: obligations linked or
indexed to equities, currencies, or commodities; certain swaps and options; and
interest-only and principal-only mortgage securities. The absence of an "r"
symbol should not be taken as an indication that an obligation will exhibit no
volatility or variability in total return.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain ratings or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: This designation indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3: Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B: Issues rated "B" are regarded as having only speculative capacity for timely
payment .
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold a
security in as much as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may on occasion, rely on
unaudited financial information. The ratings may be changed, suspended or
withdrawn as a result of changes in, or unavailability of, such information or
based on other circumstances.
3. PREFERRED STOCK
A S&P preferred stock rating is an assessment of the capacity and willingness of
an issuer to pay preferred stock dividends and any applicable sinking fund
obligations. A preferred stock rating differs from a bond rating inasmuch as it
is assigned to an equity
A- 2
<PAGE> 72
issue, which issue is intrinsically different from, and subordinated to, a debt
issue. Therefore, to reflect this difference, the preferred stock rating symbol
will normally not be higher than the bond rating symbol assigned to, or that
would be assigned to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
i. Likelihood of payment-capacity and willingness of the issuer to meet the
timely payment of preferred stock dividends and any applicable sinking fund
requirements in accordance with the terms of the obligation.
ii. Nature of, and provisions of, the issuer.
iii. Relative position of the issue in the event of bankruptcy, reorganization,
or other arrangements under the laws of bankruptcy and other laws affecting
creditors' rights.
AAA: This is the highest rating that may be assigned by S&P to a preferred stock
issue and indicates an extremely strong capacity to pay the preferred stock
obligations.
AA: A preferred stock issue rated "AA" also qualifies as a high-quality, fixed
income security. The capacity to pay preferred stock obligations is very strong,
although not as overwhelming as for issues rated "AAA".
A: An issue rated "A" is backed by a sound capacity to pay the preferred stock
obligations, although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions.
BBB: An issue rated "BBB" is regarded as backed by an adequate capacity to pay
the preferred stock obligations. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to make payments for a preferred
stock in this category than for issues in the "A" category.
BB, B and CCC: Preferred stock rated "B", "B", and "CCC" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay preferred stock obligations.
"BB" indicates the lowest degree of speculation and "CCC" the highest. While
such issues will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
CC: The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments, but that is currently paying.
C: A preferred stock rated "C" is a nonpaying issue.
D: A preferred stock rated "D" is a nonpaying issue with the issuer in default
on debt instruments.
NR: This indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy. PLUS (+) or MINUS (-): To provide more
detailed indications of preferred stock quality, ratings from "AA" to "CCC" may
be modified by the addition of a plus or minus sign to show relative standing
within the major rating categories.
A preferred stock rating is not a recommendation to purchase, sell, or hold a
security inasmuch as it does not comment as to market price or suitability for a
particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
MOODY'S INVESTORS SERVICE, INC. -- a brief description of the applicable Moody's
Investors Service (Moody's) rating symbols and their meanings (as published by
Moody's Investors Service) follows:
1. LONG-TERM DEBT
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They carry
the smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
A- 3
<PAGE> 73
Aa: Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long- term risks appear somewhat larger than the Aaa securities.
A: Bonds which are rated a possess many favorable investment attributes and are
to be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest payment
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other market shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category.
ABSENCE OF RATING: Where no rating has been assigned or where a rating has been
suspended or withdrawn, it may be for reasons unrelated to the quality of the
issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not rated as a
matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not published in
Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise, the
effects of which preclude satisfactory analysis; if there is no longer available
reasonable up-to-date data to permit a judgment to be formed; if a bond is
called for redemption; or for other reasons.
2. SHORT-TERM DEBT
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year unless explicitly noted.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issues:
Issuers rated Prime-1 (or supporting institutions) have a superior ability for
repayment of senior short-term debt obligations. Prime-1 repayment ability will
often be evidenced by many of the following characteristics:
-- Leading market positions in well-established industries.
-- High rates of return on funds employed.
-- Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
A- 4
<PAGE> 74
-- Broad margins is earnings coverage of fixed financial charges and high
internal cash generation.
-- Well-established access to a range of financial markets and assured sources
of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong ability for
repayment of senior short-term debt obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser degree. Earnings
trends and coverage ratios, while sound, may be more subject to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable ability
for repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability in
earnings and profitability may result in changes of the level of debt protection
measurements and may require relatively high financial leverage. Adequate
alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating categories.
3. PREFERRED STOCK
Preferred stock rating symbols and their definitions are as follows:
aaa: As issue which is rated "aaa" is considered to be a top-quality preferred
stock. This rating indicates good asset protection and the least risk of
dividend impairment within the universe of preferred stocks.
aa: An issue which is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is a reasonable assurance the earnings and
asset protection will remain relatively well maintained in the foreseeable
future.
a: An issue which is rated "a" is considered to be an upper-medium-grade
preferred stock. While risks are judged to be somewhat greater than in the "AAA"
and "AA" classifications, earnings and asset protections are, nevertheless,
expected to be maintained at adequate levels.
baa: An issue which is rated "baa" is considered to be a medium-grade preferred
stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba: An issue which is rated "ba" is considered to have speculative elements and
its future cannot be considered well assured. Earnings and asset protection may
be very moderate and not well safeguarded during adverse periods. Uncertainty of
position characterizes preferred stocks in this class.
b: An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa: An issue which is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the future status
of payments.
ca: An issue which is rated "ca" is speculative in a high degree and is likely
to be in arrears on dividends with little likelihood of eventual payment.
c: This is the lowest rated class of preferred or preference stock. Issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each rating classification.
The modifier 1 indicates that the security ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates that the issue ranks in the lower end of its generic rating
category.
A- 5
<PAGE> 75
BOARD OF TRUSTEES
AND OFFICERS
BOARD OF TRUSTEES
<TABLE>
<S> <C>
J. Miles Branagan Richard F. Powers, III*
Jerry D. Choate Phillip B. Rooney
Linda Hutton Heagy Fernando Sisto
R. Craig Kennedy Wayne W. Whalen*, Chairman
Mitchell M. Merin* Suzanne H. Woolsey
Jack E. Nelson
</TABLE>
OFFICERS
Richard F. Powers, III*
President
Stephen L. Boyd*
Executive Vice President and Chief Investment Officer
A. Thomas Smith III*
Vice President and Secretary
John H. Zimmermann, III*
Vice President
Michael H. Santo*
Vice President
Richard A. Ciccarone*
Vice President
John R. Reynoldson*
Vice President
John L. Sullivan*
Vice President, Chief Financial Officer and Treasurer
* "Interested persons" of the Fund, as defined in the Investment Company Act of
1940, as amended.
FOR MORE INFORMATION
EXISTING SHAREHOLDERS OR PROSPECTIVE INVESTORS
Call your broker or (800) 341-2911
7:00 a.m. to 7:00 p.m. Central time Monday through Friday
DEALERS
For dealer information, selling agreements, wire orders, or
redemptions, call the Distributor at (800) 421-5666
TELECOMMUNICATIONS DEVICE FOR THE DEAF
For shareholder and dealer inquiries through Telecommunications Device for the
Deaf (TDD), call (800) 421-2833
FUNDINFO(R)
For automated telephone services, call (800) 847-2424
WEB SITE
www.vankampen.com
VAN KAMPEN STRATEGIC INCOME FUND
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Investment Adviser
VAN KAMPEN INVESTMENT ADVISORY CORP.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Distributor
VAN KAMPEN FUNDS INC.
1 Parkview Plaza
PO Box 5555
Oakbrook Terrace, IL 60181-5555
Transfer Agent
VAN KAMPEN INVESTOR SERVICES INC.
PO Box 218256
Kansas City, MO 64121-8256
Attn: Van Kampen Strategic Income Fund
Custodian
STATE STREET BANK AND TRUST COMPANY
225 West Franklin Street, PO Box 1713
Boston, MA 02105-1713
Attn: Van Kampen Strategic Income Fund
Legal Counsel
SKADDEN, ARPS, SLATE, MEAGHER & FLOM (ILLINOIS)
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
ERNST & YOUNG LLP
233 South Wacker Drive
Chicago, IL 60606
<PAGE> 76
VAN KAMPEN
STRATEGIC INCOME FUND
PROSPECTUS
JULY 28, 2000
A Statement of Additional Information, which
contains more details about the Fund, is
incorporated by reference in its entirety into
this prospectus.
You will find additional information about the
Fund in its annual and semiannual reports to
shareholders. The annual report explains the
market conditions and investment strategies
affecting the Fund's performance during its
last fiscal year.
You can ask questions or obtain a free copy of
the Fund's reports or its Statement of
Additional Information by calling (800)
341-2911 from 7:00 a.m. to 7:00 p.m., Central
time, Monday through Friday.
Telecommunications Device for the Deaf users
may call (800) 421-2833. A free copy of the
Fund's reports can also be ordered from our
web site at www.vankampen.com.
Information about the Fund, including its
reports and Statement of Additional
Information, has been filed with the
Securities and Exchange Commission (SEC). It
can be reviewed and copied at the SEC's Public
Reference Room in Washington, DC or on the
EDGAR database on the SEC's internet site
(http://www.sec.gov). Information on the
operation of the SEC's Public Reference Room
may be obtained by calling the SEC at
1-202-942-8090. You can also request copies of
these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail
address ([email protected]), or by writing
the Public Reference Section of the SEC,
Washington, DC 20549-0102.
[VAN KAMPEN FUNDS LOGO]
The Fund's Investment Company Act
File No. is 811-4629.
SIF PRO 7/00
65112
<PAGE> 77
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
HIGH YIELD FUND
Van Kampen High Yield Fund (the "Fund") is a mutual fund with the primary
investment objective to seek to provide a high level of current income. As a
secondary investment objective, the Fund seeks capital appreciation. The Fund's
investment adviser seeks to achieve the Fund's investment objectives by
investing primarily in a portfolio of medium- and lower-grade domestic corporate
debt securities.
The Fund is organized as a diversified series of the Van Kampen Trust, an
open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
---------------------------------------------
TABLE OF CONTENTS
---------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information......................................... B-2
Investment Objectives, Policies and Risks................... B-4
Strategic Transactions...................................... B-10
Investment Restrictions..................................... B-19
Trustees and Officers....................................... B-21
Investment Advisory Agreement............................... B-31
Other Agreements............................................ B-32
Distribution and Service.................................... B-33
Transfer Agent.............................................. B-37
Portfolio Transactions and Brokerage Allocation............. B-37
Shareholder Services........................................ B-39
Redemption of Shares........................................ B-42
Contingent Deferred Sales Charge-Class A.................... B-43
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-43
Taxation.................................................... B-45
Fund Performance............................................ B-49
Other Information........................................... B-53
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-19
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 28, 2000.
HYF SAI 7/00
<PAGE> 78
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio, such as the Fund. The Trustees may create one or more
classes of shares for each series.
The Trust was originally organized in 1986 under the name Van Kampen
Merritt Trust as a Massachusetts business trust (the "Massachusetts Trust"). The
Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Trust on July 31, 1995. The Trust was created for facilitating
the Massachusetts Trust reorganization into a Delaware business trust. On July
14, 1998, the Trust adopted its current name.
The Fund was organized in 1986 under the name Van Kampen Merritt High Yield
Fund as a sub-trust of the Massachusetts Trust. The Fund was reorganized as a
series of the Trust under the name Van Kampen American Capital High Yield Fund
on July 31, 1995. On July 14, 1998, the Fund adopted its current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
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 Dean Witter & Co. ("Morgan Stanley Dean Witter"). The principal
office of the Trust, the Fund, the Adviser, the Distributor and Van Kampen
Investments is located at 1 Parkview Plaza, PO Box 5555, Oakbrook Terrace,
Illinois 60181-5555. The principal office of Investor Services is located at
7501 Tiffany Springs Parkway, Kansas City, Missouri 64153.
Morgan Stanley Dean Witter is a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities, asset management and credit services.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. 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
B-2
<PAGE> 79
investment policy for a series would be voted upon by shareholders of only the
series involved and a change in the distribution fee for a class of a series
would be voted upon by shareholders of only the class of such series involved.
Except as otherwise described in the Prospectus or herein, shares do not have
cumulative voting rights, preemptive rights or any conversion, subscription or
exchange rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
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. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less than to holders of
Class A Shares.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the shares of each affected series
outstanding and entitled to vote (or such higher vote as may be required by the
1940 Act or other applicable law) and except that the Trustees cannot amend the
Declaration of Trust to impose any liability on shareholders, make any
assessment on shares or impose liabilities on the Trustees without approval from
each affected shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
B-3
<PAGE> 80
As of July 5, 2000, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
Amount of
Ownership at Class Percentage
Name and Address of Holder July 5, 2000 of Shares Ownership
-------------------------- ------------ --------- ----------
<S> <C> <C> <C>
Van Kampen Trust Company...................... 2,381,829 A 8.19%
2800 Post Oak Blvd. 823,746 B 6.38%
Houston, TX 77056 94,839 C 5.94%
Merrill Lynch Pierce Fenner & Smith Inc....... 706,381 B 5.47%
For the Sole Benefit of its Customers 299,120 C 18.75%
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
Edward Jones & Co............................. 6,240,002 A 21.46%
Attn: Fund Administration 761,226 B 5.90%
Shareholder Accounting 161,249 C 10.10%
201 Progress Pkwy
Maryland Hts, MO 63043-3009
Charles Schwab & Co. Inc...................... 1,745,101 A 6.00%
Special Custody Acct. for
Exclusive Benefit of Customers
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104-4122
</TABLE>
Van Kampen Trust Company acts as custodian for certain employee benefit
plans and individual retirement accounts.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following disclosure supplements the disclosures set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other recognized financial institutions in order 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 debt 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
B-4
<PAGE> 81
herein. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of the bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses including: (a) possible decline in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto; (b) possible lack of access to income on the underlying security during
this period; and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that certain funds advised or subadvised by the Adviser or
certain of its affiliates would otherwise invest separately into a joint
account. The cash in the joint account is then invested in repurchase agreements
and the funds that contributed to the joint account share pro rata in the net
revenue generated. The Adviser believes that the joint account produces
efficiencies and economies of scale that may contribute to reduced transaction
costs, higher returns, higher quality investments and greater diversity of
investments for the Fund than would be available to the Fund investing
separately. The manner in which the joint account is managed is subject to
conditions set forth in an exemptive order from the SEC permitting this
practice, which conditions are designed to ensure the fair administration of the
joint account and to protect the amounts in that account.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Fund pays for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may purchase and sell portfolio securities on a "when-issued" and
"delayed delivery" basis. No income accrues to the Fund on securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of the securities at delivery may be more or less than
their purchase price, and yields generally available on comparable securities
when delivery occurs may be higher or lower than yields on the securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Fund will make commitments to purchase securities on such basis only with
the intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purpose of investment leverage.
B-5
<PAGE> 82
REVERSE REPURCHASE AGREEMENTS
The Fund may enter into reverse repurchase agreements with respect to
securities which could otherwise be sold by the Fund. Reverse repurchase
agreements involve sales by the Fund of portfolio assets concurrently with an
agreement by the Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities.
The Fund will establish a segregated account with its custodian in which it
will maintain cash or liquid securities equal in value to its obligations in
respect of reverse repurchase agreements and, accordingly, the Fund will not
treat such obligations as senior securities for purposes of the 1940 Act.
Reverse repurchase agreements involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the agreement
may be restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
No more than 5% of the Fund's total assets may be invested in bank borrowings
and reverse repurchase agreements.
LENDING OF SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend portfolio securities to broker-dealers, banks and other institutional
borrowers of securities provided such loans are callable at any time and are
continuously secured by collateral that is at least equal to the market value,
determined daily, of the loaned securities. The advantage of such loans is that
the Fund continues to receive the interest or dividends on the loaned
securities, while at the same time earning interest on the collateral which is
invested in short-term obligations or the Fund receives an agreed upon amount of
interest from the borrower of the security. The Fund may pay reasonable
finders', administrative and custodial fees in connection with loans of its
securities. There is no assurance as to the extent to which securities loans can
be effected.
If the borrower fails to maintain the requisite amount of collateral or
return securities borrowed upon proper request, the loan automatically
terminates, and the Fund could use the collateral to replace the securities
while holding the borrower liable for any excess of replacement cost over
collateral. As with any extensions of credit, there are risks of delay in
recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's Adviser to be
creditworthy and when the consideration which can be earned from such loans is
believed to justify the attendant risks. On termination of the loan, the
borrower is required to return the securities to the Fund; any gains or loss in
the market price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
B-6
<PAGE> 83
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year. The
turnover rate may vary greatly from year to year as well as within a 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 fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Board of Trustees. Ordinarily,
the Fund would invest in restricted securities only when it receives the
issuer's commitment to register the securities without expense to the Fund.
However, registration and underwriting expenses (which typically range from 7%
to 15% of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and the number of potential
purchasers in the market for such security. For purposes hereof, investments by
the Fund in securities of other investment companies will not be considered
investments in restricted securities to the extent permitted by (i) the 1940
Act, as amended from time to time, (ii) the rules and regulations promulgated by
the SEC under the 1940 Act, as amended from time to time, or (iii) an exemption
or other relief (such as "no-action" letters issued by the staff of the SEC
interpreting or providing guidance on the 1940 Act or regulations thereunder)
from the provisions of the 1940 Act, as amended from time to time.
DISCOUNT, ZERO COUPON SECURITIES AND PAYMENT-IN-KIND SECURITIES
The Fund may invest in securities sold at a substantial discount from their
value at maturity. Such securities include "zero coupon" and payment-in-kind
securities of governmental or private issuers. Zero coupon securities generally
pay no cash interest (or dividends in the case of preferred stock) to their
holders prior to maturity. Payment-in-kind securities allow the issuer, at its
option, to make current interest payments on such
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securities either in cash or additional securities. Accordingly, such securities
usually are issued and traded at a deep discount from their face or par value
and generally are subject to greater fluctuations of market value in response to
changing interest rates than securities of comparable maturities and credit
quality that pay cash interest (or dividends in the case of preferred stock) on
a current basis.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security and to include the
"interest" on payment-in-kind securities as income each year, even though the
holder receives no interest payment on the security during the year. Federal tax
law also requires that entities such as the Fund which seek to qualify for
pass-through federal income tax treatment as regulated investment companies
distribute substantially all of their investment company taxable income each
year, including non-cash income. Accordingly, although the Fund will receive no
payments on its zero coupon or payment-in-kind securities prior to their
maturity or disposition, it will have income attributable to such securities,
and it will be required, in order to maintain the desired tax treatment, to
include in its dividends an amount equal to the income attributable to its zero
coupon and payment-in-kind securities. Such dividends will be paid from the cash
assets of the Fund, from borrowings or by liquidation of portfolio securities,
if necessary, at a time that the Fund otherwise might not have done so. To the
extent the proceeds from any such dispositions are used by the Fund to pay
distributions, the Fund will not be able to purchase additional income-producing
securities with such proceeds, and as a result the Fund's current income
ultimately may be reduced.
CONVERTIBLE SECURITIES
A convertible security is a bond, debenture, note, preferred stock, warrant
or other security that may be converted into or exchanged for a prescribed
amount of common stock or other equity security of the same or a different
issuer or into cash within a particular period of time and at a specified price
or formula. A convertible security generally entitles the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock until
the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible income securities, (ii) are less subject to
fluctuation in value than the underlying stock since they have fixed income
characteristics, and (iii) provide the potential for capital appreciation if the
market price of the underlying common stock increases. Most convertible
securities currently are issued by domestic companies, although a substantial
Eurodollar convertible securities market has developed, and the markets for
convertible securities denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to
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the investment value, the price of the convertible security is governed
principally by its investment value. Generally the conversion value decreases as
the convertible security approaches maturity. To the extent the market price of
the underlying common stock approaches or exceeds the conversion price, the
price of the convertible security will be increasingly influenced by its
conversion value. A convertible security generally will sell at a premium over
its conversion value by the extent to which investors place value on the right
to acquire the underlying common stock while holding a fixed income security.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities or commodities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments.
PREFERRED STOCK
Preferred stock generally has a preference as to dividends and upon
liquidation over an issuer's common stock but ranks junior to other income
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on income securities, preferred stock dividends
are payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions.
LOANS
The Fund may invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between an issuer and one or more financial
institutions ("Lenders"). The Fund's investments in Loans are expected in most
instances to be in the form of participations in Loans ("Participations") and
assignments of all or a portion of Loans ("Assignments") from third parties.
Participations typically will result in the Fund having a contractual
relationship only with the Lender, not with the borrower. The Fund will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the Lender selling the Participation and only upon receipt by
the Lender of the payments from the borrower. The Fund generally has no direct
right to enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan ("Loan Agreement"), nor any rights of set-off against the
borrower, and the Fund may not directly benefit from any collateral supporting
the Loan in which it has purchased the Participation. As a result, the Fund will
assume the credit risk of both the borrower and the Lender that is selling the
Participation. When the Fund purchases Assignments from Lenders, the Fund will
acquire direct rights against the borrower on the Loan. However, since
Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Fund as the
purchaser of an
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Assignment may differ from, and be more limited than, those held by the
assigning Lender.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management, and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur. Although the Fund's
Adviser seeks to use such transactions to further the Fund's investment
objectives, no assurance can be given that the use of these transactions will
achieve this result.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative securities such as exchange-listed and
over-the-counter put and call options on securities, financial futures,
fixed-income and interest rate indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currency or currency futures
(collectively, all the above are called "Strategic Transactions"). Among other
things, Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
markets, to protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio, or to
establish a position in the derivatives markets as a temporary substitute for
purchasing or selling particular securities.
The Fund may sell options on securities the Fund owns or has the right to
purchase without additional payments, up to 25% of the Fund's net assets, for
non-hedging purposes. When the Fund sells an option, if the underlying
securities do not increase (in the case of a call option) or decrease (in the
case of a put option) to a price level that would make the exercise of the
option profitable to the holder of the option, the option generally will expire
without being exercised and the Fund will realize as profit the premium received
for such option. When a call option of which the Fund is the writer is
exercised, the option holder purchases the underlying security at the strike
price and the Fund does not participate in any increase in the price of such
securities above the strike price. In addition, the Fund would need to replace
the underlying securities at prices which may not be advantageous to the Fund.
When a put option of which the Fund is the writer is exercised, the Fund will be
required to purchase the underlying securities at the strike price, which may be
in excess of the market value of such securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
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Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of currency transactions can result in the Fund
incurring losses as a result of a number of factors including the imposition of
exchange controls, suspension of settlements, or the inability to deliver or
receive a specified currency. The use of options and futures transactions
entails certain other risks. In particular, the variable degree of correlation
between price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
these futures contracts and options transactions for hedging should tend to
minimize the risk of loss due to a decline in the value of the hedged position,
at the same time they tend to limit any potential gain which might result from
an increase in value of such position. Finally, the daily variation margin
requirements for futures contracts would create a greater ongoing potential
financial risk than would purchases of options, where the exposure is limited to
the cost of the initial premium. Losses resulting from the use of Strategic
Transactions would reduce net asset value, and possibly income, and such losses
can be greater than if the Strategic Transactions had not been utilized. Income
earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable.
OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be
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exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options ("OTC options"). Exchange listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ("OCC"), which
guarantees the performance of the obligations of the parties to such options.
The discussion below uses the OCC as a paradigm, but is also applicable to other
financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any
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anticipated benefit of the transaction. Accordingly, the Adviser must assess the
creditworthiness of each such Counterparty or any guarantor or credit
enhancement of the Counterparty's credit to determine the likelihood that the
terms of the OTC option will be satisfied. The Fund will engage in OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers", or broker dealers,
domestic or foreign banks or other financial institutions which have received
(or the guarantors of the obligation of which have received) a short-term credit
rating of "A-1" from Standard & Poor's ("S&P") or "P-1" from Moody's Investors
Service, Inc. ("Moody's") or an equivalent rating from any other nationally
recognized statistical rating organization ("NRSRO"). The staff of the SEC
currently takes the position that, in general, 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.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call or put options on securities, including
U.S. Treasury and agency securities, foreign sovereign debt, mortgage-backed
securities, corporate debt securities, Eurodollar instruments and foreign debt
securities that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and related futures on such securities, indices,
currencies and futures. All calls sold by the Fund must be "covered" (i.e., the
Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold. In
selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
FUTURES
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures as a hedge against anticipated interest rate or
currency market changes, for duration management and for risk management
purposes. Futures generally are bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The purchase of a futures contract creates a firm obligation by the Fund,
as purchaser, to take delivery from the seller the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. The sale of a futures contract creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount).
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the
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right in return for the premium paid to assume a position in a futures contract
and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission ("CFTC") and
will be entered into only for bona fide hedging, risk management (including
duration management) or other portfolio management purposes. Typically,
maintaining a futures contract or selling an option thereon requires the Fund to
deposit with a financial intermediary as security for its obligations an amount
of cash or other specified assets (initial margin) which initially is typically
1% to 10% of the face amount of the contract (but may be higher in some
circumstances). Additional cash or assets (variation margin) may be required to
be deposited thereafter on a daily basis as the mark to market value of the
contract fluctuates. The purchase of options on financial futures involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potential subsequent variation margin) for
the resulting futures position just as it would for any position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction but there can be no assurance that the position can be
offset prior to settlement at an advantageous price nor that delivery will
occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
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CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order
to hedge the value of currencies against fluctuations in relative value.
Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and OTC options on currencies, and currency
swaps. A forward currency contract involves a privately negotiated obligation to
purchase or sell (with delivery generally required) a specific currency at a
future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. A
currency swap is an agreement to exchange cash flows based on the notional
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below. The Fund may enter into currency
transactions with Counterparties rated A-1 or P-1 by S&P or Moody's,
respectively, or that have an equivalent rating from an NRSRO or (except for OTC
options) are determined to be of equivalent credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to cross-hedging or proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which Fund expects to
have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in Austrian schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars. Currency hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedged fluctuates in value to a degree or in a direction that is not
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anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
Risks of Currency Transactions. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
COMBINED TRANSACTIONS
Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser, it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional
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amount of principal. A currency swap is an agreement to exchange cash flows on a
notional amount of two or more currencies based on the relative value
differential among them and an index swap is an agreement to swap cash flows on
a notional amount based on changes in the values of the reference indices. The
purchase of a cap entitles the purchaser to receive payments on a notional
principal amount from the party selling such cap to the extent that a specified
index exceeds a predetermined interest rate or amount. The purchase of a floor
entitles the purchaser to receive payments on a notional principal amount from
the party selling such floor to the extent that a specified index falls below a
predetermined interest rate or amount. A collar is a combination of a cap and a
floor that preserves a certain return within a predetermined range of interest
rates or values.
The Fund may enter into swaps, caps, floors and collars on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities and will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least
"A" by S&P or Moody's or has an equivalent rating from an NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. A large number of banks and investment banking firms
now act both as principals and agents utilizing standardized swap documentation.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Strategic Transactions, in addition to other requirements, require
that the Fund segregate cash or liquid securities with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or
B-17
<PAGE> 94
currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid securities at least equal
to the current amount of the obligation must be segregated with the custodian.
The segregated assets cannot be sold or transferred unless equivalent assets are
substituted in their place or it is no longer necessary to segregate them. For
example, a call option written by the Fund will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate cash or liquid
securities sufficient to purchase and deliver the securities if the call is
exercised. A call option sold by the Fund on an index will require the Fund to
own portfolio securities which correlate with the index or to segregate cash or
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option written by the Fund requires the Fund to
segregate cash or liquid securities equal to the exercise price. A currency
contract which obligates the Fund to buy or sell currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate cash or liquid
securities equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, swaps, caps, floors and collars will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or liquid
securities equal in value to such excess. OCC issued and exchange listed options
sold by the Fund other than those above generally settle with physical delivery,
and the Fund will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement, will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets 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. Such assets may consist of cash or liquid
securities.
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 or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund also may enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding
B-18
<PAGE> 95
obligation in related options and Strategic Transactions. For example, the Fund
could purchase a put option if the strike price of that option is the same or
higher than the strike price of a put option sold by the Fund. Moreover, instead
of segregating assets if the Fund held a futures or forward contract, it could
purchase a put option on the same futures or forward contract with a strike
price as high or higher than the price of the contract held. Other Strategic
Transactions also may be offset in combinations. If the offsetting transaction
terminates at the time of or after the primary transaction no segregation is
required, but if it terminates prior to such time, assets equal to any remaining
obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. With respect to the limitations on illiquid securities and
borrowings, the percentage limitations apply at the time of purchase and on an
ongoing basis. These restrictions provide that the Fund shall not:
1. Purchase any securities (other than obligations issued or guaranteed by
the U.S. government or by its instrumentalities) if, as a result, more
than 5% of the Fund's total assets (taken at current value) would then
be invested in securities of a single issuer or, if, as a result, the
Fund would hold more than 10% of the outstanding voting securities of
an issuer; except that up to 25% of the Fund's total assets may be
invested without regard to such limitations, and except that the Fund
may purchase securities of other investment companies without regard to
such limitations to the extent permitted by (i) the 1940 Act, as
amended from time to time, (ii) the rules and regulations promulgated
by the SEC under the 1940 Act, as amended from time to time or (iii) an
exemption or other relief from the provisions of the 1940 Act, as
amended from time to time.
2. Invest more than 25% of its assets in a single industry. (Neither the
U.S. government nor any of its agencies or instrumentalities will be
considered an industry for purposes of this restriction.)
3. Borrow money, except for temporary purposes from banks or in reverse
repurchase transactions as described in the Statement of Additional
Information and then in amounts not in excess of 5% of the total asset
value of the Fund, or mortgage, pledge, or hypothecate any assets
except in connection with a borrowing and in amounts not in excess of
10% of the total asset value of the Fund. Borrowings may not be made
for investment leverage, but only to enable
B-19
<PAGE> 96
the Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter
into "when-issued" and "delayed delivery" transactions as described in
the Prospectus or herein.
4. Make loans, except that the Fund may purchase or hold debt obligations
in accordance with the investment restrictions set forth in paragraph 1
above, may enter into repurchase agreements, and may lend its portfolio
securities against collateral consisting of cash or of securities
issued or guaranteed by the U.S. government or its agencies, which
collateral is equal at all times to at least 100% of the value of the
securities loaned, including accrued interest.
5. Sell any securities "short", unless at all times when a short position
is open the Fund owns an equal amount of the securities or of
securities convertible into, or exchangeable without further
consideration for, securities of the same issue as the securities sold
short.
6. Write, purchase, or sell puts, calls or combinations thereof, or
purchase or sell interest rate futures contracts or related options,
except that the Fund may write covered call options with respect to its
portfolio securities and enter into closing purchase transactions with
respect to such options, to a maximum of 25% of its net assets and
except that the Fund may invest in hedging instruments as described in
the Prospectus and the Statement of Additional Information from time to
time.
7. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of
securities held in its portfolio.
8. Make investments for the purpose of exercising control or management,
except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time or (iii) an exemption
or other relief from the provisions of the 1940 Act, as amended from
time to time.
9. Invest in securities issued by other investment companies except as
part of a merger, reorganization or other acquisition and extent
permitted by (i) the 1940 Act, as amended from time to time, (ii) the
rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time or (iii) an exemption or other relief from
the provisions of the 1940 Act, as amended from time to time.
10. Invest in interests in oil, gas, or other mineral exploration or
development programs.
11. Purchase or sell real estate, commodities, or commodity contracts,
except for investments in hedging instruments as described in the
Prospectus and this Statement of Additional Information from time to
time.
B-20
<PAGE> 97
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 officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of
1632 Morning Mountain Road the funds in the Fund Complex. Co-founder, and
Raleigh, NC 27614 prior to August 1996, Chairman, Chief Executive
Date of Birth: 07/14/32 Officer and President, MDT Corporation (now
Age: 68 known as Getinge/Castle, Inc., a subsidiary of
Getinge Industrier AB), a company which
develops, manufactures, markets and services
medical and scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological
53 Monarch Bay Drive company. Trustee/Director of each of the funds
Dana Point, CA 92629 in the Fund Complex. Prior to January 1999,
Date of Birth: 09/16/38 Chairman and Chief Executive Officer of The
Age: 61 Allstate Corporation ("Allstate") and Allstate
Insurance Company. Prior to January 1995,
President and Chief Executive Officer of
Allstate. Prior to August 1994, various
management positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an
Sears Tower executive search firm. Trustee/Director of each
233 South Wacker Drive of the funds in the Fund Complex. Prior to
Suite 7000 1997, Partner, Ray & Berndtson, Inc., an
Chicago, IL 60606 executive recruiting and management consulting
Date of Birth: 06/03/48 firm. Formerly, Executive Vice President of ABN
Age: 52 AMRO, N.A., a Dutch bank holding company. Prior
to 1992, Executive Vice President of La Salle
National Bank. Trustee on the University of
Chicago Hospitals Board, Vice Chair of the
Board of The YMCA of Metropolitan Chicago and a
member of the Women's Board of the University
of Chicago. Prior to 1996, Trustee of The
International House Board, a fellowship and
housing organization for international graduate
students.
</TABLE>
B-21
<PAGE> 98
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
R. Craig Kennedy.......................... President and Director, German Marshall Fund of
11 DuPont Circle, N.W. the United States, an independent U.S.
Washington, D.C. 20016 foundation created to deepen understanding,
Date of Birth: 02/29/52 promote collaboration and stimulate exchanges
Age: 48 of practical experience between Americans and
Europeans. Trustee/Director of each of the
funds in the Fund Complex. 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.
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since
New York, NY 10048 April 1997 and Chief Executive Officer since
Date of Birth: 08/13/53 June 1998 of Morgan Stanley Dean Witter
Age: 46 Advisors Inc. and Morgan Stanley Dean Witter
Services Company Inc. Chairman, Chief Executive
Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998.
Chairman and Chief Executive Officer since June
1998, and Director since January 1998, of
Morgan Stanley Dean Witter Trust FSB. Director
of various Morgan Stanley Dean Witter
subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index
Series since May 1999. Trustee/Director of each
of the funds in the Fund Complex. Previously
Chief Strategic Officer of Morgan Stanley Dean
Witter Advisors Inc. and Morgan Stanley Dean
Witter Services Company Inc. and Executive Vice
President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice
President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series May
1997-April 1999, and Executive Vice President
of Dean Witter, Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company
Winter Park, FL 32789 and registered investment adviser in the State
Date of Birth: 02/13/36 of Florida. President and owner, Nelson Ivest
Age: 64 Brokerage Services Inc., a member of the
National Association of Securities Dealers,
Inc. and Securities Investors Protection Corp.
Trustee/Director of each of the funds in the
Fund Complex.
</TABLE>
B-22
<PAGE> 99
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer
1 Parkview Plaza of Van Kampen Investments. Chairman, Director
P.O. Box 5555 and Chief Executive Officer of the Advisers,
Oakbrook Terrace, IL 60181-5555 the Distributor, Van Kampen Advisors Inc. and
Date of Birth: 02/02/46 Van Kampen Management Inc. Director and officer
Age: 54 of certain other subsidiaries of Van Kampen
Investments. Trustee/Director and President of
each of the funds in the Fund Complex. Trustee,
President and Chairman of the Board of other
investment companies advised by the Advisers
and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director
of Marketing at Morgan Stanley Dean Witter and
Director of Dean Witter Discover & Co. and Dean
Witter Realty. Prior to 1996, Director of Dean
Witter Reynolds Inc.
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director
One ServiceMaster Way (since 1994) of The ServiceMaster Company, a
Downers Grove, IL 60515 business and consumer services company.
Date of Birth: 07/08/44 Director of Illinois Tool Works, Inc., a
Age: 56 manufacturing company and the Urban Shopping
Centers Inc., a retail mall management company.
Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the
Fund Complex. Prior to 1998, Director of Stone
Smurfit Container Corp., a paper manufacturing
company. From May 1996 through February 1997 he
was President, Chief Executive Officer and
Chief Operating Officer of Waste Management,
Inc., an environmental services company, and
from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a
155 Hickory Lane George M. Bond Chaired Professor with Stevens
Closter, NJ 07624 Institute of Technology, and prior to 1995,
Date of Birth: 08/02/24 Dean of the Graduate School, Stevens Institute
Age: 75 of Technology. Director, Dynalysis of
Princeton, a firm engaged in engineering
research. Trustee/Director of each of the funds
in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps,
333 West Wacker Drive Slate, Meagher & Flom (Illinois), legal counsel
Chicago, IL 60606 to the funds in the Fund Complex, and other
Date of Birth: 08/22/39 investment companies advised by the Advisers or
Age: 60 Van Kampen Management Inc. Trustee/Director of
each of the funds in the Fund Complex, and
Trustee/Managing General Partner of other
investment companies advised by the Advisers.
</TABLE>
B-23
<PAGE> 100
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy
2101 Constitution Ave., N.W. of Sciences/National Research Council, an
Room 206 independent, federally chartered policy
Washington, D.C. 20418 institution, since 1993. Director of Neurogen
Date of Birth: 12/27/41 Corporation, a pharmaceutical company, since
Age: 58 January 1998. Director of the German Marshall
Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/
Director of each of the funds in the Fund
Complex. 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>
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-24
<PAGE> 101
OFFICERS
Messrs. Smith, Santo, Ciccarone, Reynoldson, Sullivan and Zimmermann are
located at 1 Parkview Plaza, Oakbrook Terrace, IL 60181-5555. Mr. Boyd is
located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel,
Date of Birth: 12/14/56 Secretary and Director of Van Kampen Investments,
Age: 43 the Advisers, Van Kampen Advisors Inc., Van Kampen
Vice President and Secretary Management Inc., the Distributor, American Capital
Contractual Services, Inc., Van Kampen Exchange
Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of
Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal
Legal Officer and Secretary of other investment
companies advised by the Advisers or their
affiliates. Vice President and Secretary of each of
the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel
to New York Life Insurance Company ("New York
Life"), and prior to March 1997, Associate General
Counsel of New York Life. Prior to December 1993,
Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior
Associate, Willkie Farr & Gallagher. Prior to
January 1989, Staff Attorney at the Securities and
Exchange Commission, Division of Investment
Management, Office of Chief Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative
Date of Birth: 10/22/55 Officer and Director of Van Kampen Investments, the
Age: 44 Advisers, the Distributor, Van Kampen Advisors
Vice President Inc., Van Kampen Management Inc. and Van Kampen
Investor Services Inc., and serves as a Director or
Officer of certain other subsidiaries of Van Kampen
Investments. Vice President of each of the funds in
the Fund Complex and certain other investment
companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President
and Senior Planning Officer for Individual Asset
Management of Morgan Stanley Dean Witter and its
predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
</TABLE>
B-25
<PAGE> 102
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Stephen L. Boyd...................... Executive Vice President and Chief Investment
Date of Birth: 11/16/40 Officer of Van Kampen Investments, and President
Age: 59 and Chief Operating Officer of the Advisers.
Executive Vice President and Chief Executive Vice President and Chief Investment
Investment Officer Officer of each of the funds in the Fund Complex
and certain other investment companies advised by
the Advisers or their affiliates. Prior to April
2000, Executive Vice President and Chief Investment
Officer for Equity Investments of the Advisers.
Prior to October 1998, Vice President and Senior
Portfolio Manager with AIM Capital Management, Inc.
Prior to February 1998, Senior Vice President and
Portfolio Manager of Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American
Capital Management, Inc.
Richard A. Ciccarone................. Senior Vice President and Co-head of the Fixed
Date of Birth: 06/15/52 Income Department of the Advisers, Van Kampen
Age: 48 Management Inc. and Van Kampen Advisors Inc. Prior
Vice President to May 2000, he served as Co-head of Municipal
Investments and Director of Research of the
Advisers, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Mr. Ciccarone first joined the
Adviser in June 1983, and worked for the Adviser
until May 1989, with his last position being a Vice
President. From June 1989 to April 1996, he worked
at EVEREN Securities (formerly known as Kemper
Securities), with his last position at EVEREN being
an Executive Vice President. Since April 1996, Mr.
Ciccarone has been a Senior Vice President of the
Advisers, Van Kampen Management Inc. and Van Kampen
Advisors Inc.
John R. Reynoldson................... Senior Vice President and Co-head of the Fixed
Date of Birth: 05/15/53 Income Department of the Advisers, Van Kampen
Age: 47 Management Inc. and Van Kampen Advisors Inc. Prior
Vice President to May 2000, he managed the investment grade
taxable group for the Adviser since July 1999. From
July 1988 to June 1999, he managed the government
securities bond group for Asset Management. Mr.
Reynoldson has been with Asset Management since
April 1987, and has been a Senior Vice President of
Asset Management since July 1988. He has been a
Senior Vice President of the Adviser and Van Kampen
Management Inc. since June 1995 and Senior Vice
President of Van Kampen Advisors Inc. since June
2000.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and
Date of Birth: 08/20/55 the Advisers. Vice President, Chief Financial
Age: 44 Officer and Treasurer of each of the funds in the
Vice President, Chief Financial Fund Complex and certain other investment companies
Officer and Treasurer advised by the Advisers or their affiliates.
</TABLE>
B-26
<PAGE> 103
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
John H. Zimmermann, III.............. Senior Vice President and Director of Van Kampen
Date of Birth: 11/25/57 Investments, President and Director of the
Vice President Distributor, and President of Van Kampen Insurance
Age: 42 Agency of Illinois Inc. Vice President of each of
the funds in the Fund Complex. From November 1992
to December 1997, Mr. Zimmermann was Senior Vice
President of the Distributor.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 60 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of the Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex 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 as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. 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.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such 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 equal to $2,500
B-27
<PAGE> 104
per year for each of the ten years following such retirement from such 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 such Fund. Each trustee/director has served as a member of the Board of
Trustees of the Fund since he or she was first appointed or elected in the year
set forth below. The retirement plan contains a Fund Complex retirement benefit
cap of $60,000 per year.
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 Upon Fund
Name(1) Registrant(2) Expenses(3) Retirement(4) Complex(5)
------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
J. Miles Branagan $4,070 $40,303 $60,000 $126,000
Jerry D. Choate(1) 3,470 0 60,000 88,700
Linda Hutton Heagy 4,070 5,045 60,000 126,000
R. Craig Kennedy 4,070 3,571 60,000 125,600
Jack E. Nelson 4,070 21,664 60,000 126,000
Phillip B. Rooney 4,070 7,787 60,000 113,400
Fernando Sisto 4,070 72,060 60,000 126,000
Wayne W. Whalen 4,070 15,189 60,000 126,000
Suzanne H. Woolsey(1) 3,070 0 60,000 88,700
</TABLE>
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Choate and Ms. Woolsey became members of the Board of Trustees
for the Fund and other funds in the Fund Complex on May 26, 1999 and
therefore do not have a full year of information to report. Paul G. Yovovich
resigned as a member of the Board of Trustees for the Fund and other funds
in the Fund Complex on April 14, 2000.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from the operating series of the Trust during the fiscal year ended
March 31, 2000. The details of aggregate compensation before deferral for
each operating series of the Registrant during the fiscal year ended March
31, 2000 are shown in Table A below. The details of compensation deferred
for each operating series of the Registrant during the fiscal year ended
March 31, 2000 are shown in Table B below. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to either the
return on the common shares of the Fund or other funds in the Fund Complex
as selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
in the Fund Complex. To the extent permitted by the 1940 Act, each fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The details of
cumulative deferred compensation (including interest) for each operating
series of the Registrant as of March 31,
B-28
<PAGE> 105
2000 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 investment companies in the Fund Complex
for each of the trustees for the funds' respective fiscal years ended in
1999. 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 the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table. Each
Non-Affiliated 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, 1999 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. Certain trustees
deferred all or a portion of their aggregate compensation from the Fund
Complex during the calendar year ended December 31, 1999. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such Non-
Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of
those investment companies selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The Advisers and their
affiliates also serve as investment adviser for other investment companies;
however, with the exception of Mr. Whalen, the Non-Affiliated Trustees were
not trustees of such investment companies. Combining the Fund Complex with
other investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
The Fund, the Adviser and the Distributor have adopted Codes of Ethics
(collectively, the "Code of Ethics") that set forth general and specific
standards relating to the securities trading activities of their employees. The
Code of Ethics does not prohibit employees from acquiring securities that may be
purchased or held by the Fund, but is intended to ensure that all employees
conduct their personal transactions in a manner that does not interfere with the
portfolio transactions of the Fund or other Van Kampen funds, or that such
employees take unfair advantage of their relationship with the Fund. Among other
things, the Code of Ethics prohibits certain types of transactions absent prior
approval, imposes various trading restrictions (such as time periods during
which personal transactions may or may not be made) and requires quarterly
reporting of securities transactions and other 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.
B-29
<PAGE> 106
As of July 3, 2000, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
TABLE A
2000 AGGREGATE COMPENSATION FROM
THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund............. 3/31 $1,698 $1,498 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,298
Managed Short-Term Income
Fund*..................... 3/31 * * * * * * * * *
Short-Term Global Income
Fund(1)................... 3/31 1,049 849 1,049 1,049 1,049 1,049 1,049 1,049 849
Strategic Income Fund....... 3/31 1,323 1,123 1,323 1,323 1,323 1,323 1,323 1,323 923
------ ------ ------ ------ ------ ------ ------ ------ ------
Trust Total............... $4,070 $3,470 $4,070 $4,070 $4,070 $4,070 $4,070 $4,070 $3,070
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations
as of March 31, 2000.
(1) The Fund was liquidated during the Registrant's fiscal year ended March 31,
2000.
TABLE B
2000 AGGREGATE COMPENSATION DEFERRED FROM
THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund............. 3/31 $1,698 $1,152 $1,698 $ 849 $1,698 $1,698 $ 849 $1,698 $0
Managed Short-Term Income
Fund*..................... 3/31 * * * * * * * * *
Short-Term Global Income
Fund(1)................... 3/31 1,049 630 1,049 525 1,049 1,049 525 1,049 0
Strategic Income Fund....... 3/31 1,323 885 1,323 662 1,323 1,323 662 1,323 0
------ ------ ------ ------ ------ ------ ------ ------ --
Trust Total............... $4,070 $2,667 $4,070 $2,036 $4,070 $4,070 $2,036 $4,070 $0
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations
as of March 31, 2000.
(1) The Fund was liquidated during the Registrant's fiscal year ended March 31,
2000.
B-30
<PAGE> 107
TABLE C
2000 CUMULATIVE COMPENSATION DEFERRED
(PLUS INTEREST) FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ---------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund...... 3/31 $13,854 $1,777 $13,441 $27,898 $38,608 $12,232 $6,293 $30,637 $0
Managed Short-Term
Income Fund*........ 3/31 0 0 0 0 0 0 0 0 0
Strategic Income
Fund................ 3/31 12,417 1,375 12,289 27,060 36,748 10,155 5,502 29,146 0
------- ------ ------- ------- ------- ------- ------- ------- --
Trust Total......... $26,271 $3,152 $25,730 $54,958 $75,356 $22,387 $11,795 $59,783 $0
<CAPTION>
FORMER TRUSTEES
------------------------------------------------
FUND NAME GAUGHAN MILLER REES ROBINSON YOVOVICH
--------- ------- ------ ---- -------- --------
<S> <C> <C> <C> <C> <C>
High Yield Fund...... $1,142 $13,406 $3,096 $26,162 $2,507
Managed Short-Term
Income Fund*........ 0 0 0 0 0
Strategic Income
Fund................ 1,142 13,406 3,285 26,162 1,918
------ ------- ------ ------- ------
Trust Total......... $2,284 $26,812 $6,381 $52,324 $4,425
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations as
of March 31, 2000.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund................................ 1995 1999 1995 1993 1986 1997 1995 1986 1999
Managed Short-Term Income Fund................. 1999 1999 1999 1999 1999 1999 1999 1999 1999
Strategic Income Fund.......................... 1995 1999 1995 1993 1993 1997 1995 1993 1999
</TABLE>
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services, renders periodic reports to the Board of Trustees and permits its
officers and employees to serve without compensation as trustees of the Trust or
officers of the Fund if elected to such positions. The Fund, however, bears the
cost of its day-to-day operations, including service fees, distribution fees,
custodian fees, legal and independent accountants fees, the costs of reports and
proxies to shareholders, the compensation of trustees of the Trust (other than
those who are affiliated persons of the Adviser, Distributor or Van Kampen
Investments), and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to the Fund for any error of judgement or of law, or for any loss
suffered by the Fund in connection with the matters to which the agreement
relates, except a loss 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
B-31
<PAGE> 108
permitted to be excluded from the computation under applicable law or
regulation), the compensation due the Adviser will be reduced by the amount of
such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the fiscal year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, the Adviser received
approximately $2,944,700, $2,325,800 and $3,298,500, respectively, in advisory
fees from the Fund.
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
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 cost based proportionately on their respective net assets per fund.
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, Advisory Corp. received
approximately $89,500, $25,400 and $42,000, respectively, in accounting services
fees from the Fund.
Legal Services Agreement. The Fund and certain of the other Van Kampen
funds advised by the Adviser or its affiliates and distributed by the
Distributor have entered into legal services agreements pursuant to which Van
Kampen Investments provides legal services, including without limitation:
accurate maintenance of the fund's minute books and records, preparation and
oversight of the 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, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Other funds distributed by the
Distributor also receive legal services from Van Kampen Investments. Of the
total costs for legal services provided to funds distributed by the Distributor,
one half of such costs are allocated equally to each fund and the remaining one
half of such costs are allocated to specific funds based on monthly time
records.
B-32
<PAGE> 109
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, Van Kampen Investments
received approximately $12,400, $9,100 and $13,000, respectively, in legal
services fees from the Fund.
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
Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by a vote of a majority of Trustees who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal years/periods are shown in the chart below.
<TABLE>
<CAPTION>
Total Amounts
Underwriting Retained by
Commissions Distributor
------------ -----------
<S> <C> <C>
Fiscal year ended March 31, 2000....................... $418,154 $ 45,977
Fiscal period ended March 31, 1999..................... $528,594 $ 58,735
Fiscal year ended June 30, 1998........................ $653,254 $ 78,100
</TABLE>
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
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.......................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............. 3.75% 3.90% 3.25%
$250,000 but less than $500,000............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........... 2.00% 2.04% 1.75%
$1,000,000 or more.......................... * * *
------------------------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will
B-33
<PAGE> 110
be paid by the Distributor at the time of purchase directly out of the
Distributor's assets (and not out of the Fund's assets) to authorized dealers
who initiate and are responsible for purchases of $1 million or more computed
on a percentage of the dollar value of such shares sold as follows: 1.00% on
sales to $2 million, plus 0.80% on the next $1 million and 0.50% on the excess
over $3 million. For single purchases of $20 million or more by an individual
retail investor the Distributor will pay, at the time of purchase and directly
out of the Distributor's assets (and not out of the Fund's assets), a
commission or transaction fee of 1.00% to authorized dealers who initiate and
are responsible for such purchases. The commission or transaction fee of 1.00%
will be computed on a percentage of the dollar value of such shares sold.
With respect to sales of Class B Shares and Class C Shares 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 are paid the ongoing commission and transaction
fees of up to 0.75% of the average daily net assets of the Fund's Class C Shares
annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will reallow to any authorized dealer that sponsors
sales contests or recognition programs conforming to criteria established by the
Distributor, or participates in sales programs sponsored by the Distributor, an
amount not exceeding the total applicable sales charges on the sales generated
by the authorized dealer at the public offering price during such programs.
Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by the Distributor, pay fees to, and sponsor
business seminars for, qualifying authorized dealers for certain services or
activities which are primarily intended to result in sales of shares of the Fund
or other Van Kampen funds. Fees may include payment for travel expenses,
including lodging, incurred in connection with trips taken by invited registered
representatives for meetings or seminars of a business nature. In some instances
additional compensation or promotional incentives may be offered to brokers,
dealers or financial intermediaries that have sold or may sell significant
amounts of shares during specified periods of time. The Distributor may provide
additional compensation to Edward D. Jones & Co. or an affiliate thereof based
on a combination of its quarterly sales of shares of the Fund and other Van
Kampen funds and increases in net assets of the Fund and other Van Kampen funds
over specified thresholds. All of the foregoing payments are made by the
Distributor out of its own assets. Such fees paid for such services and
activities with respect to the Fund will not exceed in the aggregate 1.25% of
the average total daily net assets of the Fund on an annual basis. These
programs
B-34
<PAGE> 111
will not change the price an investor will pay for shares or the amount that a
Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans". The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and financial intermediaries who are acting as brokers (collectively,
"Selling Agreements") that may provide for their customers or clients certain
services or assistance, which may include, but not be limited to, processing
purchase and redemption transactions, establishing and maintaining shareholder
accounts regarding the Fund, and such other services as may be agreed to from
time to time and as may be permitted by applicable statute, rule or regulation.
Brokers, dealers and financial intermediaries that have entered into sub-
agreements with the Distributor and sell shares of the Fund are referred to
herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary were
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 consequence
to the Fund.
For shares sold prior to the July 1, 1987 implementation date of the
Distribution Plan, the financial intermediary was not eligible to receive
compensation pursuant to such Distribution and Service Agreement or Selling
Agreement. To the extent that there remain outstanding shares of the Fund that
were purchased prior to the implementation date of the Distribution Plan, the
percentage of the total average daily net asset value of a class of shares that
may be utilized pursuant to the Distribution and Service Agreement will be less
than the current maximum percentage amount permissible with respect to such
class of shares under the Distribution and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, 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
B-35
<PAGE> 112
such class, and all material amendments to either of the Plans must be approved
by the Trustees and also by the disinterested Trustees. Each of the Plans may be
terminated with respect to any class of shares at any time by a vote of a
majority of the disinterested Trustees or by a vote of a majority of the
outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These unreimbursed actual net
expenses may or may not be recovered through plan fees or contingent deferred
sales charges in future years.
Because of fluctuation in net asset value, the plan fees with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
March 31, 2000, there were $2,184,389 and $34,535 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 2.00% and 0.27% of the Fund's average daily net
assets attributable to Class B Shares and Class C Shares, respectively. If the
Plans were terminated or not continued, the Fund would not be contractually
obligated to pay the Distributor for any expenses not previously reimbursed by
the Fund or recovered through contingent deferred sales charges.
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.
B-36
<PAGE> 113
For the fiscal year ended March 31, 2000, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $633,068 or 0.24% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Class A Share Plans. For the fiscal year
ended March 31, 2000, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $1,254,728 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $937,293 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $317,435
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended March 31, 2000,
the Fund's aggregate expenses paid under the Plans for Class C Shares were
$135,647 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $70,066 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $65,581 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into agreements with the following firms: (i)
Dean Witter Reynolds, Inc., (ii) Merrill Lynch, Pierce, Fenner & Smith Inc.
(iii) First Union National Bank (iv) Huntington Bank, (v) Invesco Retirement and
Benefit Services, Inc., (vi) Lincoln National Life Insurance Company, (vii)
National Deferred Compensation, Inc., (viii) Wells Fargo Bank, N.A., (ix) The
Prudential Insurance Company of America, (x) Charles Schwab & Co., Inc., (xi)
Union Bank of CA, N.A. and (xii) Buck Consultants, Inc. Shares of the Fund will
be offered pursuant to such firm's retirement plan alliance program(s). Trustees
and other fiduciaries of retirement plans seeking to invest in multiple fund
families through broker-dealer retirement plan alliance programs should contact
the firms mentioned above for further information concerning the program(s)
including, but not limited to, minimum size and operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency prices
are determined through negotiations with the Fund's Board of Trustees and 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 will at all times
be subject to review by the Board of Trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer
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to the underwriter and purchases from dealers serving as market makers include a
spread or markup to the dealer between the bid and asked price. Sales to dealers
are effected at bid prices. The Fund may also purchase certain money market
instruments directly from an issuer, in which case no commissions or discounts
are paid, or may purchase and sell listed securities on an exchange, which are
effected through brokers who charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund. The Adviser also may place portfolio transactions, to the extent
permitted by law, with brokerage firms affiliated with the Fund, the Adviser or
the Distributor and with brokerage firms participating in the distribution of
the Fund's shares if it reasonably believes that the quality of execution and
the commission are comparable to that available from other qualified firms.
Similarly, to the extent permitted by law and subject to the same considerations
on quality of execution and comparable commission rates, the Adviser may direct
an executing broker to pay a portion or all of any commissions, concessions or
discounts to a firm supplying research or other services or to a firm
participating in the distribution of the Fund's shares.
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
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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.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. 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 given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated
brokers during the years/periods shown:
Commissions Paid:
<TABLE>
<CAPTION>
Affiliated
Brokers
----------------
All Morgan Dean
Brokers Stanley Witter
------- ------- ------
<S> <C> <C> <C>
Fiscal year ended March 31, 2000............................ $0 $0 $0
Fiscal period ended March 31, 1999.......................... $0 $0 $0
Fiscal year ended June 30, 1998............................. $0 $0 $0
Fiscal 2000 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to
total transactions...................................... 0% 0%
</TABLE>
During the fiscal year ended March 31, 2000, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
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INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the Prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time through authorized dealers or by mailing a check and
detailed instructions directly to Investor Services.
SHARE CERTIFICATES
Generally, the Fund will not issue share certificates. However, upon
written or telephone request to the Fund, a share certificate will be issued
representing shares (with the exception of fractional shares) of the Fund. A
shareholder will be required to surrender such certificates upon an exchange or
redemption of the shares represented by the certificate. In addition, if such
certificates are lost the shareholder must write to Van Kampen Funds Inc., c/o
Investor Services, PO Box 218256, Kansas City, MO 64121-8256, 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; Section 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. Van Kampen Trust Company serves
as custodian under the IRA, 403(b)(7) and Money Purchase and Profit Sharing
Keogh plans. Details regarding fees, as well as full plan administration for
profit sharing, pension and 401(k) plans, are available from the Distributor.
AUTOMATED CLEARING HOUSE("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order 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. The
shareholder must also include a voided check or deposit slip from the
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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)341-2911 ((800)421-2833 for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request or by completing the appropriate
section of the account application form or by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired), elect 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 Participating Fund 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), Keogh) 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 minimum investment and other
requirements of the fund into which distributions would be invested.
Distributions are invested into the selected fund at its net asset value per
share as of the payable date of the distribution.
SYSTEMATIC WITHDRAWAL PLAN
A shareholder may establish a monthly, quarterly, semiannual or annual
withdrawal plan if the shareholder owns shares in a single account valued at
$10,000 or more at the next determined net asset value per share at the time the
plan is established. If a shareholder owns shares in a single account valued at
$5,000 or more at the next determined net asset value per share at the time the
plan is established, the shareholder may establish a quarterly, semiannual or
annual withdrawal plan. This plan provides for the orderly use of the entire
account, not only the income but also the capital, if necessary. Each payment
represents the proceeds of a redemption of shares on which any capital gain or
loss will be recognized. The planholder may arrange for periodic checks in any
amount, not less than $25. Such a systematic withdrawal plan may also be
maintained by an investor purchasing shares for a retirement plan 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 plan 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
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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.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made by a shareholder during a rolling
365-day period. If exchange privileges are suspended, subsequent exchange
requests during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight exchanges in
the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange
plans, or employer-sponsored retirement plans.
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 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 in
Class C Shares of the Fund with credit given for any contingent deferred sales
charge paid upon such redemption. Such reinstatement is made at the net asset
value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants in
those eligible retirement plans held or administered by Van Kampen Trust Company
for repayment of principal (and interest) on their borrowings on such plans.
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 will result in recognition by the shareholder of a gain or
loss for federal income tax purposes when such securities are distributed, and
the
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shareholder may incur brokerage charges and a gain or loss for federal income
tax purposes upon the shareholder's subsequent disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into will be assumed to be the date on which shares were
purchased in the fund from which the exchange was made. If the exchanged shares
themselves are acquired through an exchange, the purchase date is assumed to
carry over from the date of the original election to purchase shares subject to
a CDSC-Class A rather than a front-end load sales charge. In determining whether
a CDSC-Class A is payable, it is assumed that shares being redeemed first are
any shares in the shareholder's account not subject to a contingent deferred
sales charge, followed by shares held the longest in the shareholder's account.
The contingent deferred sales charge is assessed on an amount equal to the
lesser of the then current market value or the cost of the shares being
redeemed. Accordingly, no sales charge is imposed on increases in net asset
value above the initial purchase price. In addition, no sales charge is assessed
on shares derived from reinvestment of dividends or capital gain dividends.
WAIVER OF CLASS B AND CLASS C CONTINGENT
DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC-Class B and C"). The CDSC-Class B and C is waived on redemptions
of Class B Shares and Class C Shares in the circumstances described below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), which in pertinent part defines a person as disabled if
such person "is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and indefinite duration."
While the Fund does not specifically adopt the balance of the Code's definition
which pertains to furnishing the Secretary of Treasury with such proof as he or
she may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary
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account, and where the redemption is made within one year of the death or
initial determination of disability. This waiver of the CDSC-Class B and C
applies to a total or partial redemption, but only to redemptions of shares held
at the time of the death or initial determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to U.S. Code Section 401(k)(8) or 402(g)(2), the financial hardship of
the employee pursuant to Treasury Regulations Section 1.401(k)-1(d)(2), or from
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
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase
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of shares. See "Purchase of Shares -- Waiver of Contingent Deferred Sales
Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of the Fund may reinvest at
net asset value, with credit for any CDSC-Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C Shares of the Fund, provided that the reinvestment is
effected within 180 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege with respect to Class C Shares
of the Fund. Shares acquired in this manner will be deemed to have the original
cost and purchase date of the redeemed shares for purposes of applying the
CDSC-Class C to subsequent redemptions.
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 has elected and
qualified, and intends to continue to qualify each year, to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source 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 taxable
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 of investment company taxable income
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.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its
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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 interest charges
and make distributions before requalifying for taxation as a regulated
investment company.
Some of the Fund's investment practices are subject to special provisions
of the Code that may, among other things (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher taxed short-term capital gain or ordinary
income, (iii) convert an ordinary loss or a deduction into a capital loss (the
deductibility of which is more limited) and (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 in order 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 gain 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
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the maximum tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
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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 the 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. Some portion of
the distributions from the Fund may be eligible for the dividends received
deduction for corporations if the Fund receives qualifying dividends during the
year and if certain other requirements of the Code are satisfied.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Such taxes will not be deductible or creditable by
shareholders. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares sold are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the maximum
tax rates applicable to capital gains (including capital gain dividends) see
"Capital Gains Rates" below. Any loss recognized upon a taxable disposition of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received with respect to such
shares. For purposes of determining whether shares have been held for six months
or less, the holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
CAPITAL GAINS RATES
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) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
B-47
<PAGE> 124
NON-U.S. SHAREHOLDERS
A shareholder who is not (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or any state thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust (a "Non-U.S.
Shareholder") generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from the
Fund (other than capital gain dividends) that are not "effectively connected"
with a United States trade or business carried on by such shareholder.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to United States 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 on capital gain dividends and gross proceeds paid to them
upon the sale of their shares. See "Backup Withholding" below.
If income from the Fund or gains realized from the sale of shares is
effectively connected with a Non-U.S. Shareholder's United States trade or
business, then such amounts will be subject to United States federal income tax
on a net basis at the tax rates applicable to United States citizens or domestic
corporations. 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 United States trade or business.
United States Treasury regulations generally effective for payments made
after December 31, 2000, modify the withholding, backup withholding and
information reporting rules, including the procedures to be followed by Non-U.S.
Shareholders in establishing foreign status. Prospective foreign investors
should consult their tax advisors concerning the applicability and effect of
such Treasury regulations on an investment in shares of the Fund.
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. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their tax 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 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to 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
B-48
<PAGE> 125
fails to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
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 paid to such shareholder
and the amount, if any, of tax withheld pursuant to backup withholding rules
with respect to such dividends. In the case of a Non-U.S. Shareholder, the Fund
must report to the IRS and such shareholder the aggregate amount of dividends
paid that are subject to backup withholding (if any) and the amount of tax
withheld with respect to such dividends pursuant to the backup withholding
rules. This information may also be made available to the tax authorities in the
Non-U.S. Shareholder's country of residence. Generally, dividends paid to
Non-U.S. Shareholders that are subject to the 30% federal income tax withholding
described above under "Non-U.S. Shareholders" are not subject to backup
withholding.
GENERAL
The federal income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisors regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year, five-year and ten-year periods. 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 capital gain dividends paid by the
Fund or to reflect the fact that 12b-1 fees previously may have been less than
the current 12b-1 fees for certain classes of shares as specified in the
Prospectus.
B-49
<PAGE> 126
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
The 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 such contingent deferred sales charge with respect to
the contingent deferred sales charge imposed at the time of redemption were
reflected, it would reduce the performance quoted.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement) and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a
B-50
<PAGE> 127
measure of the income actually earned by the Fund's investments, and from total
return which is a measure of the income actually earned by the Fund's
investments plus the effect of any realized and unrealized appreciation or
depreciation of such investments during a stated period. Distribution rate is,
therefore, not intended to be a complete measure of the Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by the Fund. Distribution rates will be computed separately for each
class of the Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update and discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sectors 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 the shareholders
purchased their fund shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased in the Dalbar study and the conclusions based
therein are not necessarily indicative of future performance of such funds or
conclusions that may result from similar studies in the futures. The Fund may
also be marketed on the internet.
In reports or other communications to shareholders or in advertising
material, the Fund may compare its performance with that of other mutual funds
as listed in the rankings or ratings prepared by Lipper Analytical Services,
Inc., CDA, Morningstar Mutual Funds or similar independent services which
monitor the performance of mutual funds with the Consumer Price Index, the Dow
Jones Industrial Average, Standard & Poor's indices, NASDAQ Composite Index,
other appropriate indices of investment securities, or with investment or
savings vehicles. The performance information may also include evaluations of
the Fund published by nationally recognized ranking or rating services and by
nationally recognized financial publications. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's === shares.
For these purposes, the performance of the Fund, as well as the performance of
other mutual funds or indices, do not reflect sales charges, the inclusion of
which would reduce the Fund's performance. The Fund will include performance
data for each class of shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments
B-51
<PAGE> 128
made in a rising market; (3) illustrate allocations among different types of
mutual funds for investors at different stages of their lives; and (4) in
reports or other communications to shareholders or in advertising material,
illustrate the benefits of compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the back cover of this Statement of Additional
Information.
CLASS A SHARES
The Fund's average annual total return, assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
March 31, 2000 was -1.42%, (ii) the five-year period ended March 31, 2000 was
7.01%, (iii) the ten-year period ended March 31, 2000 was 9.17% and (iv) the
approximately thirteen-year, nine-month period since June 27, 1986, commencement
of distribution for Class A Shares of the Fund, through March 31, 2000 was
7.52%.
The Class A Shares cumulative non-standardized total return, including
payment of the maximum sales charge, with respect to the Class A Shares from its
inception to March 31, 2000 was 171.07%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to March 31, 2000 was 184.55%.
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended March 31, 2000 was -1.11%, (ii) the five-year period ended March
31, 2000 was 7.04%, and (iii) the approximately six-year, ten-month period since
May 17, 1993, the commencement of investment operations for Class B Shares of
the Fund, through March 31, 2000 was 6.55%.
The Class B Shares cumulative non-standardized total return, including
payment of the contingent deferred sales charge, with respect to the Class B
Shares from May 17, 1993 (commencement of distribution of Class B Shares) to
March 31, 2000 was 54.60%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
May 17, 1993 (commencement of distribution of Class B Shares) to March 31, 2000
was 54.60%.
CLASS C SHARES
The average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended March 31, 2000 was 1.71%, (ii) the five-year, period ended March
31, 2000 was 7.23%, and (iii) the approximately six-year, seven-month period
since August 13, 1993, the commencement of distribution for Class C Shares of
the Fund, through March 31, 2000 was 6.00%.
B-52
<PAGE> 129
The Class C Shares cumulative non-standardized total return, including
payment of the contingent deferred sales charge, with respect to the Class C
Shares from August 13, 1993 (commencement of distribution of Class C Shares) to
March 31, 2000 was 47.16%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
August 13, 1993 (commencement of distribution of Class C Shares) to March 31,
2000 was 47.16%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
All securities owned by the Fund and all cash, including proceeds from the
sale of shares of the Fund and of securities in the Fund's investment portfolio,
are held by State Street Bank and Trust Company, 225 West Franklin Street,
Boston, Massachusetts 02110, as custodian. The custodian also provides
accounting services to the Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT AUDITORS
Independent auditors perform an annual audit of the financial statements of
the Fund. The Trust's Board of Trustees has engaged Ernst & Young LLP, located
at 233 South Wacker Drive, Chicago, Illinois 60606, to be the independent
auditors. The change in independent auditors was approved by the Fund's audit
committee and the Fund's Board of Trustees, including Trustees who are not
"interested persons" of the Fund (as defined in the 1940 Act).
PricewaterhouseCoopers LLP, located at 200 East Randolph Drive, Chicago,
Illinois 60601 ("PWC"), ceased being the Fund's independent accountants
effective May 25, 2000. The cessation of the client-auditor relationship between
the Fund and PWC was based solely on a possible future business relationship
with PWC with an affiliate of the Fund's investment adviser. The change in
independent accountants was approved by the Trust's audit committee and the
Trust's Board of Trustees, including Trustees who are not "interested persons"
of the Portfolios (as defined in the 1940 Act).
KPMG LLP, located at 303 West Wacker Drive, Chicago, Illinois 60601
("KPMG"), ceased being the Fund's independent accountants effective April 14,
2000. The cessation of the client-auditor relationship between the Fund and KPMG
was based solely on a possible future business relationship by KPMG with an
affiliate of the Fund's investment adviser. The change in independent
accountants was approved by the Fund's audit committee and the Fund's Board of
Trustees, including Trustees who are not "interested persons" of the Fund (as
defined in the 1940 Act).
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-53
<PAGE> 130
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of Van Kampen High Yield Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen High Yield Fund (the
"Fund") at March 31, 2000, and the results of its operations, the changes in its
net assets and the financial highlights for the year then ended in conformity
with accounting principles generally accepted in the United States. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the Untied States, which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit, which included confirmation
of securities at March 31, 2000 by correspondence with the custodian and
brokers, provides a reasonable basis for the opinion expressed above. The
statement of changes in net assets and the financial highlights for each of the
periods ended on or prior to March 31, 1999 were audited by other independent
accountants whose report dated May 5, 1999 expressed an unqualified opinion
thereon.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
May 5, 2000
F-1
<PAGE> 131
BY THE NUMBERS
PORTFOLIO OF INVESTMENTS
March 31, 2000
THE FOLLOWING PAGES DETAIL THE SPECIFIC HOLDINGS OF YOUR FUND AT THE END OF THE
REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
DOMESTIC CORPORATE BONDS 72.4%
AEROSPACE & DEFENSE 1.2%
$1,720 Compass Aerospace Corp., Ser B......... 10.125% 04/15/05 $ 696,600
4,500 Dyncorp (g)............................ 9.500 03/01/07 3,577,500
------------
4,274,100
------------
AUTOMOBILE 4.3%
5,360 Aetna Industries, Inc. ................ 11.875 10/01/06 5,252,800
1,125 Cambridge Industries, Inc., Ser B...... 10.250 07/15/07 258,750
2,000 Eagle Picher Industries, Inc. ......... 9.375 03/01/08 1,705,000
2,700 Oxford Automotive, Inc., Ser D......... 10.125 06/15/07 2,524,500
1,200 Stanadyne Automotive Corp., Ser B...... 10.250 12/15/07 978,000
4,430 Talon Automotive Group, Inc., Ser B
(g).................................... 9.625 05/01/08 2,037,800
2,825 Venture Holdings, Inc. ................ 12.000 06/01/09 2,274,125
------------
15,030,975
------------
BEVERAGE, FOOD & TOBACCO 4.5%
2,000 Agrilink Foods, Inc. (g) .............. 11.875 11/01/08 1,850,000
2,500 Chiquita Brands International, Inc. ... 10.000 06/15/09 1,925,000
3,900 Fleming Cos., Inc., Ser B (g).......... 10.500 12/01/04 3,529,500
500 Jitney Jungle Stores America,
Inc. (e) (h) (k)....................... 12.000 03/01/06 100,000
2,000 Luiginos, Inc. ........................ 10.000 02/01/06 1,670,000
2,500 National Wine & Spirits, Inc. ......... 10.125 01/15/09 2,375,000
4,100 Pantry, Inc. (g)....................... 10.250 10/15/07 3,649,000
2,000 Pathmark Stores, Inc. ................. 11.625 06/15/02 680,000
------------
15,778,500
------------
BUILDINGS & REAL ESTATE 2.9%
1,650 American Plumbing & Mechanical......... 11.625 10/15/08 1,493,250
1,800 Building One Services Corp. ........... 10.500 05/01/09 1,620,000
750 Cemex International Capital, Inc. ..... 9.660 11/29/49 755,625
1,750 Home Interiors Gifts, Inc. ............ 10.125 06/01/08 1,408,750
2,750 Schuler Homes, Inc. ................... 9.000 04/15/08 2,310,000
3,075 Webb (Del E.) Corp. ................... 10.250 02/15/10 2,567,625
------------
10,155,250
------------
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 132
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
CHEMICALS, PLASTICS & RUBBER 1.9%
$ 600 Georgia Gulf Corp., 144A Private
Placement (a).......................... 10.375% 11/01/07 $ 600,000
1,748 ISP Holdings, Inc. .................... 9.750 02/15/02 1,669,340
185 ISP Holdings, Inc., Ser B.............. 9.000 10/15/03 172,050
1,800 Lyondell Chemical Co., Ser A........... 9.625 05/01/07 1,719,000
1,000 Lyondell Chemical Co., Ser B........... 9.875 05/01/07 955,000
900 Sovereign Specialty Chemicals, 144A
Private Placement (a).................. 11.875 03/15/10 888,750
1,000 United Industries Corp., Ser B......... 9.875 04/01/09 710,000
------------
6,714,140
------------
CONSUMER DURABLES 0.5%
1,800 Sleepmaster LLC........................ 11.000 05/15/09 1,791,000
------------
CONSUMER SERVICES 0.5%
1,800 Muzak, Inc. ........................... 9.875 03/15/09 1,714,500
------------
DIVERSIFIED/CONGLOMERATE
MANUFACTURING 1.3%
4,600 Communications & Power Industries,
Inc., Ser B (g)........................ 12.000 08/01/05 3,634,000
780 Intersil Corp. ........................ 13.250 08/15/09 893,100
------------
4,527,100
------------
ELECTRONICS 0.3%
1,950 DecisionOne Corp. (e).................. 9.750 08/01/07 9,750
3,100 DecisionOne Corp. (Including 3,100
common stock warrants) (b) (e)......... 0/11.500 08/01/08 620
2,000 Radio Unica Corp. (b) (g).............. 0/11.750 08/01/06 1,225,000
------------
1,235,370
------------
ENERGY 1.8%
2,310 Cheasapeake Energy Corp., Ser B........ 9.625 05/01/05 2,159,850
3,190 Houston Exploration Co., Ser B......... 8.625 01/01/08 2,918,850
2,200 Universal Compression
Holdings, Inc. (b) (g)................. 0/9.875 02/15/08 1,320,000
------------
6,398,700
------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 133
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
FINANCE 2.7%
$3,300 Americo Life, Inc., 144A Private
Placement (a) (g)...................... 9.250% 06/01/05 $ 3,283,500
2,000 DLJ Secured Loan Trust, 144A Private
Placement (a).......................... 10.125 07/07/07 2,000,000
2,000 Madison River Capital, 144A Private
Placement (a).......................... 13.250 03/01/10 1,930,000
2,425 Port Arthur Finance Corp., Ser A, 144A
Private Placement (a).................. 12.500 01/15/09 2,285,562
------------
9,499,062
------------
HEALTHCARE 3.5%
3,000 Hudson Respiratory Care, Inc. (g)...... 9.125 04/15/08 2,355,000
1,075 Iasis Healthcare Corp., 144A Private
Placement (a).......................... 13.000 10/15/09 1,072,312
2,500 King Pharmaceuticals, Inc. ............ 10.750 02/15/09 2,462,500
2,000 Mediq, Inc. ........................... 11.000 06/01/08 220,000
4,000 Oxford Health Plans, Inc. ............. 11.000 05/15/05 3,980,000
1,800 Tenet Healthcare Corp. ................ 8.125 12/01/08 1,656,000
545 Triad Hospitals........................ 11.000 05/15/09 550,450
------------
12,296,262
------------
HOTEL, MOTEL, INNS & GAMING 2.4%
1,110 Argosy Gaming Co. ..................... 10.750 06/01/09 1,134,975
2,000 Hollywood Casino Corp. ................ 11.250 05/01/07 2,025,000
780 Hollywood Casino Shreveport, 144A
Private Placement (a).................. 13.000 08/01/06 842,400
1,700 Horseshoe Gaming LLC................... 8.625 05/15/09 1,559,750
2,225 Isle of Capri Casinos, Inc. ........... 8.750 04/15/09 1,941,312
1,085 Majestic Star Casino LLC............... 10.875 07/01/06 1,022,613
------------
8,526,050
------------
LEISURE 1.1%
3,000 Booth Creek Ski Holdings, Inc., Ser B
(g).................................... 12.500 03/15/07 2,175,000
2,000 Premier Parks, Inc. ................... 9.250 04/01/06 1,865,000
------------
4,040,000
------------
MACHINERY 0.3%
1,300 Terex Corp., Ser D..................... 8.875 04/01/08 1,157,000
------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 134
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MINING, STEEL, IRON & NON-PRECIOUS
METAL 1.4%
$1,000 GS Technologies Operating, Inc. ....... 12.000% 09/01/04 $ 550,000
2,000 Pen Holdings, Inc., Ser B.............. 9.875 06/15/08 1,710,000
1,950 Renco Steel Holdings, Inc. ............ 10.875 02/01/05 1,745,250
725 Republic Technologies International,
Inc. .................................. 13.750 07/15/09 188,500
3,550 Republic Technologies International,
Inc., 144A Private Placement (a)....... 13.750 07/15/09 923,000
------------
5,116,750
------------
OIL & GAS 4.0%
1,915 Frontier Oil Corp. .................... 11.750 11/15/09 1,809,675
1,150 Giant Industries, Inc. ................ 9.750 11/15/03 1,112,625
2,735 Giant Industries, Inc. (g)............. 9.000 09/01/07 2,461,500
1,500 Hydrochem Industrial Services, Inc.,
Ser B.................................. 10.375 08/01/07 1,162,500
1,835 KCS Energy, Inc. (e) (k) .............. 11.000 01/15/03 1,513,875
3,700 National Energy Group, Inc.,
Ser D (e) (g) (k)...................... 10.750 11/01/06 1,933,250
2,000 Pride International, Inc. ............. 10.000 06/01/09 1,970,000
2,000 Triton Energy Ltd. .................... 8.750 04/15/02 2,010,000
------------
13,973,425
------------
PRINTING, PUBLISHING &
BROADCASTING 9.9%
3,000 @Entertainment, Inc., Ser B (b)........ 0/14.500 02/01/09 1,815,000
1,500 Cadmus Communications Corp. ........... 9.750 06/01/09 1,447,500
3,000 Capstar Broadcasting Partners (g)...... 9.250 07/01/07 3,075,000
3,750 Capstar Broadcasting Partners.......... 12.750 02/01/09 3,375,000
3,350 Century Communications Corp. (g)....... 8.875 01/15/07 3,115,500
600 Classic Cable, Inc. ................... 9.375 08/01/09 561,000
715 Classic Cable, Inc., 144A Private
Placement (a).......................... 10.500 03/01/10 711,425
2,100 Coaxial Commerce Central Ohio, Inc. ... 10.000 08/15/06 2,037,000
2,600 CSC Holdings, Inc. .................... 10.500 05/15/16 2,899,000
1,600 Gray Communications Systems, Inc.
(g).................................... 10.625 10/01/06 1,596,000
2,450 International Cabletel, Inc. (b)....... 0/12.750 04/15/05 2,486,750
2,750 International Cabletel, Inc. (b)....... 0/11.500 02/01/06 2,557,500
1,970 James Cable Partners LP, Ser B......... 10.750 08/15/04 1,970,000
1,850 Northland Cable Television, Inc. (g)... 10.250 11/15/07 1,766,750
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 135
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
PRINTING, PUBLISHING & BROADCASTING (CONTINUED)
$2,550 Pegasus Communications Corp., Ser B
(g).................................... 9.625% 10/15/05 $ 2,473,500
2,000 Premier Graphics, Inc. ................ 11.500 12/01/05 910,000
2,000 Young Broadcasting, Inc. .............. 11.750 11/15/04 2,030,000
------------
34,826,925
------------
PRODUCER MANUFACTURING 0.5%
1,265 Anvil Knitwear, Inc. .................. 10.875 03/15/07 1,012,000
1,060 Numatics, Inc., Ser B ................. 9.625 04/01/08 848,000
------------
1,860,000
------------
RETAIL 1.4%
1,250 Big 5 Corp., Ser B (g)................. 10.875 11/15/07 1,181,250
1,800 Community Distributors, Inc., Ser B
(g).................................... 10.250 10/15/04 1,449,000
1,750 Hosiery Corp. of America, Inc. (e)..... 13.750 08/01/02 1,828,750
480 Musicland Group, Inc. ................. 9.000 06/15/03 424,800
------------
4,883,800
------------
TELECOMMUNICATIONS 23.5%
2,560 Airgate PCS, Inc. (b).................. 0/13.500 10/01/09 1,395,200
1,940 Alamosa Holdings, Inc. (b)............. 0/12.875 02/15/10 999,100
2,000 AMSC Acquisition, Inc. ................ 12.250 04/01/08 1,580,000
3,800 Centennial Cellular Operating Co. ..... 10.750 12/15/08 3,781,000
4,000 Charter Communications Holdings, 144A
Private Placement (a) (b).............. 0/11.750 01/15/10 2,200,000
750 Charter Communications Holdings, 144A
Private Placement (a).................. 10.000 04/01/09 725,625
1,100 Citadel Broadcasting Co. .............. 9.250 11/15/08 1,039,500
1,000 Crown Castle International Corp. (b)... 0/10.625 11/15/07 695,000
1,000 Crown Castle International Corp. ...... 9.500 08/01/11 930,000
2,600 E Spire Communications, Inc. (b)....... 0/13.000 11/01/05 1,560,000
2,000 Fairchild Semiconductor Corp. ......... 10.375 10/01/07 1,980,000
1,050 Global Telesystems Europe (EUR) (i).... 11.000 12/01/09 975,265
4,380 GST Network Funding, Inc. (b).......... 0/10.500 05/01/08 1,905,300
3,250 ICG Holdings, Inc. (b)................. 0/13.500 09/15/05 3,079,375
1,350 Intermedia Communications of Florida,
Inc., Ser B............................ 13.500 06/01/05 1,522,125
6,800 Intermedia Communications, Inc. (b).... 0/12.500 03/01/09 4,114,000
1,350 Intermedia Communications, Inc. (b).... 0/11.250 07/15/07 1,053,000
3,700 KMC Telecommunications Holdings, Inc.
(b).................................... 0/12.500 02/15/08 2,090,500
2,100 Level 3 Communications, Inc., 144A
Private Placement (a) (b).............. 0/12.875 03/15/10 1,044,750
1,000 Metromedia Fiber Network, Inc. (EUR)
(i).................................... 10.000 12/15/09 943,187
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 136
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS (CONTINUED)
$1,485 Metromedia Fiber Network, Inc. ........ 10.000% 12/15/09 $ 1,414,462
250 MGC Communications, Inc., Ser B........ 13.000 10/01/04 253,750
2,000 MJD Communications, Inc. .............. 9.500 05/01/08 1,910,000
2,250 Nextel Communications, Inc. (b)........ 0/10.650 09/15/07 1,639,687
1,450 Nextel Communications, Inc. ........... 9.375 11/15/09 1,319,500
1,800 Nextlink Communications, Inc., 144A
Private Placement (a) (b).............. 0/12.125 12/01/09 936,000
2,850 Nextlink Communications, Inc., 144A
Private Placement (a).................. 10.500 12/01/09 2,707,500
2,000 NTL Communications Corp., Ser B........ 11.500 10/01/08 2,060,000
1,000 NTL, Inc. (GBP) (i).................... 9.500 04/01/08 1,432,891
1,000 NTL, Inc., Ser B (b)................... 0/9.750 04/01/08 642,500
1,000 Park N View, Inc., Ser B............... 13.000 05/15/08 610,000
3,030 Pinnacle Holdings, Inc. (b) (g)........ 0/10.000 03/15/08 1,961,925
2,000 Price Communications Wireless, Inc. ... 11.750 07/15/07 2,155,000
570 Primus Telecommunications Group........ 11.250 01/15/09 521,550
750 PSINet, Inc. (EUR) (i)................. 10.500 12/01/06 703,799
2,315 PSINet, Inc. .......................... 11.500 11/01/08 2,303,425
1,930 PSINet, Inc., Ser B.................... 10.000 02/15/05 1,814,200
2,500 RSL Communications (b)................. 0/10.125 03/01/08 1,375,000
3,750 SBA Communications Corp. (b)........... 0/12.000 03/01/08 2,456,250
3,500 Splitrock Services, Inc., Ser B........ 11.750 07/15/08 3,727,500
3,000 Startec Global Communications.......... 12.000 05/15/08 2,475,000
2,000 Telecommunications Techniques (g)...... 9.750 05/15/08 1,835,000
2,200 Telecorp PCS, Inc. (b)................. 0/11.625 04/15/09 1,364,000
3,150 Triton Communications, Inc. (b)........ 0/11.000 05/01/08 2,142,000
3,520 United International Holdings, Inc. (b)
(g).................................... 0/10.750 02/15/08 2,428,800
530 US Unwired, Inc., 144A Private
Placement (a) (b)...................... 0/13.375 11/01/09 283,550
540 Verio, Inc. ........................... 13.500 06/15/04 579,150
1,420 Verio, Inc. (g)........................ 10.375 04/01/05 1,363,200
2,160 Viatel, Inc. (b)....................... 0/12.500 04/15/08 1,236,600
2,000 Viatel, Inc. .......................... 11.500 03/15/09 1,895,949
1,000 Williams Communications Group, Inc. ... 10.700 10/01/07 1,002,500
1,500 Winstar Communications, Inc., 144A
Private Placement (a) (b) (f).......... 0/14.750 04/15/10 720,000
------------
82,883,615
------------
TECHNOLOGY 0.3%
1,025 Globix Corp., 144A Private Placement
(a).................................... 12.500 02/01/10 963,500
------------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 137
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
TEXTILES 0.4%
$3,000 Globe Manufacturing Corp. ............. 10.000% 08/01/08 $ 1,050,000
640 Scovill Fasteners, Inc., Ser B......... 11.250 11/30/07 288,000
------------
1,338,000
------------
TRANSPORTATION 1.8%
1,750 Atlas Air, Inc. ....................... 9.375 11/15/06 1,636,250
1,125 Atlas Air, Inc. ....................... 9.250 04/15/08 1,040,625
1,000 Avis Rent A Car, Inc. ................. 11.000 05/01/09 995,000
3,795 Greyhound Lines, Inc., Ser B........... 11.500 04/15/07 2,865,225
------------
6,537,100
------------
TOTAL DOMESTIC CORPORATE BONDS 72.4%................................... 255,521,124
------------
<CAPTION>
PAR
AMOUNT
IN LOCAL
CURRENCY MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
FOREIGN BONDS AND DEBT
SECURITIES 21.4%
ARGENTINA 0.4%
2,000 CTI Holdings SA (US$) (b).............. 0/11.500 04/15/08 1,315,000
------------
BERMUDA 1.4%
4,000 Global Crossing Holdings Limited (US$),
144A Private Placement (a)............. 9.125 11/15/06 3,850,000
1,100 Globenet Communications Group (US$).... 13.000 07/15/07 1,083,500
------------
4,933,500
------------
BRAZIL 1.4%
2,426 Federal Republic of Brazil (US$)....... 8.000 04/15/14 1,819,815
1,000 Globo Communicacoes Participacoe
(US$).................................. 10.625 12/05/08 872,500
400 Globo Communicacoes Participacoe (US$),
144A Private Placement (a)............. 10.625 12/05/08 349,000
500 Multicanal Participacoes (US$)......... 12.625 06/18/04 520,000
1,200 Multicanal Participacoes, Ser B
(US$).................................. 12.625 06/18/04 1,248,000
------------
4,809,315
------------
CANADA 4.2%
2,000 Clearnet Communications, Inc. (US$)
(b).................................... 0/14.750 12/15/05 2,005,000
1,240 Doman Industries Ltd (US$)............. 12.000 07/01/04 1,289,600
4,035 GT Group Telecom, Inc. (US$), 144A
Private Placement (a) (b).............. 0/13.250 02/01/10 2,219,250
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 138
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT
IN LOCAL
CURRENCY MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
CANADA (CONTINUED)
910 Hurricane Hydrocarbons Ltd. (US$), 144A
Private Placement (a) (b) (e).......... 11.75/16.00% 11/01/04 $ 796,250
450 Intrawest Corp. (US$), 144A Private
Placement (a).......................... 10.500 02/01/10 434,250
3,300 Microcell Telecommunications, Ser B
(US$) (b).............................. 0/14.000 06/01/06 2,953,500
1,425 Pacifica Papers, Inc. (US$)............ 10.000 03/15/09 1,396,500
825 Repap New Brunswick, Inc. (US$)........ 9.000 06/01/04 779,625
2,750 Worldwide Fiber, Inc. (US$)............ 12.000 08/01/09 2,880,625
------------
14,754,600
------------
CHILE 0.1%
1,855 Empresa Electrica Delaware Norte SA
(US$), 144A Private Placement (a)
(c).................................... 7.750 03/15/06 519,400
------------
COLOMBIA 0.9%
750 Republic of Colombia (Var. Rate Coupon)
(DEM).................................. 4.890 11/21/01 358,011
2,500 Republic of Colombia (US$)............. 9.750 04/23/09 2,331,250
500 Republic of Colombia (US$)............. 9.750 04/23/09 465,000
------------
3,154,261
------------
FRANCE 0.4%
1,200 Go Outdoor Systems Holdings SA (EUR)... 10.500 07/15/09 1,332,909
------------
HUNGARY 0.2%
216,650 Hungary Government (HUF)............... 16.000 11/24/00 830,353
------------
KOREA 0.3%
1,000 Korea Electric Power Corp. (US$)....... 7.000 02/01/27 915,000
------------
LUXEMBOURG 1.0%
4,000 Millicom International Cellular SA
(US$) (b) (g).......................... 0/13.500 06/01/06 3,390,000
------------
MEXICO 1.4%
1,000 Gruma SA (US$)......................... 7.625 10/15/07 900,000
4,850 Satelites Mexicanos SA (US$), 144A
Private Placement (a).................. 10.125 11/01/04 4,098,250
125 United Mexican States (US$)............ 9.875 02/01/10 132,250
------------
5,130,500
------------
</TABLE>
See Notes to Financial Statements
F-9
<PAGE> 139
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR
AMOUNT
IN LOCAL
CURRENCY MARKET
(000) DESCRIPTION COUPON MATURITY VALUE
<C> <S> <C> <C> <C>
MOROCCO 0.5%
2,036 Morocco Trust A Loan (US$) (c)......... 6.844% 01/01/09 1,837,884
------------
NETHERLANDS 2.7%
2,000 Global Telesystems Europe (EUR)........ 10.500 12/01/06 1,862,435
1,800 Kappa Beheer BV (EUR) (b).............. 0/12.500 07/15/09 1,120,333
715 Kappa Beheer BV (EUR).................. 10.625 07/15/09 718,881
650 United Pan Europe Commerce NV (US$),
144A Private Placement (a) (b)......... 0/13.750 02/01/10 325,000
4,030 United Pan Europe Communication (US$)
(b).................................... 0/12.500 08/01/09 2,055,300
1,665 United Pan Europe Communication (US$).. 10.875 08/01/09 1,556,775
2,140 United Pan Europe Communication (US$),
Ser B, 144A Private Placement (a)...... 11.250 02/01/10 2,054,400
------------
9,693,124
------------
PHILIPPINES 0.3%
1,150 Philippine Long Distance Telephone
(US$).................................. 10.500 04/15/09 1,132,405
------------
POLAND 0.8%
3,000 Netia Holdings, Inc., Ser B (US$)...... 10.250 11/01/07 2,670,000
------------
RUSSIA 2.1%
22,750 Russia Principal Loans--Vnesh (US$) (d)
(e) (k)................................ 6.906 12/15/20 6,583,281
362 Russian--IAN (US$) (k)................. 6.906 12/15/15 107,704
3,000 Vnesheconombank (US$) (e) (k).......... 6.906 12/15/15 892,500
------------
7,583,485
------------
UNITED KINGDOM 3.1%
2,750 Cenargo International PLC (US$)........ 9.750 06/15/08 2,406,250
3,450 Diamond Cable Commerce PLC (US$) (b)
(g).................................... 0/10.750 02/15/07 2,708,250
1,400 Espirit Telecom Group PLC (US$)........ 11.500 12/15/07 1,253,000
1,250 Espirit Telecom Group PLC (US$)........ 10.875 06/15/08 1,093,750
2,000 Filtronic PLC (GBP).................... 10.000 12/01/05 1,930,000
1,600 Jazztel PLC (EUR)...................... 13.250 12/15/09 1,562,721
------------
10,953,971
------------
</TABLE>
See Notes to Financial Statements
F-10
<PAGE> 140
PORTFOLIO OF INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
MARKET
DESCRIPTION VALUE
<C> <S> <C> <C> <C>
VENEZUELA 0.2%
1,000 Republic of Venezuela (US$) (j)........ 6.750% 03/31/20 710,000
------------
TOTAL FOREIGN BONDS AND DEBT SECURITIES 21.4%.......................... 75,665,707
------------
EQUITIES 3.0%
Airgate PCS, Inc. (2,560 common stock warrants) (e)..................... 486,400
American Mobile Satellite Corp., (2,000 common stock warrants)
144A Private Placement (a) (e)......................................... 240,000
Anvil Holdings, Inc. (67,160 preferred shares) (d)...................... 638,020
Crown Castle International Corp. (2,341 preferred shares) (d)........... 2,329,783
Dobson Communications Corp. (1,982 preferred shares) (d)................ 2,130,650
Firstworld Communications, Inc., (2,525 common stock warrants)
144A Private Placement (a) (e)......................................... 441,875
Hosiery Corp. of America, Inc., (1,000 common shares)................... 40,500
Intermedia Communications, Inc. (13,797 common shares) (e).............. 666,568
Intersil Holding Corp., (1,200 common stock warrants) 144A Private
Placement (a) (e)...................................................... 1,068,000
KMC Telecommunications Holdings, Inc., (3,235 common stock warrants),
144A Private Placement (a) (e)......................................... 64,700
McLeodUSA, Inc. (9,959 common shares) (e)............................... 844,630
NTL, Inc., (5,178 common stock warrants)
144A Private Placement (a) (e)......................................... 626,538
Park N View, Inc., (1,000 common stock warrants) 144A Private
Placement (a) (e)...................................................... 250
Price Communications Corp. (35,572 common shares) (e)................... 818,156
Republic Technologies International, Inc., (4,275 common stock warrants)
144A Private Placement (a) (e)......................................... 43
Star Gas Partners LP (440 common shares)................................ 5,995
Startec Global Communications (3,000 common stock warrants) (e)......... 55,500
------------
TOTAL EQUITIES.......................................................... 10,457,608
------------
TOTAL INVESTMENTS 96.8%
(Cost $379,289,160)................................................... 341,644,439
FOREIGN CURRENCY (GBP) 0.0%
(Cost $10,673)........................................................ 10,364
OTHER ASSETS IN EXCESS OF LIABILITIES 3.2%.............................. 11,125,068
------------
NET ASSETS 100.0%...................................................... $352,779,871
============
</TABLE>
See Notes to Financial Statements
F-11
<PAGE> 141
PORTFOLIO OF INVESTMENTS
March 31, 2000
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may be resold in
transactions exempt from registration which are normally transactions with
qualified institutional buyers.
(b) Security is a "step-up" bond where the coupon increases or steps up at a
predetermined date.
(c) Security is a bank loan participation.
(d) Payment-in-kind security.
(e) Non-income producing security.
(f) Securities purchased on a when issued or delayed delivery basis.
(g) Assets segregated as collateral for open forward commitments or when issued
or delayed delivery purchase commitments.
(h) This borrower has filed for protection in federal bankruptcy court.
(i) This security is a United States company denominated in a foreign currency.
(j) Item represents a "Brady Bond" which is the product of the "Brady Plan"
under which various Latin American, African, and Southeast Asian nations
have converted their outstanding external defaulted commercial bank loans
into bonds. Certain Brady Bonds have been collateralized, as to principal
due at maturity, by U.S. Treasury zero coupon bonds with a maturity date
equal to the final maturity date of such Brady Bonds.
(k) Security is in default.
DEM--German Mark
EUR--Eurodollar
GBP--British Pound
HUF--Hungarian Forint
US$--United States Dollar
See Notes to Financial Statements
F-12
<PAGE> 142
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
March 31, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $379,289,160)....................... $341,644,439
Foreign Currency (Cost $10,673)............................. 10,364
Receivables:
Interest.................................................. 9,290,679
Investments Sold.......................................... 8,542,525
Fund Shares Sold.......................................... 529,092
Other....................................................... 24,011
------------
Total Assets............................................ 360,041,110
------------
LIABILITIES:
Payables:
Investments Purchased..................................... 2,620,165
Income Distributions...................................... 1,369,609
Custodian Bank............................................ 1,180,853
Fund Shares Repurchased................................... 1,178,413
Distributor and Affiliates................................ 273,052
Investment Advisory Fee................................... 206,603
Trustees' Deferred Compensation and Retirement Plans........ 211,266
Accrued Expenses............................................ 206,498
Forward Currency Contracts.................................. 14,780
------------
Total Liabilities....................................... 7,261,239
------------
NET ASSETS.................................................. $352,779,871
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $429,409,451
Accumulated Distributions in Excess of Net Investment
Income.................................................... (1,446,206)
Accumulated Net Realized Loss............................... (37,522,675)
Net Unrealized Depreciation................................. (37,660,699)
------------
NET ASSETS.................................................. $352,779,871
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $230,583,027 and 27,184,146 shares of
beneficial interest issued and outstanding)............. $ 8.48
Maximum sales charge (4.75%* of offering price)......... .42
------------
Maximum offering price to public........................ $ 8.90
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $109,213,909 and 12,870,818 shares of
beneficial interest issued and outstanding)............. $ 8.49
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $12,982,935 and 1,531,987 shares of
beneficial interest issued and outstanding)............. $ 8.47
============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-13
<PAGE> 143
Statement of Operations
For the Year Ended March 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $3,938)....... $ 42,182,192
Dividends................................................... 475,874
Other....................................................... 842,458
------------
Total Income............................................ 43,500,524
------------
EXPENSES:
Investment Advisory Fee..................................... 2,944,704
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B, and C of $608,941, $1,233,272, and $134,425,
respectively)............................................. 1,976,638
Shareholder Services........................................ 532,762
Custody..................................................... 132,179
Trustees' Fees and Related Expenses......................... 79,640
Legal....................................................... 35,310
Other....................................................... 311,012
------------
Total Expenses.......................................... 6,012,245
Less:
Investment Advisory Fee Reduction..................... 392,628
Credits Earned on Cash Balances....................... 23,050
------------
Net Expenses............................................ 5,596,567
------------
NET INVESTMENT INCOME....................................... $ 37,903,957
============
REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $ (8,436,882)
Options................................................... (33,668)
Futures................................................... (861,920)
Forwards.................................................. 185,778
Foreign Currency Transactions............................. (1,337,034)
------------
Net Realized Loss........................................... (10,483,726)
------------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (22,324,238)
------------
End of the Period:
Investments............................................. (37,644,721)
Forwards................................................ (14,780)
Foreign Currency Translation............................ (1,198)
------------
(37,660,699)
------------
Net Unrealized Depreciation During the Period............... (15,336,461)
------------
NET REALIZED AND UNREALIZED LOSS............................ $(25,820,187)
============
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 12,083,770
============
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 144
Statement of Changes in Net Assets
For the Year Ended March 31, 2000, the Nine Months Ended March 31, 1999
and the Year Ended June 30, 1998
<TABLE>
<CAPTION>
YEAR NINE MONTHS YEAR
ENDED ENDED ENDED
MARCH 31, MARCH 31, JUNE 30,
2000 1999 1998
---------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................... $ 37,903,957 $ 26,991,960 $ 36,727,184
Net Realized Gain/Loss.................. (10,483,726) (11,821,088) 10,238,004
Net Unrealized Depreciation During
the Period............................ (15,336,461) (25,290,256) (8,832,338)
------------- ------------- -------------
Change in Net Assets from Operations.... 12,083,770 (10,119,384) 38,132,850
------------- ------------- -------------
Distributions from Net Investment
Income................................ (36,085,784) (26,991,960) (36,588,695)
Distributions in Excess of Net
Investment Income..................... -0- (161,827) -0-
------------- ------------- -------------
Distributions from and in Excess of Net
Investment Income*.................... (36,085,784) (27,153,787) (36,588,695)
Return of Capital Distribution*......... (471,642) (586,214) -0-
------------- ------------- -------------
Total Distributions..................... (36,557,426) (27,740,001) (36,588,695)
------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM INVESTMENT
ACTIVITIES............................ (24,473,656) (37,859,385) 1,544,155
------------- ------------- -------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............... 95,859,095 127,864,335 141,976,974
Net Asset Value of Shares Issued Through
Dividend Reinvestment................. 17,763,113 11,396,598 14,616,655
Cost of Shares Repurchased.............. (164,331,736) (110,498,564) (145,829,346)
------------- ------------- -------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS.......................... (50,709,528) 28,762,369 10,764,283
------------- ------------- -------------
TOTAL INCREASE/DECREASE IN NET ASSETS... (75,183,184) (9,097,016) 12,308,438
NET ASSETS:
Beginning of the Period................. 427,963,055 437,060,071 424,751,633
------------- ------------- -------------
End of the Period (Including accumulated
distributions in excess of net
investment income of $1,446,206,
$1,847,204, and $1,685,377,
respectively)......................... $ 352,779,871 $ 427,963,055 $ 437,060,071
============= ============= =============
* Distributions by Class
----------------------------------------
Distributions from and in Excess of Net
Investment Income:
Class A Shares........................ $ (24,250,603) $ (18,127,647) $ (24,757,453)
Class B Shares........................ (10,671,518) (8,272,046) (11,057,055)
Class C Shares........................ (1,163,663) (754,094) (774,187)
------------- ------------- -------------
$ (36,085,784) $ (27,153,787) $ (36,588,695)
------------- ------------- -------------
Return of Capital Distribution:
Class A Shares........................ $ (314,838) $ (391,352) $ -0-
Class B Shares........................ (141,491) (178,582) -0-
Class C Shares........................ (15,313) (16,280) -0-
------------- ------------- -------------
$ (471,642) $ (586,214) $ -0-
============= ============= =============
</TABLE>
See Notes to Financial Statements
F-15
<PAGE> 145
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30
CLASS A SHARES MARCH 31, MARCH 31, ---------------------------------
2000 1999 1998 1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD.................... $9.034 $9.893 $9.854 $9.493 $9.398 $9.643
------ ------ ------ ------ ------ ------
Net Investment Income......... .848 .619 .857 .857 .878 .844
Net Realized and Unrealized
Gain/Loss................... (.560) (.848) .037 .384 .147 (.099)
------ ------ ------ ------ ------ ------
Total from Investment
Operations.................... .288 (.229) .894 1.241 1.025 .745
------ ------ ------ ------ ------ ------
Less:
Distributions from and in
Excess of Net Investment
Income...................... .828 .617 .855 .865 .880 .815
Return of Capital
Distribution................ .012 .013 -0- .015 .050 .175
------ ------ ------ ------ ------ ------
Total Distributions............. .840 .630 .855 .880 .930 .990
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE
PERIOD........................ $8.482 $9.034 $9.893 $9.854 $9.493 $9.398
====== ====== ====== ====== ====== ======
Total Return* (a)............... 3.50% (2.13%)** 9.36% 13.60% 11.26% 8.50%
Net Assets at End of the Period
(In millions)................. $230.6 $277.9 $280.6 $288.0 $271.1 $253.3
Ratio of Expenses to Average Net
Assets *...................... 1.15% 1.17% 1.14% 1.17% 1.31% 1.31%
Ratio of Net Investment Income
to Average Net Assets *....... 9.96% 8.98% 8.61% 8.83% 9.16% 9.13%
Portfolio Turnover.............. 109% 104%** 154% 125% 102% 152%
* If certain expenses had not been waived or reimbursed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average Net
Assets........................ 1.25% 1.27% 1.24% 1.26% 1.31% N/A
Ratio of Net Investment Income
to Average Net Assets......... 9.86% 8.88% 8.51% 8.73% 9.15% N/A
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a CDSC of 1% may
be imposed on certain redemptions made within one year of purchase. If the
sales charges were included, total returns would be lower.
N/A -- Not applicable.
See Notes to Financial Statements
F-16
<PAGE> 146
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30,
CLASS B SHARES MARCH 31, MARCH 31, ---------------------------------
2000 1999 1998 1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
THE PERIOD................... $9.032 $9.890 $9.855 $9.497 $9.398 $9.638
------ ------ ------ ------ ------ ------
Net Investment Income........ .803 .560 .782 .777 .797 .788
Net Realized and Unrealized
Gain/Loss.................. (.582) (.842) .036 .389 .160 (.115)
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... .221 (.282) .818 1.166 .957 .673
------ ------ ------ ------ ------ ------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .757 .564 .783 .794 .812 .751
Return of Capital
Distribution............... .011 .012 -0- .014 .046 .162
------ ------ ------ ------ ------ ------
Total Distributions............ .768 .576 .783 .808 .858 .913
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF THE
PERIOD....................... $8.485 $9.032 $9.890 $9.855 $9.497 $9.398
====== ====== ====== ====== ====== ======
Total Return* (a).............. 2.65% (2.71%)** 8.58% 12.64% 10.55% 7.61%
Net Assets at End of the Period
(In millions)................ $109.2 $135.4 $145.0 $128.7 $ 97.1 $ 55.9
Ratio of Expenses to Average
Net Assets*.................. 1.93% 1.93% 1.91% 1.93% 2.07% 2.04%
Ratio of Net Investment Income
to Average Net Assets*....... 9.17% 8.19% 7.84% 8.03% 8.39% 8.35%
Portfolio Turnover............. 109% 104%** 154% 125% 102% 152%
* If certain expenses had not been waived or reimbursed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets................... 2.03% 2.03% 2.01% 2.02% 2.07% N/A
Ratio of Net Investment Income
to Average Net Assets........ 9.07% 8.09% 7.74% 7.94% 8.38% N/A
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 4%,
charged on certain redemptions made within one year of purchase and
declining thereafter to 0% after the sixth year. If the sales charge was
included, total returns would be lower.
N/A -- Not applicable.
See Notes to Financial Statements
F-17
<PAGE> 147
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30,
CLASS C SHARES MARCH 31, MARCH 31, ---------------------------------
2000 1999 1998 1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD....................... $9.023 $9.884 $9.851 $9.495 $9.396 $9.643
------ ------ ------ ------ ------ ------
Net Investment Income........ .795 .562 .780 .780 .828 .745
Net Realized and Unrealized
Gain/Loss.................. (.576) (.847) .036 .384 .129 (.079)
------ ------ ------ ------ ------ ------
Total from Investment
Operations................... .219 (.285) .816 1.164 .957 .666
------ ------ ------ ------ ------ ------
Less:
Distributions from and in
Excess of Net Investment
Income..................... .757 .564 .783 .794 .812 .751
Return of Capital
Distribution............... .011 .012 -0- .014 .046 .162
------ ------ ------ ------ ------ ------
Total Distributions............ .768 .576 .783 .808 .858 .913
------ ------ ------ ------ ------ ------
NET ASSET VALUE, END OF
PERIOD....................... $8.474 $9.023 $9.884 $9.851 $9.495 $9.396
====== ====== ====== ====== ====== ======
Total Return* (a).............. 2.65% (2.71%)** 8.47% 12.65% 10.55% 7.61%
Net Assets at End of Period (In
millions).................... $ 13.0 $ 14.7 $ 11.5 $ 8.1 $ 7.0 $ 2.0
Ratio of Expenses to Average
Net Assets*.................. 1.93% 1.93% 1.91% 1.93% 2.06% 2.12%
Ratio of Net Investment Income
to Average Net Assets*....... 9.17% 8.25% 7.83% 8.08% 8.38% 8.13%
Portfolio Turnover............. 109% 104%** 154% 125% 102% 152%
* If certain expenses had not been waived or reimbursed by Van Kampen, total return would
have been lower and the ratios would have been as follows:
Ratio of Expenses to Average
Net Assets................... 2.03% 2.03% 2.01% 2.03% 2.07% N/A
Ratio of Net Investment Income
to Average Net Assets........ 9.07% 8.15% 7.73% 7.99% 8.38% N/A
</TABLE>
** Non-Annualized
(a) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 1%,
charged on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower.
N/A -- Not applicable.
See Notes to Financial Statements
F-18
<PAGE> 148
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Yield Fund (the "Fund") is organized as a series of Van Kampen
Trust, a Delaware business trust (the "Trust"), and is registered as a
diversified open-end management investment company under the Investment Company
Act of 1940, as amended. The Fund's primary investment objective is to provide a
high level of current income through investment in medium and lower grade
domestic corporate debt securities. The Fund also may invest up to 35% of its
assets in foreign government and corporate debt securities of comparable
quality. The Fund commenced investment operations on June 27, 1986. The Fund
commenced distribution of its Class B and C shares on May 17, 1993 and August
13, 1993, respectively.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
A. SECURITY VALUATION Investments are stated at value using market quotations or
indications of value obtained from an independent pricing service. For those
securities where quotations or prices are not available valuations are obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith by the
Board of Trustees. Short-term securities with remaining maturities of 60 days or
less are valued at amortized cost, which approximates market value.
At March 31, 2000, approximately 94% of the net assets of the Fund consisted
of high-yield securities rated below investment grade. Investments in high-yield
securities are accompanied by a greater degree of credit risk and the risk tends
to be more sensitive to economic conditions than higher rated securities.
Certain securities may be valued on the basis of bid prices provided by one
principal market maker.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least
F-19
<PAGE> 149
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
equal to the amount of the when issued or delayed delivery purchase commitments
until payment is made.
The Fund may invest in repurchase agreements, which are short-term
investments in which the Fund acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Fund may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other investment
companies advised by Van Kampen Investment Advisory Corp. (the "Adviser") or its
affiliates, the daily aggregate of which is invested in repurchase agreements.
Repurchase agreements are fully collateralized by the underlying debt security.
The Fund will make payment for such securities only upon physical delivery or
evidence of book entry transfer to the account of the custodian bank. The seller
is required to maintain the value of the underlying security at not less than
the repurchase proceeds due the Fund.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis and
dividend income is recorded net of applicable withholding taxes on the ex-
dividend date. Bond discount is amortized over the expected life of each
applicable security. Income and expenses of the Fund are allocated on a pro rata
basis to each class of shares, except for distribution and service fees and
transfer agency costs which are unique to each class of shares.
D. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required. Although the
Fund's tax year end was recently changed from June 30 to December 31, the Fund's
fiscal year end remains March 31.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1999, the Fund had an accumulated capital loss
carryforward for tax purposes of $32,438,270, which will expire between December
31, 2001 and December 31, 2007. Net realized gains or losses may differ for
financial and tax reporting purposes primarily as a result of the difference in
the Fund's tax year end, wash sales, and reclass of consent fee income.
At March 31, 2000, for federal income tax purposes, the cost of long- and
short-term investments is $380,691,380; the aggregate gross unrealized
appreciation is $7,282,291 and the aggregate gross unrealized depreciation is
$46,329,232,
F-20
<PAGE> 150
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
resulting in net unrealized depreciation on long- and short-term investments
of $39,046,941.
E. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays monthly
dividends from net investment income. Net investment income for federal income
tax purposes includes gains and losses realized on foreign currency
transactions. These gains and losses are included as net realized gains and
losses for financial reporting purposes.
Net realized gains, if any, are distributed annually. Distributions from net
realized gains for book purposes may include short-term capital gains, which are
included as ordinary income for tax purposes.
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under generally accepted accounting principles and federal
income tax purposes, permanent differences between book and tax basis reporting
for the 1999 fiscal year have been identified and appropriately reclassified.
For the tax year ended December 31, 1999, permanent book and tax differences of
$379,210 relating to the recognition of net realized losses on foreign currency
transactions were reclassified from accumulated undistributed net investment
income to accumulated net realized gain/loss. Also, $1,037,965 relating to fee
income were reclassified from accumulated undistributed net investment income to
accumulated net realized gain/loss, and $69,479,123 relating to a portion of the
capital loss carryforward that expired during the year ended December 31, 1999
were reclassified from capital to accumulated net realized gain/loss.
For tax purposes, the determination of a return of capital distribution is
made at the end of the Fund's taxable year (December 31).
F. CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies
and commitments under forward currency contracts are translated into U.S.
dollars at the mean of the quoted bid and ask prices of such currencies against
the U.S. dollar. Purchases and sales of portfolio securities are translated at
the rate of exchange prevailing when such securities were acquired or sold.
Income and expenses are translated at rates prevailing when accrued.
G. EXPENSE REDUCTIONS During the year ended March 31, 2000, the Fund's custody
fee was reduced by $23,050 as a result of credits earned on overnight cash
balances.
F-21
<PAGE> 151
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
AVERAGE NET ASSETS % PER ANNUM
<S> <C>
First $500 million.......................................... .75 of 1%
Over $500 million........................................... .65 of 1%
</TABLE>
For the year ended March 31, 2000, the Adviser waived approximately $392,600
of its advisory fee. This waiver is voluntary and may be discontinued at any
time.
For the year ended March 31, 2000, the Fund recognized expenses of
approximately $22,900, representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended March 31, 2000, the Fund recognized expenses of
approximately $101,900, representing Van Kampen Funds Inc.'s or its affiliates'
(collectively "Van Kampen") cost of providing accounting and legal services to
the Fund.
Van Kampen Investor Services Inc., ("VKIS"), an affiliate of the Adviser,
serves as the shareholder servicing agent for the Fund. For the year ended March
31, 2000, the Fund recognized expenses of approximately $390,600. Transfer
agency fees are determined through negotiations with the Fund's Board of
Trustees and are based on competitive market benchmarks.
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
F-22
<PAGE> 152
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
3. CAPITAL TRANSACTIONS
At March 31, 2000, capital aggregated $314,011,029, $103,206,468 and $12,191,954
for Class A, B and C shares, respectively. For the year ended March 31, 2000,
transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A............................................... 6,099,454 $ 53,846,860
Class B............................................... 3,889,246 34,206,260
Class C............................................... 888,416 7,805,975
----------- -------------
Total Sales............................................. 10,877,116 $ 95,859,095
=========== =============
Dividend Reinvestment:
Class A............................................... 1,461,944 $ 12,717,402
Class B............................................... 512,719 4,469,956
Class C............................................... 66,098 575,755
----------- -------------
Total Dividend Reinvestment............................. 2,040,761 $ 17,763,113
=========== =============
Repurchases:
Class A............................................... (11,138,896) $ (97,954,546)
Class B............................................... (6,521,827) (57,161,016)
Class C............................................... (1,046,422) (9,216,174)
----------- -------------
Total Repurchases....................................... (18,707,145) $(164,331,736)
=========== =============
</TABLE>
F-23
<PAGE> 153
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
At March 31, 1999, capital aggregated $391,207,193, $144,042,232 and
$15,406,532 for Class A, B and C shares, respectively. For the nine months ended
March 31, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A............................................... 8,548,658 $ 77,472,960
Class B............................................... 4,618,109 42,170,273
Class C............................................... 916,995 8,221,102
----------- -------------
Total Sales............................................. 14,083,762 $ 127,864,335
=========== =============
Dividend Reinvestment:
Class A............................................... 850,491 $ 7,690,242
Class B............................................... 364,542 3,296,841
Class C............................................... 45,353 409,515
----------- -------------
Total Dividend Reinvestment............................. 1,260,386 $ 11,396,598
=========== =============
Repurchases:
Class A............................................... (6,997,669) $ (63,522,912)
Class B............................................... (4,654,114) (42,458,339)
Class C............................................... (501,047) (4,517,313)
----------- -------------
Total Repurchases....................................... (12,152,830) $(110,498,564)
=========== =============
</TABLE>
F-24
<PAGE> 154
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
At June 30, 1998, capital aggregated $369,566,903, $141,033,457 and
$11,293,228 for Class A, B and C shares, respectively. For the year ended June
30, 1998, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A............................................... 8,945,784 $ 89,317,500
Class B............................................... 4,588,921 45,799,499
Class C............................................... 687,284 6,859,975
----------- -------------
Total Sales............................................. 14,221,989 $ 141,976,974
=========== =============
Dividend Reinvestment:
Class A............................................... 997,599 $ 9,948,016
Class B............................................... 427,244 4,261,071
Class C............................................... 40,893 407,568
----------- -------------
Total Dividend Reinvestment............................. 1,465,736 $ 14,616,655
=========== =============
Repurchases:
Class A............................................... (10,812,030) $(107,994,896)
Class B............................................... (3,408,945) (33,992,220)
Class C............................................... (385,647) (3,842,230)
----------- -------------
Total Repurchases....................................... (14,606,622) $(145,829,346)
=========== =============
</TABLE>
Class B shares purchased on or after June 1, 1996, and any dividend
reinvestment plan Class B shares received thereon, automatically convert to
Class A shares eight years after the end of the calendar month in which the
shares were purchased. Class B shares purchased before June 1, 1996, and any
dividend reinvestment plan Class B shares received thereon, automatically
convert to Class A shares six years after the end of the calendar month in which
the shares were purchased. For the year ended March 31, 2000, 783,210 Class B
shares converted to Class A shares, and are shown in the above tables as sales
of Class A shares and repurchases of Class B shares. Class C shares purchased
before January 1, 1997, and any dividend reinvestment plan Class C shares
received thereon, automatically convert to Class A shares ten years after the
end of the calendar month in which such shares were purchased. Class C shares
purchased on or after January 1, 1997 do not possess a conversion feature. For
the year ended March 31, 2000, no Class C shares converted to Class A shares.
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
F-25
<PAGE> 155
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
<S> <C> <C>
First...................................................... 4.00% 1.00%
Second..................................................... 3.75% None
Third...................................................... 3.50% None
Fourth..................................................... 2.50% None
Fifth...................................................... 1.50% None
Sixth...................................................... 1.00% None
Seventh and Thereafter..................................... None None
</TABLE>
For the year ended March 31, 2000, Van Kampen, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$45,600, and CDSC on redeemed shares of approximately $366,200. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
For the year ended March 31, 2000, the cost of purchases and proceeds from sales
of investments, excluding short-term investments, were $407,681,421 and
$467,671,407, respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, foreign currency
exposure, maturity and duration, or generate potential gain. All of the Fund's
portfolio holdings, including derivative instruments, are marked to market each
day with the change in value reflected in unrealized appreciation/depreciation.
Upon disposition, a realized gain or loss is recognized accordingly, except when
exercising a call option contract or taking delivery of a security underlying a
futures or forward contract. In these instances, the recognition of gain or loss
is postponed until the disposal of the security underlying the option, futures
or forward contract. Risks may arise as a result of the potential inability of
the counterparties to meet the terms of their contracts.
F-26
<PAGE> 156
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended March 31, 2000, were as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
<S> <C> <C>
Outstanding at March 31, 1999............................... 100 $(33,613)
Options Expired (Net)....................................... (100) 33,613
---- --------
Outstanding at March 31, 2000............................... -0- $ -0-
==== ========
</TABLE>
B. FUTURES CONTRACTS A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and typically closes
the contract prior to the delivery date. These contracts are generally used to
manage the portfolio's effective maturity and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin).
Transactions in futures contracts for the year ended March 31, 2000, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
<S> <C>
Outstanding at March 31, 1999............................... 250
Futures Opened.............................................. 1,761
Futures Closed.............................................. (2,011)
------
Outstanding at March 31, 2000............................... -0-
======
</TABLE>
C. FORWARD CURRENCY CONTRACTS These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the closing value of such contract is included as a component of realized
gain/loss on forwards.
F-27
<PAGE> 157
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
At March 31, 2000, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
CURRENT UNREALIZED
FORWARD CURRENCY CONTRACTS VALUE DEPRECIATION
<S> <C> <C>
SHORT CONTRACTS:
British Pound
860,110 expiring 04/10/00................................ $1,369,454 $(14,780)
</TABLE>
D. SWAP TRANSACTIONS These securities represent an agreement between two parties
to exchange a series of cash flows based upon various indices at specified
intervals. There were no open swap transactions at March 31, 2000.
6. BANK LOAN PARTICIPATIONS
The Fund invests in participation interests of loans to foreign entities. When
the Fund purchases a participation of a foreign loan interest, the Fund
typically enters into a contractual agreement with the lender or other third
party selling the participation, but not with the borrower directly. As such,
the Fund assumes credit risk for the borrower, selling participant or other
persons positioned between the Fund and the borrower.
7. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, and a service plan
(collectively the "Plans"). The Plans govern payments for the distribution of
the Fund's shares, ongoing shareholder services and maintenance of shareholder
accounts.
Annual fees under the Plans of up to .25% for Class A net assets and 1.00%
each for Class B and Class C net assets are accrued daily. Included in these
fees for the year ended March 31, 2000, are payments retained by Van Kampen of
approximately $1,025,266.
8. BORROWINGS
In accordance with its investment policies, the Fund may borrow from banks for
temporary purposes and is subject to certain other customary restrictions.
Effective November 30, 1999, the Fund, in conjunction with certain other funds
of Van Kampen, has entered in to a $650,000,000 committed line of credit
facility with a group of banks which expires on November 28, 2000, but is
renewable with the consent of the participating banks. Each fund is permitted to
utilize the facility in accordance with the restrictions of its prospectus. In
the event the demand for
F-28
<PAGE> 158
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
the credit facility meets or exceeds $650 million on a complex-wide basis, each
fund will be limited to its pro-rata percentage based on the net assets of each
participating fund. Interest on borrowings is charged under the agreement at a
rate of 0.50% above the federal funds rate per annum. An annual commitment fee
of 0.09% per annum is charged on the unused portion of the credit facility,
which each fund incurs based on its pro-rata percentage of quarterly net assets.
The Fund has not borrowed against the credit facility during the period.
F-29
<PAGE> 159
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN
STRATEGIC INCOME FUND
Van Kampen Strategic Income Fund (the "Fund") is a mutual fund with the
primary investment objective to seek to provide its shareholders with high
current income. The Fund has a secondary investment objective of seeking capital
appreciation. The Fund's investment adviser seeks to achieve the Fund's
investment objectives by investing primarily in a portfolio of income securities
selected from the following market sectors: U.S. government securities; domestic
investment-grade income securities; domestic lower-grade income securities;
foreign investment-grade income securities; and foreign lower-grade income
securities. Investments are allocated among these sectors based on evaluations
of the relative investment opportunities and investment risks presented by each
sector as determined from time to time by the Fund's investment adviser.
The Fund is organized as a non-diversified series of the Van Kampen Trust,
an open-end, management investment company (the "Trust").
This Statement of Additional Information is not a prospectus. This
Statement of Additional Information should be read in conjunction with the
Fund's prospectus (the "Prospectus") dated as of the same date as this Statement
of Additional Information. This Statement of Additional Information does not
include all the information that a prospective investor should consider before
purchasing shares of the Fund. Investors should obtain and read the Prospectus
prior to purchasing shares of the Fund. A Prospectus may be obtained without
charge by writing or calling Van Kampen Funds Inc. at 1 Parkview Plaza, PO Box
5555, Oakbrook Terrace, Illinois 60181-5555 or (800) 341-2911 (or (800) 421-2833
for the hearing impaired).
---------------------------------------------
TABLE OF CONTENTS
---------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information......................................... B-2
Investment Objectives, Policies and Risks................... B-4
Strategic Transactions...................................... B-24
Investment Restrictions..................................... B-33
Trustees and Officers....................................... B-34
Investment Advisory Agreement............................... B-44
Other Agreements............................................ B-45
Distribution and Service.................................... B-46
Transfer Agent.............................................. B-50
Portfolio Transactions and Brokerage Allocation............. B-51
Shareholder Services........................................ B-53
Redemption of Shares........................................ B-56
Contingent Deferred Sales Charge-Class A.................... B-56
Waiver of Class B and Class C Contingent Deferred Sales
Charges................................................... B-57
Taxation.................................................... B-59
Fund Performance............................................ B-63
Other Information........................................... B-67
Report of Independent Accountants........................... F-1
Financial Statements........................................ F-2
Notes to Financial Statements............................... F-18
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 28, 2000.
SIF SAI 7/00
<PAGE> 160
GENERAL INFORMATION
The Trust is an unincorporated business trust established under the laws of
the State of Delaware by an Agreement and Declaration of Trust (the "Declaration
of Trust") dated May 10, 1995. The Declaration of Trust permits the Trustees to
create one or more separate investment portfolios and issue a series of shares
for each portfolio, such as the Fund. The Trustees may create one or more
classes of shares for each series.
The Trust was originally organized in 1986 under the name Van Kampen
Merritt Trust as a Massachusetts business trust (the "Massachusetts Trust"). The
Massachusetts Trust was reorganized into the Trust under the name Van Kampen
American Capital Trust on July 31, 1995. The Trust was created for facilitating
the Massachusetts Trust reorganization into a Delaware business trust. On July
14, 1998, the Trust adopted its current name.
The Fund was originally organized in 1993 under the name Van Kampen Merritt
Strategic Income Fund as a sub-trust of the Massachusetts Trust. The Fund was
reorganized as a series of the Trust under the name Van Kampen American Capital
Strategic Income Fund on July 31, 1995. On July 14, 1998, the Fund adopted its
current name.
Van Kampen Investment Advisory Corp. (the "Adviser" or "Advisory Corp."),
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 Dean Witter & Co. ("Morgan Stanley Dean Witter"). The principal
office of the Trust, the Fund, the Adviser, the Distributor and Van Kampen
Investments is located at 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555. The principal office of Investor Services is located at 7501 Tiffany
Springs Parkway, Kansas City, Missouri 64153.
Morgan Stanley Dean Witter is a preeminent global financial services firm
that maintains leading market positions in each of its three primary businesses:
securities; asset management; and credit services.
The authorized capitalization of the Trust consists of an unlimited number
of shares of beneficial interest, par value $0.01 per share, which can be
divided into series, such as the Fund, and further subdivided into classes of
each series. Each share represents an equal proportionate interest in the assets
of the series with each other share in such series and no interest in any other
series. No series is subject to the liabilities of any other series. The
Declaration of Trust provides that shareholders are not liable for any
liabilities of the Trust or any of its series, requires inclusion of a clause to
that effect in every agreement entered into by the Trust or any of its series
and indemnifies shareholders against any such liability.
The Fund currently offers three classes of shares, designated Class A
Shares, Class B Shares and Class C Shares. Other classes may be established from
time to time in accordance with provisions of the Declaration of Trust. Each
class of shares of the Fund generally is identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. 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
B-2
<PAGE> 161
involved and a change in the distribution fee for a class of a series would be
voted upon by shareholders of only the class of such series involved. Except as
otherwise described in the Prospectus or herein, shares do not have cumulative
voting rights, preemptive rights or any conversion, subscription or exchange
rights.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of two-thirds of the shares then outstanding cast
in person or by proxy at such meeting. The Fund will assist such holders in
communicating with other shareholders of the Fund to the extent required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or rules or
regulations promulgated by the Securities and Exchange Commission ("SEC").
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. Since Class B Shares and Class C Shares have higher
distribution fees and transfer agency costs, the liquidation proceeds to holders
of Class B Shares and Class C Shares are likely to be less than to holders of
Class A Shares.
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 present at a meeting of shareholders (or such
higher vote as may be required by the 1940 Act or other applicable law) and
except that the Trustees cannot amend the Declaration of Trust to impose any
liability on shareholders, make any assessment on shares or impose liabilities
on the Trustees without approval from each affected shareholder or Trustee, as
the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
B-3
<PAGE> 162
As of July 3, 2000, no person was known by the Fund to own beneficially or
to hold of record 5% or more of the outstanding Class A Shares, Class B Shares
or Class C Shares of the Fund, except as follows:
<TABLE>
<CAPTION>
Amount of
Ownership at Class Percentage
Name and Address of Holder July 3, 2000 of Shares Ownership
-------------------------- -------------- --------- ----------
<S> <C> <C> <C>
Van Kampen Trust Company.................... 251,176 A 7.83%
2800 Post Oak Blvd. 236,491 B 5.71%
Houston, TX 77056
Edward Jones & Co. ......................... 1,148,184 A 35.80%
Attn Mutual Fund 372,784 B 9.00%
Shareholder Accounting
201 Progress Pkwy
Maryland Hts, MO 63043-3009
Merrill Lynch Pierce Fenner & Smith Inc..... 418,982 B 10.12%
For the Sole Benefit of its Customers
Attn: Fund Administration
4800 Deer Lake Drive East
2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
------------------------------------
Van Kampen Trust Company acts as custodian for certain employee benefit
plans and individual retirement accounts.
INVESTMENT OBJECTIVES, POLICIES AND RISKS
The following disclosure supplements the disclosure set forth under the
same caption in the Prospectus and does not, standing alone, present a complete
or accurate explanation of the matters disclosed. Readers must refer also to
this caption in the Prospectus for a complete presentation of the matters
disclosed below.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreements with broker-dealers, banks and
other financial institutions for investment purposes and in order to earn a
return on temporarily available cash. The Fund may invest an amount up to 20% of
its total assets in securities subject to repurchase agreements. A repurchase
agreement is a short-term investment in which the purchaser (i.e., the Fund)
acquires ownership of a security and the seller agrees to repurchase the
obligation at a future time and set price, thereby determining the yield during
the holding period. Repurchase agreements involve certain risks in the event of
default by the other party. The Fund may enter into repurchase agreements with
broker-dealers, banks and other financial institutions deemed to be creditworthy
by the Adviser under guidelines approved by the Fund's Board of Trustees. The
Fund will not invest in repurchase agreements maturing in more than seven days
if any such investment, together with any other illiquid securities held by the
Fund, would exceed the Fund's limitation on illiquid securities described
herein. The Fund does not bear the risk of a decline in the value of the
underlying security unless the seller defaults under its repurchase obligation.
In the event of the bankruptcy or other default of a seller of a repurchase
agreement, the Fund could experience both delays in liquidating the underlying
securities and losses
B-4
<PAGE> 163
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.
"WHEN-ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS
The Fund may purchase and sell portfolio securities on a "when-issued" and
"delayed delivery" basis. No income accrues to the Fund on securities in
connection with such purchase transactions prior to the date the Fund actually
takes delivery of such securities. These transactions are subject to market
fluctuation; the value of the securities at delivery may be more or less than
their purchase price, and yields generally available on comparable securities
when delivery occurs may be higher or lower than yields on the securities
obtained pursuant to such transactions. Because the Fund relies on the buyer or
seller, as the case may be, to consummate the transaction, failure by the other
party to complete the transaction may result in the Fund missing the opportunity
of obtaining a price or yield considered to be advantageous. When the Fund is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, cash or portfolio securities having an aggregate
value equal to the amount of such purchase commitments until payment is made.
The Fund will make commitments to purchase securities on such basis only with
the intention of actually acquiring these securities, but the Fund may sell such
securities prior to the settlement date if such sale is considered to be
advisable. To the extent the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objectives and
policies and not for the purpose of investment leverage.
B-5
<PAGE> 164
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both to obtain capital gains from anticipated declines in securities and as a
form of hedging to offset potential declines in long positions in the same or
similar securities. The short sale of a security is considered a speculative
investment technique.
When the Fund makes a short sale, it must borrow the security sold short
and deliver it to the broker-dealer through which it made the short sale in
order to satisfy its obligation to deliver the security upon conclusion of the
sale. The Fund may have to pay a fee to borrow particular securities and is
often obligated to pay over any payments received on such borrowed securities.
The Fund's obligation to replace the borrowed security will be secured by
collateral of cash or liquid securities. The Fund will also be required to
deposit additional collateral to the extent, if any, necessary so that the value
of collateral in the aggregate is at all times equal to the greater of the price
at which the security is sold short or 100% of the current market value of the
security sold short. Depending on arrangements made with the broker-dealer from
which it borrowed the security regarding payment over of any payments received
by the Fund on such security, the Fund may not receive any payments (including
interest) on its collateral.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain will be decreased, and any loss increased, by the transaction
costs described above. Although the Fund's gain is limited to the price at which
it sold the security short, its potential loss is theoretically unlimited.
The market value of a security sold short of any one issuer will not exceed
either 5% of the Fund's total assets or 5% of such issuer's voting securities.
The Fund will not make a short sale, if, after giving effect to such sale, the
market value of all securities sold short exceeds 25% of the value of its assets
or the Fund's aggregate short sales of a particular class of securities exceeds
25% of the outstanding securities of that class. The Fund may also make short
sales "against the box" without respect to such limitations.
BORROWING, REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may borrow for investment purposes. The Fund may borrow money from
banks and engage in reverse repurchase agreements and dollar rolls in an
aggregate amount up to 33 1/3% of the Fund's total assets (including the amount
borrowed). The Fund will borrow only when the Adviser believes that such
borrowings will benefit the Fund. The Fund may also borrow money in an amount up
to 5% of the Fund total assets for temporary purposes.
Borrowing by the Fund creates an opportunity for increased net income but,
at the same time, increases the risk of the Fund's portfolio. Leveraging by the
Fund will generally increase the volatility of the Fund's net asset value in
response to fluctuations in market interest rates and accordingly may increase
the risk of the Fund's portfolio. Although the
B-6
<PAGE> 165
principal of such borrowings will be fixed, the Fund's assets may change in
value during the time the borrowing is outstanding. Borrowing will create
interest expenses for the Fund which can exceed the income from the assets
retained. To the extent the income derived from securities purchased with
borrowed funds exceeds the interest the Fund will have to pay, the Fund's net
income will be greater than if borrowing were not used. Conversely, if the
income from the assets retained with borrowed funds is not sufficient to cover
the cost of borrowing, the net income of the Fund will be less than if borrowing
were not used, and therefore the amount available for distribution to
stockholders as dividends will be reduced.
Reverse repurchase agreements involve sales by the Fund of portfolio assets
concurrently with an agreement by the Fund to repurchase the same assets at a
later date at a fixed price. During the reverse repurchase agreement period, the
Fund continues to receive principal and interest payments on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase,
typically in 30 or 60 days, substantially similar (same type, coupon and
maturity) securities on a specified future date. During the roll period, the
Fund forgoes principal and interest paid on such securities. The Fund is
compensated by the difference between the current sales price and the forward
price for the future purchase (often referred to as the "drop") as well as by
the interest earned on the cash proceeds of the initial sale. A "covered roll"
is a specific type of dollar roll for which there is an offsetting cash position
or cash equivalent security position which matures on or before the forward
settlement date of the dollar roll transaction.
The Fund will establish a segregated account with its custodian in which it
will maintain cash or liquid securities equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls and, accordingly, the
Fund will not treat such obligations as senior securities for purposes of the
1940 Act. "Covered rolls" are not subject to these segregation requirements.
Reverse repurchase agreements and dollar rolls involve the risk that the market
value of the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the buyer of securities under a reverse repurchase agreement or
dollar roll files for bankruptcy or becomes insolvent, the Fund's use of the
proceeds of the agreement may be restricted pending a determination by the other
party, or its trustee or receiver, whether to enforce the Fund's obligation to
repurchase the securities.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable legal and regulatory requirements, the Fund may
lend portfolio securities to broker-dealers, banks and other institutional
borrowers of securities provided that such loans are at all times secured by
collateral that is at least equal to the market value, determined daily, of the
loaned securities and such loans are callable at any time by the Fund. The
advantage of such loans is that the Fund continues to receive the interest or
dividends on the loaned securities, while at the same time earning interest on
the collateral which is invested in short-term obligations or the Fund receives
an agreed-upon amount of interest from the borrower of the security. The Fund
may pay reasonable finders', administrative and custodial fees in connection
with loans of its securities. There is no assurance as to the extent to which
securities loans can be effected.
B-7
<PAGE> 166
If the borrower fails to maintain the requisite amount of collateral, the
loan automatically terminates, and the Fund could use the collateral to replace
the securities while holding the borrower liable for any excess of replacement
cost over collateral. As with any extensions of credit, there are risks of delay
in recovery and in some cases even loss of rights in the collateral should the
borrower of the securities fail financially. However, these loans of portfolio
securities will only be made to firms deemed by the Fund's Adviser to be
creditworthy and when the consideration which can be earned from such loans is
believed to justify the attendant risks. On termination of the loan, the
borrower is required to return the securities to the Fund; any gains or loss in
the market price during the loan would inure to the Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Fund's investment in the securities
which are the subject of the loan.
PORTFOLIO TURNOVER
The Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year. The
turnover rate may vary greatly from year to year as well as within a 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 fair value as determined in good faith by the Adviser in
accordance with procedures approved by the Fund's Board of Trustees. Ordinarily,
the Fund would invest in restricted securities only when it receives the
issuer's commitment to register the securities without expense to the Fund.
However, registration and underwriting expenses (which typically range from 7%
to 15% of the gross proceeds of the securities sold) may be paid by the Fund.
Restricted securities which can be offered and sold to qualified institutional
buyers under Rule 144A under the 1933 Act ("144A Securities") and are determined
to be liquid under guidelines adopted by and subject to the supervision of the
Fund's Board of Trustees are not subject to the limitation on illiquid
securities. Such 144A Securities are subject to monitoring and may become
illiquid to the extent qualified institutional buyers become, for a time,
uninterested in purchasing such securities. Factors used to determine whether
144A Securities are liquid include, among other things, a security's trading
history, the availability of reliable pricing information, the number of dealers
making quotes or making a market in such security and
B-8
<PAGE> 167
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.
NON-DIVERSIFICATION
The Fund is a "non-diversified" investment company, which means the Fund is
not limited in the proportion of its assets that may be invested in the
securities of a single issuer. However, the Fund intends to conduct its
operations so as to qualify as a "regulated investment company" for purposes of
the Internal Revenue Code of 1986, as amended (the "Code"). If the Fund
qualifies as a regulated investment company under the Code, it will be relieved
of any liability for federal income tax to the extent its earnings are
distributed to shareholders. In order to qualify, among other requirements, the
Fund must limit its investments so that, at the close of each quarter of the
Fund's taxable year, (i) not more than 25% of the market value of the Fund's
total assets are invested in securities of a single issuer (other than the U.S.
government, its agencies and instrumentalities, or other regulated investment
companies), or of two or more issuers which the Fund controls and which are
determined to be in the same or similar, or related, trades or businesses and
(ii) at least 50% of the market value of its total assets is invested in cash,
cash items, securities of the U.S. government, its agencies and
instrumentalities, securities of other regulated investment companies, and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the market value of the Fund's total assets and not greater than 10% of the
outstanding voting securities of such issuer. Since the Fund, as a
non-diversified investment company, may invest in a smaller number of individual
issuers than a diversified investment company, an investment in the Fund may,
under certain circumstances, present greater risks to an investor than an
investment in a diversified company.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities include: (1) U.S. Treasury obligations, which differ in their
interest rates, maturities and times of issuance: U.S. Treasury bills (maturity
of one year or less), U.S. Treasury notes (maturity of one to ten years), and
U.S. Treasury bonds (generally maturities of greater than ten years), including
the principal components or the interest components issued by the U.S.
government under the Separate Trading of Registered Interest and Principal of
Securities program (i.e., "STRIPS"), all of which are backed by the full faith
and credit of the United States; and (2) obligations issued or guaranteed by
U.S. government agencies or instrumentalities, including government issued or
guaranteed mortgage-backed securities, some of which are backed by the full
faith and credit of the U.S. Treasury, some of which are supported by the right
of the issuer to borrow from the U.S. government and some of which are backed
only by the credit of the instrumentality. U.S. government securities are
considered among the most creditworthy of fixed-income investments; however, the
yields on U.S. government securities generally are lower than yields available
from corporate debt securities.
B-9
<PAGE> 168
TREASURY INFLATION-PROTECTED SECURITIES
The Fund may invest in U.S. Treasury inflation-protected securities
("TIPS") that are designed to provide an investment vehicle that is not
vulnerable to inflation. The coupon interest rate as a percentage of principal
for these securities is established in an open auction process and then remains
constant over the life of the security. The principal value rises or falls
semi-annually based upon changes in the Consumer Price Index. If inflation
occurs, the principal and interest payments on TIPS are adjusted to protect
investors from inflationary loss. If deflation occurs, the principal and
interest payments will be adjusted downward, although the principal will not
fall below its face amount at maturity. Holders of TIPS are taxed on the
interest income received, as well as on the increase in principal that is due to
the inflation adjustment. As a result, the after-tax annual yield on TIPS is
lower than the after-tax annual yield on a fixed-principal Treasury security of
the same maturity. TIPS are expected to show less market risk/price volatility
as interest rates rise and fall than a fixed-principal Treasury security of the
same maturity. Even though TIPS should experience less market volatility than
regular fixed-principal instruments, they should not be viewed as a surrogate
for a money market instrument or other cash equivalents.
EUROPEAN ECONOMIES
In recent years there have been two key issues influencing the investment
environment and economic conditions of Europe: the creation of the single market
and the emergence of Eastern European economies. Both of these factors have
helped European companies by opening up new markets for growth.
In connection with efforts to create a single market, on January 1, 1999,
eleven of the fifteen member countries of the European Union began conversion of
their existing sovereign currencies to a new common currency, the euro. For the
first three years, the euro will be a phantom currency (only an accounting
entry). Euro notes and coins will begin circulating in year 2002. The euro is
expected to reshape financial markets, banking systems and monetary policies in
Europe and other parts of the world. Financial transactions and market
information, including share quotations and company accounts, in participating
countries will be denominated in euros. Monetary policy for participating
countries will be uniformly managed by a new central bank, the European Central
Bank (ECB).
Although the initial phase of the introduction of the euro has already
occurred, there remain uncertainties that will continue for some time such as
the applicable conversion rate and whether the payment, valuation and
operational systems of banks and financial institutions will operate reliably;
the ability of clearing and settlement systems to process transactions; the
effects of the euro on European financial and commercial markets; and the effect
of new legislation and regulations to address euro-related issues. The process
of implementing the euro may likely affect financial markets world-wide and may
result in changes in the relative strength and value of the U.S. dollar or other
major currencies, as well as possible adverse tax consequences. The transition
to the euro is likely to have a significant impact on fiscal and monetary policy
in the participating countries and may produce unpredictable effects on trade
and commerce generally. These uncertainties could cause increased volatility in
financial markets would-wide.
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Governments across Europe have also initiated major privatization programs
shifting a greater share of economic activity into the more efficient private
sector. Private companies have sought quotation, following the need to compete
in the capital markets, as much as in the market place for their products and
services. Those companies already quoted have begun to appreciate the value of
their being listed. To achieve a high rating on their equity, companies need to
produce transparent accounts, communicate effectively with their shareholders
and manage their businesses and assets to their shareholders' advantage. The
restructuring, management incentives and rationalization of companies has led to
lower wage structures and greater flexibility. This has enabled European
companies to match the competitive cost environment of developing economies.
MORTGAGE-BACKED SECURITIES
"Mortgage-Backed Securities" are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. There are currently three basic types of
Mortgage-Backed Securities: (i) those issued or guaranteed by the U.S.
government or one of its agencies or instrumentalities, such as Government
National Mortgage Association (GNMA), Federal National Mortgage Association
(FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) securities; (ii) those
issued by private issuers that represent an interest in or are collateralized by
Mortgage-Backed Securities issued or guaranteed by the U.S. government or one of
its agencies or instrumentalities; and (iii) those issued by private issuers
that represent an interest in or are collateralized by whole mortgage loans or
Mortgage-Backed Securities without a government guarantee but usually having
some form of private credit enhancement.
Mortgage-Backed Securities may represent an undivided ownership interests
in pools of mortgages. The mortgages backing these securities may include
conventional 30-year fixed rate mortgages, 15-year fixed rate mortgages,
graduated payment mortgages and adjustable rate mortgages. The U.S. government
or the issuing agency guarantees the payment of the interest on and principal of
these securities. However, the guarantees do not extend to the securities' yield
or value, which are likely to vary inversely with fluctuations in interest
rates, nor do the guarantees extend to the yield or value of the Fund's shares.
These securities are in most cases "pass-through" instruments, through which the
holders receive a share of all interest and principal payments from the
mortgages underlying the securities, net of certain fees. Because the principal
amounts of such underlying mortgages may generally be prepaid in whole or in
part by the mortgagees at any time without penalty and the prepayment
characteristics of the underlying mortgages vary, it is not possible to predict
accurately the average life of a particular issue of pass-through securities.
Mortgage-Backed Securities are subject to more rapid repayment than their stated
maturity date would indicate as a result of the pass-through of prepayments of
principal on the underlying mortgage obligations. The remaining maturity of a
Mortgage-Backed Security will be deemed to be equal to the average maturity of
the mortgages underlying such security determined by the Adviser on the basis of
assumed prepayment rates with respect to such mortgages. The remaining expected
average life of a pool of mortgages underlying a Mortgage-Backed Security is a
prediction of when the mortgages will be repaid and is based upon a variety of
factors such as the demographic and geographic characteristics of the borrowers
and the mortgaged properties, the length of time that each of the mortgages has
been outstanding, the interest rates payable on the
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mortgages and the current interest rate environment. While the timing of
prepayments of graduated payment mortgages differs somewhat from that of
conventional mortgages, the prepayment experience of graduated payment mortgages
is basically the same as that of the conventional mortgages of the same maturity
dates over the life of the pool.
The yield characteristics of Mortgage-Backed Securities differ from
traditional debt securities. Among the major differences are that interest and
principal prepayments are made more frequently, usually monthly, and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Conversely, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. Stripped Mortgage-Backed Securities (defined herein)
are highly sensitive to changes in prepayment and interest rates.
Prepayments on a pool of mortgage loans are influenced by a variety of
economic, geographic, social and other factors, including changes in mortgagors'
housing needs, job transfers, unemployment, mortgagors' net equity in the
mortgaged properties and servicing decisions. Generally, however, prepayments on
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Mortgage-Backed
Securities, like traditional debt securities, may decrease in value as a result
of increases in interest rates; however, Mortgage-Backed Securities may be more
susceptible to further declines in value during periods of rising interest rates
than traditional debt securities because of extension risk (i.e. rising interest
rates could cause property owners to prepay their mortgages more slowly than
expected when the security was purchased by the Fund which may further reduce
the market value of such security and lengthen the duration of the security). In
addition, Mortgage-Backed Securities tend to benefit less than traditional debt
securities from declining interest rates because of the risk of prepayment (i.e.
underlying mortgages often get prepaid faster than expected in periods of
declining interest rates).
The Fund's yield may also be affected by the yields on instruments in which
the Fund is able to reinvest the proceeds of payments and prepayments.
Accelerated prepayments on securities purchased by the Fund at a premium also
impose a risk of loss of principal because the premium may not have been fully
amortized at the time the principal is repaid in full.
During periods of declining interest rates, prepayment of mortgages
underlying Mortgage-Backed Securities can be expected to accelerate. When the
mortgage obligations are prepaid, the Fund reinvests the prepaid amounts in
other income producing securities, the yields of which reflect interest rates
prevailing at the time. Therefore, the Fund's ability to maintain a portfolio of
high-yielding Mortgage-Backed Securities will be adversely affected to the
extent that prepayments of mortgages must be reinvested in securities which have
lower yields than the prepaid Mortgage-Backed Securities. Moreover, prepayments
of mortgages which underlie securities purchased by the Fund at a premium would
result in capital losses.
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Guaranteed Mortgage Pass-Through Securities. The Fund may invest in
mortgage pass-through securities representing participation interest in pools of
residential mortgage loans originated by U.S. governmental or private lenders or
guaranteed, to the extent provided in such securities, by the U.S. government or
one of its agencies or instrumentalities. Mortgage pass-through securities
provide for monthly payments that are a "pass-through" of the monthly interest
and principal payments (including any prepayment) made by the individual
borrowers on the pooled mortgage loans, net of any fees paid to the guarantor of
such securities and the servicer of the underlying mortgage loans.
The guaranteed mortgage pass-through securities that the Fund may invest in
include those issued or guaranteed by GNMA, FNMA and FHLMC. Each of GNMA, FNMA
and FHLMC guarantee timely distributions of interest to security holders. GNMA
and FNMA also guarantee timely distribution of scheduled principal. FHLMC
guarantees only ultimate collection of principal on the underlying loans, which
collection may take up to one year. The Fund may also invest in other agency
securities, including but not limited to securities issued by the Small Business
Administration, Export-Import Bank of the United States, Federal Housing
Administration, Farm Credit Administration, Federal Home Loan Banks, General
Services Administration, U.S. Department of Transportation, U.S. Department of
Housing and Urban Development, and Student Loan Marketing Association. These
securities generally are not backed by the full faith and credit of the United
States.
Private Mortgage Pass-Through Securities. Private mortgage pass-through
securities ("Private Pass-Throughs") are structured similarly to the GNMA, FNMA
and FHLMC mortgage pass-through securities described above and are issued by
originators of and investors in mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose subsidiaries of the foregoing. Private Pass-Throughs constituting ARMS
are backed by a pool of conventional adjustable rate mortgage loans. Since
Private Pass-Throughs typically are not guaranteed by an entity having the
credit status of GNMA, FNMA or FHLMC, such securities generally are structured
with one or more types of credit enhancement.
GNMA Certificates. GNMA is a wholly-owned corporate instrumentality of the
United States within the Department of Housing and Urban Development. The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA to
guarantee the timely payment of the principal of and interest on certificates
that are based on and backed by a pool of mortgage loans insured by the Federal
Housing Administration under the Housing Act, or Title V of the Housing Act of
1949 ("FHA Loans"), or guaranteed by the Veteran's Administration under the
Servicemen's Readjustment Act of 1944, as amended ("VA Loans"), or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. In order to meet its obligations
under such guarantee, GNMA is authorized to borrow from the U.S. Treasury with
no limitations as to amount.
GNMA Certificates will represent a pro rata interest in one or more pools
of the following types of mortgage loans: (i) fixed rate level payment mortgage
loans; (ii) fixed rate graduated payment mortgage loans; (iii) fixed rate
growing equity mortgage loans; (iv) fixed rate mortgage loans secured by
manufactured (mobile) homes; (v) mortgage
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loans on multifamily residential properties under construction; (vi) mortgage
loans on completed multifamily projects; (vii) fixed rate mortgage loans as to
which escrowed funds are used to reduce the borrower's monthly payments during
the early years of the mortgage loans ("buydown" mortgage loans); (viii)
mortgage loans that provide for adjustments in payments based on periodic
changes in interest rates or in other payment terms of the mortgage loans; and
(ix) mortgage-backed serial notes. All of these mortgage loans will be FHA Loans
or VA Loans and, except as otherwise specified above, will be fully-amortizing
loans secured by first liens on one- to four-family housing units.
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
government agency to provide supplemental liquidity to the mortgage market and
was transformed into a stockholder owned and privately managed corporation by
legislation enacted in 1968. FNMA provides funds to the mortgage market
primarily by purchasing home mortgage loans from local lenders, thereby
replenishing their funds for additional lending. FNMA acquires funds to purchase
home mortgage loans from many capital market investors that may not ordinarily
invest in mortgage loans directly, thereby expanding the total amount of funds
available for housing.
Each FNMA Certificate will entitle the registered holder thereof to receive
amounts representing such holder's pro rata interest in scheduled principal
payments and interest payments (at such FNMA Certificate's pass-through rate,
which is net of any servicing and guarantee fees on the underlying mortgage
loans), and any principal prepayments on the mortgage loans in the pool
represented by such FNMA Certificate and such holder's proportionate interest in
the full principal amount of any foreclosed or otherwise finally liquidated
mortgage loan. The full and timely payment of principal of and interest on each
FNMA Certificate will be guaranteed by FNMA, which guarantee is not backed by
the full faith and credit of the U.S. government.
Each FNMA Certificate will represent a pro rata interest in one or more
pools of FHA Loans, VA Loans or conventional mortgage loans (i.e., mortgage
loans that are not insured or guaranteed by any governmental agency) of the
following types: (i) fixed rate level payment mortgage loans; (ii) fixed rate
growing equity mortgage loans; (iii) fixed rate graduated payment mortgage
loans; (iv) variable rate mortgage loans; (v) other adjustable rate mortgage
loans; and (vi) fixed rate loans secured by multifamily projects.
FHLMC Certificates. FHLMC is a corporate instrumentality of the United
States created pursuant to the Emergency Home Finance Act of 1970, as amended
(the "FHLMC Act"). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently consists of the purchase of first lien,
conventional, residential mortgage loans and participation interests in such
mortgage loans and the resale of the mortgage loans so purchased in the form of
mortgage securities, primarily Freddie Mac Certificates.
FHLMC guarantees to each registered holder of a FHLMC Certificate the
timely payment of interest at the rate provided for by such FHLMC Certificate,
whether or not received. Freddie Mac also guarantees to each registered holder
of a FHLMC Certificate ultimate collection of all principal of the related
mortgage loans, without any offset or deduction, but does not, generally,
guarantee the timely payment of scheduled principal.
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FHLMC may remit the amount due on account of its guarantee of collection of
principal at any time after default on an underlying mortgage loan, but not
later than 30 days following (i) foreclosure sale, (ii) payment of a claim by
any mortgage insurer, or (iii) the expiration of any right of redemption,
whichever occurs later, but in any event no later than one year after demand has
been made upon the mortgagor for accelerated payment of principal. The
obligation of FHLMC under its guarantee are obligations solely of FHLMC and are
not backed by the full faith and credit of the U.S. government.
FHLMC Certificates represent a pro rata interest in a group of mortgage
loans (a "FHLMC Certificate group") purchased by FHLMC. The mortgage loans
underlying the FHLMC Certificates will consist of fixed rate or adjustable rate
mortgage loans with original terms to maturity of between ten and thirty years,
substantially all of which are secured by first liens on one- to four-family
residential properties or multifamily projects. Each mortgage loan must meet the
applicable standards set forth in the FHLMC Act. A FHLMC Certificate group may
include whole loans, participation interests in whole loans and undivided
interests in whole loans and participations comprising another FHLMC Certificate
group.
Collateralized Mortgage Obligations and Multiclass Pass-Through Securities.
Collateralized mortgage obligations ("CMOs") are debt obligations which are
secured by mortgage loans or other mortgage-backed securities (such collateral
is collectively hereinafter referred to as "Mortgage Assets"). Multiclass
pass-through securities are equity interests in a trust composed of Mortgage
Assets. Unless the context indicates otherwise, all references herein to CMOs
include multiclass pass-through securities. Payments of principal of and
interest on the Mortgage Assets, and any reinvestment income thereon, provide
the funds to pay debt service on the CMOs or make scheduled distributions on the
multiclass pass-through securities. CMOs may be issued by agencies or
instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations, mortgage
banks, commercial banks, investment banks and special purpose subsidiaries of
the foregoing. The issuer of a series of CMOs may elect to be treated as a Real
Estate Mortgage Investment Conduit (a "REMIC"). All future references to CMOs
shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," may be issued at a
specific fixed or floating coupon rate and has a stated maturity or final
distribution date. Principal prepayments on the underlying Mortgage Assets may
cause the CMOs to be retired substantially earlier than their stated maturities
or final distribution dates. Interest is paid or accrues on all classes of a CMO
on a monthly, quarterly or semi-annual basis. The principal of and interest on
the Mortgage Assets may be allocated among the several classes of a series of a
CMO in many ways. By investing in particular tranches of a CMO with specified
cash flows, the Fund may gain more predictability of cash flows than if it had
invested in the underlying Mortgage Assets. Generally, the more predictable the
cash flow of a CMO tranche, the lower the anticipated yield will be on that
tranche at the time of issuance relative to prevailing market yields on
mortgage-backed securities. As part of the process of creating more predictable
cash flows on most of the tranches in a series of CMOs, one or more tranches
generally must be created that absorb most of the volatility in the cash flows
on the underlying Mortgage Assets. The yields on these tranches are generally
higher than prevailing market yields on mortgage-backed securities with similar
average lives.
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Because of the uncertainty of the cash flows on these tranches, and the
sensitivity thereof to changes in prepayment rates on the underlying Mortgage
Assets, the market prices of and yield on these tranches tend to be more
volatile.
One or more tranches of a CMO may have coupon rates which reset
periodically at a specified increment over an index such as LIBOR. These
adjustable rate tranches are known as "floating rate CMOs," "inverse floating
CMOs" and "interest only CMOs". Floating rate CMOs may be backed by fixed rate
or adjustable rate mortgages; to date, fixed rate mortgages have been more
commonly utilized for this purpose. Floating rate CMOs are typically issued with
lifetime caps on the coupon rate thereon. These caps, similar to the caps on
adjustable rate mortgages, represent a ceiling beyond which the coupon rate on a
floating rate CMO may not be increased regardless of increases in the interest
rate index to which the floating rate CMO is geared. Inverse floating rate CMOs
pay interest at rates that vary inversely with changes in market rates of
interest and may pay a rate of interest determined by applying a multiple to the
floating rate. Accordingly, when market rates of interest decrease, the change
in value of inverse floating CMOs owned by the Fund will have a positive effect
on the net asset value of the Fund and when market rates of interest increase,
the change in value of inverse floating rate CMOs owned by the Fund will have a
negative effect on the net asset value of the Fund. In addition, the extent of
increases and decreases in the net asset value of the Fund in response to
changes in market rates of interest generally will be larger than comparable
changes in the net asset value of the Fund if the Fund held an equal principal
amount of a fixed rate CMO security having similar credit quality, redemption
provisions and maturity.
The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date.
In reliance on an SEC interpretation, the Fund's investment in certain
qualifying collateralized mortgage obligations (CMOs), including CMOs that have
elected to be treated as Real Estate Mortgage Investment Conduits (REMICs), are
not subject to the 1940 Act's limitation on acquiring interests in other
investment companies. In order to be able to rely on the SEC's interpretation,
the CMOs and REMICs must be unmanaged, fixed-asset issuers that (a) invest
primarily in mortgage-backed securities, (b) do not issue redeemable securities,
(c) operate under general exemptive orders exempting them from all provisions of
the 1940 Act, and (d) are not registered or regulated under the 1940 Act as
investment companies. To the extent that the Fund selects CMOs or REMICs that do
not meet the above requirements, the Fund may not invest more than 10% of its
assets in all such entities and may not acquire more than 3% of the voting
securities of any single such entity.
Stripped Mortgage-Backed Securities. Stripped Mortgage-Backed Securities
are derivative multi-class mortgage securities. Stripped Mortgage-Backed
Securities may be issued by agencies or instrumentalities of the U.S.
government, or by private originators of, or investors in, mortgage loans,
including savings and loan associations, mortgage banks, commercial banks,
investment banks and special purpose subsidiaries of the foregoing.
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Stripped Mortgage-Backed Securities issued by parties other than agencies or
instrumentalities of the U.S. government are considered, under current
guidelines of the staff of the SEC, to be illiquid securities.
Stripped Mortgage-Backed Securities are generally structured with two
classes that receive different proportions of the interest and principal
distributions on a pool of mortgage assets. A common type of Stripped
Mortgage-Backed Securities will have one class receiving a small portion of the
interest and a larger portion of the principal from the mortgage assets, while
the other classes will receive primarily interest and only a small portion of
the principal. In the most extreme case, one class will receive all of the
interest (the interest-only or "IO" class), while the other class will receive
all of the principal (the principal-only or "PO" class). The yields to maturity
on IOs and POs are especially sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup its initial investment in IOs. Conversely, if the
underlying mortgage assets experience less than anticipated prepayments of
principal, the yield on POs could be materially adversely affected. The market
value of such Stripped Mortgage-Backed Securities, including adjustable rate
U.S. government IOs, are subject to greater risk of fluctuation in response to
changes in market interest rates than other adjustable rate securities, and such
greater risk of fluctuation may adversely affect the ability of the Fund to
maintain a relatively stable net asset value.
Types of Credit Support. To lessen the effect of failures by obligors on
underlying mortgages to make payments, certain Mortgage-Backed Securities may
contain elements of credit support. Such credit support falls into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the pass-through of
payments due on the underlying pool occurs in a timely fashion. Protection
against losses resulting from ultimate default enhances the likelihood of
ultimate payment of the obligations on at least a portion of the assets in the
pool. Such protection may be provided through guarantees, insurance policies or
letters of credit obtained by the issuer or sponsor from third parties, through
various means of structuring the transaction or through a combination of such
approaches. The Fund will not pay any additional fees for such credit support,
although the existence of credit support may increase the price of a security.
The ratings of securities for which third-party credit enhancement provides
liquidity protection or protection against losses from default are generally
dependent upon the continued creditworthiness of the enhancement provider. The
ratings of such securities could be subject to reduction in the event of
deterioration in the creditworthiness of the credit enhancement provider even in
cases where the delinquency and loss experience on the underlying pool of assets
is better than expected.
Examples of credit support arising out of the structure of the transaction
include "senior-subordinated securities" (multiple class securities with one or
more classes subordinate to other classes as to the payment of principal thereof
and interest thereon, with the result that defaults on the underlying assets are
borne first by the holders of the subordinated class), creation of "reserve
funds" (where cash or investments, sometimes funded from a portion of the
payments on the underlying assets, are held in reserve against
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future losses) and "over-collateralization" (where the scheduled payments on, or
the principal amount of, the underlying assets exceed those required to make
payment on the securities and pay any servicing or other fees). The degree of
credit support provided for each issue is generally based on historical
information with respect to the level of credit risk associated with the
underlying assets. Other information which may be considered include demographic
factors, loan underwriting practices and general market and economic conditions.
Delinquency or loss in excess of that which is anticipated could adversely
affect the return on an investment in such a security.
Adjustable Rate Mortgage-Backed Securities. Adjustable rate Mortgage-Backed
Securities are debt securities having interest rates which are adjusted or reset
at periodic intervals ranging, in general, from one month to three years, based
on a spread over a specific interest rate or interest rate index. There are
three main categories of indices: (i) those based on U.S. government securities,
(ii) those derived from a calculated measure such as a cost of funds index and
(iii) those based on a moving average of interest rates, including mortgage
rates. Commonly utilized indices include, for example, the One Year Constant
Maturity Treasury Index, the London Interbank Offered Rate (LIBOR), the Federal
Home Loan Bank Cost of Funds, the prime rate and commercial paper rates.
Adjustable rate securities allow the Fund to participate in increases in
interest rates through periodic upward adjustments of the coupon rates of such
securities, resulting in higher yields. During periods of declining interest
rates, however, coupon rates may readjust downward resulting in lower yields to
the Fund. During periods of rising interest rates, changes in the coupon rate of
adjustable rate securities will lag behind changes in the market interest rate,
which may result in such security having a lower value until the coupon resets
to reflect more closely market interest rates. Investors who redeem shares of
the Fund prior to the time the coupon rates of the Fund's portfolio securities
are adjusted could suffer some loss on their investment in the Fund's shares.
Adjustable rate securities typically limit the maximum amount the coupon rate
may be adjusted during any adjustment period, in any one year and during the
term of the security. During periods of significant fluctuations in market rates
of interest the net asset value of the Fund may fluctuate more significantly
since these limits may prevent the Fund's portfolio securities from fully
adjusting to reflect market rates.
The Fund may invest in adjustable rate securities with interest rates that
adjust or vary inversely to changes in market interest rates. Such securities,
which are referred to as "inverse floating obligations," provide opportunities
for high current income, but the market value of such securities may be more
volatile in response to changes in market interest rates. Certain of such
inverse floating obligations have coupon rates that adjust to changes in market
interest rates to a greater degree than the change in the market rate and
accordingly have investment characteristics similar to investment leverage. As a
result, the market value of such inverse floating obligations are subject to
greater risk of fluctuation than other adjustable rate securities which do not
vary inversely to changes in market interest rates, and such greater risk of
fluctuation may adversely affect the ability of the Fund to maintain a
relatively stable net asset value.
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ASSET-BACKED SECURITIES
"Asset-Backed Securities" have structural characteristics similar to
Mortgage-Backed Securities but have underlying assets that are not mortgage
loans or interests in mortgage loans. Through the use of trusts and special
purpose corporations, various types of assets, including assets such as
automobile and credit card receivables and home equity loans, have been
securitized in pass-through structures similar to the mortgage pass-through
structures or pay-through structures. In general, these types of loans are of
shorter average life than mortgage loans and are less likely to have substantial
prepayments.
Asset-Backed Securities present certain risks that are not presented by
Mortgage-Backed Securities, including the risk that these securities do not have
the benefit of a security interest in the related collateral. For example,
credit card receivables are generally unsecured and the debtors are entitled to
the protection of a number of state and federal consumer credit laws, some of
which give such debtors the right to set off certain amounts owed on the credit
cards, thereby reducing the balance due. Most issues of Asset-Backed Securities
backed by automobile receivables permit the servicers of such receivable to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related Asset-Backed
Securities. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirement under state laws, the trustee for the
holders of Asset-Backed Securities backed by automobile receivables may not have
a proper security interest in the obligations backing such receivables.
Therefore, there is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
FLOATING AND VARIABLE RATE DEBT SECURITIES
Debt securities may provide for floating or variable rate interest or
dividend payments. The floating or variable rate may be determined by reference
to a known lending rate, such as a bank's prime rate, a certificate of deposit
rate or the London Inter Bank Offered Rate (LIBOR). Alternatively, the rate may
be determined through an auction or remarketing process. The rate may also be
indexed to changes in the values of interest rate or securities indexes,
currency exchange rates or other commodities. The amount by which the rate paid
on an income security may increase or decrease may be subject to periodic or
lifetime caps. Floating and variable rate income securities include derivative
securities whose rates vary inversely with changes in market rates of interest.
Such securities may also pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of securities whose rates vary inversely with changes in market rates of
interest generally will be larger than comparable changes in the value of an
equal principal amount of a fixed rate security having similar credit quality,
redemption provisions and maturity.
DISCOUNT, ZERO COUPON SECURITIES AND PAYMENT-IN-KIND SECURITIES
The Fund may invest in securities sold at a substantial discount from their
value at maturity. Such securities include "zero coupon" and payment-in-kind
securities of governmental or private issuers. Zero coupon securities generally
pay no cash interest (or dividends in the case of preferred stock) to their
holders prior to maturity.
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Payment-in-kind securities allow the issuer, at its option, to make current
interest payments on such securities either in cash or additional securities.
Accordingly, such securities usually are issued and traded at a deep discount
from their face or par value and generally are subject to greater fluctuations
of market value in response to changing interest rates than securities of
comparable maturities and credit quality that pay cash interest (or dividends in
the case of preferred stock) on a current basis.
Federal tax law requires that a holder of a zero coupon security accrue a
portion of the original issue discount on the security and to include the
"interest" on payment-in-kind securities as income each year, even though the
holder receives no interest payment on the security during the year. Federal tax
law also requires that entities such as the Fund which seek to qualify for
pass-through federal income tax treatment as regulated investment companies
distribute substantially all of their investment company taxable income each
year, including non-cash income. Accordingly, although the Fund will receive no
payments on its zero coupon or payment-in-kind securities prior to their
maturity or disposition, it will have income attributable to such securities,
and it will be required, in order to maintain the desired tax treatment, to
include in its dividends an amount equal to the income attributable to its zero
coupon and payment-in-kind securities. Such dividends will be paid from the cash
assets of the Fund, from borrowings or by liquidation of portfolio securities,
if necessary, at a time that the Fund otherwise might not have done so. To the
extent the proceeds from any such dispositions are used by the Fund to pay
distributions, the Fund will not be able to purchase additional income-producing
securities with such proceeds, and as a result the Fund's current income
ultimately may be reduced.
PREMIUM SECURITIES
The Fund may invest in income securities bearing coupon rates higher than
prevailing market rates. Such "premium" securities are typically purchased at
prices greater than the principal amounts payable on maturity. The Fund will not
amortize the premium paid for such securities in calculating its net investment
income. As a result, in such cases the purchase of such securities provides the
Fund a higher level of investment income distributable to shareholders on a
current basis than if the Fund purchased securities bearing current market rates
of interest. Although such securities bear coupon rates higher than prevailing
market rates, because they are purchased at a price in excess of par value, the
yield earned by the Fund on such investments may not exceed prevailing market
yields. If an issuer were to redeem securities held by a Fund during a time of
declining interest rates, the Fund may not be able to reinvest the proceeds in
securities providing the same investment return as the securities redeemed. If
securities purchased by a Fund at a premium are called or sold prior to
maturity, the Fund will recognize a capital loss to the extent the call or sale
price is less than the purchase price. Additionally, the Fund will recognize a
capital loss if it holds such securities to maturity.
CONVERTIBLE SECURITIES
Convertible securities include bonds, debentures, notes, preferred stocks,
warrants or other securities that may be converted into or exchanged for a
specified amount of common stock or other security of the same or a different
issuer or into cash within a particular period of time and at a specified price
or formula. A convertible security generally entitles the holder to receive
interest paid or accrued on debt or the dividend paid on preferred stock
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until the convertible security matures or is redeemed, converted or exchanged.
Convertible securities have unique investment characteristics in that they
generally (i) have higher yields than common stocks, but lower yields than
comparable non-convertible income securities, (ii) are less subject to
fluctuation in value than the underlying stock since they have fixed income
characteristics, and (iii) provide the potential for capital appreciation if the
market price of the underlying common stock increases. Most convertible
securities currently are issued by domestic companies, although a substantial
Eurodollar convertible securities market has developed, and the markets for
convertible securities denominated in local currencies are increasing.
The value of a convertible security is a function of its "investment value"
(determined by its yield in comparison with the yields of other securities of
comparable maturity and quality that do not have a conversion privilege) and its
"conversion value" (the security's worth, at market value, if converted into the
underlying common stock). The investment value of a convertible security is
influenced by changes in interest rates, with investment value declining as
interest rates increase and increasing as interest rates decline. The credit
standing of the issuer and other factors also may have an effect on the
convertible security's investment value. The conversion value of a convertible
security is determined by the market price of the underlying common stock. If
the conversion value is low relative to the investment value, the price of the
convertible security is governed principally by its investment value. Generally
the conversion value decreases as the convertible security approaches maturity.
To the extent the market price of the underlying common stock approaches or
exceeds the conversion price, the price of the convertible security will be
increasingly influenced by its conversion value. A convertible security
generally will sell at a premium over its conversion value by the extent to
which investors place value on the right to acquire the underlying common stock
while holding a fixed income security.
Warrants are securities permitting, but not obligating, their holder to
subscribe for other securities or commodities. Warrants do not carry with them
the right to dividends or voting rights with respect to the securities that they
entitle their holder to purchase, and they do not represent any rights in the
assets of the issuer. As a result, warrants may be considered more speculative
than certain other types of investments.
PREFERRED STOCK
Preferred stock generally has a preference as to dividends and upon
liquidation over an issuer's common stock but ranks junior to other income
securities in an issuer's capital structure. Preferred stock generally pays
dividends in cash (or additional shares of preferred stock) at a defined rate
but, unlike interest payments on income securities, preferred stock dividends
are payable only if declared by the issuer's board of directors. Dividends on
preferred stock may be cumulative, meaning that, in the event the issuer fails
to make one or more dividend payments on the preferred stock, no dividends may
be paid on the issuer's common stock until all unpaid preferred stock dividends
have been paid. Preferred stock also may provide that, in the event the issuer
fails to make a specified number of dividend payments, the holders of the
preferred stock will have the right to elect a specified number of directors to
the issuer's board. Preferred stock also may be subject to optional or mandatory
redemption provisions.
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DEPOSITORY RECEIPTS
Some of the securities in the Fund may be in the form of depository
receipts. Depository receipts usually represent common stock or other equity
securities of non-domestic issuers deposited with a custodian in a depository.
The underlying securities are usually withdrawable at any time by surrendering
the depository receipt. Depository receipts are usually denominated in U.S.
dollars and dividends and other payments from the issuer are converted by the
custodian into U.S. dollars before payment to receipt holders. In other respects
depository receipts for foreign securities have the same characteristics as the
underlying securities. Depository receipts that are not sponsored by the issuer
may be less liquid and there may be less readily available public information
about the issuer.
BRADY BONDS
The Fund may invest in Brady Bonds and other sovereign debt of countries
that have restructured or are in the process of restructuring sovereign debt
pursuant to the Brady Plan. "Brady Bonds" are income securities issued under the
framework of the Brady Plan, an initiative announced by former U.S. Treasury
Secretary Nicholas F. Brady in 1989 as a mechanism for debtor nations to
restructure their outstanding external commercial bank indebtedness. The Brady
Plan framework contemplates the exchange of commercial bank debt for newly
issued Brady Bonds. Brady Bonds may also be issued in respect of new money being
advanced by existing lenders in connection with the debt restructuring. Certain
Brady Bonds have been collateralized as to principal due at maturity by U.S.
Treasury zero coupon bonds with a maturity equal to the final maturity of such
Brady Bonds.
Agreements implemented under the Brady Plan to date are designed to achieve
debt and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. Brady Bonds issued to date include bonds issued at 100% of face
value of such debt, which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest rate
which increases over time and bonds issued in exchange for the advancement of
new money by existing lenders.
In light of the risk of Brady Bonds including, among other factors, the
history of defaults with respect to commercial bank loans by public and private
entities of countries issuing Brady Bonds, investments in Brady Bonds are to be
viewed as speculative. The Fund may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with terms of the Brady Bonds. Many of the Brady Bonds and other income
securities in which the Fund invests are likely to be acquired at a discount.
SOVEREIGN DEBT
Certain countries have historically experienced, and may continue to
experience, high rates of inflation, high interest rates, exchange rate
fluctuations, large amounts of external debt, balance of payment and trade
difficulties and extreme poverty and unemployment. The issuer of sovereign debt
or the governmental authorities that control the repayment of
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sovereign debt may be unable or unwilling to repay principal or interest when
due in accordance with the terms of such debt. Sovereign debt differs from debt
obligations issued by private entities in that, generally, remedies for defaults
must be pursued in the courts of the defaulting party. Legal recourse is
therefore limited.
Certain emerging market countries are among the largest debtors to
commercial banks and foreign governments. At times certain emerging market
countries have declared moratoria on the payment of principal and interest on
external debt. Certain emerging market countries have experienced difficulty in
servicing their sovereign debt on a timely basis which has led to defaults on
certain obligations and the restructuring of certain indebtedness. Restructuring
arrangements have included, among other things, reducing and rescheduling
interest and principal payments by negotiating new or amended credit agreements
or converting outstanding principal and unpaid interest to Brady Bonds, and
obtaining new credit to finance interest payments. Holders of sovereign debt,
including the Fund, may be requested to participate in the rescheduling of such
debt and to extend further loans to sovereign debtors. The interests of holders
of sovereign debt could be adversely affected in the course of restructuring
arrangements. Furthermore, some of the participants in the secondary market for
sovereign debt may also be directly involved in negotiating the terms of these
arrangements and may therefore have access to information not available to other
market participants.
OTHER SOVEREIGN-RELATED DEBT
The Fund may invest in other sovereign-related debt obligations, including
obligations of supranational entities. Such investments may include
participations and assignments of sovereign bank debt, restructured external
debt that has not undergone a Brady-style debt exchange, and internal government
debt.
The sovereign-related income securities in which the Fund may invest
generally consist of obligations issued or backed by national, state or
provincial governments or similar political subdivisions or central banks in
foreign countries. Sovereign-related income securities also include debt
obligations of supranational entities, which include international organizations
designated or backed by governmental entities to promote economic reconstruction
or development, international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
Sovereign-related income securities also include income securities of
"quasi-governmental agencies" and income securities denominated in multinational
currency units of an issuer (including supranational issuers). Income securities
of quasi-governmental agencies are issued by entities owned by either a
national, state or equivalent government or are obligations of a political unit
that is not backed by the national government's full faith and credit and
general taxing powers.
STRUCTURED INVESTMENTS
The Fund may invest a portion of its assets in interests in entities
organized and operated solely for the purpose of restructuring the investment
characteristics of other income securities, including income securities issued
by foreign governments. This type of
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restructuring involves the deposit with or purchase by an entity, such as a
corporation or trust, of specified instruments (such as commercial bank loans or
Brady Bonds) and the issuance by that entity of one or more classes of
securities ("Structured Investments") backed by, or representing interests in,
the underlying instruments. The cash flow on the underlying instruments may be
apportioned among the newly issued Structured Investments to create securities
with different investment characteristics such as varying maturities, payment
priorities and interest rate provisions, and the extent of the payments made
with respect to Structured Investments is dependent on the extent of the cash
flow on the underlying instruments. The Fund may invest in a class of Structured
Investments that is subordinated to the right of payment of another class.
Subordinated Structured Investments typically have higher yields and present
greater risks than unsubordinated Structured Investments.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, use various investment strategies as
described below to earn income, facilitate portfolio management, and mitigate
risks. Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur. Although the Fund's
Adviser seeks to use such transactions to further the Fund's investment
objectives, no assurance can be given that the use of these transactions will
achieve this result.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative securities such as exchange-listed and
over-the-counter put and call options on securities, financial futures, equity,
fixed-income and interest rate indices and other financial instruments, purchase
and sell financial futures contracts and options thereon, enter into various
interest rate transactions such as swaps, caps, floors or collars, and enter
into various currency transactions such as currency forward contracts, currency
futures contracts, currency swaps or options on currency or currency futures
(collectively, all the above are called "Strategic Transactions"). Among other
things, Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities markets or currency exchange
markets, to protect the Fund's unrealized gains in the value of its portfolio
securities, to facilitate the sale of such securities for investment purposes,
to manage the effective maturity or duration of the Fund's portfolio, to protect
against changes in foreign currency exchange rates, or to establish a position
in the derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions
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could result in losses greater than if they had not been used. Use of put and
call options may result in losses to the Fund, force the sale or purchase of
portfolio securities at inopportune times or for prices other than current
market values, limit the amount of appreciation the Fund can realize on its
investments or cause the Fund to hold a security it might otherwise sell. The
use of currency transactions can result in the Fund incurring losses as a result
of a number of factors including the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency. The
use of options and futures transactions entails certain other risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related portfolio position of the
Fund creates the possibility that losses on the hedging instrument may be
greater than gains in the value of the Fund's position. In addition, futures and
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets,
the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the use of these futures contracts and
options transactions for hedging should tend to minimize the risk of loss due to
a decline in the value of the hedged position, at the same time they tend to
limit any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing potential financial risk than would purchases of
options, where the exposure is limited to the cost of the initial premium.
Losses resulting from the use of Strategic Transactions would reduce net asset
value, and possibly income, and such losses can be greater than if the Strategic
Transactions had not been utilized. Income earned or deemed to be earned, if
any, by the Fund from its Strategic Transactions will generally be taxable.
OPTIONS
Put options and call options typically have similar structural
characteristics and operational mechanics regardless of the underlying
instrument on which they are purchased or sold. Thus, the following general
discussion relates to each of the particular types of options discussed in
greater detail below. In addition, many Strategic Transactions involving options
require segregation of Fund assets in special accounts, as described below under
"Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, currency or other instrument at the exercise price.
For instance, the Fund's purchase of a put option on a security might be
designed to protect its holdings in the underlying instrument (or, in some
cases, a similar instrument) against a substantial decline in the market value
by giving the Fund the right to sell such instrument at the option exercise
price. A call option, upon payment of a premium, gives the purchaser of the
option the right to buy, and the seller the obligation to sell, the underlying
instrument at the exercise price. The Fund's purchase of a call option on a
security, financial future, index, currency or other instrument might be
intended to protect the Fund against an increase in the price of the underlying
instrument that it intends to purchase in the future by fixing the price at
which it may purchase such instrument. An American style put or call option may
be exercised at any time during the option period while a European style put or
call option may be exercised only upon expiration or during a fixed period prior
thereto. The Fund is authorized to purchase and sell exchange listed options and
over-the-counter options
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("OTC options"). Exchange listed options are issued by a regulated intermediary
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options. The discussion
below uses the OCC as a paradigm, but is also applicable to other financial
intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, currency or other instrument underlying an OTC
option it has entered into with the Fund or fails to make a cash settlement
payment due in accordance with the terms of that option, the Fund will lose any
premium it paid for the option as well as any anticipated benefit of the
transaction. Accordingly, the Adviser must assess the creditworthiness of each
such Counterparty or any guarantor or credit enhancement of the Counterparty's
credit to determine the likelihood that the terms of the OTC option will be
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satisfied. The Fund will engage in OTC option transactions only with U.S.
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from Standard &
Poor's ("S&P") or "P-1" from Moody's Investors Service, Inc. ("Moody's") or an
equivalent rating from any other nationally recognized statistical rating
organization ("NRSRO"). The staff of the SEC currently takes the position that,
in general, 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.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call or put options on securities, including
U.S. Treasury and agency securities, foreign sovereign debt, mortgage-backed
securities, corporate debt securities, Eurodollar instruments and foreign debt
securities that are traded on U.S. and foreign securities exchanges and in the
over-the-counter markets and related futures on such securities, indices,
currencies and futures. All calls sold by the Fund must be "covered" (i.e., the
Fund must own the securities or futures contract subject to the call) or must
meet the asset segregation requirements described below as long as the call is
outstanding. Even though the Fund will receive the option premium to help
protect it against loss, a call sold by the Fund exposes the Fund during the
term of the option to possible loss of opportunity to realize appreciation in
the market price of the underlying security or instrument and may require the
Fund to hold a security or instrument which it might otherwise have sold. In
selling put options, there is a risk that the Fund may be required to buy the
underlying security at a disadvantageous price above the market price.
FUTURES
The Fund may enter into financial futures contracts or purchase or sell put
and call options on such futures as a hedge against anticipated interest rate or
currency market changes, for duration management and for risk management
purposes. Futures generally are bought and sold on the commodities exchanges
where they are listed with payment of initial and variation margin as described
below. The purchase of a futures contract creates a firm obligation by the Fund,
as purchaser, to take delivery from the seller the specific type of financial
instrument called for in the contract at a specific future time for a specified
price. The sale of a futures contract creates a firm obligation by the Fund, as
seller, to deliver to the buyer the specific type of financial instrument called
for in the contract at a specific future time for a specified price (or, with
respect to index futures and Eurodollar instruments, the net cash amount).
Options on futures contracts are similar to options on securities except that an
option on a futures contract gives the purchaser the right in return for the
premium paid to assume a position in a futures contract and obligates the seller
to deliver such option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the
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Commodity Futures Trading Commission ("CFTC") and will be entered into only for
bona fide hedging, risk management (including duration management) or other
portfolio management purposes. Typically, maintaining a futures contract or
selling an option thereon requires the Fund to deposit with a financial
intermediary as security for its obligations an amount of cash or other
specified assets (initial margin) which initially is typically 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) for other than bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open futures contracts and options thereon would exceed 5% of the Fund's
total assets (taken at current value); however, in the case of an option that is
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. The segregation requirements with
respect to futures contracts and options thereon are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
The Fund also may purchase and sell call and put options on securities
indices and other financial indices and in so doing can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, they settle by cash settlement, i.e., an option on an index gives
the holder the right to receive, upon exercise of the option, an amount of cash
if the closing level of the index upon which the option is based exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of the
option (except if, in the case of an OTC option, physical delivery is
specified). This amount of cash is equal to the excess of the closing price of
the index over the exercise price of the option, which also may be multiplied by
a formula value. The seller of the option is obligated, in return for the
premium received, to make delivery of this amount. The gain or loss on an option
on an index depends on price movements in the instruments making up the market,
market segment, industry or other composite on which the underlying index is
based, rather than price movements in individual securities, as is the case with
respect to options on securities.
CURRENCY TRANSACTIONS
The Fund may engage in currency transactions with Counterparties in order
to manage the value of currencies against fluctuations in relative value.
Currency transactions include forward currency contracts, exchange listed
currency futures, exchange listed and
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OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below. The Fund may enter into currency transactions with Counterparties rated
A-1 or P-1 by S&P or Moody's, respectively, or that have an equivalent rating
from an NRSRO or (except for OTC options) are determined to be of equivalent
credit quality by the Adviser.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater, after netting all transactions intended to wholly or partially
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency
other than with respect to cross-hedging or proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which Fund expects to
have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage in proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a forward contract to sell a currency whose
changes in value are generally considered to be linked to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, and to buy U.S. dollars. The amount of the contract
would not exceed the value of the Fund's securities denominated in linked
currencies. For example, if the Adviser considers the Austrian schilling is
linked to the German deutschemark (the "D-mark"), the Fund holds securities
denominated in Austrian schillings and the Adviser believes that the value of
schillings will decline against the U.S. dollar, the Adviser may enter into a
contract to sell D-marks and buy dollars. Currency hedging involves some of the
same risks and considerations as other transactions with similar instruments.
Currency transactions can result in losses to the Fund if the currency being
hedged fluctuates in value to a degree or in a direction that is not
anticipated. Further, there is the risk that the perceived linkage between
various currencies may not be present or may not be present during the
particular time that the Fund is engaging in proxy hedging. If the Fund enters
into a currency hedging transaction, the Fund will comply with the asset
segregation requirements described below.
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<PAGE> 188
Risks of Currency Transactions. Currency transactions are subject to risks
different from other transactions. Because currency control is of great
importance to the issuing governments and influences economic planning and
policy, purchases and sales of currency and related instruments can be
negatively affected by government exchange controls, blockages, and
manipulations or exchange restrictions imposed by governments. These can result
in losses to the Fund if it is unable to deliver or receive currency or funds in
settlement of obligations and could also cause hedges it has entered into to be
rendered useless, resulting in full currency exposure as well as incurring
transaction costs. Buyers and sellers of currency futures are subject to the
same risks that apply to the use of futures generally. Further, settlement of a
currency futures contract for the purchase of most currencies must occur at a
bank based in the issuing nation. Trading options on currency futures is
relatively new, and the ability to establish and close out positions on such
options is subject to the maintenance of a liquid market which may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
COMBINED TRANSACTIONS
Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions and multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions
("component" transactions), instead of a single Strategic Transaction, as part
of a single or combined strategy when, in the opinion of the Adviser, it is in
the best interests of the Fund to do so. A combined transaction will usually
contain elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Adviser's
judgment that the combined strategies will reduce risk or otherwise more
effectively achieve the desired portfolio management goal, it is possible that
the combination will instead increase such risks or hinder achievement of the
portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS
Among the Strategic Transactions into which the Fund may enter are interest
rate, currency and index swaps and the purchase or sale of related caps, floors
and collars. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio, to protect against currency fluctuations, as a duration management
technique or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as hedges and not as speculative investments and will not sell
interest rate caps or floors where it does not own securities or other
instruments providing the income stream the Fund may be obligated to pay.
Interest rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal. A currency swap is an agreement to exchange cash flows on a notional
amount of two or more currencies based on the relative value differential among
them and an index swap is an agreement to swap cash flows on a notional amount
based on changes in the values of the reference indices. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling such
B-30
<PAGE> 189
cap to the extent that a specified index exceeds a predetermined interest rate
or amount. The purchase of a floor entitles the purchaser to receive payments on
a notional principal amount from the party selling such floor to the extent that
a specified index falls below a predetermined interest rate or amount. A collar
is a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund may enter into swaps, caps, floors, and collars on either an
asset-based or liability-based basis, depending on whether it is hedging its
assets or its liabilities and will usually enter into swaps on a net basis,
i.e., the two payment streams are netted out in a cash settlement on the payment
date or dates specified in the instrument, with the Fund receiving or paying, as
the case may be, only the net amount of the two payments. Inasmuch as these
swaps, caps, floors and collars are entered into for good faith hedging
purposes, the Adviser and the Fund believe such obligations do not constitute
senior securities under the 1940 Act and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will not enter into any
swap, cap, floor or collar transaction unless, at the time of entering into such
transaction, the unsecured long-term debt of the Counterparty, combined with any
credit enhancements, is rated at least
"A" by S&P or Moody's or has an equivalent rating from an NRSRO or is determined
to be of equivalent credit quality by the Adviser. If there is a default by the
Counterparty, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. A large number of banks and investment banking firms
now act both as principals and agents utilizing standardized swap documentation.
As a result, the swap market has become relatively liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been fully developed and, accordingly, they are less liquid than swaps.
RISKS OF STRATEGIC TRANSACTIONS OUTSIDE THE UNITED STATES
When conducted outside the United States, Strategic Transactions may not be
regulated as rigorously as in the United States, may not involve a clearing
mechanism and related guarantees, and are subject to the risk of governmental
actions affecting trading in, or the prices of, foreign securities, currencies
and other instruments. The value of such positions also could be adversely
affected by: (i) other complex foreign political, legal and economic factors,
(ii) lesser availability than in the United States of data on which to make
trading decisions, (iii) delays in the Fund's ability to act upon economic
events occurring in foreign markets during non-business hours in the United
States, (iv) the imposition of different exercise and settlement terms and
procedures and margin requirements than in the United States, and (v) lower
trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Many Strategic Transactions, in addition to other requirements, require
that the Fund segregate cash or liquid securities with its custodian to the
extent Fund obligations are not otherwise "covered" through ownership of the
underlying security, financial instrument or currency. In general, either the
full amount of any obligation by the Fund to pay or deliver securities or assets
must be covered at all times by the securities, instruments or currency required
to be delivered, or, subject to any regulatory restrictions, an amount of cash
or liquid securities at least equal to the current amount of the obligation must
be segregated with the custodian. The segregated assets cannot be sold or
transferred unless equivalent
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<PAGE> 190
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate cash or
liquid securities sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by the Fund on an index will require the Fund
to own portfolio securities which correlate with the index or to segregate cash
or liquid securities equal to the excess of the index value over the exercise
price on a current basis. A put option written by the Fund requires the Fund to
segregate cash or liquid securities equal to the exercise price. A currency
contract which obligates the Fund to buy or sell currency will generally require
the Fund to hold an amount of that currency or liquid securities denominated in
that currency equal to the Fund's obligations or to segregate cash or liquid
securities equal to the amount of the Fund's obligation.
OTC options entered into by the Fund, including those on securities,
currency, financial instruments or indices and OCC issued and exchange listed
index options, swaps, caps, floors and collars will generally provide for cash
settlement. As a result, when the Fund sells these instruments it will only
segregate an amount of assets equal to its accrued net obligations, as there is
no requirement for payment or delivery of amounts in excess of the net amount.
These amounts will equal 100% of the exercise price in the case of a non
cash-settled put, the same as an OCC guaranteed listed option sold by the Fund,
or the in-the-money amount plus any sell-back formula amount in the case of a
cash-settled put or call. In addition, when the Fund sells a call option on an
index at a time when the in-the-money amount exceeds the exercise price, the
Fund will segregate, until the option expires or is closed out, cash or liquid
securities equal in value to such excess. OCC issued and exchange listed options
sold by the Fund other than those above generally settle with physical delivery,
and the Fund will segregate an amount of assets equal to the full value of the
option. OTC options settling with physical delivery, or with an election of
either physical delivery or cash settlement, will be treated the same as other
options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets 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. Such assets may consist of cash or liquid
securities.
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 or liquid securities having a
value equal to the accrued excess. Caps, floors and collars require segregation
of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund also may enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held.
B-32
<PAGE> 191
Other Strategic Transactions also may be offset in combinations. If the
offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
INVESTMENT RESTRICTIONS
The Fund has adopted the following fundamental investment restrictions
which may not be changed without shareholder approval by the vote of a majority
of its outstanding voting securities which is defined by the 1940 Act as the
lesser of (i) 67% or more of the Fund's voting securities present at a meeting,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. With respect to the limitations on illiquid securities and
borrowings, the percentage limitations apply at the time of purchase and on an
ongoing basis. The Fund shall not:
1. Invest 25% or more of the value of its total assets in any single
industry. (Neither the U.S. government nor any of its agencies or
instrumentalities will be considered an industry for purposes of this
restriction.)
2. Issue senior securities, borrow money or enter into reverse repurchase
agreements or dollar rolls in the aggregate in excess of 33 1/3% of the
Fund's total assets (after giving effect to any such borrowing);
provided that the Fund may, with respect to up to an additional 5% of
its total assets, borrow from and enter into reverse repurchase
agreements and dollar rolls with any entity for temporary purposes. The
Fund will not mortgage, pledge or hypothecate any assets other than in
connection with borrowings, reverse repurchase agreements, dollar rolls,
and Strategic Transactions.
3. Make loans of money or property to any person, except (i) to the extent
the securities in which the Fund may invest are considered to be loans,
(ii) through the loan of portfolio securities or the acquisition of
securities subject to repurchase agreements and (iii) to the extent that
the Fund may lend money or property in connection with maintenance of
the value of, or the Fund's interest with respect to, the securities
owned by the Fund.
4. Buy securities "on margin." Neither the deposit of initial or
maintenance margin in connection with Strategic Transactions, short term
credits as may be necessary for the clearance of transactions nor
borrowing, entering into reverse repurchase agreements or dollar rolls
consistent with investment restriction 2. above is considered the
purchase of a security on margin.
5. Act as an underwriter of securities, except to the extent the Fund may
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
6. Make investments for the purpose of exercising control or participation
in management of any company other than a CMO issuer, except to the
extent that
B-33
<PAGE> 192
exercise by the Fund of its rights under agreements related to portfolio
securities would be deemed to constitute such control or participation,
and except that the Fund may purchase securities of other investment
companies to the extent permitted by (i) the 1940 Act, as amended from
time to time, (ii) the rules and regulations promulgated by the SEC
under the 1940 Act, as amended from time to time or (iii) an exemption
or other relief from the provisions of the 1940 Act, as amended from
time to time.
7. Invest in securities issued by other investment companies except as part
of a merger, reorganization or other acquisition and except to the
extent permitted by (i) the 1940 Act, as amended from time to time, (ii)
the rules and regulations promulgated by the SEC under the 1940 Act, as
amended from time to time or (iii) an exemption or other relief from the
provisions of the 1940 Act, as amended from time to time.
8. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs except pursuant to
the exercise by the Fund of its rights under agreements relating to
portfolio securities.
9. Purchase or sell real estate, commodities or commodity contracts, except
to the extent that the securities that the Fund may invest in are
considered to be interests in real estate, commodities or commodity
contracts or to the extent the Fund exercises its rights under
agreements relating to portfolio securities (in which case the Fund may
liquidate real estate acquired as a result of a default on a mortgage),
and except to the extent that Strategic Transactions the Fund may engage
in are considered to be commodities or commodities contracts.
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 officers of the Fund and
executive officers of the Fund's investment adviser and their principal
occupations for the last five years and their affiliations, if any, with Van
Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Investment
Advisory Corp. ("Advisory Corp."), Van Kampen Asset Management Inc. ("Asset
Management"), Van Kampen Funds Inc. (the "Distributor"), Van Kampen Management
Inc., Van Kampen Advisors Inc., Van Kampen Insurance Agency of Illinois Inc.,
Van Kampen Insurance Agency of Texas Inc., Van Kampen System Inc., Van Kampen
Recordkeeping Services Inc., American Capital Contractual Services, Inc., Van
Kampen Trust Company, Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). Advisory Corp. and Asset Management sometimes are
referred to herein collectively as the "Advisers". For purposes hereof, the term
"Fund Complex" includes each of the open-end investment companies advised by the
Advisers (excluding Van Kampen Exchange Fund).
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<PAGE> 193
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan......................... Private investor. Trustee/Director of each of
1632 Morning Mountain Road the funds in the Fund Complex. Co-founder, and
Raleigh, NC 27614 prior to August 1996, Chairman, Chief Executive
Date of Birth: 07/14/32 Officer and President, MDT Corporation (now
Age: 68 known as Getinge/Castle, Inc., a subsidiary of
Getinge Industrier AB), a company which
develops, manufactures, markets and services
medical and scientific equipment.
Jerry D. Choate........................... Director of Amgen Inc., a biotechnological
53 Monarch Bay Drive company. Trustee/Director of each of the funds
Dana Point, CA 92629 in the Fund Complex. Prior to January 1999,
Date of Birth: 09/16/38 Chairman and Chief Executive Officer of The
Age: 61 Allstate Corporation ("Allstate") and Allstate
Insurance Company. Prior to January 1995,
President and Chief Executive Officer of
Allstate. Prior to August 1994, various
management positions at Allstate.
Linda Hutton Heagy........................ Managing Partner of Heidrick & Stuggles, an
Sears Tower executive search firm. Trustee/Director of each
233 South Wacker Drive of the funds in the Fund Complex. Prior to
Suite 7000 1997, Partner, Ray & Berndtson, Inc., an
Chicago, IL 60606 executive recruiting and management consulting
Date of Birth: 06/03/48 firm. Formerly, Executive Vice President of ABN
Age: 52 AMRO, N.A., a Dutch bank holding company. Prior
to 1992, Executive Vice President of La Salle
National Bank. Trustee on the University of
Chicago Hospitals Board, Vice Chair of the
Board of The YMCA of Metropolitan Chicago and a
member of the Women's Board of the University
of Chicago. Prior to 1996, Trustee of The
International House Board, a fellowship and
housing organization for international graduate
students.
R. Craig Kennedy.......................... President and Director, German Marshall Fund of
11 DuPont Circle, N.W. the United States, an independent U.S.
Washington, D.C. 20016 foundation created to deepen understanding,
Date of Birth: 02/29/52 promote collaboration and stimulate exchanges
Age: 48 of practical experience between Americans and
Europeans. Trustee/Director of each of the
funds in the Fund Complex. 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.
</TABLE>
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<PAGE> 194
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Mitchell M. Merin*........................ President and Chief Operating Officer of Asset
Two World Trade Center Management of Morgan Stanley Dean Witter since
66th Floor December 1998. President and Director since
New York, NY 10048 April 1997 and Chief Executive Officer since
Date of Birth: 08/13/53 June 1998 of Morgan Stanley Dean Witter
Age: 46 Advisors Inc. and Morgan Stanley Dean Witter
Services Company Inc. Chairman, Chief Executive
Officer and Director of Morgan Stanley Dean
Witter Distributors Inc. since June 1998.
Chairman and Chief Executive Officer since June
1998, and Director since January 1998, of
Morgan Stanley Dean Witter Trust FSB. Director
of various Morgan Stanley Dean Witter
subsidiaries. President of the Morgan Stanley
Dean Witter Funds and Discover Brokerage Index
Series since May 1999. Trustee/Director of each
of the funds in the Fund Complex. Previously
Chief Strategic Officer of Morgan Stanley Dean
Witter Advisors Inc. and Morgan Stanley Dean
Witter Services Company Inc. and Executive Vice
President of Morgan Stanley Dean Witter
Distributors Inc. April 1997-June 1998, Vice
President of the Morgan Stanley Dean Witter
Funds and Discover Brokerage Index Series May
1997-April 1999, and Executive Vice President
of Dean Witter, Discover & Co.
Jack E. Nelson............................ President and owner, Nelson Investment Planning
423 Country Club Drive Services, Inc., a financial planning company
Winter Park, FL 32789 and registered investment adviser in the State
Date of Birth: 02/13/36 of Florida. President and owner, Nelson Ivest
Age: 64 Brokerage Services Inc., a member of the
National Association of Securities Dealers,
Inc. and Securities Investors Protection Corp.
Trustee/Director of each of the funds in the
Fund Complex.
Richard F. Powers, III*................... Chairman, President and Chief Executive Officer
1 Parkview Plaza of Van Kampen Investments. Chairman, Director
P.O. Box 5555 and Chief Executive Officer of the Advisers,
Oakbrook Terrace, IL 60181-5555 the Distributor, Van Kampen Advisors Inc. and
Date of Birth: 02/02/46 Van Kampen Management Inc. Director and officer
Age: 54 of certain other subsidiaries of Van Kampen
Investments. Trustee/Director and President of
each of the funds in the Fund Complex. Trustee,
President and Chairman of the Board of other
investment companies advised by the Advisers
and their affiliates, and Chief Executive
Officer of Van Kampen Exchange Fund. Prior to
May 1998, Executive Vice President and Director
of Marketing at Morgan Stanley Dean Witter and
Director of Dean Witter Discover & Co. and Dean
Witter Realty. Prior to 1996, Director of Dean
Witter Reynolds Inc.
</TABLE>
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<PAGE> 195
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
Phillip B. Rooney......................... Vice Chairman (since April 1997) and Director
One ServiceMaster Way (since 1994) of The ServiceMaster Company, a
Downers Grove, IL 60515 business and consumer services company.
Date of Birth: 07/08/44 Director of Illinois Tool Works, Inc., a
Age: 56 manufacturing company and the Urban Shopping
Centers Inc., a retail mall management company.
Trustee, University of Notre Dame.
Trustee/Director of each of the funds in the
Fund Complex. Prior to 1998, Director of Stone
Smurfit Container Corp., a paper manufacturing
company. From May 1996 through February 1997 he
was President, Chief Executive Officer and
Chief Operating Officer of Waste Management,
Inc., an environmental services company, and
from November 1984 through May 1996 he was
President and Chief Operating Officer of Waste
Management, Inc.
Fernando Sisto............................ Professor Emeritus. Prior to August 1996, a
155 Hickory Lane George M. Bond Chaired Professor with Stevens
Closter, NJ 07624 Institute of Technology, and prior to 1995,
Date of Birth: 08/02/24 Dean of the Graduate School, Stevens Institute
Age: 75 of Technology. Director, Dynalysis of
Princeton, a firm engaged in engineering
research. Trustee/Director of each of the funds
in the Fund Complex.
Wayne W. Whalen*.......................... Partner in the law firm of Skadden, Arps,
333 West Wacker Drive Slate, Meagher & Flom (Illinois), legal counsel
Chicago, IL 60606 to the funds in the Fund Complex, and other
Date of Birth: 08/22/39 investment companies advised by the Advisers.
Age: 60 Trustee/Director of each of the funds in the
Fund Complex, and Trustee/ Managing General
Partner of other investment companies advised
by the Advisers.
Suzanne H. Woolsey........................ Chief Operating Officer of the National Academy
2101 Constitution Ave., N.W. of Sciences/National Research Council, an
Room 206 independent, federally chartered policy
Washington, D.C. 20418 institution, since 1993. Director of Neurogen
Date of Birth: 12/27/41 Corporation, a pharmaceutical company, since
Age: 58 January 1998. Director of the German Marshall
Fund of the United States, Trustee of Colorado
College, and Vice Chair of the Board of the
Council for Excellence in Government. Trustee/
Director of each of the funds in the Fund
Complex. 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>
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Mr. Whalen is an interested person of the Fund by reason of
his firm currently acting as legal counsel to the Fund. Messrs. Merin and
Powers are interested persons of the Fund and the Advisers by reason of their
positions with Morgan Stanley Dean Witter or its affiliates.
B-37
<PAGE> 196
OFFICERS
Messrs. Smith, Santo, Sullivan, Ciccarone, Reynoldson and Zimmermann are
located at 1 Parkview Plaza, Oakbrook Terrace, IL 60181-5555. Mr. Boyd is
located at 2800 Post Oak Blvd., Houston, TX 77056.
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
A. Thomas Smith III.................. Executive Vice President, General Counsel,
Date of Birth: 12/14/56 Secretary and Director of Van Kampen Investments,
Age: 43 the Advisers, Van Kampen Advisors Inc., Van Kampen
Vice President and Secretary Management Inc., the Distributor, American Capital
Contractual Services, Inc., Van Kampen Exchange
Corp., Van Kampen Recordkeeping Services Inc.,
Investor Services, Van Kampen Insurance Agency of
Illinois Inc. and Van Kampen System Inc. Vice
President and Secretary/Vice President, Principal
Legal Officer and Secretary of other investment
companies advised by the Advisers or their
affiliates. Vice President and Secretary of each of
the funds in the Fund Complex. Prior to January
1999, Vice President and Associate General Counsel
to New York Life Insurance Company ("New York
Life"), and prior to March 1997, Associate General
Counsel of New York Life. Prior to December 1993,
Assistant General Counsel of The Dreyfus
Corporation. Prior to August 1991, Senior
Associate, Willkie Farr & Gallagher. Prior to
January 1989, Staff Attorney at the Securities and
Exchange Commission, Division of Investment
Management, Office of Chief Counsel.
Michael H. Santo..................... Executive Vice President, Chief Administrative
Date of Birth: 10/22/55 Officer and Director of Van Kampen Investments, the
Age: 44 Advisers, the Distributor, Van Kampen Advisors
Vice President Inc., Van Kampen Management Inc. and Van Kampen
Investor Services Inc., and serves as a Director or
Officer of certain other subsidiaries of Van Kampen
Investments. Vice President of each of the funds in
the Fund Complex and certain other investment
companies advised by the Advisers and their
affiliates. Prior to 1998, Senior Vice President
and Senior Planning Officer for Individual Asset
Management of Morgan Stanley Dean Witter and its
predecessor since 1994. From 1990-1994, First Vice
President and Assistant Controller in Dean Witter's
Controller's Department.
</TABLE>
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<PAGE> 197
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
Stephen L. Boyd...................... Executive Vice President and Chief Investment
Date of Birth: 11/16/40 Officer of Van Kampen Investments, and President
Age: 59 and Chief Operating Officer of the Advisers.
Executive Vice President and Chief Executive Vice President and Chief Investment
Investment Officer Officer of each of the funds in the Fund Complex
and certain other investment companies advised by
the Advisers or their affiliates. Prior to April
2000, Executive Vice President and Chief Investment
Officer for Equity Investments of the Advisers.
Prior to October 1998, Vice President and Senior
Portfolio Manager with AIM Capital Management, Inc.
Prior to February 1998, Senior Vice President and
Portfolio Manager of Van Kampen American Capital
Asset Management, Inc., Van Kampen American Capital
Investment Advisory Corp. and Van Kampen American
Capital Management, Inc.
Richard A. Ciccarone................. Senior Vice President and Co-head of the Fixed
Date of Birth: 06/15/52 Income Department of the Advisers, Van Kampen
Age: 48 Management Inc. and Van Kampen Advisors Inc. Prior
Vice President to May 2000, he served as Co-head of Municipal
Investments and Director of Research of the
Advisers, Van Kampen Management Inc. and Van Kampen
Advisors Inc. Mr. Ciccarone first joined the
Adviser in June 1983, and worked for the Adviser
until May 1989, with his last position being a Vice
President. From June 1989 to April 1996, he worked
at EVEREN Securities (formerly known as Kemper
Securities), with his last position at EVEREN being
an Executive Vice President. Since April 1996, Mr.
Ciccarone has been a Senior Vice President of the
Advisers, Van Kampen Management Inc. and Van Kampen
Advisors Inc.
John R. Reynoldson................... Senior Vice President and Co-head of the Fixed
Date of Birth: 05/15/53 Income Department of the Advisers, Van Kampen
Age: 47 Management Inc. and Van Kampen Advisors Inc. Prior
Vice President to May 2000, he managed the investment grade
taxable group for the Adviser since July 1999. From
July 1988 to June 1999, he managed the government
securities bond group for Asset Management. Mr.
Reynoldson has been with Asset Management since
April 1987, and has been a Senior Vice President of
Asset Management since July 1988. He has been a
Senior Vice President of the Adviser and Van Kampen
Management Inc. since June 1995 and Senior Vice
President of Van Kampen Advisors Inc. since June
2000.
John L. Sullivan..................... Senior Vice President of Van Kampen Investments and
Date of Birth: 08/20/55 the Advisers. Vice President, Chief Financial
Age: 44 Officer and Treasurer of each of the funds in the
Vice President, Chief Financial Fund Complex and certain other investment companies
Officer and Treasurer advised by the Advisers or their affiliates.
</TABLE>
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<PAGE> 198
<TABLE>
<CAPTION>
NAME, AGE, POSITIONS AND PRINCIPAL OCCUPATIONS
OFFICES WITH FUND DURING PAST 5 YEARS
------------------------ ---------------------
<S> <C>
John H. Zimmermann, III.............. Senior Vice President and Director of Van Kampen
Date of Birth: 11/25/57 Investments, President and Director of the
Vice President Distributor, and President of Van Kampen Insurance
Age: 42 Agency of Illinois Inc. Vice President of each of
the funds in the Fund Complex. From November 1992
to December 1997, Mr. Zimmermann was Senior Vice
President of the Distributor.
</TABLE>
Each trustee/director holds the same position with each of the funds in the
Fund Complex. As of the date of this Statement of Additional Information, there
are 60 operating funds in the Fund Complex. Each trustee/director who is not an
affiliated person of Van Kampen Investments, the Advisers or the Distributor
(each a "Non-Affiliated Trustee") is compensated by an annual retainer and
meeting fees for services to the funds in the Fund Complex. Each fund in the
Fund Complex provides a deferred compensation plan to its Non-Affiliated
Trustees that allows trustees/directors to defer receipt of their compensation
and earn a return on such deferred amounts. Deferring compensation has the
economic effect as if the Non-Affiliated Trustee reinvested his or her
compensation into the funds. Each fund in the Fund Complex 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 as more fully described below.
The compensation of each Non-Affiliated Trustee includes an annual retainer
in an amount equal to $50,000 per calendar year, due in four quarterly
installments on the first business day of each quarter. Payment of the annual
retainer is allocated among the funds in the Fund Complex on the basis of the
relative net assets of each fund as of the last business day of the preceding
calendar quarter. The compensation of each Non-Affiliated Trustee includes a per
meeting fee from each fund in the Fund Complex in the amount of $200 per
quarterly or special meeting attended by the Non-Affiliated Trustee, due on the
date of the meeting, plus reasonable expenses incurred by the Non-Affiliated
Trustee in connection with his or her services as a trustee, provided that no
compensation will be paid in connection with certain telephonic special
meetings.
Under the deferred compensation plan, each Non-Affiliated Trustee generally
can elect to defer receipt of all or a portion of the compensation earned by
such Non-Affiliated Trustee until retirement. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to the return on the
common shares of such Fund or other funds in the Fund Complex as selected by the
respective Non-Affiliated Trustee, with the same economic effect as if such
Non-Affiliated Trustee had invested in one or more funds in the Fund Complex. 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.
Under the retirement plan, a Non-Affiliated Trustee who is receiving
compensation from such 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
B-40
<PAGE> 199
or after attaining the age of 60, is eligible to receive a retirement benefit
equal to $2,500 per year for each of the ten years following such retirement
from such 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 such Fund. Each trustee/director has served as a member
of the Board of Trustees of the Fund since he or she was first appointed or
elected in the year set forth below. The retirement plan contains a Fund Complex
retirement benefit cap of $60,000 per year.
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 Upon Fund
Name(1) Registrant(2) Expenses(3) Retirement(4) Complex(5)
------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
J. Miles Branagan $4,070 $40,303 $60,000 $126,000
Jerry D. Choate(1) 3,470 0 60,000 88,700
Linda Hutton Heagy 4,070 5,045 60,000 126,000
R. Craig Kennedy 4,070 3,571 60,000 125,600
Jack E. Nelson 4,070 21,664 60,000 126,000
Phillip B. Rooney 4,070 7,787 60,000 113,400
Fernando Sisto 4,070 72,060 60,000 126,000
Wayne W. Whalen 4,070 15,189 60,000 126,000
Suzanne H. Woolsey(1) 3,070 0 60,000 88,700
</TABLE>
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Choate and Ms. Woolsey became members of the Board of Trustees
for the Fund and other funds in the Fund Complex on May 26, 1999 and
therefore do not have a full year of information to report. Paul G. Yovovich
resigned as a member of the Board of Trustees for the Fund and other funds
in the Fund Complex on April 14, 2000.
(2) The amounts shown in this column represent the aggregate compensation before
deferral from the operating series of the Trust during the fiscal year ended
March 31, 2000. The details of aggregate compensation before deferral for
each operating series of the Registrant during the fiscal year ended March
31, 2000 are shown in Table A below. The details of compensation deferred
for each operating series of the Registrant during the fiscal year ended
March 31, 2000 are shown in Table B below. Amounts deferred are retained by
the Fund and earn a rate of return determined by reference to either the
return on the common shares of the Fund or other funds in the Fund Complex
as selected by the respective Non-Affiliated Trustee, with the same economic
effect as if such Non-Affiliated Trustee had invested in one or more funds
B-41
<PAGE> 200
in the Fund Complex. To the extent permitted by the 1940 Act, each fund may
invest in securities of those funds selected by the Non-Affiliated Trustees
in order to match the deferred compensation obligation. The details of
cumulative deferred compensation (including interest) for each operating
series of the Registrant as of March 31, 2000 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 investment companies in the Fund Complex
for each of the trustees for the funds' respective fiscal years ended in
1999. 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 the year of such trustee's anticipated retirement. The
retirement plan is described above the Compensation Table. Each
Non-Affiliated 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, 1999 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. Certain trustees
deferred all or a portion of their aggregate compensation from the Fund
Complex during the calendar year ended December 31, 1999. The deferred
compensation earns a rate of return determined by reference to the return on
the shares of the funds in the Fund Complex as selected by the respective
Non-Affiliated Trustee, with the same economic effect as if such Non-
Affiliated Trustee had invested in one or more funds in the Fund Complex. To
the extent permitted by the 1940 Act, the Fund may invest in securities of
those investment companies selected by the Non-Affiliated Trustees in order
to match the deferred compensation obligation. The Advisers and their
affiliates also serve as investment adviser for other investment companies;
however, with the exception of Mr. Whalen, the Non-Affiliated Trustees were
not trustees of such investment companies. Combining the Fund Complex with
other investment companies advised by the Advisers and their affiliates, Mr.
Whalen received Total Compensation of $279,250 during the calendar year
ended December 31, 1999.
The Fund, the Adviser and the Distributor have adopted Codes of Ethics
(collectively, the "Code of Ethics") that set forth general and specific
standards relating to the securities trading activities of their employees. The
Code of Ethics does not prohibit employees from acquiring securities that may be
purchased or held by the Fund, but is intended to ensure that all employees
conduct their personal transactions in a manner that does not interfere with the
portfolio transactions of the Fund or other Van Kampen funds, or that such
employees take unfair advantage of their relationship with the Fund. Among other
things, the Code of Ethics prohibits certain types of transactions absent prior
approval, imposes various trading restrictions (such as time periods during
which personal transactions may or may not be made) and requires quarterly
reporting of securities transactions and other 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
B-42
<PAGE> 201
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.
As of July 3, 2000, the trustees and officers of the Fund as a group owned
less than 1% of the shares of the Fund.
TABLE A
2000 AGGREGATE COMPENSATION FROM
THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund............. 3/31 $1,698 $1,498 $1,698 $1,698 $1,698 $1,698 $1,698 $1,698 $1,298
Managed Short-Term Income
Fund*..................... 3/31 * * * * * * * * *
Short-Term Global Income
Fund(1)................... 3/31 1,049 849 1,049 1,049 1,049 1,049 1,049 1,049 849
Strategic Income Fund....... 3/31 1,323 1,123 1,323 1,323 1,323 1,323 1,323 1,323 923
------ ------ ------ ------ ------ ------ ------ ------ ------
Trust Total............... $4,070 $3,470 $4,070 $4,070 $4,070 $4,070 $4,070 $4,070 $3,070
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations
as of March 31, 2000.
(1) The Fund was liquidated during the Registrant's fiscal year ended March 31,
2000.
TABLE B
2000 AGGREGATE COMPENSATION DEFERRED FROM
THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL ----------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund............. 3/31 $1,698 $1,152 $1,698 $ 849 $1,698 $1,698 $ 849 $1,698 $0
Managed Short-Term Income
Fund*..................... 3/31 * * * * * * * * *
Short-Term Global Income
Fund(1)................... 3/31 1,049 630 1,049 525 1,049 1,049 525 1,049 0
Strategic Income Fund....... 3/31 1,323 885 1,323 662 1,323 1,323 662 1,323 0
------ ------ ------ ------ ------ ------ ------ ------ --
Trust Total............... $4,070 $2,667 $4,070 $2,036 $4,070 $4,070 $2,036 $4,070 $0
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations
as of March 31, 2000.
(1) The Fund was liquidated during the Registrant's fiscal year ended March 31,
2000.
B-43
<PAGE> 202
TABLE C
2000 CUMULATIVE COMPENSATION DEFERRED
(PLUS INTEREST) FROM THE TRUST AND EACH SERIES
<TABLE>
<CAPTION>
TRUSTEE
FISCAL -------------------------------------------------------------------------------------------
FUND NAME YEAR-END BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund...... 3/31 $13,854 $1,777 $13,441 $27,898 $38,608 $12,232 $6,293 $30,637 $0
Managed Short-Term
Income Fund*........ 3/31 0 0 0 0 0 0 0 0 0
Strategic Income
Fund................ 3/31 12,417 1,375 12,289 27,060 36,748 10,155 5,502 29,146 0
------- ------- ------- -------- ------- -------- ------- -------- --
Trust Total......... $26,271 $3,152 $25,730 $54,958 $75,356 $22,387 $11,795 $59,783 $0
<CAPTION>
FORMER TRUSTEES
------------------------------------------------
FUND NAME GAUGHAN MILLER REES ROBINSON YOVOVICH
--------- ------- ------ ---- -------- --------
<S> <C> <C> <C> <C> <C>
High Yield Fund...... $1,142 $13,406 $3,096 $26,162 $2,507
Managed Short-Term
Income Fund*........ 0 0 0 0 0
Strategic Income
Fund................ 1,142 13,406 3,285 26,162 1,918
------ ------- ------ ------- ------
Trust Total......... $2,284 $26,812 $6,381 $52,324 $4,425
</TABLE>
------------------------------------
* The Managed Short-Term Income Fund has not commenced investment operations as
of March 31, 2000.
TABLE D
YEAR OF ELECTION OR APPOINTMENT TO EACH SERIES OF THE TRUST
<TABLE>
<CAPTION>
TRUSTEE
---------------------------------------------------------------------------------
FUND NAME BRANAGAN CHOATE HEAGY KENNEDY NELSON ROONEY SISTO WHALEN WOOLSEY
--------- -------- ------ ----- ------- ------ ------ ----- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
High Yield Fund................................ 1995 1999 1995 1993 1986 1997 1995 1986 1999
Managed Short-Term Income Fund................. 1999 1999 1999 1999 1999 1999 1999 1999 1999
Strategic Income Fund.......................... 1995 1999 1995 1993 1993 1997 1995 1993 1999
</TABLE>
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of the Fund's assets, including the placing of
orders for the purchase and sale of portfolio securities. The Adviser obtains
and evaluates economic, statistical and financial information to formulate
strategy and implement the Fund's investment objectives. The Adviser also
furnishes offices, necessary facilities and equipment, provides administrative
services to the Fund, renders periodic reports to the Fund's Board of Trustees,
and permits its officers and employees to serve without compensation as trustees
of the Trust or officers of the Fund if elected to such positions. The Fund
however, bears the cost of its day-to-day operations, including service fees,
distribution fees, custodian fees, legal and independent accountant fees, the
cost of reports and proxies to shareholders, compensation of trustees of the
Trust (other than those who are affiliated persons of the Adviser, Distributor
or Van Kampen Investments), and all other ordinary business expenses not
specifically assumed by the Adviser. The Advisory Agreement also provides that
the Adviser shall not be liable to the Fund for any error of judgment or of law,
or for any loss suffered by the Fund in connection with the matters to which the
Advisory Agreement relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Adviser in the performance of
its obligations and duties, or by reason of its reckless disregard of its
obligations and duties under the Advisory Agreement.
B-44
<PAGE> 203
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitations
applicable in any jurisdiction in which the Fund's shares are qualified for
offer and sale (excluding any expenses permitted to be excluded from the
computation under applicable law or regulation), the compensation due the
Adviser will be reduced by the amount of such excess and that, if a reduction in
and refund of the advisory fee is insufficient, the Adviser will pay the Fund
monthly an amount sufficient to make up the deficiency, subject to readjustment
during the fiscal year.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Board of Trustees or (ii) by a
vote of a majority of the Fund's outstanding voting securities and (b) by a vote
of a majority of the Trustees who are not parties to the agreement or interested
persons of any such party by votes cast in person at a meeting called for such
purpose. The Advisory Agreement provides that it shall terminate automatically
if assigned and that it may be terminated without penalty by either party on 60
days' written notice.
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, the Adviser received
approximately $974,500, $893,500 and $1,262,800, respectively, in advisory fees
from the Fund.
OTHER AGREEMENTS
Accounting Services Agreement. The Fund has entered into an accounting
services agreement pursuant to which Advisory Corp. provides accounting services
to the Fund, supplementary to those provided by the custodian. Such services are
expected to enable the Fund to more closely monitor and maintain its accounts
and records, which include, maintaining the books and records of the Fund,
calculating the Fund's net asset value and coordinating tax compliance and other
regulatory issues. 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 cost based proportionately on the
respective net assets per fund.
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, Advisory Corp. received
approximately $13,000, $8,200 and $11,600, respectively, in accounting services
fees from the Fund.
Legal Services Agreement. The Fund and certain of the other Van Kampen
funds advised by the Adviser or its affiliates and distributed by the
Distributor have entered into legal services agreements pursuant to which Van
Kampen Investments provides legal services, including without limitation:
accurate maintenance of the fund's minute books and records, preparation and
oversight of the 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
B-45
<PAGE> 204
salary and salary-related benefits, including but not limited to bonuses, group
insurance and other regular wages for the employment of personnel, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Other funds distributed by the
Distributor also receive legal services from Van Kampen Investments. Of the
total costs for legal services provided to funds distributed by the Distributor,
one half of such costs are allocated equally to each fund and the remaining one
half of such costs are allocated to specific funds based on monthly time
records.
During the fiscal year ended March 31, 2000, the fiscal period ended March
31, 1999 and the fiscal year ended June 30, 1998, Van Kampen Investments
received approximately $16,400, $9,400 and $16,500, respectively, in legal
services fees from the Fund.
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
Trustees or (ii) by a vote of a majority of the Fund's outstanding voting
securities and (b) by a vote of a majority of Trustees who are not parties to
the Distribution and Service Agreement or interested persons of any party, by
votes cast in person at a meeting called for such purpose. The Distribution and
Service Agreement provides that it will terminate if assigned, and that it may
be terminated without penalty by either party on 90 days' written notice. Total
underwriting commissions on the sale of shares of the Fund for the last three
fiscal years/period are shown in the chart below.
<TABLE>
<CAPTION>
Total Amounts
Underwriting Retained by
Commissions Distributor
------------ -----------
<S> <C> <C>
Fiscal year ended March 31, 2000....................... $106,990 $ 1,095
Fiscal period ended March 31, 1999..................... $134,029 $15,130
Fiscal year ended June 30, 1998........................ $239,538 $27,505
</TABLE>
B-46
<PAGE> 205
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
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Less than $100,000.......................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000............. 3.75% 3.90% 3.25%
$250,000 but less than $500,000............. 2.75% 2.83% 2.25%
$500,000 but less than $1,000,000........... 2.00% 2.04% 1.75%
$1,000,000 or more.......................... * * *
------------------------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although the Fund may impose a contingent deferred sales
charge of 1.00% on certain redemptions made within one year of the purchase. A
commission or transaction fee will be paid by the Distributor at the time of
purchase directly out of the Distributor's assets (and not out of the Fund's
assets) to authorized dealers who initiate and are responsible for purchases
of $1 million or more computed on a percentage of the dollar value of such
shares sold as follows: 1.00% on sales to $2 million, plus 0.80% on the next
$1 million and 0.50% on the excess over $3 million. For single purchases of
$20 million or more by an individual retail investor the Distributor will pay,
at the time of purchase and directly out of the Distributor's assets (and not
out of the Fund's assets), a commission or transaction fee of 1.00% to
authorized dealers who initiate and are responsible for such purchases. The
commission or transaction fee of 1.00% will be computed on a percentage of the
dollar value of such shares sold.
With respect to sales of Class B Shares and Class C Shares 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 are paid the ongoing commission and transaction
fees of up to 0.75% of the average daily net assets of the Fund's Class C Shares
annually commencing in the second year after purchase.
In addition to reallowances or commissions described above, the Distributor
may from time to time implement programs under which an authorized dealer's
sales force may be eligible to win nominal awards for certain sales efforts or
under which the Distributor will
B-47
<PAGE> 206
reallow to any authorized dealer that sponsors sales contests or recognition
programs conforming to criteria established by the Distributor, or participates
in sales programs sponsored by the Distributor, an amount not exceeding the
total applicable sales charges on the sales generated by the authorized dealer
at the public offering price during such programs. Also, the Distributor in its
discretion may from time to time, pursuant to objective criteria established by
the Distributor, pay fees to, and sponsor business seminars for, qualifying
authorized dealers for certain services or activities which are primarily
intended to result in sales of shares of the Fund or other Van Kampen funds.
Fees may include payment for travel expenses, including lodging, incurred in
connection with trips taken by invited registered representatives for meetings
or seminars of a business nature. In some instances additional compensation or
promotional incentives may be offered to brokers, dealers or financial
intermediaries that have sold or may sell significant amounts of shares during
specified periods of time. The Distributor may provide additional compensation
to Edward D. Jones & Co. or an affiliate thereof based on a combination of its
quarterly sales of shares of the Fund and other Van Kampen funds and increases
in net assets of the Fund and other Van Kampen funds over specified thresholds.
All of the foregoing payments are made by the Distributor out of its own assets.
Such fees paid for such services and activities with respect to the Fund will
not exceed in the aggregate 1.25% of the average total daily net assets of the
Fund on an annual basis. These programs will not change the price an investor
will pay for shares or the amount that a Fund will receive from such sale.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein as the "Plans." The Plans provide that the Fund may spend
a portion of the Fund's average daily net assets attributable to each class of
shares in connection with distribution of the respective class of shares and in
connection with the provision of ongoing services to shareholders of such class,
respectively. The Distribution Plan and the Service Plan are being implemented
through the Distribution and Service Agreement with the Distributor of each
class of the Fund's shares, sub-agreements between the Distributor and members
of the NASD who are acting as securities dealers and NASD members or eligible
non-members who are acting as brokers or agents and similar agreements between
the Fund and financial intermediaries who are acting as brokers (collectively,
"Selling Agreements") that may provide for their customers or clients certain
services or assistance, which may include, but not be limited to, processing
purchase and redemption transactions, establishing and maintaining shareholder
accounts regarding the Fund, and such other services as may be agreed to from
time to time and as may be permitted by applicable statute, rule or regulation.
Brokers, dealers and financial intermediaries that have entered into
sub-agreements with the Distributor and sell shares of the Fund are referred to
herein as "financial intermediaries."
Certain financial intermediaries may be prohibited under law from providing
certain underwriting or distribution services. If a financial intermediary were
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.
B-48
<PAGE> 207
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Distribution Plan and the purposes for which
such expenditures were made, together with such other information as from time
to time is reasonably requested by the Trustees. The Plans provide that they
will continue in full force and effect from year to year so long as such
continuance is specifically approved by a vote of the Trustees, and also by a
vote of the disinterested Trustees, cast in person at a meeting called for the
purpose of voting on the Plans. Each of the Plans may not be amended to increase
materially the amount to be spent for the services described therein with
respect to any class of shares without approval by a vote of a majority of the
outstanding voting shares of such class, and all material amendments to either
of the Plans must be approved by the Trustees and also by the disinterested
Trustees. Each of the Plans may be terminated with respect to any class of
shares at any time by a vote of a majority of the disinterested Trustees or by a
vote of a majority of the outstanding voting shares of such class.
For Class A Shares in any given year in which the Plans are in effect, the
Plans generally provide for the Fund to pay the Distributor the lesser of (i)
the amount of the Distributor's actual expenses incurred during such year less
any deferred sales charges (if any) it received during such year (the "actual
net expenses") or (ii) the distribution and service fees at the rates specified
in the Prospectus (the "plan fees"). Therefore, to the extent the Distributor's
actual net expenses in a given year are less than the plan fees for such year,
the Fund only pays the actual net expenses. Alternatively, to the extent the
Distributor's actual net expenses in a given year exceed the plan fees for such
year, the Fund only pays the plan fees for such year. For Class A Shares, there
is no carryover of any unreimbursed actual net expenses to succeeding years.
The Plans for Class B Shares and Class C Shares are similar to the Plans
for Class A Shares, except that any actual net expenses which exceed plan fees
for a given year are carried forward and are eligible for payment in future
years by the Fund so long as the Plans remain in effect. Thus, for each of the
Class B Shares and Class C Shares, in any given year in which the Plans are in
effect, the Plans generally provide for the Fund to pay the Distributor the
lesser of (i) the applicable amount of the Distributor's actual net expenses
incurred during such year for such class of shares plus any actual net expenses
from prior years that are still unpaid by the Fund for such class of shares or
(ii) the applicable plan fees for such class of shares. Except as may be
mandated by applicable law, the Fund does not impose any limit with respect to
the number of years into the future that such unreimbursed actual net expenses
may be carried forward (on a Fund level basis). These unreimbursed actual net
expenses may or may not be recovered through plan fees or contingent deferred
sales charges in future years.
Because of fluctuation in net asset value, the plan fees with respect to a
particular Class B Share or Class C Share may be greater or less than the amount
of the initial commission (including carrying cost) paid by the Distributor with
respect to such share. In such circumstances, a shareholder of a share may be
deemed to incur expenses attributable to other shareholders of such class. As of
March 31, 2000, there were $1,962,286 and $5,379 of unreimbursed
distribution-related expenses with respect to Class B Shares and Class C Shares,
respectively, representing 3.70% and 0.15% of the Fund's net assets attributable
to Class B Shares and Class C Shares, respectively. If the Plans are terminated
or not continued, the Fund would not be contractually obligated to
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pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor
as reimbursement for expenses of one series of the Trust may indirectly benefit
the other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of shares to defray distribution-related expenses
attributable to any other class of shares.
For the fiscal year ended March 31, 2000, the Fund's aggregate expenses
paid under the Plans for Class A Shares were $93,123 or 0.25% of the Class A
Shares' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to financial intermediaries for servicing Fund
shareholders and for administering the Class A Share Plans. For the fiscal year
ended March 31, 2000, the Fund's aggregate expenses paid under the Plans for
Class B Shares were $532,924 or 1.00% of the Class B Shares' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $408,904 for commissions and transaction fees paid to financial
intermediaries in respect of sales of Class B Shares of the Fund and $141,422
for fees paid to financial intermediaries for servicing Class B shareholders and
administering the Class B Share Plans. For the fiscal year ended March 31, 2000,
the Fund's aggregate expenses paid under the Plans for Class C Shares were
$36,423 or 1.00% of the Class C Shares' average daily net assets. Such expenses
were paid to reimburse the Distributor for the following payments: $16,469 for
commissions and transaction fees paid to financial intermediaries in respect of
sales of Class C Shares of the Fund and $20,112 for fees paid to financial
intermediaries for servicing Class C shareholders and administering the Class C
Share Plans.
The Distributor has entered into an agreement with the following firm: (i)
Buck Consultants, Inc., (ii) Fidelity Brokerage Services, Inc. & National
Financial Services Corporation, (iii) First Union National Bank, (iv) Invesco
Retirement and Benefit Services, Inc., (v) Lincoln National Life Insurance
Company, (vi) Merrill Lynch Pierce, Fenner & Smith, Incorporated, (vii) National
Deferred Compensation, Inc., (viii) The Prudential Insurance Company of America
and (ix) Union Bank of CA, N.A. Shares of the Fund shall be offered pursuant to
such firm's retirement plan alliance program(s). Trustees and other fiduciaries
of retirement plans seeking to invest in multiple fund families through
broker-dealer retirement plan alliance programs should contact the firm
mentioned above for further information concerning such program(s) including,
but not limited to, minimum size and operational requirements.
TRANSFER AGENT
The Fund's transfer agent, shareholder service agent and dividend
disbursing agent is Van Kampen Investor Services Inc. The transfer agency prices
are determined through negotiations with the Fund's Board of Trustees and are
based on competitive benchmarks.
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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 will at all times
be subject to review by the Board of Trustees of the Fund.
As most transactions made by the Fund are principal transactions at net
prices, the Fund generally incurs little or no brokerage costs. The portfolio
securities in which the Fund invests are normally purchased directly from the
issuer or in the over-the-counter market from an underwriter or market maker for
the securities. Purchases from underwriters of portfolio securities include a
commission or concession paid by the issuer to the underwriter and purchases
from dealers serving as market makers include a spread or markup to the dealer
between the bid and asked price. Sales to dealers are effected at bid prices.
The Fund may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser to the Fund and still must be analyzed
and reviewed by its staff, the receipt of research information is not expected
to reduce its expenses materially. The investment advisory fee is not reduced as
a result of the Adviser's receipt of such research services. Services provided
may include (a) furnishing advice as to the value of securities, the
advisability of investing in, purchasing or selling securities, and the
availability of securities or purchasers or sellers of securities; (b)
furnishing analyses and reports concerning issuers, industries, securities,
economic factors and trends, portfolio strategy, and the performance of
accounts; and (c) effecting securities transactions and performing functions
incidental thereto (such as clearance, settlement and custody). Research
services furnished by firms through which the Fund effects its securities
transactions may be used by the Adviser in servicing all of its advisory
accounts; not all of such services may be used by the Adviser in connection with
the Fund. The Adviser also may place portfolio transactions, to the extent
permitted by law, with brokerage firms affiliated with the Fund, the Adviser or
the Distributor and with brokerage firms
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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 or to a firm participating in the distribution of the Fund's
shares.
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.
Effective October 31, 1996, Morgan Stanley & Co. Incorporated ("Morgan
Stanley") became an affiliate of the Adviser. Effective May 31, 1997, Dean
Witter Reynolds, Inc. ("Dean Witter") became an affiliate of the Adviser. 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 given to affiliated brokers.
The Fund paid the following commissions to all brokers and affiliated
brokers during the years/period shown:
Commissions Paid:
<TABLE>
<CAPTION>
Affiliated Brokers
-------------------
All Morgan Dean
Brokers Stanley Witter
------- ------- ------
<S> <C> <C> <C>
Fiscal year ended March 31, 2000............................ $ 1,614 $ 0 $ 0
Fiscal period ended March 31, 1999.......................... $ 4,640 $ 0 $ 0
Fiscal year ended June 30, 1998............................. $19,191 $ 0 $ 0
Fiscal 2000 Percentages:
Commissions with affiliate to total commissions........... 0% 0%
Value of brokerage transactions with affiliate to
total transactions...................................... 0% 0%
</TABLE>
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During the fiscal year ended March 31, 2000, the Fund paid no brokerage
commissions to brokers selected primarily on the basis of research services
provided to the Adviser.
SHAREHOLDER SERVICES
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. The following information supplements the section
in the Fund's Prospectus captioned "Shareholder Services."
INVESTMENT ACCOUNT
Each shareholder has an investment account under which the investor's
shares of the Fund are held by Investor Services, the Fund's transfer agent.
Investor Services performs bookkeeping, data processing and administrative
services related to the maintenance of shareholder accounts. Except as described
in the Prospectus and this Statement of Additional Information, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in any of the
Participating Funds (as defined in the Prospectus) will receive statements
quarterly from Investor Services showing any reinvestments of dividends and
capital gain dividends and any other activity in the account since the preceding
statement. Such shareholders also will receive separate confirmations for each
purchase or sale transaction other than reinvestment of dividends and capital
gain dividends and systematic purchases or redemptions. Additional shares may be
purchased at any time through authorized dealers or by mailing a check 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 218256, Kansas City, MO 64121-8256, 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; Section 403(b)(7) plans in the case of employees of public
school systems
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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. Van Kampen Trust Company serves as custodian
under the IRA, 403(b)(7) and Money Purchase and Profit Sharing Keogh plans.
AUTOMATED CLEARING HOUSE("ACH") DEPOSITS
Shareholders can use ACH to have redemption proceeds deposited
electronically into their bank accounts. Redemption proceeds transferred to a
bank account via the ACH plan are available to be credited to the account on the
second business day following normal payment. In order 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. 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) 341-2911 ((800) 421-2833
for the hearing impaired).
DIVIDEND DIVERSIFICATION
A shareholder may, upon written request by completing the appropriate
section of the account application form or by calling (800) 341-2911 ((800)
421-2833 for the hearing impaired), elect 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 Participating Fund 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 minimum investment and other requirements of the fund into
which distributions would be invested. Distributions are invested into the
selected fund 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
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orderly use of the entire account, not only the income but also the capital, if
necessary. Each payment represents the proceeds of a redemption of shares on
which any capital gain or loss will be recognized. The planholder may arrange
for periodic checks in any amount, not less than $25. Such a systematic
withdrawal plan may also be maintained by an investor purchasing shares for a
retirement plan 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.
EXCHANGE PRIVILEGE
All shareholders are limited to eight exchanges per fund during a rolling
365-day period.
Exchange privileges will be suspended on a particular fund if more than
eight exchanges out of that fund are made by a shareholder during a rolling
365-day period. If exchange privileges are suspended, subsequent exchange
requests during the stated period will not be processed. Exchange privileges
will be restored when the account history shows fewer than eight exchanges in
the rolling 365-day period.
This policy does not apply to money market funds, systematic exchange
plans, or employer-sponsored retirement plans.
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 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 in
Class C Shares of the Fund with credit given for any contingent deferred sales
charge paid upon such redemption. Such reinstatement is made at the net asset
value per share (without sales charge) next determined after the order is
received, which must be made within 180 days after the date of the redemption.
Reinstatement at net asset value per share is also offered to participants
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in those eligible retirement plans held or administered by Van Kampen Trust
Company for repayment of principal (and interest) on their borrowings on such
plans.
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 will 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 charges and a gain or loss for federal income
tax purposes upon the shareholder's subsequent disposition of such securities.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
As described in the Prospectus under "Purchase of Shares -- Class A
Shares," there is no sales charge payable on Class A Shares at the time of
purchase on investments of $1 million or more, but a contingent deferred sales
charge ("CDSC -- Class A") may be imposed on certain redemptions made within one
year of purchase. For purposes of the CDSC-Class A, when shares of one fund are
exchanged for shares of another fund, the purchase date for the shares of the
fund exchanged into 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.
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WAIVER OF CLASS B AND CLASS C CONTINGENT
DEFERRED SALES CHARGES
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B Shares and Class C Shares will be subject to a contingent deferred sales
charge ("CDSC -- Class B and C"). The CDSC-Class B and C is waived on
redemptions of Class B Shares and Class C Shares in the circumstances described
below:
REDEMPTION UPON DEATH OR DISABILITY
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B shareholder and Class C shareholder. An
individual will be considered disabled for this purpose if he or she meets the
definition thereof in Section 72(m)(7) of the Internal Revenue Code of 1986, as
amended (the "Code"), which in pertinent part defines a person as disabled if
such person "is unable to engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or to be of long-continued and indefinite duration."
While the Fund does not specifically adopt the balance of the Code's definition
which pertains to furnishing the Secretary of Treasury with such proof as he or
she may require, the Distributor will require satisfactory proof of death or
disability before it determines to waive the CDSC-Class B and C.
In cases of death or disability, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or partial redemption,
but only to redemptions of shares held at the time of the death or initial
determination of disability.
REDEMPTION IN CONNECTION WITH CERTAIN DISTRIBUTIONS FROM RETIREMENT PLANS
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from retirement
plans. The CDSC-Class B and C will be waived upon the tax-free rollover or
transfer of assets to another retirement plan invested in one or more
Participating Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of 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 Regulations Section 1.401(k)-(1)(d)(2) or
from 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).
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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
CDSC-Class B and C will be waived on redemptions made under the systematic
withdrawal plan.
The amount of the shareholder's investment in the Fund at the time the
election to participate in the systematic withdrawal plan is made with respect
to the Fund is hereinafter referred to as the "initial account balance." The
amount to be systematically redeemed from the Fund without the imposition of a
CDSC-Class B and C may not exceed a maximum of 12% annually of the shareholder's
initial account balance. The Fund reserves the right to change the terms and
conditions of the systematic withdrawal plan and the ability to offer the
systematic withdrawal plan.
NO INITIAL COMMISSION OR TRANSACTION FEE
The Fund will waive the CDSC-Class B and C in circumstances under which no
commission or transaction fee is paid to authorized dealers at the time of
purchase of shares. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" in the Prospectus.
INVOLUNTARY REDEMPTIONS OF SHARES
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the value of the
account up to the required minimum balance. The Fund will waive the CDSC-Class B
and C upon such involuntary redemption.
REINVESTMENT OF REDEMPTION PROCEEDS
A shareholder who has redeemed Class C Shares of the Fund may reinvest at
net asset value, with credit for any CDSC-Class C paid on the redeemed shares,
any portion or all of his or her redemption proceeds (plus that amount necessary
to acquire a fractional share to round off his or her purchase to the nearest
full share) in Class C Shares of the Fund, provided that the reinvestment is
effected within 180 days after such redemption and the shareholder has not
previously exercised this reinvestment privilege
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with respect to Class C Shares of the Fund. Shares acquired in this manner will
be deemed to have the original cost and purchase date of the redeemed shares for
purposes of applying the CDSC-Class C to subsequent redemptions.
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 has elected and
qualified, and intends to continue to qualify each year, to be treated as a
regulated investment company under Subchapter M of the Code. To qualify as a
regulated investment company, the Fund must comply with certain requirements of
the Code relating to, among other things, the source 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 taxable
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 of investment company taxable income
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.
In order to avoid a 4% excise tax, the Fund will be required to distribute,
by December 31st of each year, at least an amount equal to the sum of (i) 98% of
its ordinary income for such year and (ii) 98% of its capital gain net income
(the latter of which generally is computed on the basis of the one-year period
ending on October 31st of such year), plus any amounts that were not distributed
in previous taxable years. For purposes of the excise tax, any ordinary income
or capital gain net income retained by, and subject to federal income tax in the
hands of, the Fund will be treated as having been distributed.
If the Fund failed to qualify as a regulated investment company or failed
to satisfy the 90% distribution requirement in any taxable year, the Fund would
be taxed as an ordinary corporation on its taxable income (even if such income
were distributed to its shareholders) and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income. In addition, the Fund
could be required to recognize unrealized gains, pay taxes and interest charges
and make distributions before requalifying for taxation as a regulated
investment company.
Some of the Fund's investment practices are subject to special provisions
of the Code that may, among other things: (i) disallow, suspend or otherwise
limit the allowance of certain losses or deductions, (ii) convert lower taxed
long-term capital gain into higher
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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 (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 in order 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 Fund's earnings and profits,
whether paid in cash or reinvested in additional shares. Distributions of the
Fund's net capital gain 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
holder's shares and, after such adjusted tax basis is reduced to zero, will
constitute capital gains to such holder (assuming such shares are held as a
capital asset). For a summary of the maximum tax rates applicable to capital
gains (including capital gain dividends), see "Capital Gains Rates" below.
Tax-exempt shareholders not subject to federal income tax on their income
generally will not be taxed on distributions from the Fund.
Shareholders receiving distributions in the form of additional shares
issued by the Fund will be treated for federal income tax purposes as receiving
a distribution in an amount equal to the fair market value of the shares
received, determined as of the distribution date. The basis of such shares will
equal the fair market value on the distribution date.
The Fund will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year. Distributions from
the Fund generally will not be eligible for the dividends received deduction for
corporations.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such month and paid during January of the
following year will be treated as having been distributed by the Fund and
received by the shareholders on the December 31st prior to the date of payment.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such
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case, shareholders will be treated as having received such dividends in the
taxable year in which the distribution was actually made.
Income from investments in foreign securities received by the Fund may be
subject to income, withholding or other taxes imposed by foreign countries and
U.S. possessions. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes. Investors may be entitled to claim
U.S. foreign tax credits with respect to such taxes, subject to certain
provisions and limitations contained in the Code. If more than 50% in value of
the Fund's total assets at the close of its taxable year consists of stock or
securities of foreign corporations, the Fund will be eligible to, and may, file
elections with the IRS pursuant to which shareholders of the Fund will be
required to (i) include their respective pro rata portions of such taxes in
their U.S. income tax returns as gross income, and (ii) treat such respective
pro rata portions as taxes paid by them. Shareholders will be entitled, subject
to certain limitations, to either deduct their respective pro rata portions of
such foreign taxes in computing their taxable incomes or use them as foreign tax
credits against their U.S. federal income taxes. No deduction for such foreign
taxes may be claimed by a shareholder who does not itemize deductions. Each
shareholder will be notified annually whether the foreign taxes paid by the Fund
will "pass through" for that year and, if so, such notification will designate
(i) the shareholder's portion of the foreign taxes paid to each country and (ii)
the portion of dividends that represent income derived from sources within each
country. The amount of foreign taxes for which a shareholder may claim a credit
in any year will be subject to an overall limitation such that the credit may
not exceed the shareholder's U.S. federal income tax attributable to the
shareholder's foreign source taxable income. This limitation generally applies
separately to certain specific categories of foreign source income including
"passive income" which includes, among other types of income, dividends and
interest. The foregoing is only a general description of the foreign tax credit
under current law. Because application of the rules described above depends on
the particular circumstances of each shareholder, shareholders are advised to
consult their own tax advisers.
SALE OF SHARES
The sale of shares (including transfers in connection with a redemption or
repurchase of shares) may be a taxable transaction for federal income tax
purposes. Selling shareholders will generally recognize gain or loss in an
amount equal to the difference between their adjusted tax basis in the shares
sold and the amount received. If the shares sold are held as a capital asset,
the gain or loss will be a capital gain or loss. For a summary of the maximum
tax rates applicable to capital gains (including capital gain dividends), see
"Capital Gains Rates" below. Any loss recognized upon a taxable disposition of
shares held for six months or less will be treated as a long-term capital loss
to the extent of any capital gain dividends received with respect to such
shares. For purposes of determining whether shares have been held for six months
or less, the holding period is suspended for any periods during which the
shareholder's risk of loss is diminished as a result of holding one or more
other positions in substantially similar or related property or through certain
options or short sales.
B-61
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CAPITAL GAINS RATES
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) 20% for capital assets held for more than one year. The
maximum long-term capital gains rate for corporations is 35%.
NON-U.S. SHAREHOLDERS
A shareholder who is not (i) a citizen or resident of the United States,
(ii) a corporation or partnership created or organized under the laws of the
United States or any state thereof, (iii) an estate, the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust whose administration is subject to the primary supervision of a
United States court and which has one or more United States fiduciaries who have
the authority to control all substantial decisions of the trust (a "Non-U.S.
Shareholder") generally will be subject to withholding of United States federal
income tax at a 30% rate (or lower applicable treaty rate) on dividends from the
Fund (other than capital gain dividends) that are not "effectively connected"
with a United States trade or business carried on by such shareholder.
Non-effectively connected capital gain dividends and gains realized from
the sale of shares will not be subject to United States 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 on capital gain dividends and gross proceeds paid to them
upon the sale of their shares. See "Backup Withholding" below.
If income from the Fund or gains realized from the sale of shares is
effectively connected with a Non-U.S. Shareholder's United States trade or
business, then such amounts will be subject to United States federal income tax
on a net basis at the tax rates applicable to United States citizens or domestic
corporations. 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 United States trade or business.
United States Treasury regulations, generally effective for payments made
after December 31, 2000, modify the withholding, backup withholding and
information reporting rules, including the procedures to be followed by foreign
investors in establishing foreign status. Prospective foreign investors should
consult their tax advisers concerning the applicability and effect of such
Treasury regulations on an investment in shares of the Fund.
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. Non-U.S. Shareholders may be required to provide appropriate
documentation to establish their entitlement to the benefits of such a treaty.
Foreign investors are advised to consult their
B-62
<PAGE> 221
tax 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 31%
("backup withholding") from dividends and redemption proceeds paid to
non-corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to 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 he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above.
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 paid to such shareholder
and the amount, if any, of tax withheld pursuant to backup withholding rules
with respect to such dividends. In the case of a Non-U.S. Shareholder, the Fund
must report to the IRS and such shareholder the aggregate amount of dividends
paid that are subject to backup withholding (if any) and the amount of tax
withheld with respect to such dividends pursuant to the backup withholding
rules. This information may also be made available to the tax authorities in the
Non-U.S. Shareholder's country of residence. Generally, dividends paid to
Non-U.S. Shareholders that are subject to the 30% federal income tax withholding
described above under "Non-U.S. Shareholders" are not subject to backup
withholding.
GENERAL
The federal income tax discussion set forth above is for general
information only. Prospective investors and shareholders should consult their
advisers regarding the specific federal tax consequences of purchasing, holding
and disposing of shares, as well as the effects of state, local and foreign tax
law and any proposed tax law changes.
FUND PERFORMANCE
From time to time the Fund may advertise its total return for prior
periods. Any such advertisement would include at least average annual total
return quotations for one-year,
B-63
<PAGE> 222
five-year and ten-year periods. 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 and capital gain dividends
paid by the Fund or to reflect the fact 12b-1 fees may have changed over time.
Average annual total return quotations are computed by finding the average
annual compounded rate of return over the period that would equate the initial
amount invested to the ending redeemable value.
The 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.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one-month) period (which period
will be stated in the advertisement) and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
B-64
<PAGE> 223
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
Yield and total return are calculated separately for Class A Shares, Class
B Shares and Class C Shares. Total return figures for Class A Shares include the
maximum sales charge. Total return figures for Class B Shares and Class C Shares
include any applicable contingent deferred sales charge. Because of the
differences in sales charges and distribution fees, the total returns for each
class of shares will differ.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate differs from yield, which is a measure of
the income actually earned by the Fund's investments, and from total return
which is a measure of the income actually earned by the Fund's investments plus
the effect of any realized and unrealized appreciation or depreciation of such
investments during a stated period. Distribution rate is, therefore, not
intended to be a complete measure of the Fund's performance. Distribution rate
may sometimes be greater than yield since, for instance, it may not include the
effect of amortization of bond premiums, and may include non-recurring
short-term capital gains and premiums from futures transactions engaged in by
the Fund. Distribution rates will be computed separately for each class of the
Fund's shares.
From time to time marketing materials may provide a portfolio manager
update, an Adviser update or discuss general economic conditions and outlooks.
The Fund's marketing materials may also show the Fund's asset class
diversification, top sectors holdings and largest holdings. Materials may also
mention how the Distributor believes the Fund compares relative to other Van
Kampen funds. Materials may also discuss the Dalbar Financial Services study
from 1984 to 1994 which studied investor cash flow into and out of all types of
mutual funds. The ten-year study found that investors who bought mutual fund
shares and held such shares outperformed investors who bought and sold. The
Dalbar study conclusions were consistent regardless of whether shareholders
purchased their fund shares in direct or sales force distribution channels. The
study showed that investors working with a professional representative have
tended over time to earn higher returns than those who invested directly. The
performance of the funds purchased by the investors in the Dalbar study and the
conclusions based thereon are not necessarily indicative of future performance
of such funds or conclusions that may result from similar studies in the future.
The Fund will 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
B-65
<PAGE> 224
Mutual Funds or similar independent services which monitor the performance of
mutual funds, with the Consumer Price Index, the Dow Jones Industrial Average,
Standard & Poor's indices, NASDAQ Composite Index, other appropriate indices of
investment securities, or with investment or savings vehicles. The performance
information may also include evaluations of the Fund published by nationally
recognized ranking or rating services and by nationally recognized financial
publications. Such comparative performance information will be stated in the
same terms in which the comparative data or indices are stated. Such
advertisements and sales material may also include a yield quotation as of a
current period. In each case, such total return and yield information, if any,
will be calculated pursuant to rules established by the SEC and will be computed
separately for each class of the Fund's shares. For these purposes, the
performance of the Fund, as well as the performance of other mutual funds or
indices, do not reflect sales charges, the inclusion of which would reduce the
Fund's performance. The Fund will include performance data for each class of
shares of the Fund in any advertisement or information including performance
data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations. For example, the Fund may, from time to time: (1) illustrate the
benefits of tax-deferral by comparing taxable investments to investments made
through tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return.
The Fund's Annual Report and Semiannual Report contain additional
performance information. A copy of the Annual Report or Semiannual Report may be
obtained without charge by calling or writing the Fund at the telephone number
and address printed on the cover of this Statement of Additional Information.
CLASS A SHARES
The Fund's average annual total return assuming payment of the maximum
sales charge, for Class A Shares of the Fund for (i) the one-year period ended
March 31, 2000 was -2.22%, (ii) the five-year period ended March 31, 2000 was
7.02% and (iii) the approximately six-year, three-month period since December
31, 1993, the commencement of distribution for Class A Shares of the Fund,
through March 31, 2000 was 2.84%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to March 31, 2000 was 19.09%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to March 31, 2000 was 25.01%.
B-66
<PAGE> 225
CLASS B SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class B Shares of the Fund for (i) the one-year
period ended March 31, 2000 was -1.84%, (ii) the five-year period ended March
31, 2000 was 7.00% and (iii) the approximately six-year, three-month period
since December 31, 1993, the commencement of distribution for Class B Shares of
the Fund, through March 31, 2000 was 2.77%.
The since commencement of distribution performance for Class B Shares
reflects the conversion of such shares into Class A Shares six years after
purchase. Class B Shares purchased on or after June 1, 1996 will convert to
Class A Shares eight years after purchase.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to March 31, 2000 was 19.35%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class B Shares from
its inception to March 31, 2000 was 19.35%.
CLASS C SHARES
The Fund's average annual total return, assuming payment of the contingent
deferred sales charge, for Class C Shares of the Fund for (i) the one-year
period ended March 31, 2000 was 0.99%, (ii) the five-year period ended March 31,
2000 was 7.19% and (iii) the approximately six-year, three-month period since
December 31, 1993, the commencement of distribution for Class C Shares of the
Fund, through March 31, 2000 was 2.82%.
The Fund's cumulative non-standardized total return, including payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to March 31, 2000 was 18.94%.
The Fund's cumulative non-standardized total return, excluding payment of
the contingent deferred sales charge, with respect to the Class C Shares from
its inception to March 31, 2000 was 18.94%.
These results are based on historical earnings and asset value fluctuations
and are not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objectives and policies as well as
the risks incurred in the Fund's investment practices.
OTHER INFORMATION
CUSTODY OF ASSETS
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
B-67
<PAGE> 226
Street Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts
02110, as custodian. The custodian also provides accounting services to the
Fund.
SHAREHOLDER REPORTS
Semiannual statements are furnished to shareholders, and annually such
statements are audited by the independent accountants.
INDEPENDENT AUDITORS
Independent auditors perform an annual audit of the financial statements of
the Fund. The Trust's Board of Trustees has engaged Ernst & Young LLP, located
at 233 South Wacker Drive, Chicago, Illinois 60606, to be the independent
auditors. The change in independent auditors was approved by the Fund's audit
committee and the Fund's Board of Trustees, including Trustees who are not
"interested persons" of the Fund (as defined in the 1940 Act).
PricewaterhouseCoopers LLP, located at 200 East Randolph Drive, Chicago,
Illinois 60601 ("PWC"), ceased being the Fund's independent accountants
effective May 25, 2000. The cessation of the client-auditor relationship between
the Fund and PWC was based solely on a possible future business relationship by
PWC with an affiliate of the Fund's investment adviser. The change in
independent accountants was approved by the Trust's audit committee and the
Trust's Board of Trustees, including Trustees who are not "interested persons"
of the Fund (as defined in the 1940 Act).
KPMG LLP, located at 303 West Wacker Drive, Chicago, Illinois 60601
("KPMG"), ceased being the Fund's independent accountants effective April 14,
2000. The cessation of the client-auditor relationship between the Fund and KPMG
was based solely on a possible future business relationship by KPMG with an
affiliate of the Fund's investment adviser. The change in independent
accountants was approved by the Fund's audit committee and the Fund's Board of
Trustees, including Trustees who are not "interested persons" of the Fund (as
defined in the 1940 Act).
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom (Illinois).
B-68
<PAGE> 227
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of Van Kampen Strategic Income Fund:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Van Kampen Strategic Income Fund
(the "Fund") at March 31, 2000, and the results of its operations, the changes
in its net assets and the financial highlights for the year then ended in
conformity with accounting principles generally accepted in the United States.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements in
accordance with auditing standards generally accepted in the United States,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at March 31, 2000 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above. The statement of changes in net assets and the financial highlights for
each of the periods ended on or prior to March 31, 1999 were audited by other
independent accountants whose report dated May 6, 1999 expressed an unqualified
opinion thereon.
PRICEWATERHOUSECOOPERS LLP
Chicago, Illinois
May 5, 2000
F-1
<PAGE> 228
BY THE NUMBERS
YOUR FUND'S INVESTMENTS
March 31, 2000
THE FOLLOWING PAGES DETAIL THE SPECIFIC HOLDINGS OF YOUR FUND AT THE END OF THE
REPORTING PERIOD.
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
ASSET BACKED SECURITIES 10.1%
2,500 First USA Credit Card Master Trust #99-01,
Class A--USD................................... 6.221% 10/19/06 $ 2,500,500
2,500 MBNA Master Credit Card Trust #96-J,
Class A--USD................................... 6.150 02/15/06 2,504,163
2,500 PECO Energy Transport Trust, Ser A2--USD (c)... 5.630 03/01/05 2,420,113
1,000 PECO Energy Transport Trust, Ser A6--USD (c)... 6.050 03/01/09 927,435
------------
TOTAL ASSET BACKED SECURITIES........................................... 8,352,211
------------
CORPORATE BONDS 52.5%
AUTOMOBILE 2.4%
250 Aetna Industries, Inc.--USD.................... 11.875 10/01/06 245,000
125 Cambridge Industries, Inc., Ser B--USD (c)..... 10.250 07/15/07 28,750
1,125 Federal - Mogul Corp.--USD (c)................. 7.750 07/01/06 975,938
100 Oxford Automotive, Inc., Ser D--USD............ 10.125 06/15/07 93,500
855 Talon Automotive Group, Inc., Ser B--USD (c)... 9.625 05/01/08 393,300
275 Venture Holdings Trust--USD.................... 12.000 06/01/09 221,375
------------
1,957,863
------------
BANKING 3.9%
1,000 MBNA Capital I--USD (c)........................ 8.278 12/01/26 908,787
2,400 Sovereign Bancorp Inc.--USD (c)................ 8.000 03/15/03 2,271,660
------------
3,180,447
------------
BEVERAGE, FOOD & TOBACCO 4.8%
250 Chiquita Brands International, Inc.--USD....... 10.000 06/15/09 192,500
350 Fleming Cos., Inc. --USD....................... 10.500 12/01/04 316,750
250 Luiginos, Inc.--USD............................ 10.000 02/01/06 208,750
200 National Wine & Spirits, Inc.--USD............. 10.125 01/15/09 190,000
650 Pantry, Inc.--USD (c).......................... 10.250 10/15/07 578,500
2,500 Pepsi - Gemex SA, Ser B--USD (c)............... 9.750 03/30/04 2,500,000
------------
3,986,500
------------
</TABLE>
See Notes to Financial Statements
F-2
<PAGE> 229
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
BROADCASTING, TELEVISION & MUSIC 2.1%
500 British Sky Broadcasting--USD (c).............. 6.875% 02/23/09 $ 453,750
1,250 Capstar Broadcasting Partners--USD (c) (d)..... 0/12.750 02/01/09 1,125,000
200 Muzak LLC--USD................................. 9.875 03/15/09 190,500
------------
1,769,250
------------
BUILDINGS & REAL ESTATE 3.7%
350 American Plumbing & Mechanical, Ser B--USD..... 11.625 10/15/08 316,750
500 AvalonBay Communities, Inc.--USD (c)........... 7.500 08/01/09 478,127
200 Building One Services Corp.--USD............... 10.500 05/01/09 180,000
750 Cemex International LLC--USD (c)............... 9.660 11/29/49 755,625
125 Del Webb Corp.--USD............................ 10.250 02/15/10 104,375
1,000 Owens Corning--USD (c)......................... 7.500 08/01/18 831,854
450 Standard Pacific Corp.--USD.................... 8.500 04/01/09 391,500
------------
3,058,231
------------
CABLE/MEDIA 3.7%
500 Century Communications Corp.--USD (c).......... 9.500 03/01/05 483,750
300 Charter Communication Holdings--USD............ 8.250 04/01/07 270,000
1,000 CSC Holdings, Inc.--USD (c).................... 10.500 05/15/16 1,115,000
300 Go Outdoor Systems Holdings--EUR............... 10.500 07/15/09 333,227
100 James Cable Partners L.P., Ser B--USD.......... 10.750 08/15/04 100,000
500 NTL Communications Corp.--USD (c).............. 11.500 10/01/08 515,000
250 NTL Inc., Ser A--USD (c) (d)................... 0/12.750 04/15/05 253,750
------------
3,070,727
------------
CHEMICALS, PLASTIC & RUBBER 0.8%
500 Coastal Corp.--USD (c)......................... 6.500 06/01/08 465,368
200 Lyondell Chemical Co.--USD..................... 9.625 05/01/07 191,000
------------
656,368
------------
CONTAINERS, PACKAGING, PAPER & GLASS 1.3%
325 Kappa Beheer BV--EUR........................... 10.625 07/15/09 326,764
200 Kappa Beheer BV--EUR (d)....................... 0/12.500 07/15/09 124,481
200 Repap New Brunswick--USD (c)................... 9.000 06/01/04 189,000
450 Sweetheart Cup Co., Inc.--USD.................. 10.500 09/01/03 437,625
------------
1,077,870
------------
</TABLE>
See Notes to Financial Statements
F-3
<PAGE> 230
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
HEALTHCARE 1.3%
205 Columbia / HCA Healthcare Corp.--MTN--USD...... 6.630% 07/15/45 $ 194,750
625 Oxford Health Plans--USD....................... 11.000 05/15/05 621,875
200 Tenet Healthcare Corp., Ser B--USD............. 8.125 12/01/08 184,000
50 Triad Hospital Holdings, Inc.--USD............. 11.000 05/15/09 50,500
------------
1,051,125
------------
HOTEL & GAMING 2.0%
575 Booth Creek Ski Holdings, Ser B--USD (c)....... 12.500 03/15/07 416,875
150 Hollywood Casino Corp.--USD.................... 11.250 05/01/07 151,875
150 Isle Capri Casinos, Inc.--USD.................. 8.750 04/15/09 130,875
275 Majestic Star Casino LLC--USD.................. 10.875 07/01/06 259,188
750 Park Place Entertainment Corp.--USD (c)........ 7.875 12/15/05 693,750
------------
1,652,563
------------
MACHINERY 0.2%
200 Terex Corp., Ser D--USD........................ 8.875 04/01/08 178,000
------------
MINING/STEEL 0.4%
250 Renco Steel Holdings, Inc.--USD (c)............ 10.875 02/01/05 223,750
200 Republic Technology / RTI Capital,
144A--Private Placement--USD (a)............... 13.750 07/15/09 52,000
50 Republic Technology / RTI Capital--USD......... 13.750 07/15/09 13,000
------------
288,750
------------
OIL & GAS 2.5%
400 Frontier Oil Corp.--USD........................ 11.750 11/15/09 378,000
500 Giant Industries, Inc.--USD (c)................ 9.750 11/15/03 483,750
910 Hurricane Hydrocarbons Ltd., 144A--Private
Placement--USD (a)............................. 16.000 12/31/01 796,250
125 Port Arthur Finance Corp., 144A--Private
Placement--USD (a)............................. 12.500 01/15/09 117,813
250 R&B Falcon Corp.--USD.......................... 9.500 12/15/08 242,500
------------
2,018,313
------------
RETAIL 1.6%
250 Big 5 Corp., Ser B--USD (c).................... 10.875 11/15/07 236,250
400 Community Distributors, Ser B--USD (c)......... 10.250 10/15/04 322,000
400 Duane Reade, Inc.--USD (c)..................... 9.250 02/15/08 370,000
500 Saks Inc.--USD (c)............................. 7.375 02/15/19 420,000
------------
1,348,250
------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE> 231
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
TELECOMMUNICATIONS 17.1%
200 Centennial Cellular Operating Co.--USD......... 10.750% 12/15/08 $ 199,000
1,000 CIA International Telecommunication--ARP (c)... 10.375 08/01/04 882,923
480 E. Spire Communications, Inc.--USD (c) (d)..... 0/13.000 11/01/05 288,000
200 Fairchild Semiconductor--USD................... 10.375 10/01/07 198,000
1,000 Global Telesystems Europe BV--EUR.............. 10.500 12/01/06 931,217
100 Globenet Communications LTD., 144A--Private
Placement--USD (a)............................. 13.000 07/15/07 98,500
235 Globo Communicacoes Participacoe, 144A--Private
Placement--USD (a) (c)......................... 10.625 12/05/08 204,450
500 Globo Communicacoes Participacoe--USD (c)...... 10.625 12/05/08 435,000
500 Hermes Europe Railtel BV--USD (c).............. 11.500 08/15/07 472,500
450 Intermedia Communications Inc., Ser B--USD
(d)............................................ 0/12.250 03/01/09 272,250
65 Intersil Corp, Ser UNIT--USD................... 13.250 08/15/09 74,425
500 KPNQWest BV--USD............................... 8.125 06/01/09 475,000
2,500 MCI Worldcom Inc.--USD (c)..................... 8.875 01/15/06 2,605,043
250 Millicom International--USD (c) (d)............ 0/13.500 06/01/06 211,875
1,500 Netia Holdings BV--USD......................... 10.250 11/01/07 1,335,000
630 Nextel Communications --USD.................... 9.375 11/15/09 573,300
1,000 Nextlink Communications, Inc., 144A--Private
Placement--USD (a)............................. 10.500 12/01/09 950,000
350 Philippine Long Distance Telephone, Ser
EMTN--USD (c).................................. 10.500 04/15/09 342,895
375 Pinnacle Holdings, Inc.--USD (c) (d)........... 0/10.000 03/15/08 242,813
110 Primus Telecommunications Group--USD........... 11.250 01/15/09 100,650
200 PSINet, Inc., Ser B--USD....................... 10.000 02/15/05 188,000
500 Satelites Mexicanos SA, Ser B--USD............. 10.125 11/01/04 422,500
750 SBA Communications Corp.--USD (c) (d).......... 0/12.000 03/01/08 491,250
250 Splitrock Services, Inc., Ser B--USD (c)....... 11.750 07/15/08 266,250
500 Sun Microsystems, Inc.--USD (c)................ 7.500 08/15/06 499,854
480 Telecorp PCS, Inc.--USD (d).................... 0/11.625 04/15/09 297,600
600 Triton PCS, Inc.--USD (c) (d).................. 0/11.000 05/01/08 408,000
250 Viatel, Inc.--USD (c) (d)...................... 0/12.500 04/15/08 143,125
500 Winstar Communications Inc.--USD (d)........... 0/14.000 10/15/05 513,750
------------
14,123,170
------------
TEXTILES 0.3%
110 Scovill Fasteners, Inc., Ser B--USD (c)........ 11.250 11/30/07 49,500
200 Sleepmaster LLC, Ser B--USD.................... 11.000 05/15/09 199,000
------------
248,500
------------
</TABLE>
See Notes to Financial Statements
F-5
<PAGE> 232
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
TRANSPORTATION 0.3%
350 Greyhound Lines, Inc., Ser B--USD.............. 11.500% 04/15/07 $ 264,250
------------
UTILITIES 4.1%
1,000 Central Termica Guemes, SA, 144A--Private
Placement--USD (a) (c) (i)..................... 12.000 11/26/01 50,000
1,000 Edelnor, 144A--Private Placement--USD (a)
(c)............................................ 10.500 06/15/05 400,000
1,600 Edelnor, 144A--Private Placement--USD (a)
(c)............................................ 7.750 03/15/06 448,000
1,000 Korea Electric Power Corp.--USD (c)............ 7.000 02/01/27 915,000
375 Midamerican Energy Holdings--USD (c)........... 7.230 09/15/05 366,563
250 Western Resources, Inc.--USD................... 6.875 08/01/04 200,203
1,000 Southern Energy, Inc., 144A--Private
Placement--USD (a) (c)......................... 7.900 07/15/09 989,311
------------
3,369,077
------------
TOTAL CORPORATE BONDS 52.5%............................................. 43,299,254
------------
FOREIGN GOVERNMENT AND AGENCY SECURITIES 45.7%
ARGENTINA 0.5%
500 Republic of Argentina, Ser D--USD.............. * 10/15/02 395,000
------------
AUSTRALIA 1.5%
2,000 Australian Government--AUD (c)................. 6.750 11/15/06 1,234,026
------------
BRAZIL 2.2%
2,426 Republic of Brazil--USD (e).................... 8.000 04/15/14 1,816,903
------------
BULGARIA 1.5%
1,500 Bulgaria Disc, Ser A--USD (c) (e).............. 7.062 07/28/24 1,203,750
------------
CANADA 5.1%
1,250 Canadian Government, Ser A83--CAD.............. 7.500 03/01/01 872,316
5,000 Canadian Government--CAD....................... 5.500 06/01/09 3,334,480
------------
4,206,796
------------
COLUMBIA 0.4%
750 Republic of Columbia--DEM...................... 4.890 11/21/01 358,011
------------
FRANCE 3.5%
3,000 French Treasury Note BTAN--EUR (c)............. 5.500 10/12/01 2,918,612
------------
GERMANY 3.4%
3,000 Bundesschatzanweisungen, Ser 99--EUR (c)....... 3.500 09/14/01 2,839,614
------------
HUNGARY 2.0%
433,350 Hungary Government--HUF........................ 16.000 11/24/00 1,660,898
------------
</TABLE>
See Notes to Financial Statements
F-6
<PAGE> 233
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
ITALY 4.4%
775 Republic of Italy BTPS--EUR.................... 9.500% 05/01/01 $ 781,856
3,000 Republic of Italy BTPS--EUR.................... 4.000 09/01/01 2,855,988
------------
3,637,844
------------
MEXICO 4.7%
1,000 United Mexican States, Ser XW--USD............. 10.375 02/17/09 1,076,500
1,500 United Mexican States, Ser D--USD (e).......... 6.903 12/31/19 1,471,875
1,500 United Mexican States, Ser B--USD (e).......... 6.250 12/31/19 1,276,800
------------
3,825,175
------------
MOROCCO 0.9%
857 Morocco Trust A Loan--USD (j).................. 6.844 01/01/09 773,846
------------
NEW ZEALAND 1.3%
2,000 New Zealand Government--NZD (c)................ 8.000 11/15/06 1,042,802
------------
PANAMA 1.7%
1,400 Republic of Panama, 144A--Private Placement--
USD (a) (c).................................... 7.875 02/13/02 1,361,500
------------
RUSSIA 4.5%
12,800 Russia Principal Loan-Vnesh--USD (f) (i)....... 6.906 12/15/20 3,680,000
216 Russia-IAN--USD (i)............................ 6.906 12/15/15 63,043
------------
3,743,043
------------
SPAIN 3.5%
3,000 Spanish Government--EUR (c).................... 4.250 07/30/02 2,848,232
------------
UNITED KINGDOM 2.7%
1,000 U.K. Treasury--GBP............................. 7.000 11/06/01 1,607,226
350 U.K. Treasury--GBP............................. 6.750 11/26/04 575,345
------------
2,182,571
------------
URUGUAY 1.0%
881 Republica Orient Uruguay--USD (c).............. 7.875 07/15/27 863,380
------------
VENEZUELA 0.9%
1,000 Republic of Venezuela--USD (c) (e)............. 6.750 03/31/20 710,000
------------
TOTAL FOREIGN GOVERNMENT AND AGENCY SECURITIES 45.7%.................... 37,622,003
------------
</TABLE>
See Notes to Financial Statements
F-7
<PAGE> 234
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
PAR AMOUNT
IN LOCAL U.S. $
CURRENCY MATURITY MARKET
(000) DESCRIPTION COUPON DATE VALUE
<C> <S> <C> <C> <C>
MORTGAGE BACKED SECURITIES (U.S.) 20.5%
1,272 DLJ Mortgage Acceptance Corp. 1996-E,
144A--Private Placement--USD (a) (c)........... 6.906% 12/28/25 $ 1,147,784
2,000 Federal Home Loan Bank--Ser AH01............... 7.905 11/07/01 2,028,600
2,000 Federal Home Loan Mortgage Corporation......... 7.000 05/12/14 1,886,040
11,042 FNMA REMIC #97-20 IB (Interest Only) (c)....... 1.840 03/25/27 379,576
3,500 FNMA 15 YR (b)................................. 6.500 TBA 3,367,665
46 FNMA (c)....................................... 6.500 04/01/29 42,796
295 FNMA (c)....................................... 6.500 06/01/29 277,339
42 FNMA........................................... 6.500 06/01/29 39,854
661 FNMA (c)....................................... 6.500 06/01/29 620,493
569 FNMA (c)....................................... 6.500 07/01/29 533,444
388 FNMA (c)....................................... 6.500 07/01/29 364,600
27 FNMA........................................... 6.500 07/01/29 25,008
301 FNMA........................................... 6.500 08/01/29 282,682
31 FNMA........................................... 6.500 08/01/29 29,185
471 FNMA........................................... 6.500 08/01/29 441,593
36 FNMA........................................... 6.500 09/01/29 33,683
641 FNMA (c)....................................... 6.500 11/01/29 600,576
906 FNMA (c)....................................... 6.500 11/01/29 850,882
291 GNMA (c)....................................... 7.000 05/15/26 282,450
318 GNMA (c)....................................... 7.000 05/15/28 308,440
213 GNMA (c)....................................... 7.000 06/15/28 206,259
2,227 GNMA (c)....................................... 7.000 07/15/28 2,158,825
15,856 SBA Strip (Interest Only) (c).................. * 08/24/19 1,007,944
------------
TOTAL MORTGAGE BACKED SECURITIES (U.S.)................................. 16,915,718
------------
U.S. GOVERNMENT AND GOVERNMENT AGENCY
OBLIGATIONS 2.3%
2,000 U.S. Treasury Bonds (h)........................ 5.500 08/15/28 1,856,380
------------
</TABLE>
See Notes to Financial Statements
F-8
<PAGE> 235
YOUR FUND'S INVESTMENTS
March 31, 2000
<TABLE>
<CAPTION>
U.S. $
MARKET
DESCRIPTION SHARES VALUE
<S> <C> <C>
COMMON AND PREFERRED STOCK 4.2%
Avalon Bay Communities, Ser G--Preferred Shares--USD (c)................. 50,000 $ 1,081,250
Dobson Communications Corp.--Preferred Shares--USD (f)................... 220 236,500
Grupo Casa Autrey--ADR (Mexico)--USD (c)................................. 8,500 64,813
Intersil Holding Corp.--Warrants, 144A--Private Placement--USD (a)....... 100 89,000
McLeodUSA, Inc.--USD..................................................... 600 50,927
MEPC International Capital, LP--Preferred Shares--USD (c)................ 100,000 1,962,500
Thai Military Bank--THB.................................................. 15,000 4,168
------------
TOTAL COMMON AND PREFERRED STOCK......................................... 3,489,158
------------
TOTAL LONG-TERM INVESTMENTS 135.3%
(Cost $119,317,391)................................................................ 111,534,724
FOREIGN CURRENCY (VARIOUS DENOMINATIONS) 0.1%
(Cost $61,576)..................................................................... 61,554
LIABILITIES IN EXCESS OF OTHER ASSETS (35.4%)....................................... (29,185,903)
------------
NET ASSETS 100.0%................................................................... $ 82,410,375
============
</TABLE>
* Zero coupon bond.
ARP--Argentine Peso
AUD--Australian Dollar
CAD--Canadian Dollar
DEM--German Mark
EUR--Eurodollar
GBP--Great Britain Pound
HUF--Hungarian Forint
NZD--New Zealand Dollar
THB--Thai Baht
USD--United States Dollar
ADR--American Depositary Receipt
EMTN--Euro Medium Term Note
MTN--Medium Term note
(a) 144A securities are those which are exempt from registration under Rule 144A
of the Securities Act of 1933, as amended. These securities may only be
resold in transactions exempt from registration which are normally those
transactions with qualified institutional buyers.
(b) Securities purchased on a when-issued or delayed delivery basis.
(c) Assets segregated as collateral for when-issued or delayed delivery purchase
commitments, open forwards or borrowings of the Fund.
See Notes to Financial Statements
F-9
<PAGE> 236
YOUR FUND'S INVESTMENTS
March 31, 2000
(d) Security is a "step-up" bond where the coupon increases, or steps up, at a
predetermined date.
(e) Item represents a "Brady Bond" which is the product of the "Brady Plan"
under which various Latin American, African, and Southeast Asian nations
have converted their outstanding external defaulted commercial bank loans
into bonds. Certain Brady Bonds have been collateralized, as to principal
due at maturity, by U.S. Treasury zero coupon bonds with a maturity date
equal to the final maturity date of such Brady Bonds.
(f) Payment-in-kind security.
(g) Security is accruing at less than the stated coupon.
(h) Security out as collateral for reverse repurchase agreement.
(i) Security is in default.
(j) Security is a bank loan participation.
PORTFOLIO COMPOSITION BY CREDIT QUALITY*
The following table summarizes the portfolio composition at March 31, 2000,
based upon the highest credit quality ratings as determined by Standard & Poor's
or Moody's.
<TABLE>
<S> <C>
U.S. Government and U.S. Government Agency Obligations...... 15.8%
AAA......................................................... 18.8%
AA.......................................................... 5.8%
A........................................................... 3.8%
BBB......................................................... 13.0%
BB.......................................................... 13.3%
B........................................................... 20.7%
CCC......................................................... 0.7%
CC.......................................................... 0.1%
C........................................................... 0.7%
Non-Rated................................................... 7.3%
-----
100.0%
=====
</TABLE>
* As a percentage of long-term investments.
See Notes to Financial Statements
F-10
<PAGE> 237
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
March 31, 2000
<TABLE>
<S> <C>
ASSETS:
Total Investments (Cost $119,317,391)....................... $111,534,724
Cash........................................................ 11,529
Foreign Currency (Cost $61,576)............................. 61,554
Receivables:
Interest.................................................. 2,218,439
Investments Sold.......................................... 1,807,188
Forward Currency Contracts................................ 73,203
Fund Shares Sold.......................................... 21,301
Other....................................................... 3,502
------------
Total Assets............................................ 115,731,440
------------
LIABILITIES:
Payables:
Bank Borrowings........................................... 25,995,363
Investments Purchased..................................... 4,492,947
Reverse Repurchase Agreements............................. 1,832,816
Income Distributions...................................... 239,655
Interest Payable.......................................... 141,093
Fund Shares Repurchased................................... 137,115
Distributor and Affiliates................................ 109,469
Investment Advisory Fee................................... 47,843
Trustees' Deferred Compensation and Retirement Plans........ 179,289
Accrued Expenses............................................ 145,475
------------
Total Liabilities....................................... 33,321,065
------------
NET ASSETS.................................................. $ 82,410,375
============
NET ASSETS CONSIST OF:
Capital (Par value of $.01 per share with an unlimited
number of shares authorized).............................. $105,101,736
Accumulated Distribution in Excess of Net Investment
Income.................................................... (559,864)
Net Unrealized Depreciation................................. (7,808,973)
Accumulated Net Realized Loss............................... (14,322,524)
------------
NET ASSETS.................................................. $ 82,410,375
============
MAXIMUM OFFERING PRICE PER SHARE:
Class A Shares:
Net asset value and redemption price per share (Based on
net assets of $33,929,944 and 3,272,193 shares of
beneficial interest issued and outstanding)............. $ 10.37
Maximum sales charge (4.75%* of offering price)......... .52
------------
Maximum offering price to public........................ $ 10.89
============
Class B Shares:
Net asset value and offering price per share (Based on
net assets of $45,066,353 and 4,339,448 shares of
beneficial interest issued and outstanding)............. $ 10.39
============
Class C Shares:
Net asset value and offering price per share (Based on
net assets of $3,414,078 and 329,291 shares of
beneficial interest issued and outstanding)............. $ 10.37
============
</TABLE>
* On sales of $100,000 or more, the sales charge will be reduced.
See Notes to Financial Statements
F-11
<PAGE> 238
Statement of Operations
For the Year Ended March 31, 2000
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest (Net of foreign withholding taxes of $22,097)...... $10,491,374
Dividends................................................... 359,721
-----------
Total Income............................................ 10,851,095
-----------
EXPENSES:
Investment Advisory Fee..................................... 974,546
Distribution (12b-1) and Service Fees (Attributed to Classes
A, B and C of $93,123, $532,924 and $36,423,
respectively)............................................. 662,470
Shareholder Services........................................ 145,083
Custody..................................................... 79,483
Trustees' Fees and Related Expenses......................... 69,236
Legal....................................................... 22,875
Other....................................................... 164,121
-----------
Total Operating Expenses................................ 2,117,814
Less:
Investment Advisory Fee Reduction..................... 268,083
Credits Earned on Cash Balances....................... 6,778
-----------
Net Operating Expenses.................................. 1,842,953
Interest Expense........................................ 1,946,558
-----------
Net Expenses............................................ 3,789,511
-----------
NET INVESTMENT INCOME....................................... $ 7,061,584
===========
NET REALIZED AND UNREALIZED GAIN/LOSS:
Realized Gain/Loss:
Investments............................................... $(3,223,337)
Options................................................... 3,087
Futures................................................... (857,481)
Forwards.................................................. 92,250
Foreign Currency Transactions............................. (913,531)
-----------
Net Realized Loss........................................... (4,899,012)
-----------
Net Unrealized Appreciation/Depreciation:
Beginning of the Period................................... (7,276,985)
-----------
End of the Period:
Investments............................................. (7,782,689)
Forwards................................................ (7,422)
Foreign Currency Translation............................ (18,862)
-----------
(7,808,973)
-----------
Net Unrealized Depreciation During the Period............... (531,988)
-----------
NET REALIZED AND UNREALIZED LOSS............................ $(5,431,000)
===========
NET INCREASE IN NET ASSETS FROM OPERATIONS.................. $ 1,630,584
===========
</TABLE>
See Notes to Financial Statements
F-12
<PAGE> 239
Statement of Changes in Net Assets
For the Year Ended March 31, 2000, the Nine Months Ended March 31, 1999 and the
Year Ended June 30, 1998
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED YEAR ENDED
MARCH 31, 2000 MARCH 31, 1999 JUNE 30, 1998
-------------------------------------------------
<S> <C> <C> <C>
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................. $ 7,061,584 $ 6,557,498 $ 9,217,102
Net Realized Loss..................... (4,899,012) (6,755,235) (1,253,925)
Net Unrealized Depreciation During the
Period.............................. (531,988) (6,100,297) (3,763,808)
------------ ------------ ------------
Change in Net Assets from
Operations.......................... 1,630,584 (6,298,034) 4,199,369
------------ ------------ ------------
Distributions from Net Investment
Income*............................. (5,032,864) (5,622,679) (9,238,901)
Return of Capital Distribution*....... (2,704,412) (1,182,153) -0-
------------ ------------ ------------
Total Distributions................... (7,737,276) (6,804,832) (9,238,901)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM
INVESTMENT ACTIVITIES............... (6,106,692) (13,102,866) (5,039,532)
------------ ------------ ------------
FROM CAPITAL TRANSACTIONS:
Proceeds from Shares Sold............. 11,907,164 20,972,354 37,212,204
Net Asset Value of Shares Issued
Through Dividend Reinvestment....... 4,073,954 3,077,004 4,088,237
Cost of Shares Repurchased............ (36,085,472) (27,689,372) (34,763,480)
------------ ------------ ------------
NET CHANGE IN NET ASSETS FROM CAPITAL
TRANSACTIONS........................ (20,104,354) (3,640,014) 6,536,961
------------ ------------ ------------
TOTAL INCREASE/DECREASE IN NET
ASSETS.............................. (26,211,046) (16,742,880) 1,497,429
NET ASSETS:
Beginning of the Period............... 108,621,421 125,364,301 123,866,872
------------ ------------ ------------
End of the Period (Including
accumulated distributions in excess
of net investment income of
$559,864, $974,738 and $1,909,557,
respectively)....................... $ 82,410,375 $108,621,421 $125,364,301
============ ============ ============
* Distributions by Class
--------------------------------------
Distributions from Net Investment
Income:
Class A Shares...................... $ (2,118,740) $ (2,213,332) $ (3,523,499)
Class B Shares...................... (2,725,948) (3,219,759) (5,451,394)
Class C Shares...................... (188,176) (189,588) (264,008)
------------ ------------ ------------
$ (5,032,864) $ (5,622,679) $ (9,238,901)
============ ============ ============
Return of Capital Distribution:
Class A Shares...................... $ (1,125,756) $ (465,347) $ -0-
Class B Shares...................... (1,480,317) (676,946) -0-
Class C Shares...................... (98,339) (39,860) -0-
------------ ------------ ------------
$ (2,704,412) $ (1,182,153) $ -0-
============ ============ ============
</TABLE>
See Notes to Financial Statements
F-13
<PAGE> 240
Statement of Cash Flows
For the Year Ended March 31, 2000
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Purchase of Investments..................................... $(159,955,838)
Proceeds from Sales of Investments.......................... 180,095,389
Net Investment Income....................................... 7,061,584
Adjustments to Reconcile Net Investment Income to Net Cash
Provided by Operating Activities:
Decrease in Interest Receivable........................... 154,205
Decrease in Short-Term Investments........................ 8,842,013
Increase in Foreign Currency.............................. (61,576)
Net Foreign Currency Gain/Loss............................ (989,290)
Net Futures Gain/Loss..................................... (777,480)
Amortization of Premium/Discount.......................... (540,968)
Increase in Other Assets.................................. (3,502)
Decrease in Advisory Fee Payable.......................... (15,397)
Decrease in Distributor & Affiliates Payable.............. (12,561)
Decrease in Accrued Expenses.............................. (129,019)
Increase in Trustees' Deferred Compensation and Retirement
Plans................................................... 51,149
-------------
Total Adjustments....................................... 6,517,574
-------------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 33,718,709
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Fund Shares Sold.............................. 11,999,577
Payments for Shares Redeemed................................ (36,203,100)
Distributions to Shareholders............................... (3,830,523)
Increase in Bank Borrowings................................. 6,469,766
Decrease in Reverse Repurchase Agreements................... (12,365,570)
Increase in Interest Payable................................ 141,093
-------------
NET CASH USED FOR FINANCING ACTIVITIES...................... (33,788,757)
-------------
NET DECREASE IN CASH........................................ (70,048)
Cash at Beginning of the Period............................. 81,577
-------------
CASH AT END OF THE PERIOD................................... $ 11,529
=============
Supplemental disclosure of cash flow information: Cash paid
during the period for interest............................ $ 1,992,221
=============
</TABLE>
See Notes to Financial Statements
F-14
<PAGE> 241
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30,
CLASS A SHARES MARCH 31, MARCH 31, -------------------------------------
2000(A) 1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF THE PERIOD............ $11.018 $12.286 $12.778 $12.065 $11.704 $11.975
------- ------- ------- ------- ------- -------
Net Investment Income.... .843 .679 .973 1.019 1.013 .657
Net Realized and
Unrealized Gain/Loss... (.574) (1.236) (.489) .714 .446 .272
------- ------- ------- ------- ------- -------
Total from Investment
Operations............... .269 (.557) .484 1.733 1.459 .929
------- ------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net
Investment Income...... .598 .587 .976 1.020 1.098 .793
Return of Capital
Distribution........... .320 .124 -0- -0- -0- .407
------- ------- ------- ------- ------- -------
Total Distributions........ .918 .711 .976 1.020 1.098 1.200
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD................... $10.369 $11.018 $12.286 $12.778 $12.065 $11.704
======= ======= ======= ======= ======= =======
Total Return* (b).......... 2.66% (4.47%)** 3.89% 14.92% 12.92% 8.46%
Net Assets at End of the
Period (In millions)..... $ 33.9 $ 41.8 $ 45.3 $ 43.8 $ 33.8 $ 29.6
Ratio of Expenses to
Average Net Assets....... 3.60% 3.32% 3.37% 3.80% 4.11% 4.36%
Ratio of Expenses,
excluding Interest
Expense, to Average Net
Assets*.................. 1.52% 1.53% 1.68% 1.81% 1.84% 1.98%
Ratio of Net Investment
Income to Average Net
Assets*.................. 8.00% 8.06% 7.72% 8.12% 8.34% 5.88%
Portfolio Turnover......... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been reimbursed by Van Kampen, Total Return would have been
lower and the ratios would have been as follows:
Ratio of Expenses,
excluding Interest
Expense, to Average Net
Assets................... 1.80% 1.82% 1.78% 1.86% 1.92% N/A
Ratio of Net Investment
Income to Average Net
Assets................... 7.71% 7.78% 7.63% 8.07% 8.26% N/A
</TABLE>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum sales charge of 4.75% or contingent deferred
sales charge ("CDSC"). On purchases of $1 million or more, a contingent
deferred sales charge of 1% may be imposed on certain redemptions made
within one year of purchase. If the sales charges were included, total
returns would be lower.
N/A = Not Applicable
See Notes to Financial Statements
F-15
<PAGE> 242
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30,
CLASS B SHARES MARCH 31, MARCH 31, -------------------------------------
2000(A) 1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF THE PERIOD............. $11.026 $12.286 $12.779 $12.069 $11.706 $11.968
------- ------- ------- ------- ------- -------
Net Investment Income..... .771 .622 .878 .920 .926 .585
Net Realized and
Unrealized Gain/Loss.... (.579) (1.243) (.491) .717 .443 .245
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ .192 (.621) .387 1.637 1.369 .830
------- ------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income.................. .536 .528 .880 .927 1.006 .722
Return of Capital
Distribution............ .297 .111 -0- -0- -0- .370
------- ------- ------- ------- ------- -------
Total Distributions......... .833 .639 .880 .927 1.006 1.092
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD.................... $10.385 $11.026 $12.286 $12.779 $12.069 $11.706
======= ======= ======= ======= ======= =======
Total Return* (b)........... 1.93% (4.99%)** 3.11% 13.98% 12.06% 7.62%
Net Assets at End of the
Period (In millions)...... $ 45.1 $ 62.8 $ 76.2 $ 76.2 $ 61.9 $ 52.6
Ratio of Expenses to Average
Net Assets................ 4.36% 4.09% 4.13% 4.55% 4.85% 5.06%
Ratio of Expenses, excluding
Interest Expense, to
Average Net Assets*....... 2.28% 2.29% 2.44% 2.57% 2.59% 2.68%
Ratio of Net Investment
Income to Average Net
Assets*................... 7.25% 7.30% 6.96% 7.33% 7.58% 5.30%
Portfolio Turnover.......... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been reimbursed by Van Kampen, Total Return would have been
lower and the ratios would have been as follows:
Ratio of Expenses, excluding
Interest Expense, to
Average Net Assets........ 2.56% 2.58% 2.54% 2.61% 2.67% N/A
Ratio of Net Investment
Income to Average Net
Assets.................... 6.97% 7.02% 6.86% 7.28% 7.50% N/A
</TABLE>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 4%,
charged on certain redemptions made within one year of purchase and
declining thereafter to 0% after the sixth year. If the sales charge was
included, total returns would be lower.
N/A = Not Applicable
See Notes to Financial Statements
F-16
<PAGE> 243
Financial Highlights
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE SHARE OF THE FUND
OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
<TABLE>
<CAPTION>
YEAR NINE MONTHS
ENDED ENDED YEAR ENDED JUNE 30,
CLASS C SHARES MARCH 31, MARCH 31, -------------------------------------
2000(A) 1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF THE PERIOD............. $11.013 $12.274 $12.768 $12.059 $11.699 $11.966
------- ------- ------- ------- ------- -------
Net Investment Income..... .760 .607 .876 .913 .944 .598
Net Realized and
Unrealized Gain/Loss.... (.572) (1.229) (.490) .723 .422 .227
------- ------- ------- ------- ------- -------
Total from Investment
Operations................ .188 (.622) .386 1.636 1.366 .825
------- ------- ------- ------- ------- -------
Less:
Distributions from and in
Excess of Net Investment
Income.................. .544 .528 .880 .927 1.006 .722
Return of Capital
Distribution............ .289 .111 -0- -0- -0- .370
------- ------- ------- ------- ------- -------
Total Distributions......... .833 .639 .880 .927 1.006 1.092
------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF THE
PERIOD.................... $10.368 $11.013 $12.274 $12.768 $12.059 $11.699
======= ======= ======= ======= ======= =======
Total Return* (b)........... 1.93% (5.01%)** 3.03% 13.99% 12.07% 7.53%
Net Assets at End of the
Period (In millions)...... $ 3.4 $ 4.0 $ 3.9 $ 3.8 $ 3.1 $ 1.7
Ratio of Expense to Average
Net Assets................ 4.37% 4.05% 4.13% 4.54% 4.80% 5.07%
Ratio of Expenses, excluding
Interest Expense, to
Average Net Assets*....... 2.29% 2.28% 2.44% 2.56% 2.58% 2.69%
Ratio of Net Investment
Income to Average Net
Assets*................... 7.22% 7.29% 6.96% 7.31% 7.49% 5.92%
Portfolio Turnover.......... 122% 282%** 523% 474% 343% 253%
* If certain expenses had not been reimbursed by Van Kampen, Total Return would have been
lower and the ratios would have been as follows:
Ratio of Expenses, excluding
Interest Expense, to
Average Net Assets........ 2.57% 2.57% 2.54% 2.61% 2.66% N/A
Ratio of Net Investment
Income to Average Net
Assets.................... 6.93% 7.01% 6.87% 7.27% 7.41% N/A
</TABLE>
** Non-Annualized
(a) Based on average shares outstanding.
(b) Assumes reinvestment of all distributions for the period and does not
include payment of the maximum contingent deferred sales charge of 1%,
charged on certain redemptions made within one year of purchase. If the
sales charge was included, total returns would be lower.
N/A = Not Applicable
See Notes to Financial Statements
F-17
<PAGE> 244
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen Strategic Income Fund (the "Fund") is organized as a series of Van
Kampen Trust (the "Trust"), a Delaware business trust, and is registered as a
non-diversified open-end management investment company under the Investment
Company Act of 1940, as amended. The Fund's primary investment objective is to
seek to provide shareholders with high current income, while its secondary
investment objective is to seek capital appreciation. The Fund will allocate its
investments among the following market sectors: U.S. government securities,
domestic investment grade income securities, domestic lower grade income
securities, foreign investment grade income securities and foreign lower grade
income securities. The Fund borrows money for investment purposes which will
create the opportunity for enhanced return, but also should be considered a
speculative technique and may increase the Fund's volatility. The Fund commenced
investment operations on December 31, 1993, with three classes of common shares:
Class A, Class B and Class C shares.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
A. SECURITY VALUATION Investments are stated at value using market quotations,
prices provided by market makers or, if such valuations are not available,
estimates obtained from yield data relating to instruments or securities with
similar characteristics in accordance with procedures established in good faith
by the Board of Trustees. Foreign investments are stated at value using the last
available bid price or yield equivalents obtained from dealers in the
over-the-counter (OTC) or interbank market. Short-term securities with remaining
maturities of 60 days or less are valued at amortized cost which approximates
market value. Cash includes cash deposited in demand deposits at banks.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when-issued" or "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain, in a segregated account with its custodian, assets having an aggregate
value at least
F-18
<PAGE> 245
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
equal to the amount of the when-issued or delayed delivery purchase commitments
until payment is made.
C. INCOME AND EXPENSES Interest income is recorded on an accrual basis and
dividend income is recorded on the ex-dividend date. Original issue discount is
accreted over the expected life of each applicable security. Income and expenses
of the Fund are allocated on a pro rata basis to each class of shares, except
for distribution and service fees and transfer agency costs which are unique to
each class of shares.
D. CURRENCY TRANSLATION Assets and liabilities denominated in foreign currencies
and commitments under forward currency contracts are translated into U.S.
dollars at the mean of the quoted bid and ask prices of such currencies against
the U.S. dollar. Purchases and sales of portfolio securities are translated at
the rate of exchange prevailing when such securities were acquired or sold.
Income and expenses are translated at rates prevailing when accrued.
E. FEDERAL INCOME TAXES It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required. Although the
Fund's fiscal year end is March 31, the Fund's tax year end was changed from
June 30 to December 31.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1999, the Fund had an accumulated capital loss
carryforward for tax purposes of $14,020,988 which will expire between December
31, 2002 and December 31, 2007. Net realized gains or losses may differ for
financial and tax reporting purposes primarily as a result of wash sales, and
the difference in the Fund's tax year end.
At March 31, 2000, for federal income tax purposes, the cost of long-term
investments is $119,321,991; the aggregate gross unrealized appreciation is
$3,704,918 and the aggregate gross unrealized depreciation is $11,492,185,
resulting in net unrealized depreciation on long-term investments of $7,787,267.
F. DISTRIBUTION OF INCOME AND GAINS The Fund declares daily and pays dividends
monthly from net investment income. Net investment income for federal income tax
purposes includes gains and losses realized on transactions in foreign
currencies and options and futures on foreign currencies. These realized gains
and
F-19
<PAGE> 246
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
losses are included as net realized gains or losses for financial reporting
purposes. Net realized gains, if any, are distributed annually.
For tax purposes, the determination of a return of capital distribution is
made at the end of the Fund's taxable year (December 31). For the taxable years
ended June 30, 1999 and December 31, 1999, permanent book and tax basis
differences relating to the recognition of net realized losses on foreign
currency transactions totaling $1,125,704 and $488,142 were reclassified from
accumulated net realized gain/loss to accumulated undistributed net investment
income.
G. EXPENSE REDUCTIONS During the year ended March 31, 2000, the Fund's custody
fee was reduced by $6,778 as a result of credits earned on overnight cash
balances.
2. INVESTMENT ADVISORY AGREEMENT AND
OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen
Investment Advisory Corp. ("the Adviser") will provide investment advice and
facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY MANAGED ASSETS % PER ANNUM
<S> <C>
First $500 million.......................................... .75 of 1%
Next $500 million........................................... .70 of 1%
Over $1 billion............................................. .65 of 1%
</TABLE>
For the year ended March 31, 2000, the Adviser voluntarily waived
approximately $268,100 of its investment advisory fees. This waiver is voluntary
and can be discontinued at any time.
For the year ended March 31, 2000, the Fund recognized expenses of
approximately $6,500 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom (Illinois), counsel to the Fund, of which a trustee of the
Fund is an affiliated person.
For the year ended March 31, 2000, the Fund recognized expenses of
approximately $29,400 representing Van Kampen's cost of providing accounting,
cash management and legal services to the Fund.
Van Kampen Investor Services Inc., an affiliate of the Adviser, serves as
the shareholder servicing agent for the Fund. For the year ended March 31, 2000,
the Fund recognized expenses of approximately $49,900. Transfer agency fees are
determined through negotiations with the Fund's Board of Trustees and are based
on competitive market benchmarks.
F-20
<PAGE> 247
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
Certain officers and trustees of the Fund are also officers and directors of
Van Kampen. The Fund does not compensate its officers or trustees who are
officers of Van Kampen.
The Fund provides deferred compensation and retirement plans for its
trustees who are not officers of Van Kampen. Under the deferred compensation
plan, trustees may elect to defer all or a portion of their compensation to a
later date. Benefits under the retirement plan are payable for a ten-year period
and are based upon each trustee's years of service to the Fund. The maximum
annual benefit per trustee under the plan is $2,500.
3. CAPITAL TRANSACTIONS
At March 31, 2000, capital aggregated $42,038,112, $58,833,063 and $4,230,561
for Classes A, B and C, respectively. For the year ended March 31, 2000,
transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A................................................. 533,112 $ 5,646,285
Class B................................................. 482,908 5,139,871
Class C................................................. 105,631 1,121,008
---------- ------------
Total Sales............................................... 1,121,651 $ 11,907,164
========== ============
Dividend Reinvestment:
Class A................................................. 189,864 $ 1,991,033
Class B................................................. 180,422 1,899,204
Class C................................................. 17,480 183,717
---------- ------------
Total Dividend Reinvestment............................... 387,766 $ 4,073,954
========== ============
Repurchases:
Class A................................................. (1,241,890) $(13,070,612)
Class B................................................. (2,020,638) (21,315,857)
Class C................................................. (160,607) (1,699,003)
---------- ------------
Total Repurchases......................................... (3,423,135) $(36,085,472)
========== ============
</TABLE>
F-21
<PAGE> 248
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
At March 31, 1999, capital aggregated $49,062,509, $75,267,108 and
$4,763,038 for Classes A, B and C, respectively. For the nine months ended March
31, 1999, transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A................................................. 797,826 $ 9,027,495
Class B................................................. 895,851 10,155,513
Class C................................................. 156,680 1,789,346
---------- ------------
Total Sales............................................... 1,850,357 $ 20,972,354
========== ============
Dividend Reinvestment:
Class A................................................. 112,529 $ 1,258,452
Class B................................................. 148,695 1,664,203
Class C................................................. 13,820 154,349
---------- ------------
Total Dividend Reinvestment............................... 275,044 $ 3,077,004
========== ============
Repurchases:
Class A................................................. (807,350) $ (9,050,583)
Class B................................................. (1,549,706) (17,323,867)
Class C................................................. (117,752) (1,314,922)
---------- ------------
Total Repurchases......................................... (2,474,808) $(27,689,372)
========== ============
</TABLE>
F-22
<PAGE> 249
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
At June 30, 1998, capital aggregated $47,827,145, $80,771,259 and $4,134,265
for Classes A, B and C, respectively. For the year ended June 30, 1998,
transactions were as follows:
<TABLE>
<CAPTION>
SHARES VALUE
<S> <C> <C>
Sales:
Class A................................................. 1,118,648 $ 14,164,929
Class B................................................. 1,677,599 21,153,724
Class C................................................. 150,464 1,893,551
---------- ------------
Total Sales............................................... 2,946,711 $ 37,212,204
========== ============
Dividend Reinvestment:
Class A................................................. 131,101 $ 1,649,403
Class B................................................. 180,125 2,266,285
Class C................................................. 13,723 172,549
---------- ------------
Total Dividend Reinvestment............................... 324,949 $ 4,088,237
========== ============
Repurchases:
Class A................................................. (990,262) $(12,470,355)
Class B................................................. (1,620,464) (20,396,054)
Class C................................................. (150,449) (1,897,071)
---------- ------------
Total Repurchases......................................... (2,761,175) $(34,763,480)
========== ============
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). Class B shares purchased
on or after June 1, 1996, and any dividend reinvestment plan Class B shares
received thereon, automatically convert to Class A shares eight years after the
end of the calendar month in which the shares were purchased. Class B shares
purchased before June 1, 1996, and any dividend reinvestment plan Class B shares
received thereon, automatically convert to Class A shares six years after the
end of the calendar month in which the shares were purchased. For the year ended
March 31, 2000, 203,892 Class B shares converted to Class A shares and are shown
in the above table as sales of Class A shares and repurchases of Class B shares.
Class C shares purchased before January 1, 1997, and any dividend reinvestment
plan Class C shares received thereon, automatically convert to Class A shares
ten years after the end of the calendar month in which such shares were
purchased. Class C shares purchased on or after January 1, 1997 do not possess a
conversion feature. For the year ended March 31, 2000, no Class C shares
converted to Class A shares. The CDSC will be imposed on most redemptions made
within six years of
F-23
<PAGE> 250
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
the purchase for Class B shares and one year of the purchase for Class C shares
as detailed in the following schedule.
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE
--------------------------
YEAR OF REDEMPTION CLASS B CLASS C
<S> <C> <C>
First...................................................... 4.00% 1.00%
Second..................................................... 3.75% None
Third...................................................... 3.50% None
Fourth..................................................... 2.50% None
Fifth...................................................... 1.50% None
Sixth...................................................... 1.00% None
Seventh and Thereafter..................................... None None
</TABLE>
For the year ended March 31, 2000, Van Kampen, as Distributor for the Fund,
received commissions on sales of the Fund's Class A shares of approximately
$8,200, and CDSC on redeemed shares of approximately $214,700. Sales charges do
not represent expenses of the Fund.
4. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $151,631,002 and $179,780,838,
respectively.
5. DERIVATIVE FINANCIAL INSTRUMENTS
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio, manage the portfolio's effective yield, foreign currency exposure,
maturity and duration or generate potential gain. All of the Fund's portfolio
holdings, including derivative instruments, are marked to market each day with
the change in value reflected in unrealized appreciation/depreciation. Upon
disposition, a realized gain or loss is recognized accordingly, except when
exercising a call option contract or taking delivery of a security underlying a
futures or forward contract. In these instances, the recognition of gain or loss
is postponed until the disposal of the security underlying the option, futures
or forward contract. Risks may arise as a result of the potential inability of
the counterparties to meet the terms of their contracts.
F-24
<PAGE> 251
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. OPTION CONTRACTS An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended March 31, 2000 were as follows:
<TABLE>
<CAPTION>
CONTRACTS PREMIUM
<S> <C> <C>
Outstanding at March 31, 1999............................... 25 $ 44,331
Options terminated in closing transactions.................. (25) (44,331)
--- --------
Outstanding at March 31, 2000............................... -0- $ -0-
=== ========
</TABLE>
B. FUTURES CONTRACTS A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and typically closes
the contract prior to the delivery date. These contracts are generally used to
manage the portfolio's effective maturity and duration.
Upon entering into futures contracts, the Fund maintains, in a segregated
account with its custodian, cash or liquid securities with a value equal to its
obligation under the futures contracts. During the period the futures contract
is open, payments are received from or made to the broker based upon changes in
the value of the contract (the variation margin). The cost of securities
acquired through delivery under a contract is adjusted by the unrealized gain or
loss on the contract.
Transactions in futures contracts for the year ended March 31, 2000, were as
follows:
<TABLE>
<CAPTION>
CONTRACTS
<S> <C>
Outstanding at March 31, 1999............................... 150
Futures Opened.............................................. 886
Futures Closed.............................................. (1,036)
------
Outstanding at March 31, 2000............................... -0-
======
</TABLE>
C. FORWARD CURRENCY CONTRACTS These instruments are commitments to purchase or
sell a foreign currency at a future date at a negotiated forward rate. The gain
or loss arising from the difference between the original value of the contract
and the
F-25
<PAGE> 252
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
closing value of such contract is included as a component of realized gain/loss
on forwards.
At March 31, 2000, the Fund has outstanding forward currency contracts as
follows:
<TABLE>
<CAPTION>
CURRENT UNREALIZED
FORWARD CURRENCY VALUE DEPRECIATION
<S> <C> <C>
SHORT CONTRACTS:
Great Britain Pound,
561,918 maturing 4/25/00................................. $894,746 $(7,422)
======== =======
</TABLE>
D. CLOSED BUT UNSETTLED FORWARD COMMITMENTS In certain situations, the Fund has
entered into offsetting transactions for outstanding forward commitments prior
to settlement of the obligation. In doing so, the Fund realizes a gain or loss
on the transactions at the time the forward commitment is closed. Risk may
result due to the potential inability of counterparties to meet the terms of
their contracts. At March 31, 2000, the Fund has a net realized gain on closed
but unsettled forward currency contracts of $80,625 scheduled to settle on May
31, 2000.
E. INVERSE FLOATING SECURITY These instruments have a coupon which is inversely
indexed to a short-term floating interest rate multiplied by a specified factor.
As the floating rate rises, the coupon is reduced. Conversely, as the floating
rate declines, the coupon is increased. The price of these securities may be
more volatile than the price of a comparable fixed rate security. These
instruments are typically used by the Fund to enhance the yield of the
portfolio.
F. INTEREST ONLY/PRINCIPAL ONLY SECURITIES A Mortgage-Backed Security or U.S.
Treasury Obligation may be stripped to create an Interest Only (IO) security and
a Principal Only (PO) security. An IO represents ownership in the cash flows of
the interest payments or coupon payments made. The cash flow from an IO
instrument decreases as the borrower repays the principal balance. Conversely, a
PO represents ownership in the cash flows of the principal payments made. A PO
created from a U.S. Treasury Obligation becomes a zero coupon bond. The cash
flow on a PO instrument increases as the borrowers repay the principal balance.
These instruments are typically used to manage interest rate exposure in the
fund's portfolio.
6. MORTGAGE-BACKED SECURITIES
A Mortgage-Backed Security (MBS) is a pass-through security created by pooling
mortgages and selling participations in the principal and interest payments
F-26
<PAGE> 253
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
received from borrowers. Most of these securities are guaranteed by federally
sponsored agencies such as Federal National Mortgage Association (FNMA).
A REMIC (Real Estate Mortgage Investment Conduit) is a bond which is
collateralized by a pool of MBS's. These MBS pools are divided into classes or
tranches with each class having its own characteristics.
7. ASSET-BACKED SECURITIES
An Asset-Backed Security (ABS) is a security collateralized by assets such as
installment loans, leases, mortgage loans, receivables or other kinds of assets
that are issued independently of the originator.
8. BANK LOAN PARTICIPATIONS
The Fund invests in participation interests of loans to foreign entities. When
the Fund purchases a participation of a foreign loan interest, the Fund
typically enters into a contractual agreement with the lender or other third
party selling the participation, but not with the borrower directly. As such,
the Fund assumes credit risk for the borrower, selling participant or other
persons positioned between the Fund and the borrower.
9. DISTRIBUTION AND SERVICE PLANS
The Fund and its shareholders have adopted a distribution plan pursuant to Rule
12b-1 under the Investment Company Act of 1940, as amended, and a service plan
(collectively the "Plans"). The Plans govern payments for the distribution of
the Fund's shares, ongoing shareholder services and maintenance of shareholder
accounts.
Annual fees under the Plans of up to .25% of Class A net assets and 1.00%
each of Class B and Class C net assets are accrued daily. Included in these fees
for the year ended March 31, 2000, are payments retained by Van Kampen of
approximately $428,500.
10. BORROWINGS
In accordance with its investment policies, the Fund may borrow money from banks
or enter into reverse repurchase agreements or dollar rolls for investment
purposes in an amount up to 33.3% of its total assets.
The Fund has entered into a $45,000,000 revolving credit agreement which
expires on May 31, 2000. Interest is charged under the agreement at a rate of
.425% above the federal funds rate. The interest rate in effect at March 31,
2000, was 6.7375%. An annual facility fee of .075% is charged on the maximum
facility of this line of credit.
F-27
<PAGE> 254
NOTES TO
FINANCIAL STATEMENTS
March 31, 2000
The Fund has entered into reverse repurchase agreements with Warburg Dillon
Read LLC, under which the Fund sells securities and agrees to repurchase them on
April 1, 2000 at a mutually agreed upon price. For the year ended March 31,
2000, the average interest rate in effect for reverse repurchase agreements was
4.6300%.
The average daily balance of bank borrowings and reverse repurchase
agreements for the year ended March 31, 2000, was approximately $35,782,000 with
an average interest rate of 5.49%.
At March 31, 2000, these agreements represented 24.0% of the Fund's total
assets.
F-28
<PAGE> 255
PART C: OTHER INFORMATION
ITEM 23. EXHIBITS:
(a)(1) Agreement and Declaration of Trust(2)
(2) Second Certificate of Amendment(5)
(3) Certificate of Designation for:
(i) Van Kampen High Yield Fund(5)
(ii) Van Kampen Strategic Income Fund(5)
(iii) Van Kampen Managed Short-Term Income Fund(7)
(b) By-Laws(2)
(c) Specimen Share Certificates for:
(i) Van Kampen High Yield Fund
(1) Class A Shares(3)
(2) Class B Shares(3)
(3) Class C Shares(3)
(ii) Van Kampen Strategic Income Fund
(1) Class A Shares(3)
(2) Class B Shares(3)
(3) Class C Shares(3)
(iii) Van Kampen Managed Short-Term Income Fund
(1) Class A Shares(7)
(2) Class B Shares(7)
(3) Class C Shares(7)
(d) Investment Advisory Agreement for:
(i) Van Kampen High Yield Fund(4)
(ii) Van Kampen Strategic Income Fund(4)
(iii) Van Kampen Managed Short-Term Income Fund(7)
(e)(1) Distribution and Service Agreement for:
(i) Van Kampen High Yield Fund(4)
(ii) Van Kampen Strategic Income Fund(4)
(iii) Van Kampen Managed Short-Term Income Fund(7)
(2) Form of Dealer Agreement(7)
(3) Form of Broker Fully Disclosed Clearing Agreement(7)
(4) Form of Bank Fully Disclosed Clearing Agreement(7)
(f)(1) Form of Trustee Deferred Compensation Plan(6)
(2) Form of Trustee Retirement Plan(6)
(g)(1) Custodian Contract(7)
(2) Transfer Agency and Service Agreement(4)
(h)(1) Fund Accounting Agreement(7)
(2) Amended and Restated Legal Services Agreement(7)
(i)(1) Opinion of Skadden, Arps, Slate, Meagher & Flom (Illinois)
for:
(i) Van Kampen High Yield Fund(1)
(ii) Van Kampen Strategic Income Fund(1)
(iii) Van Kampen Managed Short-Term Income Fund++
(2) Consent of Skadden, Arps, Slate, Meagher & Flom (Illinois)+
(j)(1) Opinion of KPMG LLP for:
(i) Van Kampen High Yield Fund+
(ii) Van Kampen Strategic Income Fund+
(j)(2) Consent of KPMG LLP for:
(i) Van Kampen High Yield Fund+
(ii) Van Kampen Strategic Income Fund+
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<PAGE> 256
(3) Consent of PricewaterhouseCoopers LLP for:
(i) Van Kampen High Yield Fund+
(ii) Van Kampen Strategic Income Fund+
(4) Consent of Ernst & Young LLP with respect to the Van Kampen
High Yield Fund and Van Kampen Strategic Income Fund+
(k) Not Applicable
(l) Letter of Understanding relating to initial capital(3)
(m)(1) Distribution Plan Pursuant to Rule 12b-1 for:
(i) Van Kampen High Yield Fund(3)
(ii) Van Kampen Strategic Income Fund(3)
(iii) Van Kampen Managed Short-Term Income Fund(7)
(2) Form of Shareholder Assistance Agreement(7)
(3) Form of Administrative Services Agreement(7)
(4) Service Plan for:
(i) Van Kampen High Yield Fund(3)
(ii) Van Kampen Strategic Income Fund(3)
(iii) Van Kampen Managed Short-Term Income Fund(7)
(n)(1) Amended Multi-Class Plan(4)
(2) Van Kampen Managed Short-Term Income Fund Multi-Class Plan(9)
(p) Code of Ethics+
(q) Power of Attorney+
(z)(1) List of certain investment companies in response to Item
27(a)+
(2) List of officers and directors of Van Kampen Funds Inc. in
response to Item 27(b)+
---------------
(1) Incorporated herein by reference to Post-Effective Amendment No. 36 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on August 30, 1995.
(2) Incorporated herein by reference to Post-Effective Amendment No. 39 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on April 26, 1996.
(3) Incorporated herein by reference to Post-Effective Amendment No. 41 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on October 28, 1996.
(4) Incorporated herein by reference to Post-Effective Amendment No. 42 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on October 28, 1997.
(5) Incorporated herein by reference to Post-Effective Amendment No. 43 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on October 28, 1998.
(6) Incorporated herein by reference to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on May 28, 1999.
(7) Incorporated herein by reference to Post-Effective Amendment No. 45 to
Registrant's Registration Statement on Form N-1A, File Number 33-4410 as
filed on July 21, 1999.
+ Filed herewith.
++ To be filed by further amendment.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See the Statement of Additional Information.
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<PAGE> 257
ITEM 25. INDEMNIFICATION.
Pursuant to Del. Code Ann. Title 12 Section 3817, a Delaware business 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, as amended. 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 Trust, (ii) willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of such person's office or (iii)
for a criminal proceeding, not having a reasonable cause to believe that such
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 such person's
office, the decision by the Registrant to indemnify such person must be based
upon the reasonable determination of independent legal counsel in a written
opinion or a majority of a quorum of 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 and only if the following conditions
are met: (1) the trustee or officer provides a security for the undertaking; (2)
the Registrant is insured against losses arising from lawful advances; or (3) a
majority of a quorum of the Registrant's disinterested, non-party trustees, or
an independent legal counsel in a written opinion, shall determine, based upon a
review of readily available facts, that a recipient of the advance ultimately
will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "1933 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
1933 Act and is, therefor 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 1933 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 investigating 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
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<PAGE> 258
order to make the statements not misleading under the 1933 Act, or any other
statue 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 in the indemnity of
the Registrant in favor of the Distributor or any person indemnified to be
deemed to protect the Distributor or any person against any liability to the
Fund or its security holders to which the Distributor or such person would
otherwise be subject by reason of willful misfeasance, bad faith or gross
negligence in the performance of its duties or by reason of its reckless
disregard of its obligations and duties under the agreement.
Pursuant to the agreement by which Van Kampen Investor Services Inc.
("Investor Services") is appointed transfer agent of the Fund, the Registrant
agrees to indemnify and hold Investor Services harmless against any losses,
damages, costs, charges, payments, liabilities and expenses (including
reasonable counsel fees) arising out of or attributable to:
(1) the performance of Investor Services under the agreement provided that
Investor Services acted in good faith with due diligence and without negligence
or willful misconduct.
(2) reliance by Investor Services on, or reasonable use by, Investor
Services of information, records and documents which have been prepared on
behalf of, or have been furnished by, the Fund, or the carrying out by Investor
Services of any instructions or requests of the Fund.
(3) the offer or sale of the Fund's shares in violation of any federal or
state law or regulation or ruling by any federal agency unless such violation
results from any failure by Investor Services to comply with written
instructions from the Fund that such offers or sales were not permitted under
such law, rule or regulation.
(4) the refusal of the Fund to comply with terms of the agreement or the
Fund's lack of good faith, negligence or willful misconduct or breach of any
representation or warranty made by the Fund under the agreement provided that if
the reason for such failure is attributable to any action of the Fund's
investment adviser or distributor or any person providing accounting or legal
services to the Fund, Investor Services only will be entitled to indemnification
if such entity is otherwise entitled to the indemnification from the Fund.
See also "Investment Advisory Agreement" in each Statement of Additional
Information.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in each Prospectus and "Investment
Advisory Agreement," "Other Agreements" and "Trustees and Officers" in each
Statement of Additional Information for information regarding the business of
Van Kampen Investment Advisory Corp. (the "Adviser"). For information as to the
business, profession, vocation and employment of a substantial nature of each of
the officers and directors of the Adviser, reference is made to the Adviser's
current Form ADV (File No. 801-18161) filed under the Investment Advisers Act of
1940, as amended, incorporated herein by reference.
ITEM 27. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen Funds Inc., which acts as
principal underwriter for certain investment companies and unit investment
trusts. See Exhibit(z)(1) incorporated by reference herein.
(b) Van Kampen Funds Inc., is an affiliated person of the Registrant and is
the only principal underwriter for the Registrant. The name, principal business
address and positions and offices with Van Kampen Funds Inc. of each of its
directors and officers are set forth in Exhibit (z)(2). Except as disclosed
under the heading, "Trustees and Officers" in Part B of this Registration
Statement, none of such persons has any position or office with the Registrant.
(c) Not applicable.
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<PAGE> 259
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents of the Registrant required by
Section 31 (a) of the Investment Company Act of 1940, as amended, and the Rules
thereunder to be maintained (i) by Registrant will be maintained at its offices
located at 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555, or at Van
Kampen Investors Services Inc., 7501 Tiffany Springs Parkway, Kansas City,
Missouri, 64153, or at the State Street Bank and Trust Company, 1776 Heritage
Drive, North Quincy, Massachusetts 02171; (ii) by the Adviser, will be
maintained at its offices, located at 1 Parkview Plaza, Oakbrook Terrace,
Illinois 60181-5555; and (iii) by Van Kampen Funds Inc., the principal
underwriter, will be maintained at 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555.
ITEM 29. MANAGEMENT SERVICES.
Not applicable.
ITEM 30. UNDERTAKINGS.
Not Applicable.
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<PAGE> 260
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended (the
"1933 Act"), and the Investment Company Act of 1940, as amended, the Registrant,
VAN KAMPEN TRUST, certifies that it meets all of the requirements for
effectiveness of this Amendment to the Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Amendment to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Oakbrook Terrace and the State of
Illinois, on the 27th day of July, 2000.
VAN KAMPEN TRUST
By: /s/ A. THOMAS SMITH III
---------------------------------------
A. Thomas Smith III, Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed on July 27, 2000 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
Principal Executive Officer:
/s/ RICHARD F. POWERS III* President
-----------------------------------------------------
Richard F. Powers III
Principal Financial Officer:
/s/ JOHN L. SULLIVAN* Vice President, Chief Financial Officer and
----------------------------------------------------- Treasurer
John L. Sullivan
Trustees:
/s/ J. MILES BRANAGAN* Trustee
-----------------------------------------------------
J. Miles Branagan
/s/ JERRY D. CHOATE* Trustee
-----------------------------------------------------
Jerry D. Choate
/s/ LINDA HUTTON HEAGY* Trustee
-----------------------------------------------------
Linda Hutton Heagy
/s/ R. CRAIG KENNEDY* Trustee
-----------------------------------------------------
R. Craig Kennedy
/s/ MITCHELL M. MERIN* Trustee
-----------------------------------------------------
Mitchell M. Merin
/s/ JACK E. NELSON* Trustee
-----------------------------------------------------
Jack E. Nelson
/s/ PHILLIP B. ROONEY* Trustee
-----------------------------------------------------
Phillip B. Rooney
/s/ FERNANDO SISTO* Trustee
-----------------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN* Trustee
-----------------------------------------------------
Wayne W. Whalen
/s/ SUZANNE H. WOOLSEY* Trustee
-----------------------------------------------------
Suzanne H. Woolsey
------------
* Signed by A. Thomas Smith III pursuant to a power of attorney filed herewith.
/s/ A. THOMAS SMITH III July 27, 2000
-----------------------------------------------------
A. Thomas Smith III
Attorney-in-Fact
</TABLE>
<PAGE> 261
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 47 TO FORM N-1A
AS SUBMITTED TO THE SECURITIES AND EXCHANGE COMMISSION
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<S> <C>
(i) (2) Consent of Skadden, Arps, Slate, Meagher & Flom
(Illinois)
(j) (1) Opinion of KPMG LLP for:
(i) Van Kampen High Yield Fund
(ii) Van Kampen Strategic Income Fund
(2) Consent of KPMG LLP for:
(i) Van Kampen High Yield Fund
(ii) Van Kampen Strategic Income Fund
(3) Consent of PricewaterhouseCoopers LLP for:
(i) Van Kampen High Yield Fund
(ii) Van Kampen Strategic Income Fund
(4) Consent of Ernst & Young LLP with respect to the Van
Kampen High Yield Fund and Van Kampen Strategic Income Fund
(p) Code of Ethics
(q) Power of Attorney
(z) (1) List of certain investment companies in response to Item
27(a).
(2) List of officers and directors of Van Kampen Funds Inc.
in response to Item 27(b).
</TABLE>