As filed with the Securities and Exchange Commission on May 5, 2005
Securities Act File No. 333-123443
Investment Company Act File No. 811-05769
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 1
[ ] POST-EFFECTIVE AMENDMENT NO. __
(CHECK APPROPRIATE BOX OR BOXES)
VAN KAMPEN HIGH INCOME TRUST II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
(800) 847-2424
(AREA CODE AND TELEPHONE NUMBER)
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
AMY R. DOBERMAN, ESQ.
MANAGING DIRECTOR
VAN KAMPEN INVESTMENTS INC.
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
WAYNE W. WHALEN, ESQ.
CHARLES B. TAYLOR, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
333 WEST WACKER DRIVE
CHICAGO, ILLINOIS 60606
(312) 407-0700
================================================================================
Approximate Date of Proposed Offering: As soon as practicable after this
Registration Statement becomes effective.
==============================================================================================================================
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
------------------------------------------------------------------------------------------------------------------------------
TITLE OF SECURITIES PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
BEING REGISTERED AMOUNT BEING OFFERING PRICE AGGREGATE OFFERING REGISTRATION
REGISTERED PER UNIT PRICE FEE
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Common Shares ($0.01 par value) 12,208,298 $ 4.54 (1) $ 55,425,673 $ 6,524 (2)
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Auction Preferred Shares ($0.01 par value) 1,504 $ 25,000 $ 37,600,000 $ 4,426 (2)
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(1) Average of high and low reported price for common shares on May 3, 2005.
(2) A registration fee of $117.70 was previously paid in connection with the
initial filing.
The Registrant hereby amends this registration statement on such date
or dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY NOTE
This Registration Statement is organized as follows:
- Questions and Answers to Van Kampen High Income Trust Shareholders and
Van Kampen High Income Trust II Shareholders
- Notice of Special Meeting of Shareholders of Van Kampen High Income
Trust and Van Kampen High Income Trust II
- Joint Proxy Statement/Prospectus for Van Kampen High Income Trust and
Van Kampen High Income Trust II
- Statement of Additional Information regarding the Reorganization of Van
Kampen High Income Trust into Van Kampen High Income Trust II
- Part C Information
- Exhibits
-- MAY 2005 --
--------------------------------------------------------------------------------
IMPORTANT NOTICE
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
TO SHAREHOLDERS OF VAN KAMPEN
HIGH INCOME TRUST
AND
VAN KAMPEN HIGH INCOME TRUST II
--------------------------------------------------------------------------------
QUESTIONS & ANSWERS
---------------------------------------
Although we recommend that you read the complete Joint Proxy Statement/
Prospectus, we have provided for your convenience a brief overview of the issues
to be voted on.
---------------------------------------
Q WHY IS A SHAREHOLDER
MEETING BEING HELD?
A Shareholders of
Van Kampen High Income Trust: You are being asked to vote on a reorganization
(the "Reorganization") of Van Kampen High Income Trust (the "Target Fund") into
Van Kampen High Income Trust II (the "Acquiring Fund"), a closed-end investment
company that has a similar investment objective and similar investment policies
as the Target Fund. Shareholders of Van Kampen High Income Trust II: You are
being asked to vote on the issuance of common shares of beneficial interest by
the Acquiring Fund in connection with the Reorganization.
Q WHY IS THE
REORGANIZATION BEING RECOMMENDED?
A The Board of Trustees of
each Fund has determined that the Reorganization will benefit holders of common
shares of each Fund. The Target Fund and the Acquiring Fund are similar. Each
Fund pursues a similar investment objective to provide to its common
shareholders high current income, while seeking to preserve shareholders'
capital, through investment in a professionally managed diversified portfolio of
high income producing fixed-income securities, in the case of the Acquiring
Fund, and high yield fixed-income securities, in the case of the Target Fund.
Each Fund invests primarily in fixed-income securities rated in the medium- and
lower-grade categories by established rating agencies, or in unrated securities
considered by the investment adviser to be of comparable quality. After the
Reorganization, it is anticipated that common shareholders of the Funds will
experience a reduced overall operating expense ratio, as certain fixed
administra-
tive costs will be spread across the combined larger asset base. It is not
anticipated that the Reorganization will directly benefit holders of preferred
shares; however, it is anticipated that the Reorganization will not adversely
affect preferred shareholders, and none of the expenses of the Reorganization
will be borne by preferred shareholders.
Q HOW WILL THE
REORGANIZATION AFFECT ME?
A Assuming shareholders of
the Target Fund approve the Reorganization and shareholders of the Acquiring
Fund approve the issuance of common shares of beneficial interest by that Fund,
the assets and liabilities of the Target Fund will be combined with those of the
Acquiring Fund and the Target Fund will be dissolved.
Shareholders of the Target Fund: You will become a shareholder of the Acquiring
Fund. If you are a holder of common shares of the Target Fund, you will receive
newly-issued common shares of the Acquiring Fund, and if you are a holder of
preferred shares of the Target Fund, you will receive newly-issued preferred
shares of the Acquiring Fund. The aggregate net asset value of the common shares
you receive in the Reorganization will equal the aggregate net asset value of
the common shares you own immediately prior to the Reorganization, less the
costs of the Reorganization (though you may receive cash for fractional shares).
The aggregate liquidation preference of the preferred shares you receive in the
Reorganization will equal the aggregate liquidation preference of the preferred
shares you own immediately prior to the Reorganization. No certificates for
shares of the Acquiring Fund will be issued in connection with the
Reorganization, although such certificates will be available upon request.
Shareholders of the Acquiring Fund: You will remain a shareholder of the
Acquiring Fund.
Q WILL I HAVE TO PAY ANY
SALES LOAD, COMMISSION OR OTHER SIMILAR FEE IN CONNECTION WITH THE
REORGANIZATION?
A You will pay no sales loads
or commissions in connection with the Reorganization. However, if the
Reorganization is completed, the costs associated with the Reorganization,
including the costs associated with the shareholder meeting, will be borne by
the Target Fund and the Acquiring Fund in proportion to their projected declines
in total operating expenses as a result of the Reorganization.
Q WILL I HAVE TO PAY ANY
FEDERAL TAXES AS A RESULT OF THE REORGANIZATION?
A The Reorganization is
intended to qualify as a "reorganization" within the meaning of Section
368(a)(1) of the Internal Revenue Code of 1986, as amended. If the
Reorganization so qualifies, in general, shareholders of the Target Fund will
recognize no gain or loss upon the receipt of shares of the Acquiring Fund in
connection with the Reorganization. Additionally, the Target Fund will not
recognize any gain or loss as a result of the transfer of all of its assets and
liabilities in exchange for the shares of the Acquiring Fund or as a result of
its dissolution. Neither the Acquiring Fund nor its shareholders will recognize
any gain or loss in connection with the Reorganization.
Q WHY IS THE VOTE OF
COMMON SHAREHOLDERS OF THE ACQUIRING FUND BEING SOLICITED?
A Although the Acquiring
Fund will continue its legal existence and operations after the Reorganization,
the rules of the New York Stock Exchange and Chicago Stock Exchange (on which
the Acquiring Fund's common shares are listed) require holders of common shares
of the Acquiring Fund to approve the issuance of additional common shares of
beneficial interest by the Acquiring Fund in connection with the Reorganization.
If the issuance of additional common shares of the Acquiring Fund is not
approved, the Reorganization will not occur.
Q HOW DOES THE BOARD OF
TRUSTEES OF MY FUND SUGGEST THAT I VOTE?
A After careful consideration,
the Board of Trustees of each Fund recommends that you vote "FOR" each of the
items proposed.
Q HOW DO I VOTE MY PROXY?
A You may cast your vote by mail, phone or internet. To vote by mail,
please mark your vote on the enclosed proxy card and sign, date and return the
card in the postage-paid envelope provided. If you choose to vote via phone or
internet, please refer to the instructions found on the proxy card accompanying
this Joint Proxy Statement/Prospectus. To vote by phone or internet, you will
need the "control number" that appears on the proxy card.
Q WHOM DO I CONTACT FOR FURTHER INFORMATION?
A You can contact your financial adviser for further information. You may
also call Van Kampen's Client Relations Department at (800) 341-2929
(Telecommunication Device for the Deaf users may call (800) 421-2833) or visit
our web site at www.vankampen.com where you can send us an e-mail message by
selecting "Contact Us."
ABOUT THE PROXY CARD
--------------------------------------------------------------------------------
Please vote on the proposals using blue or black ink to mark an X in one of the
boxes provided on the proxy card.
SHAREHOLDERS OF VAN KAMPEN HIGH INCOME TRUST:
Approval of Reorganization -- mark "For," "Against" or "Abstain."
SHAREHOLDERS OF VAN KAMPEN HIGH INCOME TRUST II:
Approval of the Issuance of Common Shares -- mark "For," "Against" or "Abstain."
Sign, date and return the proxy card in the enclosed postage-paid envelope. All
registered owners of an account, as shown in the address, must sign the card.
When signing as attorney, trustee, executor, administrator, custodian, guardian
or corporate officer, please indicate your full title.
[X] PLEASE MARK
VOTES AS IN
THIS EXAMPLE
VAN KAMPEN XXXXX
JOINT SPECIAL MEETING OF SHAREHOLDERS
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
FOR AGAINST ABSTAIN
1. Authority for the [ ] [ ] [ ] 3. To transact such other business as may properly
proposal to approve come before the Meeting.
the Reorganization.
2. Authority to issue [ ] [ ] [ ]
additional common
shares.
Please be sure to sign and date this Proxy, Date
Shareholder sign here Co-owner sign here
XXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXXX
SAMPLE
VAN KAMPEN HIGH INCOME TRUST
AND
VAN KAMPEN HIGH INCOME TRUST II
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 341-2929
NOTICE OF JOINT SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JUNE 22, 2005
Notice is hereby given that a joint special meeting of shareholders (the
"Special Meeting") of Van Kampen High Income Trust (the "Target Fund") and Van
Kampen High Income Trust II (the "Acquiring Fund") will be held at the offices
of Van Kampen Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois
60181-5555 on June 22, 2005 at 9:30 a.m. for the following purposes:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and Acquiring Fund, the termination
of the Target Fund's registration under the Investment Company Act of
1940, as amended, and the dissolution of the Target Fund under applicable
state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of additional common shares of the Acquiring Fund
in connection with the Reorganization Agreement; and
For shareholders of both Funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
Shareholders of record as of the close of business on April 25, 2005 are
entitled to vote at the Special Meeting or any adjournment thereof.
THE BOARD OF TRUSTEES OF EACH FUND REQUESTS THAT YOU VOTE YOUR SHARES BY
INDICATING YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD, DATING AND
SIGNING SUCH PROXY CARD AND RETURNING IT IN THE ENVELOPE PROVIDED, WHICH IS
ADDRESSED FOR YOUR CONVENIENCE AND NEEDS NO POSTAGE IF MAILED IN THE UNITED
STATES, OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA THE
INTERNET.
THE BOARD OF TRUSTEES OF THE TARGET FUND RECOMMENDS THAT YOU CAST YOUR VOTE
"FOR" THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
THE BOARD OF TRUSTEES OF THE ACQUIRING FUND RECOMMENDS THAT YOU CAST YOUR VOTE
"FOR" THE ISSUANCE OF ADDITIONAL COMMON SHARES OF THE ACQUIRING FUND IN
CONNECTION WITH THE REORGANIZATION AGREEMENT AS DESCRIBED IN THE JOINT PROXY
STATEMENT/PROSPECTUS.
IN ORDER TO AVOID THE ADDITIONAL EXPENSE OF FURTHER SOLICITATION, WE ASK THAT
YOU MAIL YOUR PROXY CARD PROMPTLY OR RECORD YOUR VOTING INSTRUCTIONS BY
TELEPHONE OR VIA THE INTERNET.
For the Board of Trustees,
Lou Anne McInnis
Assistant Secretary
Van Kampen High Income Trust
Van Kampen High Income Trust II
May 6, 2005
------------------
YOUR VOTE IS IMPORTANT.
PLEASE VOTE PROMPTLY BY SIGNING AND RETURNING THE
ENCLOSED PROXY CARD OR BY RECORDING YOUR VOTING INSTRUCTIONS BY TELEPHONE OR VIA
THE INTERNET NO MATTER HOW MANY SHARES YOU OWN.
THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE
THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 6, 2005
JOINT PROXY STATEMENT/PROSPECTUS
VAN KAMPEN HIGH INCOME TRUST
AND
VAN KAMPEN HIGH INCOME TRUST II
1221 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10020
(800) 847-2424
JOINT SPECIAL MEETING OF SHAREHOLDERS
ON
JUNE 22, 2005
This Joint Proxy Statement/Prospectus is furnished to you as a shareholder of
Van Kampen High Income Trust (the "Target Fund") and/or Van Kampen High Income
Trust II (the "Acquiring Fund"). A joint special meeting of shareholders of the
Funds (the "Special Meeting") will be held at the offices of Van Kampen
Investments Inc., 1 Parkview Plaza, Oakbrook Terrace, Illinois 60181-5555 on
June 22, 2005 at 9:30 a.m. to consider the items listed below and discussed in
greater detail elsewhere in this Joint Proxy Statement/Prospectus. If you are
unable to attend the Special Meeting or any adjournment thereof, the Board of
Trustees of each Fund requests that you vote your shares by completing and
returning the enclosed proxy card or by recording your voting instructions by
telephone or via the internet. The approximate mailing date of this Joint Proxy
Statement/Prospectus and accompanying form of proxy is May 10, 2005.
The purposes of the Special Meeting are:
For shareholders of the Target Fund:
1. To approve an Agreement and Plan of Reorganization (the "Reorganization
Agreement") between the Target Fund and the Acquiring Fund, the
termination of the Target Fund's registration under the Investment
Company Act of 1940, as amended, and the dissolution of the Target Fund
under applicable state law;
For common shareholders of the Acquiring Fund:
2. To approve the issuance of common shares of the Acquiring Fund in
connection with the Reorganization Agreement; and
For shareholders of both Funds:
3. To transact such other business as may properly be presented at the
Special Meeting or any adjournment thereof.
The Target Fund and the Acquiring Fund are sometimes referred to herein each
as a "Fund" and collectively as the "Funds." The Reorganization Agreement that
Target Fund shareholders are being asked to consider involves a transaction that
will be referred to in this Joint Proxy Statement/Prospectus as the
"Reorganization."
The Reorganization seeks to combine two similar funds to achieve certain
economies of scale and other operational efficiencies. The investment objective
of the Acquiring Fund is to provide to its common shareholders high current
income, while seeking to preserve shareholders' capital, through investment in a
professionally managed diversified portfolio of high income producing
fixed-income securities. The investment objective of the Target Fund is to
provide to its common shareholders high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed
portfolio of high yield fixed-income producing securities.
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly-issued common shares of
beneficial interest, par value $0.01 per share of the Acquiring Fund ("Acquiring
Fund Common Shares") and newly-issued auction preferred shares of the Acquiring
Fund with a par value of $0.01 per share and a liquidation preference of $25,000
per share ("Acquiring Fund APS"). The Target Fund will distribute Acquiring Fund
Common Shares to holders of common shares of the Target Fund ("Target Fund
Common Shares") and Acquiring Fund APS to holders of auction market preferred
shares of the Target Fund ("Target Fund AMPS"), and will then terminate its
registration under the Investment Company Act of 1940, as amended (the "1940
Act"), and dissolve under applicable state law. The aggregate net asset value of
Acquiring Fund Common Shares received in the Reorganization will equal the
aggregate net asset value of Target Fund Common Share held immediately prior to
the Reorganization, less the costs of the Reorganization (though common
shareholders may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund APS received in the Reorganization will
equal the aggregate liquidation preference of Target Fund AMPS held immediately
prior to the Reorganization. The Acquiring Fund will continue to operate after
the Reorganization as a registered closed-end investment company with the
investment objective and policies described in this Joint Proxy
Statement/Prospectus.
In connection with the Reorganization, holders of Acquiring Fund Common Shares
are being asked to approve the issuance of additional Acquiring Fund Common
Shares.
In the event that Target Fund shareholders do not approve the Reorganization
or Acquiring Fund common shareholders do not approve the issuance of Acquiring
Fund Common Shares, the Reorganization will not occur and the Target Fund will
2
continue to exist. The Board of Trustees of the Target Fund will consider what
additional action, if any, to take.
The Board of Trustees of each Fund has determined that including both
proposals in one Joint Proxy Statement/Prospectus will reduce costs and is in
the best interests of each Fund's shareholders.
This Joint Proxy Statement/Prospectus sets forth concisely the information
shareholders of the Funds should know before voting on the proposals and
constitutes an offering of Acquiring Fund Common Shares and Acquiring Fund APS.
Please read it carefully and retain it for future reference. A Reorganization
Statement of Additional Information, dated May 6, 2005, relating to this Joint
Proxy Statement/Prospectus (the "Reorganization Statement of Additional
Information") has been filed with the Securities and Exchange Commission (the
"SEC") and is incorporated herein by reference. If you wish to request the
Reorganization Statement of Additional Information, please ask for the
"Reorganization Statement of Additional Information." Copies of each Fund's most
recent annual report and semi-annual report can be obtained on a web site
maintained by Van Kampen Investments Inc. at www.vankampen.com. In addition,
each Fund will furnish, without charge, a copy of the Reorganization Statement
of Additional Information, its most recent annual report and semi-annual report
to any shareholder upon request. Any such request should be directed to the Van
Kampen Client Relations Department by calling (800) 341-2929 (TDD users may call
(800) 421-2833) or by writing to the respective Fund at 1 Parkview Plaza, P.O.
Box 5555, Oakbrook Terrace, Illinois 60181-5555. The address of the principal
executive office of the Funds is 1221 Avenue of the Americas, New York, New York
10020, and the telephone number is (800) 341-2929.
The Funds are subject to the informational requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith file reports,
proxy statements, proxy material and other information with the SEC. Materials
filed with the SEC can be reviewed and copied at the SEC's Public Reference Room
at 450 Fifth Street, N.W., Washington, D.C. 20549 or downloaded from the SEC's
web site at www.sec.gov. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at (202) 942-8090. You can
also request copies of these materials, upon payment at the prescribed rates of
a duplicating fee, by electronic request to the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference Branch, Office of
Consumer Affairs and Information Services, SEC, Washington, DC, 20549-0102.
The Acquiring Fund Common Shares are listed on the New York Stock Exchange
(the "NYSE") and the Chicago Stock Exchange ("CHX") under the ticker symbol
"VLT" and will continue to be so listed subsequent to the Reorganization. The
Target Fund Common Shares are listed on the NYSE and the CHX under the ticker
symbol "VIT." Reports, proxy statements and other information
3
concerning the Funds may be inspected at the offices of the NYSE, 20 Broad
Street, New York, New York 10005.
This Joint Proxy Statement/Prospectus serves as a prospectus of the Acquiring
Fund in connection with the issuance of the Acquiring Fund Common Shares and the
Acquiring Fund APS in the Reorganization. No person has been authorized to give
any information or make any representation not contained in this Joint Proxy
Statement/Prospectus and, if so given or made, such information or
representation must not be relied upon as having been authorized. This Joint
Proxy Statement/Prospectus does not constitute an offer to sell or a
solicitation of an offer to buy any securities in any jurisdiction in which, or
to any person to whom, it is unlawful to make such offer or solicitation.
The Board of Trustees of each Fund knows of no business other than that
discussed above that will be presented for consideration at the Special Meeting.
If any other matter is properly presented, it is the intention of the persons
named in the enclosed proxy to vote in accordance with their best judgment.
---------------------
THE SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE
ADEQUACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Joint Proxy Statement/Prospectus is May 6, 2005.
4
TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 7
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND............... 14
RISK FACTORS AND SPECIAL CONSIDERATIONS..................... 15
Medium-and Lower-Grade Securities Risk.................... 15
Credit Risk............................................... 15
Market Risk............................................... 16
Income Risk............................................... 17
Call Risk................................................. 17
Liquidity Risk............................................ 17
Foreign Risk.............................................. 18
Use of Strategic Transactions Risk........................ 18
Manager Risk.............................................. 18
Market Discount Risk...................................... 19
Leverage Risk............................................. 19
Anti-Takeover Provisions Risk............................. 21
Ratings Considerations.................................... 21
Special Risks Related to Preferred Shares................. 21
COMPARISON OF THE FUNDS..................................... 22
Investment Objective and Policies......................... 22
Investment Restrictions................................... 39
Management of the Funds................................... 41
Other Service Providers................................... 44
Capitalization............................................ 45
Additional Information About the Common Shares of the
Funds................................................... 47
Additional Information About the Preferred Shares of the
Funds................................................... 50
Governing Law............................................. 55
Certain Provisions of the Declarations of Trust........... 55
Conversion to Open-End Fund............................... 57
Voting Rights............................................. 57
Financial Highlights...................................... 59
INFORMATION ABOUT THE REORGANIZATION........................ 61
General................................................... 61
Terms of the Reorganization Agreement..................... 63
5
PAGE
----
Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 65
Shareholder Approval...................................... 67
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES........ 68
The Reorganization........................................ 68
Shareholder Approval...................................... 68
OTHER INFORMATION........................................... 69
Voting Information and Requirements....................... 69
Shareholder Information................................... 71
Section 16(a) Beneficial Ownership Reporting Compliance... 72
Solicitation of Proxies................................... 72
Legal Matters............................................. 73
Other Matters to Come Before the Special Meeting.......... 73
EXHIBIT I: DESCRIPTION OF SECURITIES RATINGS................ I-1
6
SUMMARY
The following is a summary of certain information contained elsewhere in this
Joint Proxy Statement/Prospectus and is qualified in its entirety by reference
to the more complete information contained in this Joint Proxy
Statement/Prospectus and in the Reorganization Statement of Additional
Information. Shareholders should read the entire Joint Proxy
Statement/Prospectus carefully.
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
THE PROPOSED REORGANIZATION. The Board of Trustees of each Fund, including the
trustees who are not "interested persons," as defined in the 1940 Act, of each
Fund, has unanimously approved the Reorganization Agreement. If the shareholders
of the Target Fund approve the Reorganization Agreement and the shareholders of
the Acquiring Fund approve the issuance of Acquiring Fund Common Shares (see
"Proposal 2: Issuance of Additional Acquiring Fund Common Shares"), Acquiring
Fund Common Shares and Acquiring Fund APS will be issued to holders of Target
Fund Common Shares and Target Fund AMPS, respectively, in exchange for
substantially all of the assets of the Target Fund and the assumption of
substantially all of the liabilities of the Target Fund. The Target Fund will
then terminate its registration under the 1940 Act and dissolve under applicable
state law. The aggregate net asset value of Acquiring Fund Common Shares
received in the Reorganization will equal the aggregate net asset value of
Target Fund Common Shares held immediately prior to the Reorganization, less the
costs of the Reorganization (though holders of Target Fund Common Shares may
receive cash for their fractional shares). The aggregate liquidation preference
of the Acquiring Fund APS received in the Reorganization will equal the
aggregate liquidation preference of Target Fund AMPS held immediately prior to
the Reorganization.
BACKGROUND AND REASONS FOR THE PROPOSED REORGANIZATION. The Reorganization
seeks to combine two similar Funds to achieve certain economies of scale and
other operational efficiencies. Each Fund is a diversified, closed-end
management investment company registered under the 1940 Act. The investment
objective of the Acquiring Fund is to provide to its common shareholders high
current income, while seeking to preserve shareholders' capital, through
investment in a professionally managed diversified portfolio of high income
producing fixed-income securities. The investment objective of the Target Fund
is to provide to its common shareholders high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed
portfolio of high yield fixed-income producing securities. The term "high yield
fixed-income securities" may hereinafter be referred to as "high income
producing fixed-income securities."
Each Fund seeks to achieve its investment objective by investing primarily in
fixed-income securities rated in the medium- and lower-grade categories by
established rating agencies, or in unrated securities considered by the
investment
7
adviser to be of comparable quality. The Funds are managed by the same
investment advisory personnel.
The proposed Reorganization will combine the assets of these similar Funds by
reorganizing the Target Fund into the Acquiring Fund. The Target Fund Board and
the Board of the Trustees of the Acquiring Fund (the "Acquiring Fund Board"),
based upon their evaluation of all relevant information, anticipate that the
Reorganization will benefit holders of Target Fund Common Shares and holders of
Acquiring Fund Common Shares. In particular, the Board of Trustees of each Fund
believes, based on data presented by Van Kampen Asset Management, the investment
adviser to each of the Funds (the "Adviser"), that holders of common shares of
the Funds will experience a reduced overall operating expense ratio as a result
of the Reorganization. The combined fund resulting from the proposed
Reorganization will have a larger asset base than either Fund has currently;
certain fixed administrative costs, such as costs of printing shareholder
reports and proxy statements, legal expenses, audit fees, mailing costs and
other expenses, will be spread across this larger asset base, thereby lowering
the expense ratio for common shareholders of the combined fund.
The table below illustrates the anticipated reduction in operating expenses
expected as a result of the Reorganization. The table sets forth (i) the fees,
expenses and distributions to preferred shareholders paid by the Target Fund for
the twelve-month period ended December 31, 2004, (ii) the fees, expenses and
distributions to preferred shareholders paid by the Acquiring Fund for the
twelve-month period ended December 31, 2004, and (iii) the pro forma fees,
expenses and distributions to preferred shareholders for the Acquiring Fund for
the twelve-month period ended December 31, 2004, assuming the Reorganization had
been completed at the beginning of such period. As shown below, the
Reorganization is expected to result in decreased total annual expenses for
shareholders of each Fund
8
(although such savings will not be immediately received (see footnote (c) to the
table)).
FEE, EXPENSE AND DISTRIBUTIONS ON PREFERRED SHARES TABLE FOR COMMON SHAREHOLDERS
OF THE FUNDS
AS OF DECEMBER 31, 2004
ACTUAL PRO FORMA
------------------------- -----------
VAN KAMPEN VAN KAMPEN VAN KAMPEN
HIGH INCOME HIGH INCOME HIGH INCOME
TRUST TRUST II TRUST II
----------- ----------- -----------
Common Shareholder Transaction
Expenses(a):
Maximum Sales Load (as a percentage
of offering price)(b)(c).......... None None None
Dividend Reinvestment Plan Fees..... None None None
Annual Expenses (as a percentage of
net assets attributable to common
shares):
Investment Advisory Fees............ 1.23% 1.23% 1.23%
Interest Payments on Borrowed
Funds............................. 0.00% 0.00% 0.00%
Other Expenses...................... 0.76% 0.89% 0.58%
----- ----- -----
Total Annual Expenses............. 1.99% 2.12% 1.81%
----- ----- -----
Distributions
Distributions on Preferred
Shares(d)......................... 1.15% 1.11% 1.13%
Total Annual Expenses and
Distributions on Preferred
Shares.......................... 3.14% 3.23% 2.94%
---------------
(a) No expense information is presented with respect to preferred shares because
holders of preferred shares do not bear any operating expenses of either
Fund and will not bear any of the Reorganization expenses or any transaction
or operating expenses of the combined fund.
(b) Common shares purchased in the secondary market may be subject to brokerage
commissions or other charges. No sales load will be charged on the issuance
of shares in the Reorganization. Common shares are not available for
purchase from the Funds but may be purchased through a broker-dealer subject
to individually negotiated commission rates.
(c) In connection with the Reorganization, there are certain other transaction
expenses which include, but are not limited to: all costs related to the
preparation, printing and distributing of this Joint Proxy
Statement/Prospectus to shareholders; costs related to preparation and
distribution of materials distributed to each Fund's Board; all expenses
incurred in connection with the preparation of the Reorganization Agreement
and registration statement on
9
Form N-14; SEC and state securities commission filing fees; legal and audit
fees; portfolio transfer taxes (if any); and any similar expenses incurred
in connection with the Reorganization. In accordance with applicable SEC
rules, the Board of Trustees of each Fund reviewed the fees and expenses
that will be borne directly or indirectly by the Funds in connection with
the Reorganization. After considering various alternatives for allocating
these costs, the Board of Trustees of each Fund agreed that, in the event
the Reorganization is approved and completed, the expenses of the
Reorganization will be shared by the Target Fund and the Acquiring Fund in
proportion to their projected declines in total annual operating expenses as
a result of the Reorganization. The table below summarizes each Fund's net
assets (common shares only) at December 31, 2004, projected annual savings
to each Fund as a result of the Reorganization, allocation of Reorganization
expenses among the Funds in dollars and percentages, an estimated payback
period (in years) and the resulting effect on each Fund's net asset value
per common share at December 31, 2004. The Acquiring Fund will benefit more
from projected annual expense savings of the Reorganization than the Target
Fund. The projected annual expense savings are generally not expected to be
immediately realized. The Acquiring Fund is projected to benefit sooner than
the Target Fund. If a shareholder sells his or her common shares prior to
the estimated payback period, then that shareholder may not realize any of
the projected expense savings resulting from the reduced expense ratio of
the combined fund. The net asset value per common share of each Fund will be
reduced at the closing date of the respective Reorganization to reflect the
allocation of Reorganization expenses to each Fund. The reduction in net
asset value per common share resulting from the allocation of Reorganization
expenses, when compared to the relative net asset sizes of the Funds
involved in the Reorganization, will be greater in the Acquiring Fund than
the Target Fund. In the event the Reorganization is not completed, the
Adviser will bear the costs associated with the Reorganization. The numbers
presented in the table are estimates; actual results may differ.
10
REORGANIZATION ESTIMATED EFFECT ON
NET ASSETS PROJECTED EXPENSE ALLOCATION PAYBACK NET ASSET
(COMMON ANNUAL IN DOLLARS/ PERIOD VALUE PER
FUND SHARES ONLY) SAVINGS PERCENTAGE (IN YEARS) COMMON SHARE
---- ------------ --------- ------------------ ---------- ------------
High Income Trust.... $49,897,356 $ 89,815 $ 167,640/44% 1.87 $0.012
High Income Trust
II................. $37,031,633 $114,798 $ 213,360/56% 1.86 $0.026
------------
Total expenses....... $381,000/100%
---------------
(d) In seeking to enhance the income for its common shareholders, each of the
Funds uses preferred shares as financial leverage. Leverage created by
borrowing or other forms of indebtedness would create interest expenses
which would, if used by the Funds, be charged to common shareholders (shown
above as "Interest Payments on Borrowed Funds"). Leverage created by
preferred shares creates dividend payments and/or capital gains
distributions to preferred shareholders which are charged to common
shareholders (shown above as "Distributions on Preferred Shares"). The
dividend rates are based on periodic auctions as described herein and thus
will differ based on varying market conditions at the times of such
auctions.
EXAMPLE. The following example is intended to help you compare the costs of
investing in the Acquiring Fund pro forma after the Reorganization with the
costs of investing in the Target Fund and the Acquiring Fund without the
Reorganization. An investor would pay the following expenses on a $1,000
investment, assuming (1) the operating expense ratio for each Fund (as a
percentage of net assets attributable to common shares) set forth in the table
above and (2) a 5% annual return throughout the period:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
Van Kampen High Income Trust.......... $20 $62 $107 $232
Van Kampen High Income Trust II....... $22 $66 $114 $245
Pro Forma -- Van Kampen High Income
Trust II().......................... $18 $57 $ 98 $213
The example set forth above assumes common shares of each Fund were purchased
in the initial offerings and the reinvestment of all dividends and distributions
and uses a 5% annual rate of return as mandated by SEC regulations. The example
should not be considered a representation of past or future expenses or annual
rates of return. Actual expenses or annual rates of return may be more or less
than those assumed for purposes of the example.
FURTHER INFORMATION REGARDING THE PROPOSED REORGANIZATION. The Target Fund
Board has determined that the Reorganization is in the best interests of holders
of Target Fund Common Shares and that the interests of such shareholders will
not be
11
diluted as a result of the Reorganization. Similarly, the Acquiring Fund Board
has determined that the Reorganization is in the best interests of holders of
Acquiring Fund Common Shares and that the interests of such shareholders will
not be diluted as a result of the Reorganization. It is not anticipated that the
Reorganization will directly benefit the holders of preferred shares of either
Fund; however, it is anticipated that holders of preferred shares of each Fund
will not be adversely affected by the Reorganization and the expenses of the
Reorganization will not be borne by the holders of preferred shares of either
Fund. As a result of the Reorganization, however, a shareholder of either Fund
will hold a reduced percentage of ownership in the larger combined fund than he
or she did in either of the separate Funds.
The Reorganization is intended to qualify as a "reorganization" within the
meaning of Section 368(a)(1) of the Internal Revenue Code of 1986, as amended
(the "Internal Revenue Code" or "Code"). If the Reorganization so qualifies, in
general, a shareholder of the Target Fund will recognize no gain or loss upon
the receipt of shares of the Acquiring Fund in connection with the
Reorganization. Additionally, the Target Fund will not recognize any gain or
loss as a result of the transfer of substantially all of its assets and
liabilities in exchange for the shares of the Acquiring Fund or as a result of
its dissolution. Neither the Acquiring Fund nor its shareholders will recognize
any gain or loss in connection with the Reorganization.
The Target Fund Board requests that shareholders of the Target Fund approve
the proposed Reorganization at the Special Meeting to be held on June 22, 2005.
Shareholder approval of the Reorganization requires the affirmative vote of
shareholders of the Target Fund representing more than 50% of the Target Fund
Common Shares and Target Fund AMPS outstanding and entitled to vote, each voting
separately as a class. Subject to the requisite approval of the shareholders of
each Fund with regard to the Reorganization, it is expected that the closing
date of the transaction (the "Closing Date") will be after the close of business
on or about June 29, 2005, but it may be at a different time as described
herein.
The Target Fund Board recommends that you vote "FOR" the proposed
Reorganization.
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES
In connection with the proposed Reorganization, as described in the section
entitled, "Proposal 1: Reorganization of the Target Fund," the Acquiring Fund
will issue additional Acquiring Fund Common Shares and list such shares on the
NYSE and the CHX. The Acquiring Fund will acquire substantially all of the
assets and assume substantially all of the liabilities of the Target Fund in
exchange for the newly-issued Acquiring Fund Common Shares and newly-issued
Acquiring Fund APS. The Reorganization will result in no reduction of net asset
value of the
12
Acquiring Fund Common Shares, other than to reflect the costs of the
Reorganization. No gain or loss will be recognized by the Acquiring Fund or its
shareholders in connection with the Reorganization. The Acquiring Fund Board,
based upon its evaluation of all relevant information, anticipates that the
Reorganization will benefit holders of Acquiring Fund Common Shares. In
particular, the Acquiring Fund Board believes, based on data presented by the
Adviser, that the Acquiring Fund will experience a reduced overall operating
expense ratio as a result of the Reorganization.
The Acquiring Fund Board requests that common shareholders of the Acquiring
Fund approve the issuance of additional Acquiring Fund Common Shares at the
Special Meeting to be held on June 22, 2005. Subject to the requisite approval
of the shareholders of each Fund with regard to the Reorganization, it is
expected that the Closing Date will be after the close of business on or about
June 29, 2005, but it may be at a different time as described herein.
Shareholder approval of the issuance of additional Acquiring Fund Common Shares
requires the affirmative vote of a majority of the votes cast on the proposal,
provided that the total votes cast on the proposal represents more than 50% in
interest of all securities entitled to vote on the proposal.
The Acquiring Fund Board recommends that you vote "FOR" the issuance of
additional Acquiring Fund Common Shares in connection with the Reorganization.
13
------------------------------------------------------------------------------
PROPOSAL 1: REORGANIZATION OF THE TARGET FUND
------------------------------------------------------------------------------
The Reorganization seeks to combine two similar Funds to achieve certain
economies of scale and other operational efficiencies. The investment objective
of the Acquiring Fund is to provide to its common shareholders high current
income, while seeking to preserve shareholders' capital, through investment in a
professionally managed diversified portfolio of high income producing
fixed-income securities. The investment objective of the Target Fund is to
provide to its common shareholders high current income, while seeking to
preserve shareholders' capital, through investment in a professionally managed
portfolio of high yield fixed-income producing securities. Each Fund seeks to
achieve its investment objective by investing primarily in fixed-income
securities rated in the medium- and lower-grade categories by established rating
agencies, or in unrated securities considered by the investment adviser to be of
comparable quality. The Funds are managed by the same investment advisory
personnel.
In the Reorganization, the Acquiring Fund will acquire substantially all of
the assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly-issued Acquiring Fund Common
Shares, and newly-issued Acquiring Fund APS. The Target Fund will distribute
Acquiring Fund Common Shares to holders of Target Fund Common Shares and
Acquiring Fund APS to holders of Target Fund AMPS, and will then terminate its
registration under the 1940 Act, and dissolve under applicable state law. The
aggregate net asset value of Acquiring Fund Common Shares will equal the
aggregate net asset value of Target Fund Common Shares held immediately prior to
the Reorganization, less the costs of the Reorganization (though common
shareholders may receive cash for their fractional shares). The aggregate
liquidation preference of Acquiring Fund APS received in the Reorganization will
equal the aggregate liquidation preference of Target Fund AMPS held immediately
prior to the Reorganization. The Acquiring Fund will continue to operate as a
registered closed-end investment company with the investment objective and
policies described in this Joint Proxy Statement/Prospectus.
The Target Fund Board based upon its evaluation of all relevant information,
anticipates that the Reorganization will benefit holders of Target Fund Common
Shares. In particular, Target Fund Board believes, based on data presented by
the Adviser, that holders of Target Fund Common Shares will experience a reduced
overall operating expense ratio as a result of the Reorganization. The combined
fund resulting from the proposed Reorganization will have a larger asset base
than either Fund has currently; certain fixed administrative costs, such as
costs of printing shareholder reports and proxy statements, legal expenses,
audit fees, mailing costs and other expenses, will be spread across this larger
asset base, thereby lowering the expense ratio for common shareholders of the
combined fund.
14
RISK FACTORS AND SPECIAL CONSIDERATIONS
Because each Fund has a substantially similar investment objective and
substantially similar investment policies, the Funds are subject to similar
risks, which will also apply to the combined fund after the proposed
Reorganization. The Reorganization is not expected to adversely affect the
rights of shareholders of either Fund or to create additional risks.
MEDIUM- AND LOWER-GRADE SECURITIES RISK
Each Fund invests primarily in fixed-income securities rated in the medium-
and lower-grade categories by established rating agencies, or in unrated
securities of comparable quality. Medium- and lower-grade securities are those
rated at the time of purchase Baa or lower by Moody's Investors Service, Inc.
("Moody's") or rated BBB or lower by Standard & Poor's ("S&P"), and securities
that are not rated by either such rating agency, but are believed by the Adviser
to be of comparable quality at the time of purchase. With respect to such
investments, neither Fund has established a limit on the percentage of its
portfolio which may be invested in securities in any one rating category.
Securities rated Ba or lower by Moody's or BB or lower by S&P and unrated
securities of comparable quality are commonly referred to as junk bonds and
involve greater risks than investments in higher-grade securities. Because of
the characteristics of such securities, the ability of the Funds to preserve
shareholders' capital may be adversely affected. The values of such securities
tend to reflect individual corporate developments to a greater extent than
higher rated securities, which react primarily to fluctuations in the general
level of interest rates. Such medium- and lower-grade securities frequently are
subordinated to the prior payment of senior indebtedness.
CREDIT RISK
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 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 each Fund experiences difficulties in the timely payment of
principal and interest and such issuer seeks to restructure the terms of its
borrowings, each Fund may incur additional expenses and may determine to invest
additional assets with respect to such issuer or the project or projects to
which each Fund's securities relate. Further, each 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
15
its portfolio holdings, and each Fund may be unable to obtain full recovery on
such amounts.
MARKET RISK
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 each Fund's investments can be
expected to fluctuate over time. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Income securities with
longer maturities, which may have higher yields, may increase or decrease in
value more than income securities with shorter maturities. However, the
secondary market prices of medium- or lower-grade securities generally are less
sensitive to changes in interest rates and are more sensitive to general adverse
economic changes or specific developments with respect to the particular issuers
than are the secondary market prices of higher-grade securities. A significant
increase in interest rates or a general economic downturn could severely disrupt
the market for medium- or lower-grade securities and adversely affect the market
value of such securities. Such events also could lead to a higher incidence of
default by issuers of medium- or lower-grade securities as compared with higher-
grade securities. In addition, changes in credit risks, interest rates, the
credit markets or periods of general economic uncertainty can be expected to
result in increased volatility in the market price of the medium- or lower-grade
securities in the Funds and thus in the net asset value of the Funds. 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.
Fixed-income securities offering the high current income sought by the Funds
ordinarily will be in the lower rating categories of recognized rating agencies
or will be unrated. The values of such securities tend to reflect individual
corporate developments to a greater extent than higher rated securities, which
react primarily to fluctuations in the general level of interest rates. Further,
these fixed-income securities will involve generally more credit risk than
securities in the higher rating categories and the issuer may default in the
payment of interest or repayment of principal as scheduled. The Funds may incur
additional expenses to the extent they are required to seek recovery upon a
default in the payment of principal or of interest on its portfolio holdings,
and the Funds may not be able to obtain full recovery thereof. The high income
producing fixed-income securities held by the Funds frequently will be
subordinated to the prior payment of senior indebtedness and will be traded in
markets that may be relatively less liquid than the market for higher rated
securities. The Funds will rely on the Adviser's judgment, analysis and
experience in evaluating the creditworthiness of an issue.
16
Fixed-income securities include convertible securities, which are bonds,
debentures, preferred stock or other securities that may be converted into or
exchanged for, or otherwise may entitle the holder to purchase, a prescribed
amount of common stock of the same or a different issuer within a particular
period of time at a specified price or formula. Prices of such securities
generally fluctuate in response to changes in the prices of the underlying
common stocks as well as to changes in interest rates.
INCOME RISK
The income shareholders receive from a 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 Funds may drop as well.
CALL RISK
If interest rates fall, it is possible that issuers of income securities with
high interest rates will prepay or "call" their securities before their maturity
dates. In this event, the proceeds from the called securities would likely be
reinvested by each Fund, as applicable, in securities bearing the new, lower
interest rates, resulting in a possible decline in that Fund's income and
distributions to shareholders.
LIQUIDITY RISK
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 each 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 a 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, each Fund may have more difficulty selling such securities in
a timely manner and at their stated value than would be the case for securities
for which an established retail market does exist.
During periods of reduced market liquidity or in the absence of readily
available market quotations for medium- or lower-grade securities held in a
Fund's portfolio,
17
the ability of that Fund to value its securities becomes more difficult and the
judgment of that Fund may play a greater role in the valuation of its securities
due to the reduced availability of reliable objective data.
FOREIGN RISK
Because each Fund may invest up to 35% of each of their net assets in
securities of foreign issuers, the Funds 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. In
addition, there generally is less publicly available information about many
foreign issuers, and auditing, accounting, and financial reporting requirements
are less stringent and less uniform in many foreign countries.
USE OF STRATEGIC TRANSACTIONS RISK
In connection with each Fund's investment objective and policies and subject
to any restrictions that may be imposed in connection with each Fund maintaining
a rating of its preferred shares, the Funds may use various investment strategic
transactions that involve special risk considerations including options, futures
contracts and options on futures contracts, in several different ways, depending
on the status of each Fund's portfolio and the expectations of the Adviser
concerning the securities markets. Although the Adviser seeks to use these
transactions to achieve each Fund's investment objective, no assurance can be
given that the sue of these transactions will achieve this result.
The Funds may purchase and sell options on fixed-income securities and on
indices based on fixed-income securities to the extent a market in any such
indices exists or develops, engage in interest rate and other hedging
transactions, purchase and sell fixed-income securities on a "when issued" or
"delayed delivery" basis, and enter into repurchase and reverse repurchase
agreements. These investment practices entail risks. 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.
Although the Adviser believes that these investment practices may further each
Fund's investment objective, no assurance can be given that these investment
practices will achieve this result.
MANAGER RISK
As with any managed fund, the Adviser may not be successful in selecting the
best-performing securities or investment techniques, and a Fund's performance
may lag behind that of similar funds.
18
MARKET DISCOUNT RISK
Whether investors will realize gains or losses upon the sale of shares of a
Fund will depend upon the market price of the shares at the time of original
purchase and subsequent sale, which may be less or more than such Fund's net
asset value per share. Since the market price of the shares will be affected by
such factors as the relative demand for and supply of the shares in the market,
general market and economic conditions and other factors beyond the control of
the Funds, the Funds cannot predict whether shares of the Funds will trade at,
below or above net asset value. Shares of closed-end funds often trade at a
discount to their net asset values, and the Funds' shares may trade at such a
discount.
In order to reduce or eliminate a market value discount from net asset value,
the Board of Trustees of each Fund may, subject to the terms and conditions of
its preferred shares, authorize that Fund from time to time to repurchase the
common shares in the open market or to tender for the common shares at net asset
value. The Board of Trustees of each Fund, in consultation with the Adviser,
will review on a quarterly basis the possibility of open market repurchases
and/or tender offers for the common shares. Subject to its borrowing
restrictions, each Fund may incur debt to finance such repurchases, which
entails risks. The ability of the Funds to enter into tender offers and the
common share repurchases may be limited by the 1940 Act asset coverage
requirements and any additional asset coverage requirements which may be imposed
by a rating agency in connection with any rating of the preferred shares. No
assurance can be given that the Board of Trustees of either Fund will, in fact,
authorize that Fund to undertake such repurchases and/or tender offers or that,
if undertaken, such actions would result in the common shares trading at a price
which is equal or close to net asset value.
LEVERAGE RISK
Use of leverage, through the issuance of preferred shares, involves certain
risks to holders of common shares of the Funds. For example, each Fund's
issuance of preferred shares may result in higher volatility of the net asset
value of its common shares and potentially more volatility in the market value
of its common shares. In addition, changes in the short-term and medium-term
dividend rates on, and the amount of taxable income allocable to, the preferred
shares of a Fund will affect the yield to holders of common shares of that Fund.
Leverage will allow holders of each Fund's common shares to realize a higher
current rate of return than if that Fund were not leveraged as long as that
Fund, while accounting for its costs and operating expenses, is able to realize
a higher net return on its investment portfolio than the then-current dividend
rate paid on its preferred shares. Similarly, since a pro rata portion of each
Fund's net realized capital gains is generally payable to holders of each Fund's
common shares, the use of leverage will increase the amount of such gains
distributed to holders of that Fund's common shares. However, short-term,
19
medium-term and long-term interest rates change from time to time as do their
relationships to each other (i.e., the slope of the yield curve) depending upon
such factors as supply and demand forces, monetary and tax policies and investor
expectations. Changes in any or all of such factors could cause the relationship
between short-term, medium-term and long-term rates to change (i.e., to flatten
or to invert the slope of the yield curve) so that short-term and medium-term
rates may substantially increase relative to the long-term obligations in which
each Fund may be invested. To the extent that the current dividend rate on a
Fund's preferred shares approaches the net return on that Fund's investment
portfolio, the benefit of leverage to holders of common shares of that Fund will
be decreased. If the current dividend rate on the preferred shares were to
exceed the net return on a Fund's portfolio, holders of common shares of that
Fund would receive a lower rate of return than if that Fund were not leveraged.
Similarly, since both the costs of issuing preferred shares and any decline in
the value of a Fund's investments (including investments purchased with the
proceeds from any preferred shares offering) will be borne entirely by holders
of a Fund's common shares, the effect of leverage in a declining market would
result in a greater decrease in net asset value to holders of common shares than
if that Fund were not leveraged. If a Fund is liquidated, holders of that Fund's
preferred shares will be entitled to receive liquidating distributions before
any distribution is made to holders of common shares of that Fund.
In an extreme case, a decline in net asset value could affect a Fund's ability
to pay dividends on its common shares. Failure to make such dividend payments
could adversely affect a Fund's qualification as a regulated investment company
under the federal tax laws. However, each Fund intends to take all measures
necessary to make required common share dividend payments. If a Fund's current
investment income is ever insufficient to meet dividend payments on either its
common shares or its preferred shares, that Fund may have to liquidate certain
of its investments. In addition, each Fund has the authority to redeem its
preferred shares for any reason and may be required to redeem all or part of its
preferred shares in the following circumstances:
- if the asset coverage for the preferred shares declines below 200%, either
as a result of a decline in the value of a Fund's portfolio investments or
as a result of the repurchase of common shares in tender offers or
otherwise, or
- in order to maintain the asset coverage guidelines established by Moody's
and S&P in rating the preferred shares.
Redemption of the preferred shares or insufficient investment income to make
dividend payments, may reduce the net asset value of a Fund's common shares and
require a Fund to liquidate a portion of its investments at a time when it may
be disadvantageous to do so.
20
ANTI-TAKEOVER PROVISIONS RISK
The Declaration of Trust of each Fund (in each case, the "Declaration of
Trust") includes provisions that could limit the ability of other entities or
persons to acquire control of that Fund or to change the composition of its
Board of Trustees. Such provisions could limit the ability of common
shareholders to sell their shares at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of each Fund.
RATINGS CONSIDERATIONS
The Funds have received ratings of each of their outstanding preferred shares
of "AAA" from S&P and "aaa" from Moody's. In order to maintain these ratings,
the Funds are required to maintain portfolio holdings meeting specified
guidelines of such rating agencies. These guidelines may impose asset coverage
requirements that are more stringent than those imposed by the 1940 Act.
As described by Moody's and S&P, a preferred stock rating is an assessment of
the capacity and willingness of an issuer to pay preferred stock obligations.
The ratings of the preferred shares are not recommendations to purchase, hold or
sell preferred shares, inasmuch as the ratings do not comment as to market price
or suitability for a particular investor, nor do the rating agency guidelines
address the likelihood that a holder of preferred shares will be able to sell
such shares in an auction. The ratings are based on current information
furnished to Moody's and S&P by the Funds and the Adviser and information
obtained from other sources. The ratings may be changed, suspended or withdrawn
as a result of changes in, or the unavailability of, such information. The
common shares of the Funds have not been rated by a nationally recognized
statistical rating organization.
The Board of Trustees of each of the Funds, without shareholder approval, may
amend, alter or repeal certain definitions or restrictions which have been
adopted by a Fund pursuant to the rating agency guidelines, in the event a Fund
receives confirmation from the rating agencies that any such amendment,
alteration or repeal would not impair the ratings then assigned to its preferred
shares.
SPECIAL RISKS RELATED TO PREFERRED SHARES
AUCTION RISK. The dividend rate for the preferred shares normally is set
through an auction process. In the auction, preferred shareholders may indicate
the dividend rate at which they would be willing to hold or sell their shares or
purchase additional shares. An auction fails if there are more preferred shares
offered for sale than there are buyers, in which case preferred shareholders may
not be able to sell their shares. Also, if preferred shareholders place bids to
retain shares at an auction only at a specified dividend rate and that rate
exceeds the rate set at the auction, they will not retain their shares.
Additionally, if preferred shareholders buy shares
21
or elect to retain shares without specifying a dividend rate below which they
would not wish to buy or continue to hold those shares, they could receive a
lower rate of return on their shares than the market rate. Finally, the dividend
period for the preferred shares may be changed by a Fund, subject to certain
conditions, including notice to preferred shareholders, which could also affect
the liquidity of an investment in preferred shares.
SECONDARY MARKET RISK. Broker-dealers may maintain a secondary trading market
in the preferred shares outside of auctions; however, they are not obligated to
do so and there can be no assurance that such a secondary market will develop
or, if it does develop, that it will provide preferred shareholders with a
liquid trading market. It may not be possible to sell preferred shares between
auctions, or it may only be possible to sell them for a price less than their
liquidation preference plus any accumulated dividends. An increase in the level
of interest rates likely will have an adverse effect on the secondary market
price of the preferred shares. Preferred shares may only be transferred outside
of auctions to or through broker-dealers or other persons as the Funds permit.
RATINGS AND ASSET COVERAGE RISKS. Although the preferred shares of each Fund
have been rated "Aaa" by Moody's and "AAA" by S&P, such ratings do not eliminate
or necessarily mitigate the risks of investing in preferred shares. Moody's or
S&P could downgrade its rating of the preferred shares or withdraw its rating at
any time, which may make the preferred shares less liquid at an auction or in
the secondary market. If a Fund fails to satisfy its asset coverage ratios, it
will be required to redeem a sufficient number of preferred shares in order to
return to compliance with the asset coverage ratios. Each Fund may voluntarily
redeem preferred shares under certain circumstances in order to meet asset
coverage tests.
COMPARISON OF THE FUNDS
INVESTMENT OBJECTIVE AND POLICIES
The Funds have a similar investment objective and similar investment policies.
The Acquiring Fund's investment objective is to provide to its common
shareholders high current income, while seeking to preserve shareholders'
capital, through investment in a professionally managed, diversified portfolio
of high income producing fixed-income securities. The Target Fund's investment
objective is to provide to its common shareholders high current income, while
seeking to preserve shareholders' capital, through investment in a
professionally managed, diversified portfolio of high yield fixed-income
securities. Each Fund's investment objective is fundamental and may not be
changed without the approval of shareholders. Each Fund will seek to preserve
capital through portfolio diversification and by limiting investments to
fixed-income securities which the Adviser believes entail reasonable credit
risk.
22
HIGH INCOME PRODUCING FIXED-INCOME SECURITIES. Under normal market conditions,
at least 65% of the Acquiring Fund's assets will be invested in fixed-income
securities; similarly, the Target Fund will invest primarily in such securities.
Each Fund invests primarily in high income producing fixed-income securities
rated in the medium- and lower-grade categories by established rating agencies,
or in unrated securities considered by the Adviser to be of comparable quality.
Medium- and lower-grade securities are those rated at the time of purchase Baa
or lower by Moody's or rated BBB or lower by S&P. With respect to such
investments, neither Fund has established any limit on the percentage of its
portfolio which may be invested in securities in any one rating category. The
fixed-income securities in which the Funds will invest consist primarily of debt
securities having varying terms with respect to security or credit support,
subordination, purchase price, interest payments or maturity.
The Funds invest in a broad range of income securities represented by various
companies and industries and traded on various markets. The Adviser uses an
investment strategy of in-depth, fundamental credit analysis and emphasizes
issuers that it believes will remain financially sound and perform well in a
range of market conditions. In its effort to enhance value and diversify each
Fund's portfolio, the Adviser may seek investments in cyclical issues or
out-of-favor areas of the market to contribute to each Fund's performance.
The higher income sought by the Funds are generally obtainable from securities
in the medium- and lower-credit quality range. Such securities tend to offer
higher yields than higher-grade securities with the same maturities because the
historical conditions of the issuers of such securities may not have been as
strong as those of other issuers. These securities may be issued in connection
with corporate restructurings such as leveraged buyouts, mergers, acquisitions,
debt recapitalization or similar events. These securities are often issued by
smaller, less creditworthy companies or companies with substantial debt and may
include financially troubled companies or companies in default or in
restructuring.
Such securities often are subordinated to the prior claims of banks and other
senior lenders. Lower-grade securities are regarded by the rating agencies as
predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. The ratings of S&P and Moody's represent
their opinions of the quality of the income securities they undertake to rate,
but not the market risk of such securities. It should be emphasized however,
that ratings are general and are not absolute standards of quality.
The value of income securities generally varies inversely with changes in
prevailing interest rates. If interest rates rise, income security prices
generally fall; if interest rates fall, income security prices generally rise.
Shorter-term securities are generally less sensitive to interest rate changes
than longer-term securities; thus, for a given change in interest rates, the
market prices of shorter-maturity securities
23
generally fluctuate less than the market prices of longer-maturity securities.
Income securities with shorter maturities generally offer lower yields than
income securities with longer maturities assuming all other factors, including
credit quality, are equal.
While neither Fund has a policy limiting the maturities of the debt securities
in which it may invest, the Adviser seeks to moderate risk by normally
maintaining a portfolio duration of two to ten years. Duration is a measure of
the expected life of a debt security that was developed as a more precise
alternative to the concept of "term to maturity." Duration incorporates a debt
security's yield, coupon interest payments, final maturity and call features
into one measurement. A duration calculation looks at the present value of a
security's entire payment stream, whereas term to maturity is based solely on
the date of a security's final principal repayment.
Fixed-income securities which may be acquired by the Funds include preferred
stocks and all types of debt obligations having varying terms with respect to
security or credit support, subordination, purchase price, interest payments and
maturity. Such obligations may include, for example, bonds, debentures, notes,
mortgage- or other asset-backed instruments, equipment lease or trust
participation certificates, conditional sales contracts, commercial paper and
obligations issued or guaranteed by the United States government or any of its
political subdivisions, agencies or instrumentalities (including obligations,
such as repurchase agreements, secured by such instruments). Mortgage-backed
securities are securities that directly or indirectly represent a participation
in, or are secured and payable from, mortgage loans secured by real property.
The Acquiring Fund will not invest in mortgage-backed residual interests.
Asset-backed securities have structural characteristics similar to
mortgage-backed securities, but have underlying assets, such as accounts
receivable, that are not mortgage loans or interests in mortgage loans.
Participation certificates are issued by obligors to finance the acquisition of
equipment and facilities and may represent participations in a lease, an
installment purchase contract or a conditional sales contract. Most debt
securities in which the Funds invest will bear interest at fixed rates. However,
the Funds reserve the right to invest without limitation in fixed-income
securities that have variable rates of interest or involve certain equity
features, such as contingent interest or participation 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 and thus enable the holder of the security to share
in the potential success of the venture). Fixed-income securities consisting of
preferred stocks may have cumulative or non-cumulative dividend rights. To the
extent the Funds invest in non-cumulative preferred stocks, that Fund's ability
to achieve its investment objective of high current income may be affected
adversely.
The Funds may invest in securities rated below B by both Moody's and S&P,
common stocks or other equity securities and income securities on which interest
or dividends are not being paid when such investments are consistent with each
Fund's
24
investment objective or are acquired as part of a unit consisting of a
combination of income or equity securities. Equity securities as referred to
herein do not include preferred stocks (which the Funds consider income
securities). Each Fund's investments may include securities with the
lowest-grade assigned by recognized rating organizations and unrated securities
considered by the Adviser to be of comparable quality. Securities assigned the
lowest grade ratings include those of companies that are in default or are in
bankruptcy or reorganization. Securities of such companies are regarded by the
rating agencies as having extremely poor prospects of ever attaining any real
investment standing and are usually available at deep discounts from the face
values of the instruments. A security purchased at a deep discount may currently
pay a very high effective yield. In addition, if the financial condition of the
issuer improves, the underlying value of the security may increase. 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 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.
Few medium- and lower-grade income securities are listed for trading on any
national securities exchange, and issuers of medium- and lower-grade income
securities may choose not to have a rating assigned to their obligations by any
nationally recognized statistical rating organization. As a result, each 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 Funds and may also limit the ability of the
Funds to sell such securities at their fair value in response to changes in the
economy or the financial markets or for other reasons. Further, to the extent
the Funds own or may acquire illiquid or restricted medium- or lower-grade
securities, these securities may involve special registration responsibilities,
liabilities and costs, and liquidity and valuation difficulties.
The Funds will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issuer. The Adviser seeks to minimize the
risks involved in investing in medium- and lower-grade securities through
diversification and a focus on in-depth research and fundamental credit
analysis. The amount of available information about the financial condition of
certain medium- or lower-grade issuers may be less extensive than other issuers.
In selecting securities for investment, the Adviser considers, among other
things, the security's current income potential, the rating assigned to the
security, the issuer's experience and managerial strength, the financial
soundness of the issuer and the outlook of its industry, changing financial
condition, borrowing requirements or debt
25
maturity schedules, regulatory concerns, and responsiveness to changes in
business conditions and interest rates. The Adviser also may consider relative
values based on anticipated cash flow, interest or dividend coverage, balance
sheet analysis and earnings prospects. The Adviser evaluates each individual
income security for credit quality and value and attempts to identify
higher-yielding securities of companies whose financial condition has improved
since the issuance of such securities or is anticipated to improve in the
future. Credit ratings of securities rating organizations that the Adviser
considers in evaluating securities evaluate only the safety of principal and
interest payments, not the market risk. In addition, ratings are general and not
absolute standards of quality, and credit ratings are subject to the risk that
the creditworthiness of an issuer may change and the rating agencies may fail to
change such ratings in a timely fashion. A rating downgrade does not require the
Funds to dispose of a security. The Adviser continuously monitors the issuers of
securities held in each Fund. Because of the number of investment considerations
involved in investing in medium- and lower-grade securities, achievement of each
Fund's investment objective may be more dependent upon the 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 Adviser is unable at this time to predict what effect, if
any, legislation may have on the market for medium- or lower-grade securities.
HIGHER-GRADE SECURITIES. Each Fund also may invest up to 35% of its total
assets in securities rated higher than Ba by Moody's or higher than BB by S&P,
or unrated securities that the Adviser considers to be of comparable quality and
may invest a higher percentage, up to 100% of its total assets, in such higher
rated securities (i) when the difference in yields between quality
classifications is relatively narrow or (ii) when the Adviser determines that
market conditions warrant a temporary, defensive policy. Investments in higher
rated issues may serve to lessen a decline in net asset value but may also
affect adversely the amount of current income produced by the Funds since the
yields from such issues are typically less than those from medium- and
lower-grade issues. Accordingly, the inclusion of such instruments in either
Fund's portfolio may have the effect of reducing the yield on the common shares.
All of the foregoing policies with respect to credit quality of portfolio
investments apply only at the time of purchase of a security, and the Funds are
not required to dispose of a security in the event that S&P or Moody's (or any
other nationally recognized statistical rating organization) downgrades its
assessment of the credit characteristics of a particular issuer. In determining
whether a Fund will retain or sell such a security, the Adviser may consider
such factors as the Adviser's assessment of the credit quality of the issuer of
such security, the price at which such security could be sold and the rating, if
any, assigned to such security by other nationally recognized statistical rating
organizations.
26
PORTFOLIO COMPOSITION
Although the investment portfolios of both Funds must satisfy the same
standards of credit quality, the actual securities owned by each Fund may be
different, as a result of which there are certain differences in the composition
of the two investment portfolios. The tables below set forth the percentages of
the fixed-income securities held by each Fund, as of December 31, 2004.
27
TARGET FUND
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
BBB Baa 2 $ 1,162 1.4%
BB Ba 61 $33,597 39.7%
B B 89 $44,999 53.1%
CCC Caa 9 $ 4,716 5.6%
Non-rated 2 $ 173 0.2%
ACQUIRING FUND
NUMBER OF VALUE
S&P* MOODY'S* ISSUES (IN THOUSANDS) PERCENT
---- -------- --------- -------------- -------
BBB Baa 2 $ 867 1.4%
BB Ba 59 $24,936 39.7%
B B 89 $33,440 53.2%
CCC Caa 9 $ 3,466 5.5%
Non-rated 2 $ 136 0.2%
---------------
* Ratings: Using the higher of S&P's or Moody's rating on the Acquiring Fund's
fixed-income securities. S&P's rating categories may be modified further by a
plus (+) or minus (-) BBB to CCC ratings. Moody's rating categories may be
modified further by a 1, 2 or 3 in Baa through Caa ratings. See Exhibit I --
"Description of Securities Ratings."
CONVERTIBLE SECURITIES. Fixed-income securities also include convertible
securities. A convertible security is a bond, debenture, note, preferred stock
or other security that may be converted into or exchanged for, or may otherwise
entitle the holder to purchase, a prescribed amount of common stock or any
equity security of the same or a different issuer within a particular period of
time at a specified price or formula. A convertible security entitles the holder
to receive a interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion, convertible securities have characteristics
similar to nonconvertible debt securities in that they ordinarily provide a
stable stream of income with generally higher yields than those of common stocks
of the same or similar issuers. Convertible securities rank senior to common
stock in a corporation's capital structure and, therefore, generally entail less
risk than the corporation's common stock, although the extent to which such risk
is reduced depends in large measure upon the degree to which the convertible
security sells above its value as a fixed-income security.
In selecting convertible securities for the Funds, the Adviser considers the
following factors, among others: (1) the Adviser's own evaluations of the
creditworthiness of the issuers of the securities; (2) the interest or dividend
income
28
generated by the securities: (3) the potential for capital appreciation of the
securities and the underlying common stock; (4) the prices of the securities
relative to the underlying common stocks; (5) the prices of the securities
relative to other comparable securities; (6) whether the securities are entitled
to the benefits of sinking funds or other protective conditions; (7)
diversification of the Fund's portfolio as to issuers and industries; and (8)
whether the securities are rated by Moody's and/or S&P and, if so, the ratings
assigned.
A convertible security may be subject to redemption at the option of the
issuer at a price established in the convertible security's governing
instrument. If a convertible security held by a Fund is called for redemption,
that Fund will be required to permit the issuer to redeem the security, convert
it into the underlying common stock or sell it to a third party. Any of these
actions could have an adverse effect on each Fund's ability to achieve its
investment objective.
ZERO COUPON SECURITIES. The Funds may invest in securities not producing
immediate cash income, including securities in default, zero coupon securities
or pay-in-kind securities. Prices on non-cash-paying instruments may be more
sensitive to changes in the issuer's financial condition, fluctuation in
interest rates and market demand/supply imbalances than cash-paying securities
with similar credit ratings, and thus may be more speculative. Special tax
considerations are associated with investing in zero coupon or pay-in-kind
securities. The Adviser will weigh these concerns against the expected total
returns from such instruments.
The Acquiring Fund is permitted to invest up to 10% of its total assets in
zero coupon securities, while the Target Fund is permitted to invest up to 25%
of its total assets in such securities. Zero coupon securities are income
securities that do not entitle the holder to any periodic payment of interest
prior to maturity or a specified date when the securities begin paying current
interest. They are issued and traded at a discount from their face amounts or
par value, which discount varies depending on the time remaining until cash
payments begin, prevailing interest rates, liquidity of the security and the
perceived credit quality of the issuer. Because such securities do not entitle
the holder to any periodic payments of interest prior to maturity, this prevents
any reinvestment of interest payments at prevailing interest rates if prevailing
interest rates rise. On the other hand, because there are no periodic interest
payments to be reinvested prior to maturity, zero coupon securities eliminate
the reinvestment risk and may lock in a favorable rate of return to maturity if
interest rates drop.
Payment-in-kind securities are income securities that pay interest through the
issuance of additional securities. Prices on such non-cash-paying instruments
may be more sensitive to changes in the issuer's financial condition,
fluctuations in interest rates and market demand/supply imbalances than
cash-paying securities with similar credit ratings, and thus may be more
speculative than are securities that pay interest periodically in cash.
29
FOREIGN SECURITIES. Each Fund invest up to 35% of its net assets in securities
of foreign issuers. Securities of foreign issuers may be denominated in U.S.
dollars or in currencies other than U.S. dollars. The percentage of assets
invested in securities of a particular country or denominated in a particular
currency will vary in accordance with the portfolio management team's assessment
of the relative yield, appreciation potential and the relationship of a
country's currency to the U.S. dollar, which is based upon such factors as
fundamental economic strength, credit quality and interest rate trends.
Investments in foreign securities present certain risks not ordinarily
associated with investments in securities of U.S. issuers. These risks include
fluctuations in foreign currency exchange rates, political, economic or legal
developments (including war or other instability, expropriation of assets,
nationalization and confiscatory taxation), the imposition of foreign exchange
limitations (including currency blockage), withholding taxes on income or
capital transactions or other restrictions, higher transaction costs (including
higher brokerage, custodial and settlement costs and currency conversion costs)
and possible difficulty in enforcing contractual obligations or taking judicial
action. Securities of foreign issuers may not be as liquid and may be more
volatile than comparable securities of domestic issuers. Additionally, since
most foreign income securities are not rated, the Funds will invest in such
securities based on the analysis of the Adviser without any guidance from
published ratings.
Further, there often is less publicly available information about many foreign
issuers, and issuers of foreign securities are subject to different, often less
comprehensive, auditing, accounting and financial reporting disclosure
requirements than domestic issuers. There is generally less government
regulation of exchanges, brokers and listed companies abroad than in the United
States and, with respect to certain foreign countries, there is a possibility of
expropriation or confiscatory taxation, or diplomatic developments which could
affect investment in those countries. Because there is usually less supervision
and governmental regulation of foreign exchanges, brokers and dealers than there
is in the United States, the Funds may experience settlement difficulties or
delays not usually encountered in the United States. Delays in making trades in
securities of foreign issuers relating to volume constraints, limitations or
restrictions, clearance or settlement procedures, or otherwise could impact
returns and result in temporary periods when assets of the Funds are not fully
invested or attractive investment opportunities are foregone.
Delays in making trades in securities of foreign issuers relating to volume
constraints, limitations or restrictions, clearance or settlement procedures, or
otherwise could impact yields and result in temporary periods when assets of the
Funds are not fully invested or attractive investment opportunities are
foregone.
The Funds may invest in securities of issuers determined by the Adviser to be
in developing or emerging market countries. Investments in securities of issuers
in developing or emerging market countries are subject to greater risks than
30
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 securities of foreign
issuers, there are often increased transaction costs associated with investing
in securities of foreign issuers including the costs incurred in connection with
converting currencies, higher foreign brokerage or dealer costs and higher
settlement costs or custodial costs.
Since the Funds may invest in securities denominated or quoted in currencies
other than the U.S. dollar, the Funds may be affected by changes in foreign
currency exchange rates (and exchange control regulations) which affect the
value of investments in the Funds and the accrued income and appreciation or
depreciation of the investments. Changes in foreign currency exchange rates
relative to the U.S. dollar will affect the U.S. dollar value of each Fund's
assets denominated in that currency and each Fund's return on such assets as
well as any temporary uninvested reserves in bank deposits in foreign
currencies. In addition, the Funds will incur costs in connection with
conversions between various currencies.
The Funds may invest in securities of foreign issuers in the form of
depositary receipts. Depositary receipts involve substantially identical risks
to those associated with direct investment in securities of foreign issuers. In
addition, the underlying issuers of certain depositary receipts, particularly
unsponsored or unregistered depositary receipts, are under no obligation to
distribute shareholder communications to the holders of such receipts, or to
pass through to them any voting rights with respect to the deposited securities.
RESTRICTED AND ILLIQUID SECURITIES. Each Fund may invest up to 20% of its
total assets in fixed-income securities that are not readily marketable,
including securities restricted as to resale. No security that is not readily
marketable will be acquired unless the Adviser believes such security to be of
comparable quality to publicly-traded securities. Securities that are not
readily marketable may offer higher yields than comparable publicly-traded
securities. However, the Funds may not be able to sell these securities when the
Adviser considers it desirable to do so or, to the extent they are sold
privately, may have to sell them at less than the price of otherwise comparable
securities and may incur higher brokerage charges or dealer discounts and other
selling expenses than in selling otherwise comparable securities. Certain
fixed-income securities are somewhat liquid and may become more liquid as
secondary markets for these securities continue to develop. These securities
will be included in, or excluded from, the 20% limitation on a case-by-case
basis by the Adviser under the supervision of the Board of Trustees, depending
on the perceived liquidity of the security and market involved. The Funds
understand the position of the staff of the SEC to be that purchases of OTC
options and the assets used as "cover" for written OTC options are illiquid
securities. The staff has, however,
31
taken no-action positions which may reduce any negative impact of such position
on the Fund. The Fund will deem that portion of its positions in OTC options to
be illiquid in accordance with the then current positions of the staff, as such
positions are stated from time to time.
SECURITIES OPTIONS TRANSACTIONS. The Funds may, but are not required to, use
various investment strategic transactions, including securities options
transactions, in several different ways depending upon the status of each Fund's
investments and the expectations of the Adviser concerning the securities
markets. Although the Adviser seeks to use these transactions to achieve each
Fund's investment objective, no assurance can be given that the use of these
transactions will achieve this result.
The Funds may invest in options on fixed-income securities. Such options may
be traded over-the-counter ("OTC") or on a national securities exchange. In
general, the Funds may purchase and sell (write) options on up to 25% of its
assets. The SEC requires that obligations of investment companies such as the
Funds, in connection with option sale positions, must comply with certain
segregation or coverage requirements. No limitation exists on the amount of the
Funds' assets which can be used to comply with such segregation or cover
requirements.
A call option gives the purchaser the right to buy, and obligates the writer
to sell, the underlying security at the agreed upon exercise (or "strike") price
during the option period. A put option gives the purchaser the right to sell,
and obligates the writer to buy, the underlying security at the strike price
during the option period. Purchasers of options pay an amount, known as a
premium, to the option writer in exchange for the right under the option
contract. Option contracts may be written with terms which would permit the
holder of the option to purchase or sell the underlying security only upon the
expiration date of the option.
The Funds may purchase put and call options in hedging transactions to protect
against a decline in the market value of the securities in the Funds' portfolios
(e.g., by the purchase of a put option) and to protect against an increase in
the cost of fixed-income securities that the Fund may seek to purchase in the
future (e.g., by the purchase of a call option). In the event the Funds purchase
put and call options, paying premiums therefor, and price movements in the
underlying securities are such that exercise of the options would not be
profitable for the Funds, then to the extent such underlying securities
correlate in value to the Funds' portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Funds' portfolio
securities in the case of a purchase of put options or by a decrease in the cost
of acquisition of securities by the Funds, in the case of purchase of call
options.
The Funds may also sell put and call options as a means of increasing the
yield on each of their portfolios and as a means of providing limited protection
against decreases in market value of their portfolios. When the Funds sell an
option, if the
32
underlying securities do not increase, in the case of a call option or decreases
in the case of a put options 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 Funds will realize as profit the premium
received for such option. When a call option of which a Fund is the writer is
exercised, that Fund will be required to sell the underlying securities to the
option holder at the strike price; therefore that Fund will not participate in
any increase in the price of such securities above the strike price. When a put
option of which either Fund is the writer is exercised, that 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.
OTC options differ from exchange-traded options in several respects. They are
transacted directly with dealers and not with a clearing corporation, and a risk
exists of non-performance by the dealer. OTC options are available for a greater
variety of securities and for a wider range of expiration dates and exercise
prices than are available for exchange-traded options. Because OTC options are
not traded on an exchange, pricing is done normally by reference to information
from a market maker, which information is monitored carefully by the Adviser and
verified in appropriate cases.
Generally, each Fund's policy, in order to avoid the exercise of an option
sold by it, will be to cancel its obligation under the option by entering into a
closing purchase transaction, if available, unless selling (in the case of a
call option) or purchasing (in the case of a put option) the underlying
securities is determined to be in that Fund's interest. A closing purchase
transaction consists of a Fund purchasing an option having the same terms as the
option sold by that Fund and has the effect of canceling that Fund's position as
a seller. The premium which a Fund will pay in executing a closing purchase
transaction may be higher (or lower) than the premium received when the option
was sold, depending in large part upon the relative price of the underlying
security at the time of each transaction. To the extent options sold by a Fund
are exercised and that Fund either delivers portfolio securities to the holder
of a call option or liquidates securities in its portfolio as a source of funds
to purchase securities put to that Fund, that Fund's portfolio turnover rate
will increase, which would cause that Fund to incur additional brokerage
expenses.
During the option period a Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, and that Fund, as a secured put writer, retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option which may be
substantially below the fair market value of such security. For the secured put
writer, substantial depreciation in the value of the underlying security would
result in the security being "put to" the writer at the
33
strike price of the option which may be substantially in excess of the fair
market value of such security. If a covered call option or a secured put option
expires unexercised, the writer realizes a gain, and the buyer a loss, in the
amount of the premium.
To the extent that an active market exists or develops, whether on a national
securities exchange or over-the-counter, in options on indices based upon fixed-
income securities, each Fund may purchase and sell options on such indices,
subject to the limitation that a Fund may purchase and sell options on up to 25%
of its assets. Through the writing or purchase of index options a Fund can
achieve many of the same objectives as through the use of options on individual
securities. Options on securities indices are similar to options on securities
except that, rather than the right to take or make delivery of a security, at a
specified price, an option on a securities index gives the holder the right to
receive upon exercise of the option, an amount of cash if the closing level of
the securities index upon which the option is based is greater than, in the case
of a call, or less than, in the case of a put, the strike price of the option.
Price movements in securities which the Funds own or intend to purchase will
not correlate perfectly with movements in the level of an index and, therefore,
a Fund bears the risk of a loss on an index option which is not offset
completely by movements in the price of such securities. Because index options
are settled in cash, a call writer cannot determine the amount of its settlement
obligations in advance and, unlike call writing on specific securities, cannot
provide in advance for, or cover, its potential settlement obligations by
acquiring and holding the underlying securities.
INTEREST RATE AND OTHER HEDGING TRANSACTIONS. In order to seek to protect the
value of its portfolio securities against declines resulting from changes in
interest rates or other market changes, the Funds may enter into various hedging
transactions, such as financial futures contracts and related options contracts.
The Funds may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the securities which
each Fund may purchase for its portfolio, including interest rate futures
contracts in such financial instruments and interest rate related indices, put
and call options on such futures contracts and on such financial instruments.
Each Fund expects to enter into these transactions to "lock in" a return or
spread on a particular investment or portion of its portfolio, to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date, or for other risk management strategies.
The Funds will not engage in the foregoing transactions for speculative
purposes, but only as a means to hedge risks associated with management of its
portfolio. Typically, investment in these contracts requires a Fund to deposit
with the applicable exchange or other specified financial intermediary as a good
faith deposit
34
for its obligations, known as "initial margins" an amount of cash or specified
debt securities which initially is 1%-15% of the face amount of the contract and
which thereafter fluctuates on a periodic basis as the value of the contract
fluctuates. Thereafter, a Fund must make additional deposits equal to any net
losses due to unfavorable price movements of the contract and will be credited
with an amount equal to any net gains due to favorable price movements. These
additional deposits or credits are calculated and required daily and are known
as "variation margin."
The SEC generally requires that when investment companies, such as the Funds,
effect transactions of the foregoing nature, such a fund either must segregate
cash or liquid portfolio securities with its custodian in the amount of its
obligations under the foregoing transactions or must cover such obligations by
maintaining positions in portfolio securities, futures contracts or options that
would serve to satisfy or offset the risk of such obligations. When effecting
transactions of the foregoing nature, the Funds will comply with such
segregation or cover requirements. No limitation exists as to the percentage of
the Fund's assets which may be segregated in connection with such transactions.
The Funds will not enter into a futures contract or related option if,
immediately after such investment, the sum of the amount of its initial margin
deposits and premiums on open contracts and options would exceed 5% of that
Fund's total assets at current value. The Funds however, may invest more than
such amount in the future if it obtains authority to do so from the appropriate
regulator agencies without rendering that Fund a commodity pool operator or
adversely affecting its status as an investment company for federal securities
law or income tax purposes.
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the security being, hedged creates the possibility that
losses on the hedge may be greater than gains in the value of the Fund's
securities. In addition, these instruments may not be liquid in all
circumstances and are closed out generally by entering into offsetting
transactions rather than by disposing of the obligations. As a result, in
volatile markets, the Funds may not be able to close out a transaction without
incurring losses. Although the contemplated use of those contracts should tend
to reduce the risk of loss due to a decline in the value of the hedged security,
at the same time the use of these contracts could tend to limit any potential
gain which might result from an increase in the value of such security. Finally,
the daily deposit requirements for futures contracts create an ongoing greater
potential financial risk than do option purchase transactions, where the
exposure is limited to the cost of the premium for the option.
Successful use of futures contracts and options thereon by the Funds is
subject to the ability of the Adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for securities.
If the Adviser's expectations are not met, the Funds would be in a worse
position than if a hedging strategy had
35
not been pursued. If the Fund has insufficient cash to meet daily variation
margin requirements, it may have to sell securities to meet such requirements.
Such sales of securities may, but will not necessarily, be at increased prices
which reflect the rising market. The Funds may have to sell securities at a time
when it is disadvantageous to do so.
In addition to engaging in transactions utilizing options on futures
contracts, the Funds may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset a Fund has the option to
buy declines in value or if an asset a Fund has the option to sell increases in
value.
The Funds also may enter into various other hedging transactions, such as
interest rate swaps and the purchase or sale of interest rate caps and floors.
The Funds expect to enter into these transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio or to protect
against any increase in the price of securities the Funds anticipate purchasing
at a later date. The Funds intend to use these transactions as a hedge and not
as a speculative investment. The Funds will not sell interest rate caps or
floors that each Fund does not own. Interest rate swaps involve the exchange by
a 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.
The purchase of an interest rate cap entitles the purchaser, to the extent that
a specified index exceeds a predetermined interest rate, to receive payments of
interest on a notional principal amount from the party selling such interest
rate cap. The purchase of an interest rate floor entitles the purchaser, to the
extent that a specified index falls below a predetermined interest rate, to
receive payments of interest on a notional principal amount from the party
selling such interest rate floor.
The Funds may enter into interest rate swaps, caps and floors on either an
asset-based or liabilities-based basis, depending on whether it is hedging its
assets or its liabilities, and will enter usually into interest rate swaps on a
net basis, i.e., the two payment streams are netted out, with the Funds
receiving or paying, as the case may be, only the net amount of the two
payments. Inasmuch as these hedging transactions are entered into for good faith
risk management purposes, the Adviser and the Funds believe such obligations do
not constitute senior securities and, accordingly, will not treat them as being
subject to its investment restrictions on borrowing. The net amount of the
excess, if any, of a Fund's obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis and an amount of cash
or liquid securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by, each Fund's
custodian. The creditworthiness of firms with which the Funds enter into
interest rate swaps, caps or floors will be monitored on an ongoing basis by the
36
Adviser pursuant to procedures adopted and reviewed, on an ongoing basis, by the
Board of Trustees of the Funds. If a default occurs by the other party to such
transaction, the Funds will have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps and floors are more recent
innovations for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
New options and futures contracts and other financial products, and various
combinations thereof, continue to be developed and the Funds may invest in any
such options, contracts and products as may be developed to the extent
consistent with its investment objective and the regulatory requirements
applicable to investment companies.
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Funds may also purchase
and sell fixed-income securities on a "when issued" and delayed delivery" basis.
No income accrues to a Fund on fixed-income securities in connection with such
transactions prior to the date a Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation: the value of
the fixed-income securities at deliver may be more or less, than their purchase
price, and yields generally available on fixed-income securities when delivery
occurs may be higher than yields on the fixed-income securities obtained
pursuant to such transactions. Because a 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 a Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When a Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or liquid 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 fixed-income securities on such basis
only with the intention of actually acquiring these securities, but a Fund may
sell such securities prior to the settlement date if such sale is considered to
be advisable. To the extent a Fund engages in "when issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for that Fund's portfolio consistent with that Fund's investment objective and
policies and not for the purpose of investment leverage.
REPURCHASE AGREEMENTS. The Funds may engage in repurchase agreements with
broker-dealers, banks and other financial institutions to earn a return on
temporarily available cash. A repurchase agreement is a short-term investment in
which the purchaser (i.e., the Funds) 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
37
event of default by the other party. The Funds may enter into repurchase
agreements with broker-dealers, banks and other financial institutions deemed to
be creditworthy by the Adviser under guidelines approved by the Fund's Board of
Trustees. The Fund will not invest in repurchase agreements maturing in more
than seven days if any such investment, together with any other illiquid
securities held by the Fund, would exceed the Fund's limitation on illiquid
securities described herein. The Fund does not bear the risk of a decline in the
value of the underlying security unless the seller defaults under its repurchase
obligation. In the event of the bankruptcy or other default of a seller of a
repurchase agreement, the Fund could experience both delays in liquidating the
underlying securities and losses including: (a) possible decline in the value of
the underlying security during the period while the Fund seeks to enforce its
rights thereto; (b) possible lack of access to income on the underlying security
during this period; and (c) expenses of enforcing its rights.
Repurchase agreements are fully collateralized by the underlying securities
and are considered to be loans under the 1940 Act. The Funds pay for such
securities only upon physical delivery or evidence of book entry transfer to the
account of a custodian or bank acting as agent. The seller under a repurchase
agreement will be required to maintain the value of the underlying securities
marked-to-market daily at not less than the repurchase price. The underlying
securities (normally securities of the U.S. government, its agencies or
instrumentalities) may have maturity dates exceeding one year.
REVERSE REPURCHASE AGREEMENTS. The Funds may enter into reverse repurchase
agreements with respect to debt obligations which could otherwise be sold by the
Funds. A reverse repurchase agreement is an instrument under which the Funds may
sell an underlying debt instrument and simultaneously obtain the commitment of
the purchaser (a commercial bank or a broker or dealer) to sell the security
back to a Fund at an agreed upon price on an agreed upon date. The value of
underlying securities will be at least equal at all times to the total amount of
the resale obligation, including the interest factor. The Funds receive payment
for such securities only upon physical delivery or evidence of book entry
transfer by its custodian. Regulations of SEC require either that securities
sold by the Funds under a reverse repurchase agreement be segregated pending
repurchase or that the proceeds be segregated. Reverse repurchase agreements
could involve certain risks in the event of default or insolvency of the other
party, including possible delays or restrictions upon a Fund's ability to
dispose of the underlying securities. An additional risk is that the market
value of securities sold by a Fund under a reverse repurchase agreement could
decline below the price at which a Fund is obligated to repurchase them. Reverse
repurchase agreements will be considered borrowings by the Funds and as such
would be subject to the restrictions on borrowing described in the section
entitled "Investment Restrictions." The Funds will not hold more than 5% of the
value of its total assets in reverse repurchase agreements.
38
INVESTMENT RESTRICTIONS
Each Fund's investment objective and the following investment restrictions are
fundamental and cannot be changed without the approval of the holders of a
majority of that Fund's outstanding voting securities (defined in the 1940 Act
as the lesser of (i) more than 50% of the Fund's outstanding common shares and
of any outstanding senior securities constituting preferred shares, voting by
class, or (ii) 67% of the Fund's outstanding common shares and of such
outstanding senior securities constituting preferred shares, voting by class,
present at a meeting at which the holders of more than 50% of the outstanding
shares of each such class are present in person or by proxy). All other
investment policies or practices are considered by the Funds not to be
fundamental and accordingly may be changed without shareholder approval. If a
percentage restriction on investment or use of assets set forth below is adhered
to at the time a transaction is effected, later changes in percentage resulting
from changing market values will not be considered a deviation from policy. Each
Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if as a result more than 5% of the Fund's
total assets 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 any single issuer, except that the Fund may purchase
securities of other investment companies to the extent permitted by (i)
the 1940 Act, as amended from time to time, (ii) the rules and regulations
promulgated by the SEC under the 1940 Act, as amended from time to time,
or (iii) an exemption or other relief from the provisions of the 1940 Act.
2. Invest more than 25% of its total assets in securities of issuers
conducting their principal business activities in the same industry;
provided, that this limitation shall not apply which respect to
investments in U.S. Government securities.
3. Issue senior securities, (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except
that the Fund may issue senior securities which are stocks (including
preferred shares of beneficial interest) subject to the limitations set
forth in Section 18 of the 1940 Act and except that the Fund may borrow up
to an additional 5% of its total assets for temporary purposes: or pledge
its assets other than to secure such issuance or in connection with
hedging transactions, when-issued and delayed delivery transactions and
similar investment strategies. The Fund's obligations under interest rate
swaps are not treated as senior securities.
39
4. Make loans of money or property to any person, except (i) to the extent
the securities the Fund may invest are considered to be loans, (ii)
through loans of portfolio securities, (iii) through the acquisition of
securities subject to repurchase agreements and (iv) that 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.
5. Buy any securities "on margin." Neither the deposit of initial or
variation margin in connection with hedging transactions nor short-term
credits as may be necessary in for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except as described herein.
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 investment for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation, 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.
9. Invest in securities issued by other investment companies, except as part
of a merger, reorganization or other acquisition and except to the extent
permitted by the 1940 Act, as amended from time to time, the rules and
regulations promulgated by the SEC under the 1940 Act, as amended from
time to time, or other relief from the 1940 Act.
10. Buy or sell oil, gas or other mineral leases, rights or royalty contracts,
although the Fund may, purchase securities of issuers which deal in,
represent interests in or are secured by interests in such leases, rights
or contracts, except to the extent that the Fund may invest in equity
interests generally, as described herein.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities 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 such
securities (in which
40
case the Fund may liquidate real estate acquired as a result of default on
a mortgage), and except to the extent that hedging instruments and risk
management transactions the Fund may engage in are considered to be
commodities or commodities contracts.
The Funds generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but will adjust their portfolios as
they deem advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, a Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if that Fund considers it
advantageous to purchase or sell securities. Each Fund anticipates that its
annual portfolio turnover rate may be in excess of 100%. A high rate of
portfolio turnover involves correspondingly greater brokerage commission
expenses than a lower rate, which expenses must be borne by the Fund and its
shareholders. High portfolio turnover also may result in the realization of
substantial net short-term capital gains.
As a matter of operating policy, each Fund will not invest 25% or more of its
assets in a single industry; however, each Fund may invest 25% or more of its
assets in U.S. Government securities.
MANAGEMENT OF THE FUNDS
THE BOARDS. The Board of each Fund is responsible for the overall supervision
of the operations of its respective Fund and performs the various duties imposed
on trustees of investment companies by the 1940 Act and under applicable state
law.
THE ADVISER. The investment adviser for each Fund is Van Kampen Asset
Management. The Adviser is a wholly owned subsidiary of Van Kampen Investments
Inc. ("Van Kampen Investments"). Van Kampen Investments is a diversified asset
management company that administers more than three million retail investor
accounts, has extensive capabilities for managing institutional portfolios and
has more than $98 under management or supervision as of March 31, 2005. Van
Kampen Investments is an indirect wholly owned subsidiary of Morgan Stanley, a
preeminent global financial services firm that maintains leading market
positions in each of its three primary businesses: securities, asset management
and credit services. Morgan Stanley is a full service securities firm engaged in
securities trading and brokerage activities, investment banking, research and
analysis, financing and financial advisory services. The principal business
address of the Adviser and Van Kampen Investments is 1221 Avenue of the
Americas, New York, New York 10020.
Pursuant to separate investment advisory agreements between each Fund and the
Adviser, each Fund pays the Adviser a monthly fee at the annual rate of 0.70% of
such Fund's average daily net assets, including assets attributable to its
preferred
41
shares. Subsequent to the Reorganization, the Adviser will continue to receive
compensation at the rate of 0.70% of the average daily net assets, including
assets attributable to preferred shares, of the combined fund. Because the fees
paid to the Adviser are calculated on net assets including assets attributable
to preferred shares, the fees earned by the Adviser will be higher when
preferred shares are outstanding.
PORTFOLIO MANAGEMENT. Each Fund's portfolio is managed by the Adviser's
Taxable Fixed Income team. The team is made up of established investment
professionals. Current team members include Gordon Loery and Chad Liu, each an
Executive Director of the Adviser, Josh Givelber, a Vice President of the
Adviser, and Sheila Finnerty, a Managing Director of the Adviser.
Gordon Loery has worked for the Adviser since 1990 and began managing the
Funds in 2001. Prior to 2001, Mr. Gordon worked in an investment management
capacity with the Adviser. Josh Givelber has worked for the Adviser since 2001
and began managing the Funds in 2003. Chad Liu has worked for the Adviser since
1999 and began managing the Funds in 2003. Prior to 2003, each of Messrs.
Givelber and Liu worked in an investment management capacity with the Adviser.
Shiela Finnerty has worked for the Adviser since 1993 and began managing the
Funds in 2004. Prior to 2004, Ms. Finnerty worked in an investment management
capacity with the Adviser.
Mr. Loery is the lead manager of each Fund. Each member is responsible for
specific sectors. All team members are responsible for the day-to-day management
of the Funds and for the execution of the overall strategy of the Funds.
The Reorganization Statement of Additional Information provides additional
information about the portfolio managers' compensation, other accounts managed
by the portfolio managers and the portfolio managers' ownership of securities in
the Acquiring Fund.
PORTFOLIO TRANSACTIONS WITH AFFILIATES. The Adviser may place portfolio
transactions, to the extent permitted by law, with brokerage firms affiliated
with the Funds and the Adviser if it reasonably believes that the quality of
execution and the commission are comparable to that available from other
qualified firms.
LEGAL PROCEEDINGS. The Adviser, certain affiliates of the Adviser, and certain
investment companies advised by the Adviser or its affiliates were named as
defendants in a number of similar class action complaints which were
consolidated. The amended complaint also names as defendants certain individual
trustees and directors of certain investment companies advised by affiliates of
the Adviser; the complaint does not, however, name the individual trustees of
any Van Kampen funds. The complaint generally alleges that defendants violated
their statutory disclosure obligations and fiduciary duties by failing properly
to disclose (i) that the Adviser and certain affiliates of the Adviser allegedly
offered economic incentives to brokers and others to steer investors to the
funds advised by the Adviser or its
42
affiliates rather than funds managed by other companies, and (ii) that the funds
advised by the Adviser or its affiliates allegedly paid excessive commissions to
brokers in return for their alleged efforts to steer investors to these funds.
The complaint seeks, among other things, unspecified compensatory damages,
rescissionary damages, fees and costs. The defendants' motion to dismiss this
action is pending. After defendants moved to dismiss, the plaintiffs filed a
motion for leave to amend the complaint, which is also pending. The proposed
amendment drops all claims against the named investment companies, which are
listed only as nominal defendants. The proposed amendment raises similar claims
against the Adviser and its affiliates with respect to the investment companies
advised by the Adviser or its affiliates, and, in addition, alleges that
affiliates of the Adviser received undisclosed compensation for steering
investors into thirteen non-affiliated fund families. The defendants intend to
continue to defend this action vigorously. While the defendants believe that
they have meritorious defenses, the ultimate outcome of this matter is not
presently determinable at this early stage of litigation.
The Adviser and certain affiliates of the Adviser are also named as defendants
in a derivative suit which additionally names as defendants individual trustees
of certain Van Kampen funds; the named investment companies are listed as
nominal defendants. The complaint alleges that defendants caused the Van Kampen
funds to pay economic incentives to a proprietary sales force to promote the
sale of Van Kampen mutual funds. The complaint also alleges that the Van Kampen
funds paid excessive commissions to Morgan Stanley and its affiliates in
connection with the sales of the funds. The complaint seeks, among other things,
the removal of the current trustees of the funds, rescission of the management
contracts for the funds, disgorgement of profits by Morgan Stanley and its
affiliates and monetary damages. This complaint has been coordinated with the
consolidated action described in the preceding paragraph. The defendants have
moved to dismiss this action and otherwise intend to defend it vigorously. This
action is currently stayed until the later of (i) a ruling on the motion to
dismiss the action described in the preceding paragraph or (ii) a ruling on a
motion to dismiss the action described in the next paragraph. While the
defendants believe that they have meritorious defenses, the ultimate outcome of
this matter is not presently determinable at this early stage of litigation.
The plaintiff in the action described in the preceding paragraph recently
filed a separate derivative action against the Adviser, certain affiliates of
the Adviser, the individual trustees of certain Van Kampen funds, and certain
unaffiliated entities. The named investment companies, including the Fund, are
listed as nominal defendants. The complaint alleges that certain unaffiliated
entities engaged in or facilitated market timing and late trading in the Van
Kampen funds, and that the Adviser, certain affiliates of the Adviser, and the
trustees failed to prevent and/or detect such market timing and late trading.
The complaint seeks, among other things, the removal of the current trustees of
the funds, rescission of the
43
management contracts and distribution plans for the funds, disgorgement of fees
and profits from the Adviser and its affiliates, and monetary damages. The
defendants' motion to dismiss the action is pending. While the defendants
believe that they have meritorious defenses, the ultimate outcome of this matter
is not presently determinable at this early stage of litigation.
The Adviser and one of the investment companies advised by the Adviser are
named as defendants in a class action complaint generally alleging that the
defendants breached their duties of care to long-term shareholders of the
investment company by valuing portfolio securities at the closing prices of the
foreign exchanges on which they trade without accounting for significant market
information that became available after the close of the foreign exchanges but
before calculation of net asset value. As a result, the complaint alleges,
short-term traders were able to exploit stale pricing information to capture
arbitrage profits that diluted the value of shares held by long-term investors.
The complaint seeks unspecified compensatory damages, punitive damages, fees and
costs. Defendants appealed an order of the federal district court remanding this
case to state court. The federal appeals court recently reversed the federal
district court's order remanding this case to state court and directed entry of
judgment in favor of defendants.
The Adviser and individual trustees of certain Van Kampen funds are named as
defendants in a recently filed class action complaint that alleges that the
defendants breached various fiduciary and statutory duties to investors by
failing to ensure that the funds participated in securities class action
settlements involving securities held in the funds' portfolios. The complaint
seeks compensatory and punitive damages on behalf of investors in the funds.
None of the funds are named as defendants and no claims are asserted against
them. The defendants expect to move to dismiss the complaint and believe that
they have meritorious defenses.
The Adviser, one of the investment companies advised by the Adviser, and
certain officers and directors of the investment company are defendants in a
class action filed in 2001 alleging that the defendants issued a series of
prospectuses and registration statements that were materially false and
misleading. Among other things, the complaint alleges that the prospectuses and
registration statements contained misleading descriptions of the method
defendants used to value senior loan interests in the fund's portfolio, and that
defendants materially overstated the net asset value of the fund. The parties
recently mediated the dispute through a court-supervised settlement conference
and reached an agreement to settle the case. The parties presented a settlement
agreement for preliminary court approval in April 2005.
OTHER SERVICE PROVIDERS
COMMUNICATIONS SUPPORT SERVICES PROVIDER. Van Kampen Funds Inc. (the "Support
Services Provider") serves as the communications support services provider for
each of the Funds. Its principal place of business is 1221 Avenue of the
44
Americas, New York, New York 10020. The communications support services provided
include telephonic and written correspondence with shareholders and brokers. The
Funds do not pay any fees to the Support Services Provider, but bears certain
expenses incurred by the Support Services Provider.
CUSTODIAN, TRANSFER AGENT, AUCTION AGENT AND DIVIDEND PAYING AGENT. State
Street Bank and Trust Company is the custodian and accountant for each of the
Funds. Its principal business address is 225 West Franklin Street, Boston,
Massachusetts 02110. EquiServe Trust Company, N.A. is the transfer agent and
dividend disbursing agent for the common shares of each of the Funds. Its
principal business address is 250 Royall Street, Canton, Massachusetts 02021.
Deutsche Bank Trust Company Americas is the dividend paying agent and auction
agent for the Acquiring Fund's APS. Its principal business address is 280 Park
Avenue, New York, New York 10017. The Bank of New York is the dividend paying
agent and auction agent for the Target Fund's AMPS. Its principal business
address is 100 Church Street, New York, New York 10286.
CAPITALIZATION
Each Fund is authorized to issue an unlimited number of common shares of
beneficial interest. The Acquiring Fund is authorized to issue 900 preferred
shares of beneficial interest and the Target Fund is authorized to issue 850
preferred shares of beneficial interest. The Board of Trustees of each Fund may
authorize separate classes of shares together with such designation of
preferences, rights, voting powers, restrictions, limitations, qualifications or
terms as may be determined from time to time by the trustees.
The table below sets forth the capitalization of the Target Fund and the
Acquiring Fund as of December 31, 2004, and the pro forma capitalization of the
combined fund as if the Reorganization had occurred on that date.
45
CAPITALIZATION AS OF DECEMBER 31, 2004
PRO FORMA
ACTUAL -------------
---------------------------- VAN KAMPEN
VAN KAMPEN VAN KAMPEN HIGH INCOME
HIGH INCOME HIGH INCOME TRUST II
TRUST II TRUST (AS ADJUSTED)
----------- ----------- -------------
NET ASSETS CONSIST OF:
Common Shares ($.01 par
value)*.................. $ 81,090 $ 137,108 $ 190,650
Paid in surplus............ 64,211,619 84,024,777 147,882,944
Net unrealized
appreciation............. 1,159,031 1,842,359 3,001,390
Accumulated undistributed
net investment income.... (234,620) (282,849) (517,469)
Accumulated net realized
loss..................... (26,617,116) (33,731,872) (60,348,988)
NET ASSETS APPLICABLE TO
COMMON SHARES............ 38,600,004 51,989,523 90,208,527**
PREFERRED SHARES ($.01 par
value, with liquidation
preference of $25,000 and
$100,000 for Acquiring
Fund and Target Fund,
respectively)*........... 27,800,000 37,600,000 65,400,000
NET ASSETS INCLUDING
PREFERRED SHARES......... $ 66,400,004 $ 89,589,523 $155,608,527
---------------
* Based on the number of outstanding shares listed in "Outstanding Securities
of the Funds" table below.
** Reflects a non-recurring cost associated with the Reorganization of
approximately $381,000, with $213,000 to be borne by Target Fund common
shareholders and $168,000 to be borne by Acquiring Fund common shareholders.
46
OUTSTANDING SECURITIES OF THE FUNDS AS OF APRIL 25, 2005
AMOUNT OUTSTANDING
AMOUNT HELD EXCLUSIVE OF AMOUNT
AMOUNT FOR ITS OWN SHOWN IN
TITLE OF CLASS AUTHORIZED ACCOUNT PREVIOUS COLUMN
-------------- ---------- ----------- -------------------
Target Fund
Common Shares.............. Unlimited 0 13,710,760
Preferred Shares........... 1,000,000 0 376
Acquiring Fund
Common Shares.............. Unlimited 0 8,109,000
Preferred Shares........... 100,000,000 0 1,112
ADDITIONAL INFORMATION ABOUT THE COMMON SHARES OF THE FUNDS
GENERAL. Common shareholders of a Fund are entitled to share equally in
dividends declared by the Fund's Board of Trustees payable to holders of the
common shares and in the net assets of the Fund available for distribution to
holders of the common shares after payment of the preferential amounts payable
to preferred shareholders. Common shareholders do not have preemptive or
conversion rights and a Fund's common shares are not redeemable. The outstanding
common shares of each Fund are fully paid and nonassessable (except as described
under "Governing Law" below). So long as any preferred shares of a Fund are
outstanding, holders of the Fund's common shares will not be entitled to receive
any dividends or other distributions from the Fund unless all accumulated
dividends on the Fund's outstanding preferred shares have been paid, and unless
asset coverage (as defined in the 1940 Act) with respect to such preferred
shares would be at least 200% after giving effect to such distributions.
PURCHASE AND SALE. Purchase and sale procedures for the common shares of each
of the Funds are identical. Investors typically purchase and sell common shares
of the Funds through a registered broker-dealer on the NYSE or CHX, thereby
incurring a brokerage commission set by the broker-dealer. Alternatively,
investors may purchase or sell common shares of the Funds through privately
negotiated transactions with existing shareholders.
COMMON SHARE PRICE DATA. The following table sets forth the high and low sales
prices for Common Shares of each Fund on the NYSE for each full quarterly period
within each Fund's two most recent fiscal years and for the first fiscal quarter
47
of the current fiscal year, along with the net asset value and discount or
premium to net asset value for each quotation.
ACQUIRING FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
December 31, 2004........ $5.18 $4.77 8.60% $4.77 $4.78 (0.21)%
September 30, 2004....... $4.93 $4.64 6.25% $4.34 $4.43 (2.03)%
June 30, 2004............ $5.05 $4.58 10.26% $3.97 $4.35 (8.74)%
March 31, 2004........... $5.20 $4.55 14.29% $4.84 $4.52 7.08%
December 31, 2003........ $5.28 $4.49 17.59% $4.60 $4.42 4.07%
September 30, 2003....... $4.94 $4.33 14.09% $4.32 $4.11 5.11%
June 30, 2003............ $5.00 $4.28 16.82% $4.64 $4.10 13.17%
March 31, 2003........... $4.69 $4.01 16.96% $4.00 $3.80 5.26%
TARGET FUND
----------------------
NET ASSET PREMIUM NET ASSET PREMIUM
QUARTERLY PERIOD ENDING HIGH PRICE VALUE (DISCOUNT) LOW PRICE VALUE (DISCOUNT)
----------------------- ---------- --------- ---------- --------- --------- ----------
December 31, 2004........ $4.48 $3.71 20.75% $4.06 $3.79 7.12%
September 30, 2004....... $4.43 $3.70 19.73% $3.73 $3.53 5.67%
June 30, 2004............ $4.34 $3.63 19.56% $3.55 $3.42 3.80%
March 31, 2004........... $4.58 $3.70 23.78% $4.07 $3.69 10.30%
December 31, 2003........ $4.28 $3.64 17.58% $3.67 $3.52 4.26%
September 30, 2003....... $3.98 $3.46 15.03% $3.41 $3.34 2.10%
June 30, 2003............ $4.09 $3.38 21.01% $3.71 $3.22 15.22%
March 31, 2003........... $3.74 $3.15 18.73% $3.15 $3.03 3.96%
As of April 25, 2005, (i) the net asset value per share for Target Fund Common
Shares was $3.55 and the market price per share was $3.65, representing a
premium to net asset value of 2.82%, and (ii) the net asset value per share for
Acquiring Fund Common Shares was $4.48 and the market price per share was $4.44,
representing a discount to net asset value of 0.89%.
Common shares of each of the Funds have historically traded at both a premium
and a discount to net asset value. To the extent that either Fund trades at a
discount, the Board of Trustees of each Fund may, subject to the terms and
conditions of its preferred shares, authorize a Fund from time to time to
repurchase the common shares in the open market or to tender for the common
shares at net asset value. The Board of Trustees of each Fund, in consultation
with the Adviser, will review on a quarterly basis the possibility of open
market repurchases and/or tender offers for the common shares. Subject to its
borrowing restrictions, each Fund may incur debt to finance such repurchases,
which entails risks. The ability of a Fund to enter into tender offers and the
common share repurchases may be limited by the 1940 Act asset coverage
requirements and any additional asset coverage requirements which may be imposed
by a rating agency in connection with any rating of the preferred shares. No
assurance can be given that the Board of
48
Trustees of either Fund will, in fact, authorize that Fund to undertake such
repurchases and/or tender offers or that, if undertaken, such actions would
result in the common shares trading at a price which is equal or close to net
asset value.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective common shares are
similar. It is each Fund's present policy, which may be changed by its Board of
Trustees, to make monthly distributions to holders of its common shares of
substantially all net investment income of the Fund, if any, remaining after the
payment of scheduled principal and interest and/or dividends on any senior
securities outstanding, including any outstanding preferred shares. Net
investment income of each Fund consists of all interest income, dividends, other
ordinary income earned by the Fund on its portfolio assets and short-term
capital gains, less all expenses of the Fund. Under current federal tax law, the
Target Fund generally allocates net capital gains and other taxable income only
to holders of Target Fund Common Shares, and not to holders of Target Fund AMPS,
in the year for which such capital gains and other income is realized. The
Acquiring Fund, however, is required to allocate net capital gains and other
taxable income, if any, proportionately between holders of Acquiring Fund Common
Shares and Acquiring Fund APS.
Expenses of each Fund are accrued each day. Net realized long-term capital
gains, if any, are expected to be distributed to shareholders at least annually.
While there are any of its preferred shares outstanding, neither Fund may
declare any cash dividend or other distribution on its common shares, unless at
the time of such declaration, (1) all accrued preferred shares dividends have
been paid and (2) the value of the Fund's total assets (determined after
deducting the amount of such dividend or other distribution), less all
liabilities and indebtedness of the Fund, is at least 200% (as required by the
1940 Act) of the liquidation value of the outstanding preferred shares (expected
to equal the aggregate original purchase price of the outstanding preferred
shares plus any accrued and unpaid dividends thereon, whether or not earned or
declared an on a cumulative basis). In addition to the requirements of the 1940
Act, the Fund may be required to comply with other asset coverage requirements
as a condition of the Fund obtaining a rating of its preferred shares from a
nationally recognized rating service. These requirements may include an asset
coverage test more stringent than under the 1940 Act. This limitation on a
Fund's ability to make distributions on its common shares could in certain
circumstances impair the ability of the Fund to maintain its qualification for
taxation as a regulated investment company. Each Fund intends, however, to the
extent possible, to purchase or redeem preferred shares from time to time to
maintain compliance with such asset coverage requirements and may pay special
dividends to the holders of the preferred shares in certain circumstances in
connection with any such impairment of the Fund's status as a regulated
investment company.
49
For information concerning the manner in which dividends and distributions to
holders of each Fund's common shares may be reinvested automatically in the
Fund's common shares, see the section entitled "Dividend Reinvestment Plan."
DIVIDEND REINVESTMENT PLAN. Each Fund offers a Dividend Reinvestment Plan
(each a "Plan") pursuant to which distributions of dividends and all capital
gains on common shares are automatically reinvested in common shares pursuant to
such Plan. The Plans for the Target Fund and the Acquiring Fund are similar,
except that, unlike the Target Fund's Plan, Acquiring Fund's Plan provides for
automatic participation. Thus, dividends and distributions to Acquiring Fund
common shareholders will be automatically reinvested in additional Acquiring
Fund Common Shares purchased on each such common shareholders' behalf in the
open market, unless an Acquiring Fund common shareholder specifically elects to
receive cash. Under the Target Fund's plan, unless Target Fund common
shareholders elect to participate in that Fund's Plan, all common shareholders
will receive distributions of dividends and capital gains in cash.
State Street Bank and Trust Company, as plan agent (the "Plan Agent"), serves
as agent for the holders of common shares of each Fund in administering the
Plans. All Acquiring Fund common shareholders are deemed to be participants in
the Plan unless they specifically elect not to participate. Common shareholders
of either Fund may withdraw from the Plan at anytime by calling (800) 341-2929
or by writing to the Plan Agent at P.O. Box 8200, Boston, Massachusetts 02101.
If you withdraw, you will receive, without charge, a share certificate issued in
your name for all full common shares credited to your account under the Plan,
and a cash payment will be made for any fractional common share credited to your
account under the Plan. Common shareholders of either Fund may again elect to
participate in the Plan at any time by calling (800) 341-2929 or by writing to
the applicable Fund at 2800 Post Oak Boulevard, Houston, Texas 77056, Attention:
Closed-End Funds.
After the Reorganization, a holder of shares of a Fund who currently elects to
receive dividends in cash will continue to receive dividends in cash; all other
holders will have their dividends automatically reinvested in shares of the
combined fund.
ADDITIONAL INFORMATION ABOUT THE PREFERRED SHARES OF THE FUNDS
GENERAL. The preferred shares of each Fund have a similar structure. The
Acquiring Fund has issued and outstanding auction preferred shares, or "APS,"
and the Target Fund has issued and outstanding auction market preferred shares,
or "AMPS." Each are preferred shares of beneficial interest which entitle their
holders to receive cumulative cash dividends when, as and if declared by the
Board of Trustees, out of funds legally available therefor, at a rate per annum
that may vary for the successive dividend periods. Acquiring Fund APS have a
liquidation preferences of $25,000 per share, while the Target Fund AMPS have a
liquidation
50
preference of $100,000 per share. Neither Acquiring Fund APS nor Target Fund
AMPS are traded on a stock exchange or over-the-counter.
Holders of each Fund's preferred shares do not have preemptive rights to
purchase any shares of Acquiring Fund APS or Target Fund AMPS, or any other
preferred shares that might be issued. The net asset value per share of
Acquiring Fund APS or Target Fund AMPS equals its liquidation preference plus
accumulated but unpaid dividends per share.
SERIES. Under the 1940 Act, each Fund is permitted to have outstanding more
than one series of preferred shares as long as no single series has priority
over another series as to the distribution of assets of the Fund or the payment
of dividends. Each Fund currently has only one series of preferred shares
outstanding. If the Reorganization is approved and completed, the combined fund
will continue to have one series of preferred shares outstanding, as the
Acquiring Fund will issue Acquiring Fund APS from the existing series in
exchange for the Target Fund AMPS. Four shares of Acquiring Fund APS
(liquidation preference $25,000 per share) will be issued for each share of
Target Fund AMPS (liquidation preference $100,000 per share).
PURCHASE AND SALE. Purchase and sale procedures for the preferred shares of
each of the Funds also are similar. Such preferred shares generally are
purchased and sold at separate auctions conducted on a regular basis by the
auction agent for each Fund's preferred shares (the "Auction Agent"). Unless
otherwise permitted by the Funds, existing and potential holders of Acquiring
Fund APS or Target Fund AMPS, as the case may be, may only participate in
auctions through their broker-dealers. Broker-dealers submit the orders of their
respective customers who are existing and potential holders of Acquiring Fund
APS or Target Fund AMPS, as the case may be, to the Auction Agent. On or prior
to each auction date for the Acquiring Fund APS or Target Fund AMPS (the
business day next preceding the first day of each dividend period), each holder
may submit orders to buy, sell or hold Acquiring Fund APS or Target Fund AMPS to
its broker-dealer. Outside of these auctions, shares of Acquiring Fund APS or
Target Fund AMPS may be purchased or sold through broker-dealers in a secondary
trading market maintained by the broker-dealers. However, there can be no
assurance that a secondary market will develop or if it does develop, that it
will provide holders with a liquid trading market for the Acquiring Fund APS or
Target Fund AMPS.
AUCTIONS. The auction terms of Acquiring Fund APS and Target Fund AMPS are
similar. Each of Acquiring Fund APS and Target Fund AMPS may be purchased at
auctions or through broker-dealers who maintain a secondary market in Acquiring
Fund APS or Target Fund AMPS, as the case may be. Auctions are generally held
every twenty-eight days for each of Acquiring Fund APS and Target Fund AMPS,
unless the applicable Fund elects, subject to certain limitations, to declare a
special dividend period. In connection with the Reorganization, a holder
51
of Target Fund AMPS would receive Acquiring Fund APS. As a result of the
Reorganization, the last dividend period for the Target Fund AMPS prior to the
closing date and the initial dividend period for the Acquiring Fund APS issued
in connection with the Reorganization after the closing date may be shorter than
the ordinary dividend period for such shares.
DIVIDEND RATES. The following table provides information about the dividend
rates for each Fund's preferred shares as of a recent auction.
AUCTION DIVIDEND DATE FUND RATE
--------------------- ---- ----
March 29, 2005 Target Fund........................... 3.210%
March 23, 2005 Acquiring Fund........................ 2.990%
The dividend rates in effect at the closing of the Reorganization will be the
rates determined in the auction most recently preceding such closing.
DIVIDENDS AND DISTRIBUTIONS. The Funds' current policies with respect to
dividends and distributions relating to their respective preferred shares are
similar. The holders of the Target Fund's AMPS and the Acquiring Fund's APS are
entitled to receive, when, as and if declared by the Board of Trustees of the
Fund, out of funds legally available therefor, cumulative cash dividends on
their shares. Dividends on the Target Fund's AMPS so declared and payable shall
be paid (i) in preference to and in priority over any dividends so declared and
payable on the Target Fund's common shares, and (ii) to the extent permitted
under the Internal Revenue Code and to the extent available and in preference to
and priority over any dividend declared and payable on that Fund's common
shares, out of available net investment income.
Prior to each dividend payment date, the relevant Fund is required to deposit
with the Auction Agent sufficient funds for the payment of such declared
dividends. Neither Fund intends to establish any reserves for the payment of
dividends, and no interest will be payable in respect of any dividend payment or
payment on Acquiring Fund APS or Target Fund AMPS, as the case may be, which may
be in arrears.
To the extent that short-term capital gains recognized by the Target Fund are
not required to be paid with respect to Target Fund AMPS in order to satisfy the
dividends thereon, and to the extent permitted by applicable laws, the Target
Fund generally allocates to holders of Target Fund Common Shares all capital
gains, if any.
The Target Fund generally allocates net capital gains and other taxable income
only to holders of Target Fund Common Shares, and not to holders of Target Fund
AMPS, in the year for which such capital gains and other income is realized.
The Acquiring Fund, however, is required to allocate net capital gains and
other taxable income, if any, proportionately between holders of Acquiring Fund
Common
52
Shares and Acquiring Fund APS. In normal circumstances, whenever the Acquiring
Fund intends to include any net capital gains or other taxable income in any
dividend on APS, the Fund will notify the Auction Agent of the amount to be so
included prior to the Auction establishing the Applicable Rate for such
dividend. The Auction Agent will in turn notify each Broker-Dealer who will
notify existing and potential holders of Acquiring Fund APS. As a result,
auction participants may, in response to such information, place bids which take
account of the inclusion of net capital gains or other taxable income in the
dividend. If the Acquiring Fund retroactively allocates any net capital gains or
other taxable income to the APS without having given notice to the Auction
Agent, the Fund will pay an Additional Dividend to offset substantially the tax
effect thereof. In no other instances will the Fund be required to make payments
to holders of its preferred shares to offset the tax effect of any reallocation
of net capital gains or other taxable income. As a result of the notice and
Additional Dividend provisions, the after-tax return to a holders of Target Fund
AMPS and Acquiring Fund APS is not expected to differ substantially.
REDEMPTIONS. The redemption provisions pertaining to the preferred shares of
each Fund are similar. It is anticipated that preferred shares of each Fund will
generally be redeemable at the option of the applicable Fund at a price equal to
the liquidation preference of each ($25,000 per share for Acquiring Fund APS and
$100,000 per share for Target Fund AMPS), plus accumulated but unpaid dividends
(whether or not earned or declared) to the date of redemption plus, in certain
circumstances, a redemption premium. Preferred shares of each Fund are also
subject to mandatory redemption at a price equal to their liquidation preference
plus accumulated but unpaid dividends (whether or not earned or declared) to the
date of redemption upon the occurrence of certain specified events, such as the
failure of a Fund to maintain asset coverage requirements for its preferred
shares specified by Moody's and S&P in connection with their issuance of ratings
on their preferred shares.
RATINGS. The Acquiring Fund APS and the Target Fund AMPS have each been
assigned a rating of "AAA" from S&P and "Aaa" from Moody's. Each Fund intends
that, so long as its preferred shares are outstanding, the composition of its
portfolio will reflect guidelines established by S&P and Moody's in connection
with each Fund's receipt of a rating for such shares of at least "AAA" from S&P
and "Aaa" from Moody's. S&P and Moody's, which are nationally recognized
statistical rating organizations, issue ratings for various securities
reflecting the perceived creditworthiness of such securities. The guidelines for
rating such preferred shares have been developed by S&P and Moody's in
connection with issuances of asset-backed and similar securities, including debt
obligations and variable rate preferred stock, generally on a case-by-case basis
through discussions with the issuers of these securities. The guidelines are
designed to ensure that assets underlying outstanding debt or preferred stock
will be varied sufficiently and will be of sufficient quality and amount to
justify investment grade ratings. The guidelines do not have the force of
53
law but have been adopted by each Fund in order to satisfy current requirements
necessary for S&P and Moody's to issue the above-described ratings for preferred
shares, which ratings generally are relied upon by institutional investors in
purchasing such securities. The guidelines provide a set of tests for portfolio
composition and asset coverage that supplement (and in some cases are more
restrictive than) the applicable requirements under the 1940 Act.
Each Fund may, but is not required to, adopt any modifications to these
guidelines that hereafter may be established by S&P or Moody's. Failure to adopt
any such modifications, however, may result in a change in the ratings described
above or a withdrawal of the ratings altogether. In addition, any rating agency
providing a rating for a Fund's preferred shares, at any time, may change or
withdraw any such rating. As set forth in the Certificate of Vote of Trustees
Establishing Preferred Shares of each Fund (each a "Certificate of Vote"), the
Board of Trustees of each Fund, without shareholder approval, may modify certain
definitions or restrictions that have been adopted by the Fund pursuant to the
rating agency guidelines, provided the Board of Trustees has obtained written
confirmation from S&P and Moody's that any such change would not impair the
ratings then assigned by S&P and Moody's to the preferred shares. For so long as
any shares of a Fund's preferred shares are rated by S&P or Moody's, as the case
may be, a Fund's use of options and financial futures contracts and options
thereon will be subject to certain limitations mandated by the rating agencies.
LIQUIDATION RIGHTS. Upon any liquidation, dissolution or winding up of either
Fund, whether voluntary or involuntary, the holders of a Fund's preferred shares
will be entitled to receive, out of the assets of the Fund available for
distribution to shareholders, before any distribution or payment is made upon
any of the Fund's common shares or any other capital shares of the Fund ranking
junior in right of payment upon liquidation to the preferred shares, $25,000 per
share for Acquiring fund APS and $100,000 per share for Target Fund AMPS,
together with the amount of any dividends accumulated but unpaid (whether or not
earned or declared) thereon to the date of distribution, and after such payment,
the holders of preferred shares will be entitled to no other payments. If such
assets of a Fund are insufficient to make the full liquidation payment on the
preferred shares and liquidation payments on any other outstanding class or
series of preferred shares of the Fund ranking on a parity with the Acquiring
Fund APS or Target Fund AMPS, as the case may be, as to payment upon
liquidation, then such assets will be distributed among the holders of Acquiring
Fund APS or Target Fund AMPS, as the case may be, and the holders of shares of
such other class or series ratably in proportion to the respective preferential
amounts to which they are entitled. After payment of the full amount of
liquidation distribution to which they are entitled, the holders of a Fund's
Acquiring Fund APS or Target Fund AMPS, as the case may be, will not be entitled
to any further participation in any distribution of assets by the Fund. A
consolidation, merger or share exchange of a Fund with or into any
54
other entity or entities or a sale, whether for cash, shares of stock,
securities or properties, of all or substantially all or any part of the assets
of a Fund shall not be deemed or construed to be a liquidation, dissolution or
winding up of that Fund for this purpose.
ADDITIONAL INFORMATION. For additional information regarding Acquiring Fund
APS, Target Fund shareholders should consult the Reorganization Statement of
Additional Information, which contains a more complete summary of the terms of
the Acquiring Fund APS, and the Certificate of Vote governing the Acquiring Fund
APS, included as Appendix B to the Reorganization Statement of Additional
Information. Acquiring Fund APS issued in connection with the Reorganization
will be governed by the Certificate of Vote of the Acquiring Fund, which, upon
completion of the Reorganization, will be amended to reflect the issuance of
additional Acquiring Fund APS.
GOVERNING LAW
Each Fund is organized as a business trust under the laws of The Commonwealth
of Massachusetts. The Target Fund was organized on November 30, 1988 and
commenced operations on January 26, 1989; the Acquiring Fund was organized on
February 15, 1989 and commenced operations on April 28, 1989.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for its obligations.
However, the Declaration of Trust of each Fund contains an express disclaimer of
shareholder liability for acts or obligations of the Fund and provides for
indemnification and reimbursement of expenses out of the Fund's property for any
shareholder held personally liable for the obligations of that Fund. Thus, the
risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which the Fund itself would be unable
to meet its obligations. Given the nature of each Fund's assets and operations,
the possibility of a Fund being unable to meet its obligations is remote and, in
the opinion of counsel to the Funds, the risk to the Funds' respective
shareholders is remote.
Each Fund is also subject to federal securities laws, including the 1940 Act
and the rules and regulations promulgated by SEC thereunder, and applicable
state securities laws. Each Fund is registered as a diversified, closed-end
management investment company under the 1940 Act.
CERTAIN PROVISIONS OF THE DECLARATIONS OF TRUST
Each Fund's Declaration of Trust includes provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Trustees, and could
have the effect of depriving common shareholders of an opportunity to sell their
common shares at a
55
premium over prevailing market prices by discouraging a third party from seeking
to obtain control of the Fund. The Board of Trustees of each Fund is divided
into three classes, with the term of one class expiring at the annual meeting of
shareholders. At each annual meeting, each class whose term is expiring will be
elected to a three-year term. This provision could delay for up to two years the
replacement of a majority of the Board of Trustees. A Trustee may be removed
from office only for cause by a written instrument signed by at least two-thirds
of the remaining Trustees or by a vote of the holders of at least two-thirds of
the class of shares of the Fund that elected such Trustee and entitled to vote
on the matter.
In addition, each Fund's Declaration of Trust requires the favorable vote of
the holders of at least 75% of the outstanding shares of each class of the Fund,
voting as a class, then entitled to vote to approve, adopt or authorize certain
transactions with 5%-or-greater holders of a class of shares and their
associates, unless the Board of Trustees shall by resolution have approved a
memorandum of understanding with such holders, in which case normal voting
requirements applicable to those transactions would be in effect. For purposes
of these provisions, a 5%-or-greater holder of a class of shares (a "Principal
Shareholder") refers to any person who, whether directly or indirectly and
whether alone or together with its affiliates and associates, beneficially owns
5% or more of the outstanding shares of any class of beneficial interest of the
Fund. The transactions subject to these special approval requirements are: (i)
the merger or consolidation of the Fund or any subsidiary of the Fund with or
into any Principal Shareholder; (ii) the issuance of any securities of the Fund
to any Principal Shareholder for cash (except pursuant to the Dividend
Reinvestment Plan); (iii) the sale, lease or exchange of all or any substantial
part of the assets of the Fund to any Principal Shareholder (except assets
having an aggregate fair market value of less than $1,000,000, aggregating for
the purpose of such computation all assets sold, leased or exchanged in any
series of similar transactions within a twelve-month period); or (iv) the sale,
lease or exchange to the Fund or any subsidiary thereof, in exchange for
securities of the Fund, of any assets of any Principal Shareholder (except
assets having an aggregate fair market value of less than $1,000,000,
aggregating for purposes of such computation all assets sold, leased or
exchanged in any series of similar transactions within a twelve-month period).
The Board of Trustees of each Fund has determined that the 75% voting
requirements described above, which are greater than the minimum requirements
under Massachusetts law or the 1940 Act, are in the best interest of
shareholders of each respective Fund generally. Reference should be made to the
Declaration of Trust of each Fund on file with the SEC for the full text of
these provisions.
The Declaration of Trust of each Fund further provides that no trustee,
officer, employee or agent of the Fund is liable to the Fund or to any
shareholder, nor is any trustee or officer liable to any third persons in
connection with the affairs of the
56
Fund, except as such liability may arise from his or her own bad faith, willful
misfeasance, gross negligence, or reckless disregard of their duties. It also
provides that all third persons shall look solely to the Fund property for
satisfaction of claims arising in connection with the affairs of the Fund. With
the exceptions stated, the Declaration of Trust provides that a trustee,
officer, employee or agent is entitled to be indemnified against all liability
in connection with the affairs of the Fund.
CONVERSION TO OPEN-END FUND
Each Fund may be converted to an open-end investment company at any time by an
amendment to its Declaration of Trust. Each Fund's Declaration of Trust provides
that such an amendment would require the approval of (a) a majority of the
Trustees, including the approval by a majority of the disinterested Trustees of
the Fund, and (b) the lesser of (i) more than 50% of the Fund's outstanding
common and preferred shares each voting as a class or (ii) 67% of the common and
preferred shares, each voting as a class, present at a meeting at which holders
of more than 50% of the outstanding shares of each such class are present in
person or by proxy. If approved in the foregoing manner, conversion of the Fund
could not occur until 90 days after the shareholders' meeting at which such
conversion was approved and would also require at least 30 days prior notice to
all shareholders. Conversion of a Fund to an open-end investment company would
require the redemption of all outstanding preferred shares, which would
eliminate the leveraged capital structure of the Fund. In the event of
conversion, the common shares would cease to be listed on the NYSE, the AMEX,
the CHX, the NASDAQ National Market System or other national securities exchange
or national market system. Shareholders of an open-end investment company may
require the company to redeem their shares at any time (except in certain
circumstances as authorized by or under the 1940 Act) at their net asset value,
less such redemption charge, if any, as might be in effect at the time of a
redemption. If a Fund were converted to an open-end fund, it is likely that new
common shares would be sold at net asset value plus a sales load. Following any
such conversion, it is also possible that certain of the Fund's investment
policies and strategies would have to be modified to assure sufficient portfolio
liquidity. In particular the Fund would be required to maintain its portfolio
such that not more than 15% of its assets would be invested in illiquid
securities. Such requirement could cause the Fund to dispose of portfolio
securities or other assets at a time when it is not advantageous to do so, and
could adversely affect the ability of the Fund to meet its investment objective.
VOTING RIGHTS
Voting rights are identical for the holders of each Fund's common shares.
Holders of each Fund's common shares are entitled to one vote for each share
held. Except as set forth in the sections entitled "Certain Provisions of the
Declarations of Trust" or "Conversion to Open-End Fund," or except as expressly
required by
57
applicable law or expressly set forth in the designation of rights and
preferences with respect to a Fund's preferred shares, holders of preferred
shares have no voting rights. When holders of a Fund's preferred shares are
entitled to vote, they are also entitled to cast one vote per share held.
Holders of preferred shares, voting as a class, are entitled to elect two of
each Fund's trustees. Under the 1940 Act, if at any time dividends on a Fund's
preferred shares are unpaid in an amount equal to two full years dividends
thereon, the holders of all outstanding preferred shares, voting as a class, are
entitled to elect a majority of the Fund's Trustees until all dividends have
been paid or declared and set apart for payment. The Certificate of Vote
establishing the Preferred Shares of each Fund provides that such Fund shall not
take certain actions relating to the preferences, rights or powers of holders of
such Fund's preferred shares without the affirmative vote of the holders of a
majority of outstanding preferred shares. Additionally, if a Fund has more than
one series of preferred shares outstanding, an affirmative vote of a majority of
the outstanding shares of each series of preferred shares, each voting
separately as a class, is required with respect to any matter that materially
affects the series in a manner different from what other series of such Fund's
preferred shares. The specific provisions of each Fund's Certificate of Vote
with respect to the voting rights of holders of preferred shares may differ and
Target Fund shareholders should consult the Certificate of Vote governing the
Acquiring Fund APS, included as Appendix B to the Reorganization Statement of
Additional Information.
58
FINANCIAL HIGHLIGHTS
TARGET FUND. The following schedule presents financial highlights for one
Target Fund common share outstanding throughout the periods indicated.
YEAR ENDED DECEMBER 31
2004 2003 2002 2001(C) 2000 1999 1998
---- ---- ---- ------- ---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 3.64 $ 3.03 $ 3.78 $ 4.22 $ 5.10 $ 5.86 $ 6.47
-------- -------- -------- -------- -------- -------- --------
Net Investment Income............. .42 .41 .47 .71 .85 .88 .91
Net Realized and Unrealized
Gain/Loss....................... .13 .59 (.69) (.44) (.85) (.75) (.58)
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.04) (.03) (.06) (.15) (.26) (.22) (.24)
-------- -------- -------- -------- -------- -------- --------
Total from Investment Operations... .51 .97 (.28) .12 (.26) (.09) .09
Distributions Paid to Common
Shareholders:
Net Investment Income........... (.36) (.35) (.46) (.56) (.61) (.67) (.70)
Return of Capital
Distributions.................. -0- (.01) (.01) -0- (.01) -0- -0-
-------- -------- -------- -------- -------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 3.79 $ 3.64 $ 3.03 $ 3.78 $ 4.22 $ 5.10 $ 5.86
======== ======== ======== ======== ======== ======== ========
Common Share Market Price at End of
the Period........................ $ 4.10 $ 4.16 $ 3.10 $ 4.54 $ 4.125 $ 4.50 $ 6.375
Total Return(a).................... 7.41% 47.66% -22.99% 23.76% 4.08% -21.20% -4.33%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 52.0 $ 50.0 $ 41.5 $ 51.8 $ 57.9 $ 70.0 $ 80.4
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(b)......................... 1.99% 2.10% 2.15% 1.98% 1.95% 1.92% 1.85%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(b).................. 11.61% 12.36% 14.42% 16.80% 18.05% 16.13% 14.56%
Portfolio Turnover................. 86% 73% 82% 64% 62% 57% 65%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(b)......................... 1.13% 1.16% 1.12% 1.07% 1.04% 1.07% 1.09%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 10.46% 11.38% 12.75% 13.32% 12.48% 12.09% 10.77%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 376 376 376 450 500 588 588
Asset Coverage Per Preferred
Share(e).......................... $238,423 $232,928 $210,413 $215,081 $215,271 $219,005 $236,742
Involuntary Liquidating Preference
Per Preferred Share............... $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
Average Market Value Per Preferred
Share............................. $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
YEAR ENDED DECEMBER 31
1997 1996 1995
---- ---- ----
NET ASSET VALUE, BEGINNING OF THE
PERIOD............................ $ 6.35 $ 6.19 $ 5.62
-------- -------- --------
Net Investment Income............. .93 .94 .98
Net Realized and Unrealized
Gain/Loss....................... .13 .15 .54
Common Share Equivalent of
Distributions Paid to Preferred
Shareholders:
Net Investment Income........... (.24) (.23) (.25)
-------- -------- --------
Total from Investment Operations... .82 .86 1.27
Distributions Paid to Common
Shareholders:
Net Investment Income........... (.70) (.70) (.70)
Return of Capital
Distributions.................. -0- -0- -0-
-------- -------- --------
NET ASSET VALUE, END OF THE
PERIOD............................ $ 6.47 $ 6.35 $ 6.19
======== ======== ========
Common Share Market Price at End of
the Period........................ $ 7.375 $ 6.75 $ 6.375
Total Return(a).................... 20.29% 17.34% 29.17%
Net Assets Applicable to Common
Shares at End of the Period (In
millions)......................... $ 88.7 $ 87.0 $ 84.8
Ratio of Expenses to Average Net
Assets Applicable to Common
Shares(b)......................... 1.76% 1.87% 1.92%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(b).................. 14.60% 15.32% 16.39%
Portfolio Turnover................. 102% 92% 119%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net
Assets Including Preferred
Shares(b)......................... 1.05% 1.11% 1.12%
Ratio of Net Investment Income to
Average Net Assets Applicable to
Common Shares(d).................. 10.90% 11.58% 12.16%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding....................... 588 588 588
Asset Coverage Per Preferred
Share(e).......................... $250,850 $247,974 $244,242
Involuntary Liquidating Preference
Per Preferred Share............... $100,000 $100,000 $100,000
Average Market Value Per Preferred
Share............................. $100,000 $100,000 $100,000
(a) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(b) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(c) As required, effective January 1, 2001, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities. The effect of this change for
the year ended December 31, 2001 was to decrease net investment income per
share by $.02, increase net realized and unrealized gains and losses per
share by $.02 and decrease the ratio of net investment income to average net
assets applicable to common shares by .38%. Per share, ratios and
supplemental data for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
59
ACQUIRING FUND. The following schedule presents financial highlights for one
Acquiring Fund Common Share outstanding throughout the periods indicated.
YEAR ENDED DECEMBER 31,
2004 2003 2002 2001(C) 2000 1999 1998 1997 1996 1995
---- ---- ---- ------- ---- ---- ---- ---- ---- ----
NET ASSET VALUE, BEGINNING
OF THE PERIOD............ $ 4.57 $ 3.79 $ 4.77 $ 5.40 $ 6.56 $ 7.59 $ 8.44 $ 8.31 $ 8.12 $ 7.32
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Net Investment Income.... .52 .52 .60 .90 1.10 1.14 1.18 1.20 1.23 1.27
Net Realized and
Unrealized Gain/Loss... .16 .75 (.89) (.61) (1.11) (1.00) (.77) .18 .21 .81
Common Share Equivalent
of Distributions Paid to
Preferred Shareholders:
Net Investment
Income................ (.05) (.04) (.07) (.18) (.33) (.27) (.30) (.29) (.29) (.32)
Return of Capital
Distributions......... -0- -0-* -0-* -0-* -0-* -0- -0- -0- -0- -0-
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
Total from Investment
Operations............... .63 1.23 (.36) .11 (.34) (.13) .11 1.09 1.15 1.76
Distributions Paid to
Common Shareholders:
Net Investment
Income................ (.44) (.44) (.58) (.73) (.76) (.90) (.96) (.96) (.96) (.96)
Return of Capital
Distributions......... -0- (.01) (.04) (.01) (.06) -0- -0- -0- -0- -0-
------- ------- ------- ------- ------- ------- -------- -------- -------- --------
NET ASSET VALUE, END OF
THE PERIOD............... $ 4.76 $ 4.57 $ 3.79 $ 4.77 $ 5.40 $ 6.56 $ 7.59 $ 8.44 $ 8.31 $ 8.12
======= ======= ======= ======= ======= ======= ======== ======== ======== ========
Common Share Market Price
at End of the Period..... $ 5.14 $ 5.08 $ 4.07 $ 5.75 $ 5.69 $ 5.75 $ 8.625 $ 9.8125 $ 9.375 $ 8.75
Total Return(a)........... 10.83% 37.20% -19.86% 13.57% 12.13% -25.28% -2.73% 15.34% 18.91% 30.33%
Net Assets Applicable to
Common Shares at End of
the Period (In
millions)................ $ 38.6 $ 37.1 $ 30.7 $ 38.7 $ 43.8 $ 53.2 $ 61.6 $ 68.4 $ 67.4 $ 65.8
Ratio of Expenses to
Average Net Assets
Applicable to Common
Shares(b)................ 2.12% 2.25% 2.28% 2.14% 2.03% 1.97% 1.92% 1.83% 1.89% 1.96%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(b)......... 11.51% 12.29% 14.50% 16.83% 18.16% 16.32% 14.54% 14.43% 15.19% 16.19%
Portfolio Turnover........ 86% 74% 81% 63% 40% 56% 65% 98% 94% 124%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to
Average Net Assets
Including Preferred
Shares(b)................ 1.21% 1.24% 1.18% 1.15% 1.07% 1.10% 1.14% 1.10% 1.12% 1.15%
Ratio of Net Investment
Income to Average Net
Assets Applicable to
Common Shares(d)......... 10.40% 11.34% 12.93% 13.40% 12.66% 12.41% 10.85% 10.93% 11.58% 12.09%
SENIOR SECURITIES:
Total Preferred Shares
Outstanding.............. 1,112 1,112 1,112 1,360 1,520 1,800 900 900 900 900
Asset Coverage Per
Preferred Share(e)....... $59,715 $58,320 $52,652 $53,426 $53,812 $54,557 $118,418 $126,015 $124,849 $123,135
Involuntary Liquidating
Preference Per Preferred
Share.................... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
Average Market Value Per
Preferred Share.......... $25,000 $25,000 $25,000 $25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
* Amount is less than $.01.
(a) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale
of all shares at the closing common share market price at the end of the
period indicated.
(b) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(c) As required, effective January 1, 2001, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities. The effect of this change for
the period ended December 31, 2001 was to decrease net investment income per
share by $.02, increase net realized and unrealized gains and losses per
share by $.02 and decrease the ratio of net investment income to average net
assets applicable to common shares by .40%. Per share, ratios and
supplemental data for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
60
INFORMATION ABOUT THE REORGANIZATION
GENERAL
Under the Reorganization Agreement (a form of which is attached as Appendix A
to the Reorganization Statement of Additional Information), the Acquiring Fund
will acquire substantially all of the assets, and will assume substantially all
of the liabilities, of the Target Fund, in exchange for Acquiring Fund Common
Shares and aggregate liquidation preference of Acquiring Fund APS to be issued
by the Acquiring Fund. The Acquiring Fund Common Shares issued to the Target
Fund will have an aggregate net asset value equal to the aggregate net asset
value of the Target Fund Common Shares, less the costs of the Reorganization
(through cash may be paid in lieu of any fractional shares). The Acquiring Fund
APS issued to the Target Fund will have an aggregate liquidation preference
equal to the aggregate liquidation preference of the Target Fund AMPS. Upon
receipt by the Target Fund of such shares, the Target Fund will (i) distribute
the Acquiring Fund Common Shares to the holders of Target Fund Common Shares and
(ii) distribute the Acquiring Fund APS to the holders of Target Fund AMPS. As
soon as practicable after the Closing Date for the Reorganization, the Target
Fund will deregister as an investment company under the 1940 Act and dissolve
under applicable state law.
The Target Fund will distribute the Acquiring Fund Common Shares and the
Acquiring Fund APS received by it pro rata to its holders of record of Target
Fund Common Shares and Target Fund AMPS, as applicable, in exchange for such
shareholders' shares in the Target Fund. Such distribution will be accomplished
by opening new accounts on the books of the Acquiring Fund in the names of the
common and preferred shareholders of the Target Fund and transferring to those
shareholder accounts the Acquiring Fund Common Shares and the Acquiring Fund APS
previously credited on those books to the accounts of the Target Fund. Each
newly-opened account on the books of the Acquiring Fund for the former common
shareholders of the Target Fund will represent the respective pro rata number of
Acquiring Fund Common Shares (rounded down, in the case of fractional shares
held other than in a Dividend Reinvestment Plan account, to the next largest
number of whole shares) due such shareholder. No fractional Acquiring Fund
Common Shares will be issued (except for shares held in a Plan account). In the
event of fractional shares in an account other than a Plan account, the
Acquiring Fund's transfer agent will aggregate all such fractional Acquiring
Fund Common Shares and sell the resulting whole shares on the NYSE for the
account of all holders of such fractional interests, and each such holder will
be entitled to the pro rata share of the proceeds from such sale upon surrender
of the Target Fund Common Share certificates. Similarly, each newly-opened
account on the books of the Acquiring Fund for the former holder of Target Fund
AMPS would represent the respective pro rata number of Acquiring Fund APS due
such
61
holder. See "Terms of the Reorganization Agreement -- Surrender and Exchange of
Share Certificates" below for a description of the procedures to be followed by
Target Fund shareholders to obtain their Acquiring Fund Common Shares or
Acquiring Fund APS (and cash in lieu of fractional shares, if any).
As a result of the Reorganization, every holder of Target Fund Common Shares
would own Acquiring Fund Common Shares that (except for cash payments received
in lieu of fractional shares) will have an aggregate net asset value immediately
after the Closing Date equal to the aggregate net asset value of that
shareholder's Target Fund Common Shares immediately prior to the Closing Date,
less the costs of the Reorganization. Since the Acquiring Fund Common Shares
will be issued at net asset value in exchange for the net assets of the Target
Fund having a value equal to the aggregate net asset value of those Acquiring
Fund Common Shares, the net asset value per share of Acquiring Fund Common
Shares should remain virtually unchanged by the Reorganization, except for its
share of the Reorganization costs. Similarly, every holder of Target Fund AMPS
will own Acquiring Fund APS that will have an aggregate liquidation preference
immediately after the Closing Date equal to the aggregate liquidation preference
of that shareholder's Target Fund AMPS immediately prior to the Closing Date.
The aggregate liquidation preference of the Acquiring Fund APS to be issued to
the Target Fund will equal the aggregate liquidation preference of the Target
Fund AMPS. The liquidation preference per share of the Acquiring Fund APS will
remain unchanged by the Reorganization. Thus, the Reorganization will result in
no dilution of net asset value of the Target Fund Common Shares or Acquiring
Fund Common Shares, other than to reflect the costs of the Reorganization, and
will result in no dilution of the value per share of Acquiring Fund APS or
Target Fund AMPS. However, as a result of the Reorganization, a shareholder of
either Fund will hold a reduced percentage of ownership in the larger combined
entity than he or she did in either Fund.
No sales charge or fee of any kind will be charged to shareholders of the
Target Fund in connection with their receipt of Acquiring Fund Common Shares or
Acquiring Fund APS in the Reorganization. Holders of Target Fund AMPS will find
that the auction dates and dividend payment dates for the Acquiring Fund APS
received in the Reorganization are ordinarily (i.e., except in the case of a
special dividend period) on the same twenty-eight day schedule as is the case
for Target Fund AMPS. The auction procedures for the preferred shares of the
Funds are similar. As a result of the Reorganization, the last dividend period
for the Target Fund AMPS prior to the Closing Date and the initial dividend
period for the Acquiring Fund APS issued in connection with the Reorganization
after the Closing Date may be shorter than the dividend period for such Target
Fund AMPS determined as set forth in its applicable Certificate of Vote.
62
TERMS OF THE REORGANIZATION AGREEMENT
The following is a summary of the significant terms of the Reorganization
Agreement. This summary is qualified in its entirety by reference to the form of
Agreement and Plan of Reorganization, attached as Appendix A to the
Reorganization Statement of Additional Information.
VALUATION OF ASSETS AND LIABILITIES. The respective assets of each of the
Funds will be valued on the business day prior to the Closing Date (the
"Valuation Date"). The valuation procedures are the same for each Fund: the net
asset value per common share of each Fund will be determined after the close of
business on the NYSE (generally, 4:00 p.m., Eastern time) on the Valuation Date.
For the purpose of determining the net asset value of a common share of each
Fund, the value of the securities held by the issuing Fund plus any cash or
other assets (including interest accrued but not yet received) minus all
liabilities (including accrued expenses) and the aggregate liquidation value of
the outstanding preferred shares of the issuing Fund is divided by the total
number of common shares of the issuing Fund outstanding at such time. Daily
expenses, including the fees payable to the Adviser, will accrue on the
Valuation Date.
AMENDMENTS AND CONDITIONS. The Reorganization Agreement may be amended at any
time prior to the Closing Date with respect to any of the terms therein. The
obligations of each Fund pursuant to the Reorganization Agreement are subject to
various conditions, including a registration statement on Form N-14 being
declared effective by the SEC, approval by the shareholders of the Target Fund,
approval by shareholders of the Acquiring Fund of the issuance of additional
Acquiring Fund Common Shares, receipt of an opinion of counsel as to tax
matters, receipt of an opinion of counsel as to corporate and securities matters
and the continuing accuracy of various representations and warranties of the
Funds being confirmed by the respective parties.
POSTPONEMENT; TERMINATION. Under the Reorganization Agreement, the Board of
Trustees of either Fund may cause the Reorganization to be postponed or
abandoned in certain circumstances should such Board determine that it is in the
best interests of the shareholders of its respective Fund to do so.
The Reorganization Agreement may be terminated, and the Reorganization
abandoned at any time (whether before or after adoption thereof by the
shareholders of either of the Funds) prior to the Closing Date, or the Closing
Date may be postponed: (i) by mutual consent of the Boards of Trustees of the
Funds and (ii) by the Board of Trustees of either Fund if any condition to that
Fund's obligations set forth in the Reorganization Agreement has not been
fulfilled or waived by such Board.
SURRENDER AND EXCHANGE OF SHARE CERTIFICATES. After the Closing Date, each
holder of an outstanding certificate or certificates formerly representing
Target
63
Fund Common Shares will be entitled to receive, upon surrender of his or her
certificate or certificates, a certificate or certificates representing the
number of Acquiring Fund Common Shares distributable with respect to such
holder's Target Fund Common Shares together with cash in lieu of any fractional
Acquiring Fund Common Shares held other than in a Dividend Plan account.
Promptly after the Closing Date, the transfer agent for the Acquiring Fund
Common Shares will mail to each holder of certificates formerly representing
Target Fund Common Shares a letter of transmittal for use in surrendering his or
her certificates for certificates representing Acquiring Fund Common Shares and
cash in lieu of any fractional shares held other than in a Dividend Plan
account.
Please do not send in any share certificates at this time. Upon consummation
of the Reorganization, holders of Target Fund Common Shares will be furnished
with instructions for exchanging their share certificates for Acquiring Fund
share certificates and, if applicable, cash in lieu of fractional shares.
From and after the Closing Date, certificates formerly representing Target
Fund Common Shares will be deemed for all purposes to evidence ownership of the
number of full Acquiring Fund Common Shares distributable with respect to the
Target Fund Common Shares held before the Reorganization, provided that, until
such share certificates have been so surrendered, no dividends payable to the
holders of record of Target Fund Common Shares as of any date subsequent to the
Closing Date will be reinvested pursuant to the Acquiring Fund's Dividend
Reinvestment Plan, but will instead be paid in cash. Once such Target Fund share
certificates have been surrendered, participants in the Target Fund's Dividend
Reinvestment Plan will automatically be enrolled in the Dividend Reinvestment
Plan of the Acquiring Fund.
From and after the Closing Date, there will be no transfers on the share
transfer books of the Target Fund. If, after the Closing Date, certificates
representing Target Fund Common Shares are presented to the Acquiring Fund, they
will be canceled and exchanged for certificates representing Acquiring Fund
Common Shares, as applicable, and cash in lieu of fractional shares, if any,
distributable with respect to such Target Fund Common Shares in the
Reorganization.
Acquiring Fund APS and Target Fund AMPS are held in "street name" by the
Depository Trust Company and all transfers will be accomplished by book entry.
EXPENSES OF THE REORGANIZATION. In the event the Reorganization is approved
and completed, the expenses of the Reorganization will be shared by the Target
Fund and the Acquiring Fund in proportion to their projected declines in total
annual operating expenses as a result of the Reorganization. In the event the
Reorganization is not completed, the Adviser will bear the costs associated with
such Reorganization.
64
Expenses incurred in connection with the Reorganization include, but are not
limited to: all costs related to the preparation and distribution of materials
distributed to each Fund's Board; all expenses incurred in connection with the
preparation of the Reorganization Agreement and a registration statement on Form
N-14; SEC and state securities commission filing fees and legal and audit fees
in connection with the Reorganization; the costs of printing and distributing
this Joint Proxy Statement/Prospectus; legal fees incurred preparing materials
for the Board of each Fund, attending each Fund's Board meetings and preparing
the minutes; auditing fees associated with each Fund's financial statements;
portfolio transfer taxes (if any); and any similar expenses incurred in
connection with the Reorganization. Neither the Funds nor the Adviser will pay
any expenses of shareholders arising out of or in connection with the
Reorganization.
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE REORGANIZATION
The following is a general summary of the material anticipated U.S. federal
income tax consequences of the Reorganization. The discussion is based upon the
Internal Revenue Code, Treasury regulations, court decisions, published
positions of the Internal Revenue Service ("IRS") and other applicable
authorities, all as in effect on the date hereof and all of which are subject to
change or differing interpretations (possibly with retroactive effect). The
discussion is limited to U.S. persons who hold shares of the Target Fund as
capital assets for federal income tax purposes (generally, assets held for
investment). This summary does not address all of the U.S. federal income tax
consequences that may be relevant to a particular shareholder or to shareholders
who may be subject to special treatment under U.S. federal income tax laws. No
ruling has been or will be obtained from the IRS regarding any matter relating
to the Reorganization. No assurance can be given that the IRS would not assert,
or that a court would not sustain, a position contrary to any of the tax aspects
described below. Prospective investors must consult their own tax advisers as to
the federal income tax consequences of the Reorganization, as well as the
effects of state, local and non-U.S. tax laws.
It is a condition to closing the Reorganization that each of the Target Fund
and the Acquiring Fund receives an opinion from Skadden, Arps, Slate, Meagher &
Flom LLP ("Skadden Arps"), dated as of the Closing Date, regarding the
characterization of the Reorganization as a "reorganization" within the meaning
of Section 368(a) of the Internal Revenue Code. As such a reorganization, the
federal income tax consequences of the Reorganization can be summarized as
follows:
- No gain or loss will be recognized by the Target Fund or the Acquiring
Fund upon the transfer to the Acquiring Fund of substantially all of the
assets of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS and the assumption by the Acquiring Fund of
65
substantially all of the liabilities of the Target Fund and the subsequent
liquidation of the Target Fund.
- No gain or loss will be recognized by a shareholder of the Target Fund who
exchanges, as the case may be, all of his, her or its Target Fund Common
Shares for Acquiring Fund Common Shares pursuant to the Reorganization
(except with respect to cash received in lieu of a fractional share of the
Acquiring Fund, as discussed below) or all of his, her or its Target Fund
AMPS for Acquiring Fund APS pursuant to the Reorganization.
- The aggregate tax basis of the Acquiring Fund Common Shares or Acquiring
Fund APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will be the same as the aggregate tax basis
of the shares of the Target Fund surrendered in exchange therefor (reduced
by any amount of tax basis allocable to a fractional share for which cash
is received).
- A shareholder of the Target Fund that receives cash in lieu of a
fractional share of the Acquiring Fund pursuant to the Reorganization will
recognize capital gain or loss with respect to the fractional share in an
amount equal to the difference between the amount of cash received for the
fractional share and the portion of such shareholder's tax basis in its
Target Fund shares that is allocable to the fractional share. The capital
gain or loss will be long-term if the holding period for such Target Fund
Common Shares is more than one year as of the date of the exchange.
- The holding period of the Acquiring Fund Common Shares or Acquiring Fund
APS, as the case may be, received by a shareholder of the Target Fund
pursuant to the Reorganization will include the holding period of the
shares of the Target Fund surrendered in exchange therefor.
- The Acquiring Fund's tax basis in the Target Fund's assets received by the
Acquiring Fund pursuant to the Reorganization will, in each instance,
equal the tax basis of such assets in the hands of the Target Fund
immediately prior to the Reorganization, and the Acquiring Fund's holding
period of such assets will include the period during which the assets were
held by the Target Fund.
The opinion of Skadden Arps will be based on federal income tax law in effect
on the Closing Date. In rendering its opinion, Skadden Arps will also rely upon
certain representations of the management of the Acquiring Fund and the Target
Fund and assume, among other things, that the Reorganization will be consummated
in accordance with the Reorganization Agreement and as described herein. An
opinion of counsel is not binding on the IRS or any court.
66
The Acquiring Fund intends to continue to be taxed under the rules applicable
to regulated investment companies as defined in Section 851 of the Code, which
are the same rules currently applicable to the Target Fund and its shareholders.
The Acquiring Fund has capital loss carryforwards that, in the absence of the
Reorganization, would generally be available to offset its capital gains. As a
result of the Reorganization, however, the Acquiring Fund will undergo an
"ownership change" for tax purposes (because the Acquiring Fund is smaller than
the Target Fund), and accordingly, the Acquiring Fund's use of its own capital
loss carryforwards (and certain built-in losses) will be significantly limited
by the operation of the tax loss limitations rules of the Code. The Code
generally limits the amount of pre-ownership change losses that may be used to
offset post-ownership change gains to an "annual loss limitation amount"
(generally the product of the net asset value of the Acquiring Fund immediately
prior to the ownership change and a rate established by the IRS for the month in
which the Reorganization occurs (for example, such rate is 4.27% for March
2005)). Subject to certain limitations, any unused portion of the "annual loss
limitation amount" may be available in subsequent years, subject to the overall
eight-year capital loss carryforward limit, as measured from the date of
recognition. In addition, for five years after the Closing Date, the combined
fund will not be allowed to offset certain pre-Reorganization built-in gains
attributable to one Fund with capital loss carryforwards (and certain built-in
losses) attributable to the other Fund.
Pursuant to the grandfather relief granted in Revenue Ruling 89-81, 1989-1
C.B. 226, the Target Fund is permitted to designate that dividends paid on
Target Fund AMPS consist of less than the Target Fund AMPS's pro rata share of
capital gains earned by the Target Fund. The Acquiring Fund, however, is not
eligible to make such disproportionate designations. Accordingly, designations
made by the Acquiring Fund with respect to dividends paid on its Acquiring Fund
APS will be treated as consisting of a pro rata portion of each type of income
so designated.
SHAREHOLDER APPROVAL
Under the Declaration of Trust of the Target Fund (as amended to date and
including the Certificate of Vote of Trustees Establishing Preferred Shares of
the Target Fund), relevant Massachusetts law and the rules of the NYSE,
shareholder approval of the Reorganization Agreement requires the affirmative
vote of shareholders of the Target Fund representing more than 50% of the Target
Fund Common Shares and Target Fund AMPS outstanding and entitled to vote, each
voting separately as a class. For more information regarding voting
requirements, see the section entitled "Other Information -- Voting Information
and Requirements below."
67
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PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES
------------------------------------------------------------------------------
THE REORGANIZATION
Pursuant to the Reorganization Agreement, which is described more fully under
"Proposal 1: Reorganization of the Target Fund" herein, the Acquiring Fund will
acquire substantially all of the assets and assume substantially all of the
liabilities of the Target Fund in exchange for Acquiring Fund Common Shares and
Acquiring Fund APS. The Target Fund will distribute Acquiring Fund Common Shares
to holders of Target Fund Common Shares and Acquiring Fund APS to holders of
Target Fund AMPS, and will then terminate its registration under the 1940 Act
and dissolve under applicable state law. The Acquiring Fund Board, based upon
its evaluation of all relevant information, anticipates that the Reorganization
will benefit holders of Acquiring Fund Common Shares.
The aggregate net asset value of Acquiring Fund Common Shares received in the
Reorganization will equal the aggregate net asset value on the Target Fund
Common Shares held immediately prior to the Reorganization, less the costs of
the Reorganization (though shareholders may receive cash for their fractional
shares). The aggregate liquidation preference of Acquiring Fund APS received in
the Reorganization will equal the aggregate liquidation preference Target Fund
AMPS held immediately prior to the Reorganization. The Reorganization will
result in no dilution of net asset value of the Acquiring Fund Common Shares,
other than to reflect the costs of the Reorganization. No gain or loss will be
recognized by the Acquiring Fund or its shareholders in connection with the
Reorganization. The Acquiring Fund will continue to operate as a registered
closed-end investment company with the investment objective and policies
described in this Joint Proxy Statement/Prospectus.
In connection with the Reorganization and as contemplated by the
Reorganization Agreement, the Acquiring Fund will issue additional Acquiring
Fund Common Shares and list such shares on the NYSE and CHX. While applicable
state and federal law does not require the shareholders of the Acquiring Fund to
approve the Reorganization, applicable NYSE and CHX rules require the common
shareholders of the Acquiring Fund to approve the issuance of additional
Acquiring Fund Common Shares to be issued in connection with the Reorganization.
SHAREHOLDER APPROVAL
While applicable state and federal law does not require the shareholders of
the Acquiring Fund to approve the Reorganization, applicable NYSE and CHX rules
require the common shareholders of the Acquiring Fund to approve the issuance of
68
additional Acquiring Fund Common Shares to be issued in connection with the
Reorganization. Shareholder approval of the issuance of Acquiring Fund Common
Shares requires the affirmative vote of a majority of votes cast, provided that
total votes cast on the proposal represents over 50% of all securities entitled
to vote on the matter. For more information regarding voting requirements, see
the section entitled "Other Information--Voting Information and Requirements
below."
------------------------------------------------------------------------------
OTHER INFORMATION
------------------------------------------------------------------------------
VOTING INFORMATION AND REQUIREMENTS
GENERAL. A list of shareholders of the Funds entitled to be present and vote
at the Special Meeting will be available at the offices of the Funds, 1 Parkview
Plaza, Oakbrook Terrace, Illinois 60181-5555, for inspection by any shareholder
during regular business hours for ten days prior to the date of the Special
Meeting.
RECORD DATE. The Target Fund Board and the Acquiring Fund Board have each
fixed the close of business on April 25, 2005 as the record date (the "Record
Date") for the determination of shareholders entitled to notice of, and to vote
at, the Special Meeting or any adjournment thereof. Shareholders on the Record
Date will be entitled to one vote for each share held, with no shares having
cumulative voting rights. At the Record Date, the Target Fund had outstanding
13,710,760 Target Fund Common Shares and 376 Target Fund AMPS entitled to vote.
At the Record Date, the Acquiring Fund had outstanding 8,109,000 Acquiring Fund
Common Shares entitled to vote.
PROXIES. Shareholders may vote by appearing in person at the Special Meeting,
by returning the enclosed proxy card or by casting their vote via telephone or
the internet using the instructions provided on the enclosed proxy card and more
fully described below. Shareholders of the Target Fund have the opportunity to
submit their voting instructions via the internet by utilizing a program
provided by a third-party vendor hired by the Target Fund, or by "touch-tone"
telephone voting. The giving of such a proxy will not affect your right to vote
in person should you decide to attend the Special Meeting. To use the internet,
please access the internet address found on your proxy card. To record your
voting instructions by automated telephone, please call the toll-free number
listed on your proxy card. The internet and automated telephone voting
instructions are designed to authenticate shareholder identities, to allow
shareholders to give their voting instructions, and to confirm that
shareholders' instructions have been recorded properly. Shareholders submitting
their voting instructions via the internet should understand that there may be
costs associated with internet access, such as usage charges from internet
access providers and telephone companies, that must be borne by the
shareholders.
69
Any person giving a proxy may revoke it at any time prior to its exercise by
giving written notice of the revocation to the Secretary of the Funds at the
address indicated above, by delivering a duly executed proxy bearing a later
date, by recording later-dated voting instructions via the internet or automated
telephone, or by attending the Special Meeting and voting in person. The giving
of a proxy will not affect your right to vote in person if you attend the
Special Meeting and wish to do so.
All properly executed proxies received prior to the Special Meeting will be
voted in accordance with the instructions marked thereon or otherwise as
provided therein. Unless instructions to the contrary are marked, proxies will
be voted "FOR" the approval of each proposal. With respect to both proposals,
abstentions and broker non-votes (i.e., where a nominee such as a broker holding
shares for beneficial owners votes on certain matters pursuant to discretionary
authority or instructions from beneficial owners, but with respect to one or
more proposals does not receive instructions from beneficial owners or does not
exercise discretionary authority) are not treated as votes "FOR" a proposal.
With respect to Proposal 1, abstentions and broker non-votes have the same
effect as votes "AGAINST" the proposal since its approvals is based on the
affirmative vote of a majority of each Target Fund's outstanding common shares
and preferred shares, each voting as a separate class. With respect to Proposal
2, abstentions will not be treated as votes "FOR" the proposal but will be
counted as votes cast on the proposal and will therefore have the same effect as
votes "AGAINST" the proposal. Broker non-votes will not be treated as vote "FOR"
the proposal and will not be counted as votes cast on the proposal and will
therefore have the effect of reducing the aggregate number of shares voting on
the proposal and reducing the number of votes "FOR" required to approve the
proposal.
With respect to both proposals, a majority of the outstanding shares entitled
to vote on a proposal must be present in person or by proxy to have a quorum to
conduct business at the Special Meeting. Abstentions and broker non-votes will
be deemed present for quorum purposes.
VOTING INFORMATION REGARDING TARGET FUND AMPS. Target Fund AMPS held in
"street name" may be voted under certain conditions by broker-dealer firms and
counted for purposes of establishing a quorum of the Target Fund if no
instructions are received one business day before the Special Meeting or, if
adjourned, one business day before the day to which the Special Meeting is
adjourned. These conditions include, among others, that (i) at least 30% of the
Target Fund's AMPS outstanding have voted on the Reorganization and (ii) less
than 10% of the Target Fund AMPS outstanding have voted against the
Reorganization. In such instance, the broker-dealer firm will vote such
uninstructed Target Fund AMPS on the Reorganization in the same proportion as
the votes cast by all holders of the Target Fund's AMPS who voted on the
Reorganization. The Target Fund will include
70
shares held of record by broker-dealers as to which such authority has been
granted in its tabulation of the total number of shares present for purposes of
determining whether the necessary quorum of shareholders of the Target Fund
exists. Proxies that are returned to the Fund but that are marked "abstain" or
on which a broker-dealer has declined to vote on any proposal ("broker
non-votes") will be counted as present for the purposes of determining a quorum.
SHAREHOLDER INFORMATION
As of April 25, 2005, to the knowledge of the Acquiring Fund, no shareholder
owned beneficially more than 5% of a class of the Acquiring Fund's outstanding
shares.
Except as set forth below, as of April 25, 2005, to the knowledge of the
Target Fund based on its review of regulatory filings, no shareholder owned
beneficially more than 5% of a class of the Target Fund's outstanding shares:
APPROXIMATE PERCENTAGE
OWNERSHIP ON
SHAREHOLDER AND ADDRESS CLASS OF SHARES APRIL 25, 2005
----------------------- --------------- ----------------------
Curian Capital, LLC............... Common Shares 5.2%
8055 East Tufts Ave.
Denver, CO 80237
Except as set forth below, as of April 25, 2005, no trustees or executive
officers owned, directly or beneficially, Acquiring Fund Common Shares or
Acquiring Fund APS.
NUMBER OF COMMON
TRUSTEE SHARES OWNED
------- ----------------
David C. Arch........................................ 550
R. Craig Kennedy..................................... 150
Wayne W. Whalen...................................... 200
As of April 25, 2005, the trustees and executive officers of the Acquiring
Fund individually and as a group owned less than 1% of the outstanding shares of
the Acquiring Fund.
Except as set forth below, as of April 25, 2005, no trustees or executive
officers owned, directly or beneficially, Target Fund Common Shares or Target
Fund AMPS.
NUMBER OF COMMON
TRUSTEE SHARES OWNED
------- ----------------
David C. Arch........................................ 676
Rod Dammeyer......................................... 2,500
71
NUMBER OF COMMON
TRUSTEE SHARES OWNED
------- ----------------
Wayne W. Whalen...................................... 19,012
As of April 25, 2005, the trustees and executive officers of the Target Fund
individually and as a group owned less than 1% of the outstanding shares of the
Target Fund.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 30(f) of the 1940 Act and Section 16(a) of the Securities Exchange Act
of 1934, as amended, require the Funds' trustees, officers, investment adviser,
affiliated persons of the investment adviser and persons who own more than 10%
of a registered class of the Fund's equity securities to file forms with the SEC
and the NYSE reporting their affiliation with the Fund and reports of ownership
and changes in ownership of Fund shares. These persons and entities are required
by SEC regulation to furnish the Fund with copies of all such forms they file.
Based on a review of these forms furnished to each Fund, each Fund believes that
during its last fiscal year, its trustees, officers, investment adviser and
affiliated persons of the investment adviser complied with the applicable filing
requirements, except that two Form 4 filings relating to common shares of the
Target Fund on behalf of Wayne W. Whalen, a trustee of the Funds, inadvertently
were not filed in a timely manner.
SOLICITATION OF PROXIES
Solicitation of proxies on behalf of the Funds is being made primarily by the
mailing of this Notice and Joint Proxy Statement/Prospectus with its enclosures
on or about May 10, 2005. Shareholders whose shares are held by nominees such as
brokers can vote their proxies by contacting their respective nominee. In
addition to the solicitation of proxies by mail, employees of the Adviser and
its affiliates as well as dealers or their representatives may, without
additional compensation, solicit proxies in person or by mail, telephone,
telegraph, facsimile or oral communication. The Funds have retained
Computershare Fund Services ("CFS") to make telephone calls to shareholders to
remind them to vote. CFS will be paid a project management fee as well as fees
charged on a per call basis and certain other expenses. Management estimates
that any such solicitation would cost approximately $20,700 for the Target Fund
and approximately $26,300 for the Acquiring Fund. Proxy solicitation expenses
are an expense of the Reorganization which will be borne by common shareholders
of the Target Fund and the Acquiring Fund in proportion to the projected
declines in total operating expenses as a result of the Reorganization.
72
LEGAL MATTERS
Certain legal matters concerning the federal income tax consequences of the
Reorganization and the issuance of Acquiring Fund Common Shares and Acquiring
Fund APS will be passed upon by Skadden Arps, which serves as counsel to the
Target Fund and the Acquiring Fund. Wayne W. Whalen, a partner of Skadden Arps,
is a trustee of both the Target Fund and the Acquiring Fund.
OTHER MATTERS TO COME BEFORE THE SPECIAL MEETING
The Board of Trustees of each Fund knows of no business other than that
described in this Joint Proxy Statement/Prospectus which will be presented for
consideration at the Special Meeting. If any other matters are properly
presented, it is the intention of the persons named on the enclosed proxy card
to vote proxies in accordance with their best judgment.
Representatives of D & T will attend the Special Meeting, will have the
opportunity to make a statement if they desire to do so and will be available to
answer appropriate questions.
In the event that a quorum is present at the Special Meeting but sufficient
votes to approve the proposals are not received, proxies (including abstentions
and broker non-votes) will be voted in favor of one or more adjournments of the
Special Meeting to permit further solicitation of proxies on such proposals,
provided that the Board of Trustees of each Fund determines that such an
adjournment and additional solicitation is reasonable and in the interest of
shareholders based on a consideration of all relevant factors, including the
percentage of votes then cast, the percentage of negative votes cast, the nature
of the proposed solicitation activities and the nature of the reasons for such
further solicitation. Any such adjournment will require the affirmative vote of
the holders of a majority of the outstanding shares of the respective Fund voted
at the session of the Special Meeting to be adjourned.
If you cannot be present in person at the Special Meeting, please fill in,
sign and return the enclosed proxy card promptly or record your voting
instructions by telephone or via the internet. No postage is necessary if mailed
in the United States.
Lou Anne McInnis
Assistant Secretary
Van Kampen High Income Trust
Van Kampen High Income Trust II
May 6, 2005
73
EXHIBIT I
DESCRIPTION OF SECURITIES RATINGS
STANDARD & POOR'S -- A brief description of the applicable Standard & Poor's
(S&P) rating symbols and their meanings (as published by S&P) follows:
A S&P issue credit rating is a current opinion of the creditworthiness of an
obligor with respect to a specific financial obligation, a specific class of
financial obligations, or a specific financial program (including ratings on
medium-term note programs and commercial paper programs). It takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation and takes into account the currency in
which the obligation is denominated. The issue credit rating is not a
recommendation to purchase, sell, or hold a financial obligation, inasmuch as it
does not comment as to market price or suitability for a particular investor.
Issue credit ratings are based on current information furnished by the obligors
or obtained by S&P from other sources it considers reliable. S&P does not
perform an audit in connection with any credit rating and may, on occasion, rely
on unaudited financial information. Credit ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. Issue credit ratings can be either long-term or
short-term. Short-term ratings are generally assigned to those obligations
considered short term in the relevant market. In the U.S., for example, that
means obligations with an original maturity of no more than 365 days including
commercial paper. Short-term ratings are also used to indicate the
creditworthiness of an obligor with respect to put features on long-term
obligations. The result is a dual rating, in which the short-term ratings
address the put feature, in addition to the usual long-term rating. Medium-term
notes are assigned long-term ratings.
LONG-TERM ISSUE CREDIT RATINGS
Issue credit ratings are based in varying degrees, on the following
considerations:
1. Likelihood of payment -- capacity and willingness of the obligor to
meet its financial commitment on an obligation in accordance with the terms
of the obligation;
2. Nature of and provisions of the obligation; and
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws
of bankruptcy and other laws affecting creditors' rights.
The issue rating definitions are expressed in terms of default risk. As such,
they pertain to senior obligations of an entity. Junior obligations are
typically rated lower than senior obligations, to reflect the lower priority in
bankruptcy, as noted above.
I-1
(Such differentiation applies when an entity has both senior and subordinated
obligations, secured and unsecured obligations, or operating company and holding
company obligations.) Accordingly, in the case of junior debt, the rating may
not conform exactly with the category definition.
AAA: An obligation rated "AAA" has the highest rating assigned by S&P. The
obligor's capacity to meet its financial commitment on the obligation is
extremely strong.
AA: An obligation rated "AA" differs from the highest-rated obligations only
in small degree. The obligor's capacity to meet its financial commitment on the
obligation is very strong.
A: An obligation rated "A" is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in higher-
rated categories. However, the obligor's capacity to meet its financial
commitment on the obligation is still strong.
BBB: An obligation rated "BBB" exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more likely
to lead to a weakened capacity of the obligor to meet its financial commitment
on the obligation.
SPECULATIVE GRADE
BB, B, CCC, CC, C: Obligations rated "BB", "B", "CCC", "CC" and "C" are
regarded as having significant speculative characteristics. "BB" indicates the
least degree of speculation and "C" the highest. While such obligations will
likely have some quality and protective characteristics, these may be outweighed
by large uncertainties or major exposures to adverse conditions.
BB: An obligation rated "BB" is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to the
obligor's inadequate capacity to meet its financial commitment on the
obligation.
B: An obligation rated "B" is more vulnerable to nonpayment than obligations
rated "BB", but the obligor currently has the capacity to meet its financial
commitment on the obligation. Adverse business, financial, or economic
conditions will likely impair the obligor's capacity or willingness to meet its
financial commitment on the obligation.
CCC: An obligation rated "CCC" is currently vulnerable to nonpayment and is
dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation. In the event of
adverse
I-2
business, financial, or economic conditions, the obligor is not likely to have
the capacity to meet its financial commitment on the obligation.
CC: An obligation rated "CC" is currently highly vulnerable to nonpayment.
C: A subordinated debt or preferred stock obligation 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 taken, but payments
on this obligation are being continued. A "C" also will be assigned to a
preferred stock issue in arrears on dividends or sinking fund payments, but that
is currently paying.
D: An obligation rated "D" is in payment default. The "D" rating category is
used when payments on an obligation are not made on the date due even if the
applicable grace period has not expired, unless S&P believes that such payments
will be made during such grace period. The "D" rating also will be used upon the
filing of a bankruptcy petition or the taking of a similar action if payments on
an obligation are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
r: This symbol is attached to the ratings of instruments with significant
noncredit risks. It highlights risks to principal or volatility of expected
returns which are not addressed in the credit rating.
N.R.: 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 obligation as a matter of policy.
SHORT-TERM ISSUE CREDIT RATINGS
A S&P short-term rating is a current assessment of the likelihood of timely
payment of debt considered short-term in the relevant market.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. These categories are as follows:
A-1: A short-term obligation rated "A-1" is rated in the highest category by
S&P. The obligor's capacity to meet its financial commitment on the obligation
is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial
commitment on these obligations is extremely strong.
A-2: A short-term obligation rated "A-2" is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations
I-3
in higher rating categories. However, the obligor's capacity to meet its
financial commitment on the obligation is satisfactory.
A-3: A short-term obligation rated "A-3" exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B: A short-term obligation rated "B" is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C: A short-term obligation rated "C" is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D: A short-term obligation rated "D" is in payment default. The "D" rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless S&P 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 short-term rating is not a recommendation to purchase, sell, or hold a
financial obligation, inasmuch as it does not comment as to market price or
suitability for a particular investor. Issue credit ratings are based on current
information furnished by the obligors or obtained by S&P from other sources it
considers reliable. S&P does not perform an audit in connection with any credit
rating and may, on occasion, rely on unaudited financial information. Credit
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or based on other circumstances.
DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option or demand
feature as part of their structure. The first rating addresses the likelihood of
repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term debt rating symbols are used for bonds to
denote the long-term maturity and the commercial paper rating symbols for the
put option (for example, "AAA/A-1+"). With short-term demand debt, S&P note
rating symbols are used with the commercial paper rating symbols (for example,
"SP-1+/A-1+").
I-4
MOODY'S INVESTORS SERVICE INC. -- A brief description of the applicable
Moody's Investors Service, Inc. (Moody's) rating symbols and their meanings (as
published by Moody's) follows:
LONG-TERM OBLIGATION RATINGS
Moody's long-term obligation ratings are opinions of the relative credit risk
of fixed-income obligations with an original maturity of one year or more. They
address the possibility that a financial obligation will not be honored as
promised. Such ratings reflect both the likelihood of default and any financial
loss suffered in the event of default.
MOODY'S LONG-TERM RATING DEFINITIONS:
Aaa: Obligations rated Aaa are judged to be of the highest quality, with
minimal credit risk.
Aa: Obligations rated Aa are judged to be of high quality and are subject to
very low credit risk.
A: Obligations rated A are considered upper-medium grade and are subject to
low credit risk.
Baa: Obligations rated Baa are subject to moderate credit risk. They are
considered medium-grade and as such may possess certain speculative
characteristics.
Ba: Obligations rated Ba are judged to have speculative elements and are
subject to substantial credit risk.
B: Obligations rated B are considered speculative and are subject to high
credit risk.
Caa: Obligations rated Caa are judged to be of poor standing and are subject
to very high credit risk.
Ca: Obligations rated Ca are highly speculative and are likely in, or very
near, default, with some prospect of recovery of principal and interest.
C: Obligations rated C are the lowest rated class of bonds and are typically
in default, with little prospect for recovery of principal or interest.
Note: Moody's appends numerical modifiers 1, 2, and 3 to 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.
I-5
MEDIUM-TERM NOTE RATINGS
Moody's assigns long-term ratings to individual debt securities issued from
medium-term note (MTN) programs, in addition to indicating ratings to MTN
programs themselves. Notes issued under MTN programs with such indicated ratings
are rated at issuance at the rating applicable to all pari passu notes issued
under the same program, at the program's relevant indicated rating, provided
such notes do not exhibit any of the characteristics listed below:
1. Notes containing features that link interest or principal to the
credit performance of any third party or parties
2. Notes allowing for negative coupons, or negative principal
3. Notes containing any provision that could obligate the investor to
make any additional payments
4. Notes containing provisions that subordinate the claim.
For notes with any of these characteristics, the rating of the individual note
may differ from the indicated rating of the program.
Market participants must determine whether any particular note is rated, and
if so, at what rating level. Moody's encourages market participants to contact
Moody's Ratings Desks or visit www.moodys.com directly if they have questions
regarding ratings for specific notes issued under a medium-term note program.
Unrated notes issued under an MTN program may be assigned an NR symbol.
SHORT-TERM RATINGS
Moody's short-term ratings are opinions of the ability of issuers to honor
short-term financial obligations. Ratings may be assigned to issuers, short-term
programs or to individual short-term debt instruments. Such obligations
generally have an original maturity not exceeding thirteen months, unless
explicitly noted. Moody's employs the following designations to indicate the
relative repayment ability of rated issuers:
P-1
Issuers (or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations.
P-2
Issuers (or supporting institutions) rated Prime-2 have a strong ability to
repay short-term debt obligations.
I-6
P-3
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability
to repay short-term obligations.
NP
Issuers (or supporting institutions) rated Not Prime do not fall within any of
the Prime rating categories.
NOTE: Canadian issuers rated P-1 or P-2 have their short-term ratings enhanced
by the senior-most long-term rating of the issuer, its guarantor or
support-provider.
I-7
[VAN KAMPEN INVESTMENTS LOGO]
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND
MAY BE CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL THESE SECURITIES AND
IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED MAY 5, 2005
STATEMENT OF ADDITIONAL INFORMATION
RELATING TO THE ACQUISITION OF THE ASSETS AND LIABILITIES OF
VAN KAMPEN HIGH INCOME TRUST
BY AND IN EXCHANGE FOR SHARES OF
VAN KAMPEN HIGH INCOME TRUST II
DATED MAY 6, 2005
This Reorganization Statement of Additional Information is available to the
shareholders of Van Kampen High Income Trust (the "Target Fund") in connection
with a proposed transaction (the "Reorganization") whereby Van Kampen High
Income Trust II (the "Acquiring Fund") will acquire substantially all of the
assets and assume substantially all of the liabilities of the Target Fund in
exchange for an equal aggregate value of newly-issued common shares of
beneficial interest, par value $0.01 per share ("Acquiring Fund Common Shares"
or "Common Shares"), and newly-issued auction preferred shares with a par value
of $0.01 per share and a liquidation preference of $25,000 per share ("Acquiring
Fund APS" or "APS"). The Target Fund will distribute Acquiring Fund Common
Shares to holders of Target Fund common shares and Acquiring Fund APS to holders
of Target Fund preferred shares, and will then terminate their registration
under the Investment Company Act of 1940, as amended (the "1940 Act"), and
dissolve under applicable state law. A copy of a form of the Agreement and Plan
of Reorganization between the Target Fund and the Acquiring Fund is attached
hereto as Appendix A. Unless otherwise defined herein, capitalized terms have
the meanings given to them in the Joint Proxy Statement/Prospectus.
This Reorganization Statement of Additional Information is not a prospectus
and should be read in conjunction with the Joint Proxy Statement/Prospectus
dated May 5, 2005 relating to the proposed Reorganization of the Target Fund
into the Acquiring Fund. A copy of the Joint Proxy Statement/Prospectus may be
obtained, without charge, by writing to the Van Kampen Client Relations
Department at 1 Parkview Plaza, P.O. Box 5555, Oakbrook Terrace, Illinois
60181-5555 or by calling (800) 341-2929 (TDD users may call (800) 421-2833). The
Acquiring Fund will provide, without charge, upon the written or oral request of
any person to whom this Reorganization Statement of Additional Information is
delivered, a copy of any and all documents that have been incorporated by
reference in the registration statement of which this Reorganization Statement
of Additional Information is a part.
This Reorganization Statement of Additional Information is intended to
provide Target Fund shareholders with certain additional information about the
Acquiring Fund, which will hereinafter sometimes be referred to simply as the
"Fund."
TABLE OF CONTENTS
Page
----
Trustees and Officers....................................... S-1
Investment Advisory Agreement............................... S-12
Management of the Target Fund and the Acquiring Fund........ S-15
Portfolio Transactions and Brokerage Allocation............. S-17
Additional Information Relating to Auction Preferred Shares
of the Acquiring Fund..................................... S-19
Other Information........................................... S-36
Financial Statements........................................ S-36
Pro Forma Financial Statements.............................. S-36
Appendix A -- Form of Agreement and Plan of
Reorganization............................................ A-1
Appendix B -- Certificate of Vote of Trustees Establishing
Preferred Shares.......................................... B-1
Appendix C -- Acquiring Fund Annual Report.................. C-1
Appendix D -- Target Fund Annual Report..................... D-1
Appendix E -- Proxy Voting Procedures....................... E-1
Appendix F -- Pro Forma Financial Statements................ F-1
TRUSTEES AND OFFICERS
GENERAL
The business and affairs of each Fund are managed under the direction of
each Fund's Board of Trustees and each Fund's officers appointed by each Fund's
Board of Trustees. The Acquiring Fund and the Target Fund share the same Board
of Trustees and executive officers. The tables below list the trustees and
executive officers of the Funds and their principal occupations during the last
five years, other directorships held by trustees and their affiliations, if any,
with Van Kampen Investments Inc. ("Van Kampen Investments"), Van Kampen Asset
Management (the "Adviser"), Van Kampen Funds Inc. (the "Distributor"), Van
Kampen Advisors Inc., Van Kampen Exchange Corp. and Van Kampen Investor Services
Inc. ("Investor Services"). The term "Fund Complex" includes each of the
investment companies advised by the Adviser as of the date of this
Reorganization Statement of Additional Information. Trustees serve until
reaching their retirement age or until their successors are duly elected and
qualified. Officers are annually elected by the trustees.
INDEPENDENT TRUSTEES
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee Trustee Chairman and Chief Executive 82 Trustee/Director/
Blistex Inc. since 1989 Officer of Blistex Inc., a Managing General
1800 Swift Drive consumer health care products Partner of funds in
Oak Brook, IL 60523 manufacturer. Director of the the Fund Complex.
Heartland Alliance, a
nonprofit organization serving
human needs based in Chicago.
Director of St. Vincent de
Paul Center, a Chicago based
day care facility serving the
children of low income
families. Board member of the
Illinois Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 80 Trustee/Director/
33971 Selva Road since 2003 Chairman and Chief Executive Managing General
Suite 130 Officer of the Allstate Partner of funds in
Dana Point, CA 92629 Corporation ("Allstate") and the Fund Complex.
Allstate Insurance Company. Director of Amgen
Prior to January 1995, Inc., a
President and Chief Executive biotechnological
Officer of Allstate. Prior to company, and Director
August 1994, various of Valero Energy
management positions at Corporation, an
Allstate. independent refining
company.
S-1
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer+ (64) Trustee Trustee President of CAC, L.L.C., a 82 Trustee/Director/
CAC, L.L.C. since 1989 private company offering Managing General
4350 LaJolla Village Drive capital investment and Partner of funds in
Suite 980 management advisory services. the Fund Complex.
San Diego, CA 92122-6223 Prior to February 2001, Vice Director of
Chairman and Director of Stericycle, Inc.,
Anixter International, Inc., a Ventana Medical
global distributor of wire, Systems, Inc., and
cable and communications GATX Corporation, and
connectivity products. Prior Trustee of The
to July 2000, Managing Partner Scripps Research
of Equity Group Corporate Institute. Prior to
Investment (EGI), a company January 2005,
that makes private investments Director of the
in other companies. University of Chicago
Hospitals and Health
Systems. Prior to
April 2004, Director
of TheraSense, Inc.
Prior to January
2004, Director of
TeleTech Holdings
Inc. and Arris Group,
Inc. Prior to May
2002, Director of
Peregrine Systems
Inc. Prior to
February 2001,
Director of IMC
Global Inc. Prior to
July 2000, Director
of Allied Riser
Communications Corp.,
Matria Healthcare
Inc., Transmedia
Networks, Inc., CNA
Surety, Corp. and
Grupo Azcarero Mexico
(GAM).
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of Heidrick & 80 Trustee/Director/
Heidrick & Struggles since 2003 Struggles, an executive search Managing General
233 South Wacker Drive firm. Trustee on the Partner of funds in
Suite 7000 University of Chicago the Fund Complex.
Chicago, IL 60606 Hospitals Board, Vice Chair of
the Board of the YMCA of
Metropolitan Chicago and a
member of the Women's Board of
the University of Chicago.
Prior to 1997, Partner of Ray
& Berndtson, Inc., an
executive recruiting firm.
Prior to 1996, Trustee of The
International House Board, a
fellowship and housing
organization for international
graduate students. Prior to
1995, Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice President
of La Salle National Bank.
S-2
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
R. Craig Kennedy (53) Trustee Trustee Director and President of the 80 Trustee/Director/
1744 R Street, NW since 2003 German Marshall Fund of the Managing General
Washington, DC 20009 United States, an independent Partner of funds in
U.S. foundation created to the Fund Complex.
deepen understanding, promote
collaboration and stimulate
exchanges of practical
experience between Americans
and Europeans. Formerly,
advisor to the Dennis Trading
Group Inc., a managed futures
and option company that
invests money for individuals
and institutions. Prior to
1992, President and Chief
Executive Officer, Director
and member of the Investment
Committee of the Joyce
Foundation, a private
foundation.
Howard J Kerr (69) Trustee Trustee Prior to 1998, President and 82 Trustee/Director/
736 North Western Avenue since 1992 Chief Executive Officer of Managing General
P.O. Box 317 Pocklington Corporation, Inc., Partner of funds in
Lake Forest, IL 60045 an investment holding company. the Fund Complex.
Director of the Marrow Director of the Lake
Foundation. Forest Bank & Trust.
Jack E. Nelson (69) Trustee Trustee President of Nelson Investment 80 Trustee/Director/
423 Country Club Drive since 2003 Planning Services, Inc., a Managing General
Winter Park, FL 32789 financial planning company and Partner of funds in
registered investment adviser the Fund Complex.
in the State of Florida.
President of Nelson Ivest
Brokerage Services Inc., a
member of the NASD, Securities
Investors Protection Corp. and
the Municipal Securities
Rulemaking Board. President of
Nelson Sales and Services
Corporation, a marketing and
services company to support
affiliated companies.
Hugo F. Sonnenschein+ (64) Trustee Trustee President Emeritus and 82 Trustee/Director/
1126 E. 59th Street since 1994 Honorary Trustee of the Managing General
Chicago, IL 60637 University of Chicago and the Partner of funds in
Adam Smith Distinguished the Fund Complex.
Service Professor in the Director of Winston
Department of Economics at the Laboratories, Inc.
University of Chicago. Prior
to July 2000, President of the
University of Chicago. Trustee
of the University of Rochester
and a member of its investment
committee. Member of the
National Academy of Sciences,
the American Philosophical
Society and a fellow of the
American Academy of Arts and
Sciences.
S-3
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Suzanne H. Woolsey, Ph.D. (63) Trustee Trustee Chief Communications Officer 80 Trustee/Director/
815 Cumberstone Road since 2003 of the National Academy of Managing General
Harwood, MD 20776 Sciences/National Research Partner of funds in
Council, an independent, the Fund Complex.
federally chartered policy Director of Fluor
institution, from 2001 to Corp., an
November 2003 and Chief engineering,
Operating Officer from 1993 to procurement and
2001. Director of the construction
Institute for Defense organization, since
Analyses, a federally funded January 2004 and
research and development Director of Neurogen
center, Director of the German Corporation, a
Marshall Fund of the United pharmaceutical
States, Director of the Rocky company, since
Mountain Institute and Trustee January 1998.
of Colorado College. Prior to
1993, Executive Director of
the Commission on Behavioral
and Social Sciences and
Education at the National
Academy of Sciences/National
Research Council. From 1980
through 1989, Partner of
Coopers & Lybrand.
S-4
INTERESTED TRUSTEES*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief Executive 80 Trustee/Director/
1221 Avenue of the Americas President since Officer of funds in the Fund Managing General
New York, NY 10020 and Chief 2003; Complex. Chairman, President, Partner of funds in
Executive President Chief Executive Officer and the Fund Complex.
Officer and Chief Director of the Adviser and Van
Executive Kampen Advisors Inc. since
Officer December 2002. Chairman,
since 2002 President and Chief Executive
Officer of Van Kampen Investments
since December 2002. Director of
Van Kampen Investments since
December 1999. Chairman and
Director of Van Kampen Funds Inc.
since December 2002. President,
Director and Chief Operating
Officer of Morgan Stanley
Investment Management since
December 1998. President and
Director since April 1997 and
Chief Executive Officer since
June 1998 of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. Chairman, Chief Executive
Officer and Director of Morgan
Stanley Distributors Inc. since
June 1998. Chairman since June
1998, and Director since January
1998 of Morgan Stanley Trust.
Director of various Morgan
Stanley subsidiaries. President
of the Morgan Stanley Funds since
May 1999. Previously Chief
Executive Officer of Van Kampen
Funds Inc. from December 2002 to
July 2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc. and
Morgan Stanley Services Company
Inc. and Executive Vice President
of Morgan Stanley Distributors
Inc. from April 1997 to June
1998. Chief Executive Officer
from September 2002 to April 2003
and Vice President from May 1997
to April 1999 of the Morgan
Stanley Funds.
Richard F. Powers, III* (59) Trustee Trustee Advisory Director of Morgan 82 Trustee/Director/
1221 Avenue of the Americas since 1999 Stanley. Prior to December 2002, Managing General
New York, NY 10020 Chairman, Director, President, Partner of funds in
Chief Executive Officer and the Fund Complex.
Managing Director of Van Kampen
Investments and its investment
advisory, distribution and other
subsidiaries. Prior to December
2002, President and Chief
Executive Officer of funds in the
Fund Complex. Prior to May 1998,
Executive Vice President and
Director of Marketing at Morgan
Stanley and Director of Dean
Witter, Discover & Co. and Dean
Witter Realty. Prior to 1996,
Director of Dean Witter Reynolds
Inc.
S-5
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INTERESTED TRUSTEE FUNDS SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm of 82 Trustee/Director/
333 West Wacker Drive since 1989 Skadden, Arps, Slate, Meagher & Managing General
Chicago, IL 60606 Flom LLP, legal counsel to funds Partner of funds in
in the Fund Complex. the Fund Complex.
Director of the
Abraham Lincoln
Presidential
Foundation.
------------------------------------
* Such trustee is an "interested person" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Merin and Powers are interested persons of funds in
the Fund Complex and the Adviser by reason of their current or former
positions with Morgan Stanley or its affiliates. Mr. Whalen is an interested
person of certain funds in the Fund Complex by reason of he and his firm
currently providing legal services as legal counsel to such funds in the Fund
Complex.
+ Designated as a Preferred Shares Trustee.
S-6
OFFICERS
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER FUNDS SERVED DURING PAST 5 YEARS
Stefanie V. Chang Yu (38) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President and Secretary of funds in the Fund Complex.
New York, NY 10020
Amy R. Doberman (43) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeltus Investment Management,
Inc from January 1997 to July 2000.
James W. Garrett (36) Chief Financial Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas Officer and since 2005 Chief Financial Officer and Treasurer of Morgan Stanley
New York, NY 10020 Treasurer Institutional Funds since 2002 and of funds in the Fund
Complex since 2005.
Joseph J. McAlinden (62) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and since 2002 Stanley Investment Advisors Inc., Morgan Stanley Investment
New York, NY 10020 Chief Investment Management Inc. and Morgan Stanley Investments LP and
Officer Director of Morgan Stanley Trust for over 5 years. Executive
Vice President and Chief Investment Officer of funds in the
Fund Complex. Managing Director and Chief Investment Officer
of Van Kampen Investments, the Adviser and Van Kampen
Advisors Inc. since December 2002.
Ronald E. Robison (66) Executive Vice Officer Executive Vice President and Principal Executive Officer of
1221 Avenue of the Americas President and since 2003 Funds in the Fund Complex since May 2003. Chief Executive
New York, NY 10020 Principal Officer and Chairman of Investor Services. Managing Director
Executive of Morgan Stanley. Chief Administrative Officer, Managing
Officer Director and Director of Morgan Stanley Investment Advisors
Inc., Morgan Stanley Services Company Inc. and Managing
Director and Director of Morgan Stanley Distributors Inc.
Chief Executive Officer and Director of Morgan Stanley
Trust. Executive Vice President and Principal Executive
Officer of the Institutional and Retail Morgan Stanley
Funds; Director of Morgan Stanley SICAV; previously Chief
Global Operations Officer and Managing Director of Morgan
Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1996 August 2004. Prior August 2004, Director and Managing
Oakbrook Terrace, IL 60181 Director of Van Kampen Investments, the Adviser, Van Kampen
Advisors Inc. and certain other subsidiaries of Van Kampen
Investments, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
---------------
COMPENSATION
Each trustee/director/managing general partner (hereinafter referred to in
this section as "trustee") who is not an affiliated person (as defined in the
1940 Act) of Van Kampen Investments, the Adviser or the Distributor (each a
"Non-Affiliated Trustee") is compensated by an annual retainer and meeting fees
for services to funds in the Fund Complex. Each fund in the Fund Complex (except
Van Kampen Exchange Fund) provides a deferred compensation plan to its
Non-Affiliated Trustees that allows trustees to defer receipt of their
compensation until retirement and earn a return on such deferred amounts.
Amounts deferred are retained by the Fund and earn a rate of return determined
S-7
by reference to the return on the common shares of the Funds or other funds in
the Fund Complex as selected by the respective Non-Affiliated Trustee. To the
extent permitted by the 1940 Act, the Funds 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 Funds. Deferring compensation has the same economic effect as if
the Non-Affiliated Trustee reinvested his or her compensation into the funds.
Each fund in the Fund Complex (except Van Kampen Exchange Fund) provides a
retirement plan to its Non-Affiliated Trustees that provides Non-Affiliated
Trustees with compensation after retirement, provided that certain eligibility
requirements are met. Under the retirement plan, a Non-Affiliated Trustee who is
receiving compensation from the Funds prior to such Non-Affiliated Trustee's
retirement, has at least 10 years of service (including years of service prior
to adoption of the retirement plan) and retires at or after attaining the age of
60, is eligible to receive a retirement benefit per year for each of the 10
years following such retirement from the Funds. Non-Affiliated Trustees retiring
prior to the age of 60 or with fewer than 10 years but more than 5 years of
service may receive reduced retirement benefits from the Funds.
Additional information regarding compensation and benefits for trustees is
set forth below for the periods described in the notes accompanying the table.
COMPENSATION TABLE
Fund Complex
--------------------------------------------------------------
Aggregate Aggregate Aggregate Pension Aggregate Estimated
Compensation Compensation or Retirement Maximum Annual
from the from the Benefits Accrued Benefits from the Total Compensation
Acquiring Target as Part of Fund Complex before Deferral from
Name(1) Fund(2) Fund(2) Expenses(3) Upon Retirement(4) Fund Complex(5)
------- ------------ ------------ ----------------- ------------------- --------------------
INDEPENDENT TRUSTEES
David C. Arch $1,410 $1,547 $ 35,277 $147,500 $192,530
Jerry D. Choate 1,805 2,011 82,527 126,000 200,002
Rod Dammeyer 1,616 1,753 63,782 147,500 208,000
Linda Hutton Heagy 1,604 1,810 24,465 142,500 184,784
R. Craig Kennedy 1,805 2,011 16,911 142,500 200,002
Howard J Kerr 1,616 1,753 140,743 146,250 208,000
Jack E. Nelson 1,805 2,011 97,294 109,500 200,002
Hugo F. Sonnenschein 1,616 1,753 64,476 147,500 208,000
Suzanne H. Woolsey 1,805 2,011 58,450 142,500 200,002
INTERESTED TRUSTEE
Wayne W. Whalen(1) 1,616 1,753 72,001 147,500 208,000
------------------------------------
(1) Trustees not eligible for compensation are not included in the Compensation
Table. Mr. Whalen is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act) of the Funds and certain other funds in the Fund
Complex. J. Miles Branagan retired as a member of the Board of Trustees of
the Funds and other funds in the Fund Complex on December 31, 2004. Theodore
A. Meyers retired as a member of the Board of Trustees of the Funds and
other funds in the Fund Complex on December 31, 2003.
(2) The amounts shown in this column represent the aggregate compensation before
deferral with respect to each Fund's fiscal year ended December 31, 2004.
The following Trustees deferred compensation from the Acquiring Fund during
the fiscal
S-8
year ended December 31, 2004: Mr. Choate, $1,805; Mr. Dammeyer, $1,616; Ms.
Heagy, $1,604; Mr. Nelson, $1,805; Mr. Sonnenschein, $1,616; and Mr. Whalen,
$1,616. The cumulative deferred compensation (including interest) accrued with
respect to each Trustee, including former Trustees, from the Acquiring Fund
as of December 31, 2004 is as follows: Mr. Choate, $3,193; Mr. Dammeyer,
$36,828; Ms. Heagy, $2,925; Mr. Nelson, $3,218; Mr. Sonnenschein, $35,710;
and Mr. Whalen, $34,959. The following trustees deferred compensation from
the Target Fund during the fiscal year ended December 31, 2004: Mr. Choate,
$2,011; Mr. Dammeyer, $1,753; Ms. Heagy, $1,810; Mr. Nelson, $2,011; Mr.
Sonnenschein, $1,753; and Mr. Whalen, $1,753. The cumulative deferred
compensation (including interest) accrued with respect to each trustee,
including former trustees, from the Target Fund as of December 31, 2004 is
as follows: Mr. Choate, $3,529; Mr. Dammeyer, $38,237; Ms. Heagy, $3,254;
Mr. Nelson, $3,555; Mr. Sonnenschein, $37,045; and Mr. Whalen, $36,437. The
deferred compensation plan is described above the Compensation Table.
(3) The amounts shown in this column represent the sum of the retirement
benefits accrued by the operating funds in the Fund Complex for each of the
trustees for the funds' respective fiscal years ended in 2004. The
retirement plan is described above the Compensation Table.
(4) For each trustee, this is the sum of the estimated maximum annual benefits
payable by the funds in the Fund Complex for each year of the 10-year period
commencing in the year of such person's anticipated retirement. The
retirement plan is described above the Compensation Table.
(5) The amounts shown in this column represent the aggregate compensation paid
by all of the funds in the Fund Complex as of December 31, 2004 before
deferral by the trustees under the deferred compensation plan. Because the
funds in the Fund Complex have different fiscal year ends, the amounts shown
in this column are presented on a calendar year basis.
BOARD COMMITTEES
The Board of Trustees of each Fund has the same three standing committees
(an audit committee, a brokerage and services committee and a governance
committee). Each committee is comprised solely of "Independent Trustees", which
is defined for purposes herein as trustees who: (1) are not "interested persons"
of a Fund as defined by the 1940 Act and (2) are "independent" of a Fund as
defined by the New York Stock Exchange, American Stock Exchange and Chicago
Stock Exchange listing standards.
Each Board's audit committee consists of Jerry D. Choate, Rod Dammeyer and
R. Craig Kennedy. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
audit committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The audit committee
makes recommendations to each Fund's Board of Trustees concerning the selection
of each Fund's independent registered public accounting firm, reviews with such
independent registered public accounting firm the scope and results of each
Fund's annual audit and considers any comments which the independent registered
public accounting firm may have regarding each Fund's financial statements,
books of account or internal controls. Each Fund's Board of Trustees has adopted
a formal written charter for the audit committee which sets forth the audit
committee's responsibilities. The audit
S-9
committee has reviewed and discussed the financial statements of each Fund with
management as well as with the independent registered public accounting firm of
each Fund, and discussed with the independent registered public accounting firm
the matters required to be discussed under the Statement of Auditing Standards
No. 61. The audit committee has received the written disclosures and the letter
from the independent registered public accounting firm required under
Independence Standards Board Standard No. 1 and has discussed with the
independent registered public accounting firm its independence. Based on this
review, the audit committee recommended to each Fund's Board of Trustees that
each Fund's audited financial statements be included in each Fund's annual
report to shareholders for the most recent fiscal year for filing with the SEC.
Each Board's brokerage and services committee consists of Linda Hutton
Heagy, Hugo F. Sonnenschein and Suzanne H. Woolsey. The brokerage and services
committee reviews each Fund's allocation of brokerage transactions and
soft-dollar practices and reviews the transfer agency and shareholder servicing
arrangements with Investor Services.
Each Board's governance committee consists of David C. Arch, Howard J Kerr
and Jack E. Nelson. In addition to being Independent Trustees as defined above,
each of these trustees also meets the additional independence requirements for
nominating committee members as defined by the New York Stock Exchange, American
Stock Exchange and Chicago Stock Exchange listing standards. The governance
committee identifies individuals qualified to serve as Independent Trustees on
each Board and on committees of each Board, advises each Board with respect to
Board composition, procedures and committees, develops and recommends to the
Board a set of corporate governance principles applicable to each Fund, monitors
corporate governance matters and makes recommendations to each Board, and acts
as the administrative committee with respect to Board policies and procedures,
committee policies and procedures and codes of ethics. The Independent Trustees
of each Fund select and nominate any other nominee Independent Trustees for each
Fund. While the Independent Trustees of each Fund expect to be able to continue
to identify from their own resources an ample number of qualified candidates for
the Board of Trustees as they deem appropriate, they will consider nominations
from shareholders to the Board. Nominations from shareholders should be in
writing and sent to the Independent Trustees of the Fund at the Fund's offices
at 1221 Avenue of the Americas, New York, New York 10020 or directly to the
Independent Trustees at the address specified above for each trustee.
During each Fund's last fiscal year, the Board of Trustees held 16
meetings. During each Fund's last fiscal year, the audit committee of each Board
held 6 meetings, the brokerage and services committee of each Board held 4
meetings and the governance committee of each Board held 5 meetings.
SHARE OWNERSHIP
Excluding any deferred compensation balances as described in the
Compensation Table, as of December 31, 2004, each trustee of each Fund
beneficially owned equity securities of each Fund and of all of the funds in the
Fund Complex overseen by the trustee in the dollar range amounts specified
below.
S-10
TRUSTEE BENEFICIAL OWNERSHIP OF SECURITIES
INDEPENDENT TRUSTEES
TRUSTEE
-----------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- ------- -------- -------- -------- ------- ------- ------------ --------
Dollar range of equity securities
in the Acquiring Fund............. $1- none none none $1- none none none none
$10,000 $10,000
Dollar range of equity securities
in the Target Fund................ $1- none $1- none none none none none none
$10,000 $10,000
Aggregate dollar range of equity
securities in all registered
investment companies overseen by
Trustee in the Fund Complex....... $50,001- $1- over $50,001- over $1- $1- $10,001- $10,001-
$100,000 $10,000 $100,000 $100,000 $100,000 $10,000 $10,000 $50,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
----------------------------
MERIN POWERS WHALEN
-------- -------- --------
Dollar range of equity securities in the Acquiring Fund..... none none $1-
$10,000
Dollar range of equity securities in the Target Fund........ none none $50,001-
$100,000
Aggregate dollar range of equity securities in all
registered investment companies overseen by Trustee in the
Fund Complex............................................... over over over
$100,000 $100,000 $100,000
Including deferred compensation balances (which are amounts deferred and
thus retained by each Fund as described in the Compensation Table), as of
December 31, 2004, each trustee of each Fund had in the aggregate, combining
beneficially owned equity securities and deferred compensation of each Fund and
of all of the funds in the Fund Complex overseen by the trustee, the dollar
range of amounts specified below.
TRUSTEE BENEFICIAL OWNERSHIP AND DEFERRED COMPENSATION
INDEPENDENT TRUSTEES
TRUSTEE
--------------------------------------------------------------------------------------------
ARCH CHOATE DAMMEYER HEAGY KENNEDY KERR NELSON SONNENSCHEIN WOOLSEY
-------- -------- -------- -------- -------- -------- -------- ------------ --------
Dollar range of equity
securities and deferred
compensation in the Acquiring
Fund........................... $1- none none none $1- over none none none
$10,000 $10,000 $100,000
Dollar range of equity
securities in the Target
Fund........................... $1- none over none none none none none none
$10,000 $100,000
Aggregate dollar range of equity
securities and deferred
compensation in all registered
investment companies overseen
by Trustee in Fund Complex..... $50,001- over over over over over over over $10,001-
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $50,000
INTERESTED TRUSTEES
TRUSTEE
-----------------------------------------------
MERIN POWERS WHALEN
----- ------ ------
Dollar range of equity securities and deferred
compensation in the Acquiring Fund............... none none $1-
$10,000
Dollar range of equity securities in the Target
Fund............................................. none none $50,001-
$100,000
Aggregate dollar range of equity securities and
deferred compensation in all registered
investment companies overseen by Trustee in the
Fund Complex..................................... over over over
$100,000 $100,000 $100,000
S-11
As of April 25, 2005, the trustees and officers of the Acquiring Fund as a
group owned less than 1% of the shares of the Acquiring Fund. As of April 25,
2005, the trustees and officers of the Target Fund as a group owned less than 1%
of the shares of the Target Fund.
CODE OF ETHICS
Each Fund, the Adviser, and the Distributor have adopted a Code of Ethics
(the "Code of Ethics") that sets forth general and specific standards relating
to the securities trading activities of their employees. The Code of Ethics does
not prohibit employees from acquiring securities that may be purchased or held
by either 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 each Fund or other Van Kampen funds, or that such employees take
unfair advantage of their relationship with each Fund. Among other things, the
Code of Ethics prohibits certain types of transactions absent prior approval,
imposes various trading restrictions (such as time periods during which personal
transactions may or may not be made) and requires quarterly reporting of
securities transactions and other reporting matters. All reportable securities
transactions and other required reports are to be reviewed by appropriate
personnel for compliance with the Code of Ethics. Additional restrictions apply
to portfolio managers, traders, research analysts and others who may have access
to nonpublic information about the trading activities of each Fund or other Van
Kampen funds or who otherwise are involved in the investment advisory process.
Exceptions to these and other provisions of the Code of Ethics may be granted in
particular circumstances after review by appropriate personnel.
INVESTMENT ADVISORY AGREEMENT
Each Fund and the Adviser are parties to an investment advisory agreement
(each, an "Advisory Agreement"). Under the Advisory Agreement, each Fund retains
the Adviser to manage the investment of that Fund's assets, including the
placing of orders for the purchase and sale of portfolio securities. The Adviser
obtains and evaluates economic, statistical and financial information to
formulate strategy and implement the Fund's investment objective. The Adviser
also furnishes offices, necessary facilities and equipment, provides
administrative services to each Fund, renders periodic reports to each Fund's
Board of Trustees and permits its officers and employees to serve without
compensation as trustees or officers of that Fund if elected to such positions.
Each Fund, however, bears the costs of its day-to-day operations, including
auction agent fees, fees for broker-dealers participating in auctions of such
Fund's preferred shares, service fees, distribution fees, custodian fees, legal
and independent registered public accounting firm fees, the costs of reports and
proxies to shareholders, compensation of trustees of each Fund (other than those
who are affiliated persons of the Adviser, Distributor or Van Kampen
Investments) and all other ordinary business expenses not specifically assumed
by the Adviser. The Advisory Agreement also provides that the Adviser shall not
be liable to either Fund for any actions or omissions in the absence of willful
misfeasance, bad faith, negligence or reckless disregard of its obligations and
duties under the Advisory Agreement.
The fee payable to the Adviser by each Fund is reduced by any commissions,
tender solicitation and other fees, brokerage or similar payments received by
the Adviser or any other direct or indirect majority owned subsidiary of Van
Kampen Investments in connection with the purchase and sale of portfolio
investments less any direct expenses
S-12
incurred by such subsidiary of Van Kampen Investments in connection with
obtaining such commissions, fees, brokerage or similar payments. The Adviser
agrees to use its best efforts to recapture tender solicitation fees and
exchange offer fees for each Fund's benefit and to advise the trustees of each
Fund of any other commissions, fees, brokerage or similar payments which may be
possible for the Adviser or any other direct or indirect majority owned
subsidiary of Van Kampen Investments to receive in connection with each Fund's
portfolio transactions or other arrangements which may benefit that Fund.
Each Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by each Fund's Board of Trustees or (ii) by a
vote of a majority of each Fund's outstanding voting securities and (b) by a
vote of a majority of the trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
In approving each Advisory Agreement, the Board of Trustees of each Fund,
including the non-interested trustees, considered the nature, quality and scope
of the services provided by the Adviser, the performance, fees and expenses of
each Fund compared to other similar investment companies, the Adviser's expenses
in providing the services and the profitability of the Adviser and its
affiliated companies. The Board of Trustees of each Fund also reviewed the
benefit to the Adviser of receiving research paid for by Fund assets and the
propriety of such an arrangement and evaluated other benefits the Adviser
derives from its relationship with each Fund. The Board of Trustees of each Fund
considered the extent to which any economies of scale experienced by the Adviser
are shared with each Fund's shareholders, and the propriety of alternative
breakpoints in each Fund's advisory fee schedule. The Board of Trustees of each
Fund considered comparative advisory fees of each Fund and other investment
companies at different asset levels, and considered the trends in the industry
versus historical and projected sales and redemptions of each Fund. The Board of
Trustees of each Fund reviewed reports from third parties about the foregoing
factors and considered changes, if any, in such items since its previous
approval. The Board of Trustees of each Fund discussed the financial strength of
the Adviser and its affiliated companies and the capability of the personnel of
the Adviser. The Board of Trustees of each Fund reviewed the statutory and
regulatory requirements for approval of advisory agreements. The Board of
Trustees of each Fund, including the non-interested trustees, evaluated all of
the foregoing and determined, in the exercise of its business judgment, that
approval of each Advisory Agreement was in the best interests of each Fund and
its shareholders.
ADVISORY FEES
The Adviser received the following approximate advisory fees from each
Fund:
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund......................................... $453,800 $433,900 $451,900
Target Fund............................................ $612,500 $586,100 $606,000
S-13
ACCOUNTING SERVICES AGREEMENT
Each Fund has entered into an accounting services agreement pursuant to
which the Adviser provides accounting services to the Fund supplementary to
those provided by the custodian. Such services are expected to enable the Fund
to more closely monitor and maintain its accounts and records. Each 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. Each Fund
shares together with the other Van Kampen funds in the cost of providing such
services with 25% of such costs shared proportionately based on the respective
number of classes of securities issued per fund and the remaining 75% of such
costs based proportionately on the respective net assets per fund.
ACCOUNTING SERVICES FEES
The Adviser received the following approximate accounting services fees
from each Fund:
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund........................................... $11,700 $11,400 $12,900
Target Fund.............................................. $12,500 $12,200 $13,900
LEGAL SERVICES AGREEMENT
Each Fund and certain other Van Kampen funds have entered into legal
services agreements pursuant to which Van Kampen Investments provides legal
services, including without limitation; accurate maintenance of each fund's
minute books and records, preparation and oversight of each fund's regulatory
reports and other information provided to shareholders, as well as responding to
day-to-day legal issues on behalf of the funds. Payment by the funds for such
services is made on a cost basis for the salary and salary-related benefits,
including but not limited to bonuses, group insurance and other regular wages
for the employment of personnel. Other funds distributed by the Distributor also
receive legal services from Van Kampen Investments. Of the total costs for legal
services provided to the funds distributed by the Distributor, one half of such
costs are allocated equally to each fund and the remaining one half of such
costs are allocated to specific funds based on monthly time records.
LEGAL SERVICES FEES
Van Kampen Investments received the following approximate legal services
fees from each Fund:
FISCAL YEAR ENDED DECEMBER 31,
------------------------------
2004 2003 2002
-------- -------- --------
Acquiring Fund........................................... $12,600 $12,400 $15,200
Target Fund.............................................. $19,000 $19,100 $36,600
S-14
MANAGEMENT OF THE TARGET FUND AND THE ACQUIRING FUND
OTHER ACCOUNTS MANAGED BY THE PORTFOLIO MANAGERS
As of December 31, 2004, Gordon Loery managed 3 registered investment
companies with a total of approximately $1.7 billion in assets; 7 pooled
investment vehicles other than registered investment companies with a total of
approximately $540 million in assets; and 5 other accounts with a total of
approximately $326 million in assets.
As of December 31, 2004, Josh Givelber managed 3 registered investment
companies with a total of approximately $1.8 billion in assets; 7 pooled
investment vehicles other than registered investment companies with a total of
approximately $540 million in assets; and 0 other accounts.
As of December 31, 2004, Chad Liu managed 3 registered investment companies
with a total of approximately $1.8 billion in assets; 7 pooled investment
vehicles other than registered investment companies with a total of
approximately $540 million in assets; and 0 other accounts.
As of December 31, 2004, Sheila Finnerty managed 3 registered investment
companies with a total of approximately $1.8 billion in assets; 7 pooled
investment vehicles other than registered investment companies with a total of
approximately $540 million in assets; and 0 other accounts.
Because the portfolio managers manage assets for other investment
companies, pooled investment vehicles and/or other accounts (including
institutional clients, pension plans and certain high net worth individuals)
there may be an incentive to favor one client over another resulting in
conflicts of interest. For instance, the Adviser may receive fees from certain
accounts that are higher than the fee it receives from the Fund, or it may
receive a performance-based fee on certain accounts. In those instances, the
portfolio managers may have an incentive to favor the higher and/or
performance-based fee accounts over the Funds. The portfolio managers of the
Funds do not currently manage assets for other investment companies, pooled
investment vehicles or other accounts that charge a performance fee. The Adviser
has adopted trade allocation and other policies and procedures that it believes
are reasonably designed to address these and other conflicts of interest.
PORTFOLIO MANAGER COMPENSATION
STRUCTURE. Portfolio managers receive a combination of base compensation
and discretionary compensation, comprised of a cash bonus and several deferred
compensation programs described below. The methodology used to determine
portfolio manager compensation is applied across all accounts managed by the
portfolio manager.
BASE SALARY COMPENSATION. Generally, portfolio managers receive base salary
compensation based on the level of their position with the Adviser.
DISCRETIONARY COMPENSATION. In addition to base compensation, portfolio
managers may receive discretionary compensation. Discretionary compensation can
include:
- Cash Bonus;
- Morgan Stanley's Equity Incentive Compensation Program (EICP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation
S-15
into restricted stock units or other awards based on Morgan Stanley common stock
that are subject to vesting and other conditions;
- Investment Management Deferred Compensation Plan (IMDCP) awards--a
mandatory program that defers a portion of discretionary year-end
compensation and notionally invests it in designated funds advised by the
Adviser or its affiliates. The award is subject to vesting and other
conditions. Portfolio managers must notionally invest a minimum of 25% to
a maximum of 50% of the IMDCP deferral into a combination of the
designated funds they manage that are included in the IMDCP fund menu;
- Select Employees' Capital Accumulation Program (SECAP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation and notionally invest the deferred
amount across a range of designated investment funds, including funds
advised by the Adviser or its affiliates; and
- Voluntary Equity Incentive Compensation Program (VEICP) awards--a
voluntary program that permits employees to elect to defer a portion of
their discretionary compensation to invest in Morgan Stanley stock units.
Several factors determine discretionary compensation, which can vary by
portfolio management team and circumstances. In order of relative importance,
these factors include:
- Investment performance. A portfolio manager's compensation is linked to
the pre-tax investment performance of the accounts managed by the
portfolio manager. Investment performance is calculated for one-, three-
and five-year periods measured against a fund's primary benchmark,
indices and/or peer groups. Generally, the greatest weight is placed on
the three- and five-year periods.
- Revenues generated by the investment companies, pooled investment
vehicles and other accounts managed by the portfolio manager.
- Contribution to the business objectives of the Adviser.
- The dollar amount of assets managed by the portfolio manager.
- Market/compensation survey research by independent third parties.
- Other qualitative factors, such as contributions to client objectives.
- Performance of Morgan Stanley and Morgan Stanley Investment Management,
and the overall performance of the Global Investor Group, a department
within Morgan Stanley Investment Management that includes all investment
professionals.
Occasionally, to attract new hires or to retain key employees, the total
amount of compensation will be guaranteed in advance of the fiscal year end
based on current market levels. In limited circumstances, the guarantee may
continue for more than one year. The guaranteed compensation is based on the
same factors as those comprising overall compensation described above.
The same methodology is used to determine portfolio manager compensation
for all accounts.
S-16
SECURITIES OWNERSHIP OF PORTFOLIO MANAGERS
As of December 31, 2004, the end of each Fund's most recently completed
fiscal year, each portfolio manager owned the dollar range of securities in each
Fund as shown below:
LOERY GIVELBER LIU FINNERTY
----- -------- --- --------
Acquiring Fund........................ None(1) None(1) None None
Target Fund........................... None(1) None(1) None None
------------------------------------
(1) Although the portfolio manager does not own any securities of a Fund
directly, the portfolio manager owns shares of funds managed pursuant to a
similar strategy by the same portfolio management team.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser is responsible for decisions to buy and sell securities for
each 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 each Fund's
portfolio business, the policies and practices in this regard are subject to
review by each Fund's Board of Trustees.
As most transactions made by the Funds are principal transactions at net
prices, the Funds generally incur little or no brokerage costs. The portfolio
securities in which the Funds 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 Funds may also purchase certain money market instruments directly from an
issuer, in which case no commissions or discounts are paid, or may purchase and
sell listed securities on an exchange, which are effected through brokers who
charge a commission for their services.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Funds and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating prices and any brokerage commissions
on such transactions, the Adviser considers the firm's reliability, integrity
and financial condition and the firm's execution capability, the size and
breadth of the market for the security, the size of and difficulty in executing
the order, and the best net price. There are many instances when, in the
judgment of the Adviser, more than one firm can offer comparable execution
services. In selecting among such firms, consideration may be given to those
firms which supply research and other services in addition to execution
services. The Adviser is authorized to pay higher commissions to brokerage firms
that provide it with investment and research information than to firms which do
not provide such services if the Adviser determines that such commissions are
reasonable in relation to the overall services provided. No specific value can
be assigned to such research services which are furnished without cost to the
Adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser
S-17
to the Funds 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 each Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Funds.
The Adviser also may place portfolio transactions, to the extent permitted
by law, with brokerage firms affiliated with each Fund and the Adviser if it
reasonably believes that the quality of execution and the commission are
comparable to that available from other qualified firms.
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 each 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 each Fund. In making such allocations among
each Fund and other advisory accounts, the main factors considered by the
Adviser are the respective sizes of each Fund and other advisory accounts, the
respective investment objectives, the relative size of portfolio holdings of the
same or comparable securities, the availability of cash for investment, the size
of investment commitments generally held and opinions of the persons responsible
for recommending the investment.
Certain broker-dealers, through which each Fund may effect securities
transactions, are affiliated persons (as defined in the 1940 Act) of each Fund
or affiliated persons of such affiliates, including Morgan Stanley or its
subsidiaries. Each 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 each 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 each Fund will be
reduced by all or a portion of the brokerage commission paid to affiliated
brokers.
S-18
Unless otherwise disclosed below, neither Fund paid any commissions to
affiliated brokers during the last three fiscal years. Each Fund paid the
following commissions to brokers during the fiscal years shown:
AFFILIATED BROKERS --
ALL BROKERS MORGAN STANLEY DW INC.
----------- ----------------------
ACQUIRING FUND:
COMMISSIONS PAID:
Fiscal year ended December 31, 2004... $110 0
Fiscal year ended December 31, 2003... 728 0
Fiscal year ended December 31, 2002... 0 0
Fiscal year December 31, 2004
percentages:
Commissions with affiliate to total
commissions........................ 0.00%
Value of brokerage transactions with
affiliate to total transactions.... 0.00%
TARGET FUND:
COMMISSIONS PAID:
Fiscal year ended December 31, 2004... $ 98 0
Fiscal year ended December 31, 2003... 695 0
Fiscal year ended December 31, 2002... 0 0
Fiscal year December 31, 2004
percentages:
Commissions with affiliate to total
commissions........................ 0.00%
Value of brokerage transactions with
affiliate to total transactions.... 0.00%
During the fiscal year ended December 31, 2004, neither Fund paid any
brokerage commissions to brokers selected primarily on the basis of research
services provided to the Adviser.
ADDITIONAL INFORMATION
RELATING TO AUCTION PREFERRED SHARES OF THE ACQUIRING FUND
The following is a brief description of the terms of the auction preferred
shares of the Fund (the "APS"). This description does not purport to be complete
and is subject to and qualified in its entirety by reference to Fund's
Declaration of Trust, including the Certificate of Vote establishing and fixing
the rights and preferences of the shares of such series of APS, attached hereto
as Appendix B (the "Certificate of Vote" and together with the Fund's
Declaration of Trust, the "APS Provisions"). For purposes of this section,
capitalized terms not otherwise defined herein have the meanings ascribed to
them in the Certificate of Vote. APS issued in connection with the
Reorganizations will be governed by the Certificate of Vote of the Acquiring
Fund, which, upon completion of the Reorganizations, will be amended to reflect
the issuance of additional APS.
S-19
GENERAL
The Declaration of Trust currently authorizes the issuance of an unlimited
number of shares of Acquiring Fund Common Shares, and 100,000,000 Acquiring Fund
APS (which may be issued from time to time in such series and with such
designations, preferences and other rights, qualifications, limitations and
restrictions as are determined in a resolution of the Board of Trustees of the
Fund). Under the APS Provisions, the Fund is authorized to issue up to 1800 APS.
All APS have a liquidation preference of $25,000 per share plus an amount equal
to accumulated but unpaid dividends (whether or not earned or declared). The APS
rank on a parity with shares of any other series of Preferred Shares (including
any other series of APS) as to the payment of dividends and the distribution of
assets upon liquidation or winding up of the affairs of the Fund. So long as
either Moody's or S&P is rating the APS, the Fund may, without the vote of the
holders of APS, issue additional series of Preferred Shares, including APS,
subject to applicable provisions of the 1940 Act and to continuing compliance
with the 1940 Act APS Asset Coverage and the APS Basic Maintenance Amount,
provided that (1) any such additional series ranks on a parity with the then
Outstanding APS as to the payment of dividends and the distribution of assets
upon liquidation and (2) the Fund obtains written confirmation from Moody's or
S&P, or both, as the case may be, that the issuance of any such additional
series would not impair the rating then assigned by such rating agency to the
APS.
Deutsche Bank Trust Company Americas is the auction agent (the "Auction
Agent") for the APS. The Auction Agent is the transfer agent, registrar,
dividend disbursing agent and redemption agent for the APS. The APS are fully
paid and (subject to the statements below concerning shareholders of a
Massachusetts business trust) nonassessable, are not convertible into Common
Shares or other shares of beneficial interest of the Fund and have no preemptive
rights.
DIVIDENDS
General. The holders of APS are entitled to receive, when, as and if
declared by the Board of Trustees of the Fund, out of funds legally available
therefor, cumulative cash dividends at the Applicable Rate per annum thereof,
determined as set forth below under "Determination of Dividend Rate," and no
more, payable on the respective dates determined as set forth below.
Each dividend on the APS will be paid on the Dividend Payment Date therefor
to the Securities Depository (or any successor in interest thereto) to pay to
the holders of record as their names appear on the registry of Existing Holders
of the Securities Depository on the Business Day next preceding such Dividend
Payment Date. Dividends in arrears for any past Dividend Period may be declared
and paid at any time, without reference to any regular Dividend Payment Date, to
the holders as their names appear on the share books of the Fund on such date,
not exceeding 15 days preceding the payment date thereof, as may be used by the
Board of Trustees of the Fund.
The Securities Depository, in accordance with its current procedures, is
expected to credit on each Dividend Payment Date dividends received from the
Fund to the accounts of the respective Agent Members in next-day funds. Certain
Broker-Dealers (or if such Broker-Dealer does not act as Agent Member, one of
its affiliates), however, may make such dividend payments available in same-day
funds on each Dividend Payment Date to customers that use such Broker-Dealer or
affiliate as Agent Member.
S-20
Determination of Dividend Rate. The dividend rate on any APS will be equal
to the rate per annum, except as provided below, that results from an Auction on
the Auction Date next preceding such Subsequent Dividend Period.
If an Auction for any Subsequent Dividend Period of APS is not held for any
reason or if the Fund fails to pay in a timely manner to the Auction Agent the
full amount of any dividend on, or Redemption Price of, any APS and such failure
has not been cured as set forth below prior to any succeeding Subsequent
Dividend Period thereof, the dividend rate for any such Subsequent Dividend
Period will be, subject to the next succeeding paragraph, the Maximum Rate for
the APS on the Auction Date for such Subsequent Dividend Period.
If the Fund fails to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the Redemption Price of, any APS during any Rate
Period thereof, and, prior to 12:00 Noon on the third Business Day next
succeeding the date on which such failure occurred, such failure shall not have
been cured in accordance with the next succeeding paragraph or the Fund shall
not have paid to the Auction Agent a late charge equal to the sum of (1) if such
failure consisted of the failure timely to pay to the Auction Agent the full
amount of dividends with respect to any Dividend Period on the APS, an amount
computed by multiplying (x) 200% of the "AA" Composite Commercial Paper Rate (or
Treasury Rate, if applicable) for the Rate Period during which such failure
occurs on the Dividend Payment Date for such Dividend Period by (y) a fraction,
the numerator of which shall be the number of days for which such failure has
not been cured in accordance with the second succeeding paragraph (including the
day such failure occurs and excluding the day such failure is cured) and the
denominator of which shall be 365 and applying the rate obtained against the
aggregate liquidation preference of the Outstanding APS and (2) if such failure
consisted of the failure timely to pay to the Auction Agent the Redemption Price
of the APS, if any, for which notice of redemption has been given by the Fund,
an amount computed by multiplying (x) 200% of the "AA" Composite Commercial
Paper Rate (or Treasury Rate, if applicable) for the Rate Period during which
such failure occurs on the redemption date by (y) a fraction, the numerator of
which shall be the number of days for which such failure is not cured in
accordance with the second succeeding paragraph (including the day such failure
occurs and excluding the day such failure is cured) and the denominator of which
shall be 365, and applying the rate obtained against the aggregate liquidation
preference of the Outstanding APS to be redeemed, then Auctions will be
suspended until such failure is so cured and the dividend rate for APS for each
Subsequent Dividend Period thereof commencing after such failure to and
including the Subsequent Dividend Period, if any, during which such failure is
so cured shall be a rate per annum equal to the Maximum Rate on the Auction Date
for such Subsequent Dividend Period (but with the prevailing rating for such
shares, for purposes of determining such Maximum Rate, being deemed to be "Below
"baa3"/BBB").
Any such failure with respect to APS shall have been cured (if such failure
is not solely due to the willful failure of the Fund to make the required
payment to the Auction Agent) with respect to any Rate Period if, not later than
12:00 Noon New York City time on the fourth Business Day preceding the Auction
Date for the Rate Period subsequent to such Rate Period, the Fund shall have
paid to the Auction Agent (i) all accumulated and unpaid dividends on the APS
and (ii) without duplication, the Redemption Price for the APS, if any, for
which notice of redemption has been given by the Fund.
S-21
For the purposes of the foregoing, "AA" Composite Commercial Paper Rate,"
on any date for any Rate Period, means:
(i)(A) in the case of any Minimum Dividend Period or any Rate Period
of between 7 and 28 Rate Period Days, the interest equivalent of the 30-day
rate; provided, however, in the case of any Minimum Dividend Period of 7
days or any Rate Period with 7 Rate Period Days, and if the "AA" Composite
Commercial Paper Rate is being used to determine the Applicable Rate when
all of the Outstanding APS are subject to Submitted Hold Orders, then the
interest equivalent of the 7-day rate, and (B) in the case of any Rate
Period with more than 28 Rate Period Days, the interest equivalent of the
180-day rate, on commercial paper placed on behalf of issuers whose
corporate bonds are rated "AA" by S&P or the equivalent of such rating by
S&P or another rating agency, as made available on a discount basis or
otherwise by the Federal Reserve Bank of New York for the Business Day
immediately preceding such date; or
(ii) in the event that the Federal Reserve Bank of New York does not
make available any such rate, then the arithmetic average of such rates, as
quoted on a discount basis or otherwise, by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day next
preceding such date.
If any Commercial Paper Dealer does not quote a rate required to determine
the "AA" Composite Commercial Paper Rate, the "AA" Composite Commercial Paper
Rate shall be determined on the basis of the quotation or quotations furnished
by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any
Substitute Commercial Paper Dealer or Substitute Commercial Paper Dealers
selected by the Fund to provide such rate or rates not being supplied by any
Commercial Paper Dealer or Commercial Paper Dealers, as the case may be, or, if
the Fund does not select any such Substitute Commercial Paper Dealer or
Substitute Commercial Paper Dealers, by the remaining Commercial Paper Dealer or
Commercial Paper Dealers. For purposes of this definition, the "interest
equivalent" of a rate stated on a discount basis (a "discount rate") for
commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360. As used herein, "Commercial Paper Dealers" means Goldman
Sachs Money Markets, L.P., Lehman Commercial Paper Incorporated, Merrill Lynch,
Pierce Fenner & Smith Incorporated and Smith Barney, Harris Upham & Co.
Incorporated or, in lieu of any thereof, their respective affiliates or
successors, if such entity is a commercial paper dealer. As used herein,
"Substitute Commercial Paper Dealer" means The First Boston Company and Morgan
Stanley & Co. Incorporated or their respective affiliates or successors, if such
entity is a commercial paper dealer, provided that none of such entities shall
be a Commercial Paper Dealer.
For the purposes of the foregoing, "Treasury Rate," on any date, means the
interest equivalent of the rate for direct obligations of the United States
having a maturity which is equal to, or, if not equal to, next shorter than, 3
months, as published weekly by the Board of Governors of the Federal Reserve
System in "Federal Reserve Statistical Release H.15(519), Selected Interest
Rates" or any successor publication, within five Business Days preceding such
date. If such statistical release is not published or is otherwise not
S-22
available, the Treasury Rate will be the arithmetic mean of the secondary market
bid rates as of approximately 3:30 p.m., New York City time, on the Business Day
next preceding such date, of U.S. Government Securities Dealers furnished to the
Auction Agent for the issue of direct obligations of the United States, in an
aggregate principal amount of at least $1 million with a remaining maturity
equal to, or next shorter than, 3 months, as the case may be. For purposes of
definition, "interest equivalent" means the equivalent yield on a 360-day basis
of a discount basis security to an interest bearing security.
If any U.S. Government Securities Dealer does not quote a rate required to
determine the Treasury Rate, the Ten Year Constant Maturity Rate or the Thirty
Year Constant Maturity Rate, such rate shall be determined on the basis of the
quotation or quotations furnished by the remaining U.S. Government Securities
Dealer or U.S. Government Securities Dealers (if any) or any Substitute U.S.
Government Securities Dealer or Substitute U.S. Government Securities Dealer
selected by the Fund to provide such rate or rates not being supplied by any
U.S. Governmental Securities Dealer or U.S. Governmental Securities Dealers, as
the case may be, or, if the Fund does not select any such Substitute U.S.
Governmental Securities Dealer or Substitute U.S. Governmental Securities
Dealers, by the remaining U.S. Governmental Securities Dealer or U.S.
Governmental Securities Dealers. As used herein, "U.S. Governmental Securities
Dealer" means Goldman, Sachs & Co., Smith Barney, Harris Upham & Co.
Incorporated and Morgan Guaranty Trust Company of New York or their respective
affiliates or successors, if such entity is a U.S. Government securities dealer.
As used herein, "Substitute U.S. Governmental Securities Dealer" shall mean The
First Boston Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or
their respective affiliates or successors, if such entity is a U.S. Government
securities dealer, provided that none of such entities shall be a U.S.
Government Securities Dealer.
"Ten Year Constant Maturity Rate", on any date, means the arithmetic
average of the two most recent weekly per annum Ten Year Average Yields (or the
one weekly per annum Ten Year Average Yield, if only one such Yield shall be
published during the Calendar Period with respect to such date), as published
weekly by the Federal Reserve Board during the Calendar Period with respect to
such date. In the event that the Federal Reserve Board does not publish such a
weekly per annum Ten Year Average Yield during such Calendar Period, then the
Ten Year Constant Maturity Rate with respect to such date shall be the
arithmetic average of the two most recent weekly per annum Ten Year Average
Yields (or the one weekly per annum Ten Year Average Yield, if only one such
Yield shall be published during such Calendar Period), as published weekly
during such Calendar Period by any Federal Reserve Bank or by any U.S.
Government department or agency selected by the Fund. In the event that a per
annum Ten Year Average Yield shall not be published by the Federal Reserve Board
or by any Federal Reserve Bank or by any U.S. Government department or agency
during such Calendar Period, then the Ten Year Constant Maturity Rate with
respect to such date will be the arithmetic average of the two most recent
weekly per annum average yields to maturity (or the one weekly per annum average
yield to maturity, if only one such yield shall be published during such
Calendar Period) for all of the actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) then having maturities
or not less than eight nor more than 12 years, as published during such Calendar
Period by the Federal Reserve Board or, if the Federal Reserve Board shall not
publish such yields, by any Federal Reserve Bank or by any U.S. Government
department or agency selected by the Fund. In the event that the
S-23
Fund determines in good faith that for any reason the Auction Agent cannot
determine the Ten Year Constant Maturity Rate with respect to such date as
provided above in this paragraph, then the Ten Year Constant Maturity Rate with
respect to such date will be the arithmetic average of the per annum average
yields to maturity based upon the closing bids during such Calendar Period for
each of the issues of actively traded marketable U.S. Treasury fixed interest
rate securities (other than Special Securities) with a final maturity date not
less than eight nor more than 12 years from the date of each such quotation, as
quoted daily for each business day in New York City (or less frequently if daily
quotations shall not be generally available) to the Auction Agent by the U.S.
Government Securities Dealers.
"Thirty Year Constant Maturity Rate", on any date, means the arithmetic
average of the two most recent weekly per annum Thirty Year Average Yields (or
the one weekly per annum Thirty Year Average Yield, if only one such Yield shall
be published during the relevant Calendar Period), as published weekly by the
Federal Reserve Board during the Calendar Period with respect to such date. In
the event that the Federal Reserve Board does not publish such a weekly per
annum Thirty Year Average Yield during such Calendar Period, then the Thirty
Year Constant Maturity Rate with respect to such date shall be the arithmetic
average of the two most recent weekly per annum Thirty Year Average Yields (or
the one weekly per annum Thirty Year Average Yield, if only one such Yield shall
be published during such Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Board or by any U.S. Government
department or agency selected by the Fund. In the event that a per annum Thirty
Year Average Yield shall not be published by the Federal Reserve Board or by any
Federal Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Thirty Year Constant Maturity Rate with respect to
such date will be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly per annum average yield to
maturity, if only one such yield shall be published during such Calendar Period)
for all of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) then having maturities of not less
than 28 nor more than 30 years, as published during such Calendar Period by the
Federal Reserve Board or, if the Federal Reserve Board shall not publish such
yields, by any Federal Reserve Bank or by any U.S. Government department or
agency selected by the Fund. In the event that the Fund determines in good faith
that for any reason the Auction Agent cannot determine the Thirty Year Constant
Maturity Rate with respect to such date as provided above in this paragraph,
then the Thirty Year Constant Maturity Rate with respect to such date will be
the arithmetic average of the per annum average yields to maturity based upon
the closing bids during such Calendar Period for each of the issues of actively
traded marketable U.S. Treasury fixed interest rate securities (other than
Special Securities) with a final maturity date not less than 28 nor more than 30
years from the date of each such quotation, as quoted daily for each business
day in New York City (or less frequently if daily quotations shall not be
generally available) to the Auction Agent by the U.S. Government Securities
Dealers.
Except as set forth in the next sentence, no dividends shall be declared or
paid or set apart for payment on the shares of any class or series of shares of
beneficial interest ranking, as to the payment of dividends, on a parity with
the APS for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the APS through the most recent
Dividend Payment Date for such APS. When dividends are
S-24
not paid in full upon the APS through their most recent respective Dividend
Payment Dates or upon the shares of any other class or series of shares of
beneficial interest ranking on a parity as to the payment of dividends with the
APS through their most recent respective dividend payment dates, all dividends
declared upon the APS and any other such class or series of shares of beneficial
interest ranking on a parity as to the payment of dividends with the APS shall
be declared pro rate so that the amount of dividends declared per share on the
APS and such other class or series of shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the APS and such
other class or series of shares of beneficial interest bear to each other (for
purposes of this sentence, the amount of dividends declared per share shall be
based on the Applicable Rate for such shares for the Dividend Periods during
which dividends, were not paid in full). Holders of the APS shall not be
entitled to any dividend, whether payable in cash, property or capital shares,
in excess of full cumulative dividends, as provided in the APS provisions, on
the APS. No interest, or sum of money in lieu of interest, will be payable in
respect of any dividend payment or payments on the APS which may be in arrears,
and, except as otherwise provided herein, no additional sum of money will be
payable in respect of any such arrearage.
The amount of dividends per share payable on the APS on any date on which
dividends shall be payable on the APS shall be computed by multiplying the
Applicable Rate in effect for such Dividend Period or Dividend Periods or part
thereof for which dividends have not been paid by a fraction, the numerator of
which shall be the number of days in such Dividend Period or Dividend Periods or
part thereof and the denominator of which shall be 365 if such Dividend Period
is a Rate Period, or is contained in a Rate Period, of less than 1 year and 360
for all other Rate Periods, and applying the rate obtained against $50,000. Any
dividend payment made on the APS shall first be credited against the earliest
accumulated but unpaid dividends due with respect to such APS.
Designation of Special Dividend Periods. The Fund, at its option, may
designate any succeeding Subsequent Dividend Period of APS as a Special Dividend
Period which shall consist of such number of days or whole years as the Board of
Trustees shall specify; provided, however, that such designation shall be
effective only if (i) notice thereof shall have been given as provided herein,
(ii) any failure to pay in a timely manner to the Auction Agent the full amount
of any dividend on, or the Redemption Price of, the APS shall have been cured as
set forth above under "Determination of Dividend Rate," (iii) Sufficient
Clearing Bids shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Special Dividend Period,
(iv) if the Fund shall have mailed a notice of redemption with respect to any
shares, as described under "Redemption -- Notice of Redemption" below, the
Redemption Price with respect to such shares shall have been deposited with the
Auction Agent, and (v) in the event the Fund wishes to designate any succeeding
Subsequent Dividend Period as a Special Dividend Period consisting of more than
28 days, the Fund has received written confirmation from S&P (if S&P is then
rating the APS) and Moody's (if Moody's is then rating the APS) that such
designation would not affect the rating then assigned by S&P and Moody's to such
APS.
If the Fund proposes to designate any succeeding Subsequent Dividend Period
of the APS as a Special Dividend Period of more than 28 days, not less than 20
nor more than 30 days prior to the date the Fund proposes to designate as the
first day of such Special
S-25
Dividend Period (which shall be such day that would otherwise be the first day
of a Minimum Dividend Period), notice shall be (i) published or caused to be
published by the Fund in a newspaper of general circulation to the financial
community in The City of New York, New York, which carries financial news, and
(ii) communicated by the Fund by telephonic or other means to the Auction Agent
and confirmed in writing promptly thereafter. Each such notice shall state (A)
that the Fund may exercise its option to designate a succeeding Subsequent
Dividend Period of the APS as a Special Dividend Period, specifying the first
day thereof and (B) that the Fund will by 11:00 A.M., New York City time, on the
second Business Day next preceding such date notify the Auction Agent, who will
promptly notify the Broker-Dealers, of either (x) its determination, subject to
certain conditions, to exercise such option, in which case the Fund shall
specify the Special Dividend Period designated and the terms of the Specific
Redemption Provisions, if any, or (y) its determination not to exercise such
option.
No later than 11:00 A.M., New York City time, on the second Business Day
next preceding the first day of any proposed Special Dividend Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the
Broker-Dealers, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Rate Period as a Special Dividend Period, specifying the
same and the first day thereof, (B) the Auction Date immediately prior to
the first day of such Special Dividend Period, (C) the terms of the
Specific Redemption Provisions, if any, (D) that such Special Dividend
Period shall not commence if (1) on such Auction Date Sufficient Clearing
Bids shall not exist (in which case the succeeding Rate Period shall be a
Minimum Dividend Period) or (2) the Fund shall have failed to pay in a
timely manner to the Auction Agent the full amount of any dividend on, or
the Redemption Price of, the APS, as set forth above under "Determination
of Dividend Rate," prior to the first day of such Special Dividend Period
with respect to the APS and (E) the scheduled Dividend Payment Dates during
such Special Dividend Period; provided, that, if the proposed Special
Dividend Period consists of more than 28 days, such notice will be
accompanied by an APS Basic Maintenance Report showing that, as of the
third Business Day next preceding such proposed Special Dividend Period,
(1) Moody's Eligible Assets (if Moody's is then rating the APS) and (2) S&P
Eligible Assets (if S&P is then rating the APS), the Discounted Value of
which at least equals or is greater than the APS Basic Maintenance Amount
as of such Business Day (assuming for purposes of the foregoing calculation
that the Maximum Rate is the Maximum Rate on such Business Day as if such
Business Day were the Auction Date for the proposed Special Dividend
Period; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate a Special Dividend Period and that the next succeeding
Rate Period shall be a Minimum Dividend Period.
If the Fund fails to deliver either such notice with respect to any
designation of any proposed Special Dividend Period to the Auction Agent by
11:00 A.M., New York City time, on the second Business Day next preceding the
first day of such proposed Special Dividend Period, the Fund shall be deemed to
have delivered a notice to the Auction Agent with respect to such Special
Dividend Period to the effect set forth in clause (ii) above.
S-26
Restrictions on Dividends and Other Payments. Under the 1940 Act, the Fund
may not declare dividends (other than dividends payable in Common Shares) or
other distributions with respect to Common Shares or purchase any such shares
if, at the time of the declaration or purchase, as applicable (and after giving
effect thereto), asset coverage (as defined in and determined pursuant to the
1940 Act) with respect to the outstanding Preferred Shares, including the APS,
would be less than 200% (or such other percentage as may in the future be
required by law).
In addition, for as long as any of the APS are outstanding, except as
otherwise set forth herein, (A) the Fund may not declare, pay or set apart for
payment any dividend or other distribution (other than a dividend or
distribution paid in shares of, or options, warrants or rights to subscribe for
or purchase, Common Shares or other shares of beneficial interest, if any,
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon liquidation) in respect of Common Shares or any other shares of
beneficial interest of the Fund ranking junior to or on a parity with the APS as
to the payment of dividends or the distribution of assets upon liquidation, or
call for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares of beneficial interest (except by
conversion into or exchange for shares of beneficial interest of the Fund
ranking junior to the APS as to the payment of dividends and the distribution of
assets upon liquidation), or any such parity shares of beneficial interest
(except by conversion into or exchange for capital shares of the Fund ranking
junior to or on a parity with the APS as to payment of dividends and the
distribution of assets upon liquidation), unless (1) full cumulative dividends
on the APS through its most recently ended Dividend Period shall have seen paid
or shall have been declared and sufficient funds for the payment thereof
deposited with the Auction Agent and (2) the Fund has redeemed the full number
of APS required to be redeemed by any provision for mandatory redemption
contained in the APS Provisions, and (B) if either Moody's or S&P is rating the
APS, the Fund may not declare, pay or set apart for payment any dividend or
other distribution (other than a dividend or distribution paid in shares of, or
options, warrants or rights to subscribe for or purchase, Common Shares or other
shares, if any, ranking junior to the APS as to the payment of dividends and the
distribution of assets upon liquidation) in respect of Common Shares or any
other shares of the Fund ranking junior to the APS as to the payment of
dividends for the distribution of assets upon liquidation, or call for
redemption, redeem, purchase or otherwise acquire for consideration any shares
of Common Shares or any other such junior shares of beneficial interest (except
by conversion into or exchange for shares of beneficial interest of the Fund
ranking junior to the APS as to the payment of dividends or the distribution of
assets upon liquidation), unless immediately after such transaction the
Discounted Value of the Fund's assets would at least equal the APS Basic
Maintenance Amount.
Under the Internal Revenue Code, the Fund must, among other things,
distribute at least 90% of its net income each year in order to maintain its
qualification for tax treatment as a regulated investment company. The foregoing
limitation on dividends, distributions and purchases may in certain
circumstances impair the Fund's ability to maintain such qualification. The Fund
currently intends, however, to exercise its optional redemption rights to redeem
a portion of the APS when necessary to preserve such qualification.
S-27
ASSET MAINTENANCE
1940 Act APS Asset Coverage. The Fund will be required under the APS
provision to maintain, with respect to the APS, as of the last Business Day of
each month in which any APS are outstanding, asset coverage of at least 200%
with respect to senior securities which are stock, including APS (or such other
asset coverage as may in the future be specified in or under the 1940 Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common stock).
If the Fund fails to maintain such asset coverage in accordance with the
requirements of the rating agency or agencies then rating the APS ("1940 Act APS
Asset Coverage") and such failure is not cured as of the last Business Day of
the following month (the "1940 Act Cure Date"), the Fund will be required in
certain circumstances to redeem certain of the APS. See "Redemption" below.
APS Basic Maintenance Amount. So long as any APS are Outstanding, the Fund
will be required under the APS Provisions to maintain as of every Friday (or if
such day is not a Business Day the next succeeding Business Day) or, during any
period in which the Fund shall have open positions in futures contracts or open
short positions in future contracts, as of every Business Day (a "Valuation
Date") assets having in the aggregate a Discounted Value at least equal to the
APS Basic Maintenance Amount established by the rating agency or agencies then
rating the APS. If the Fund fails to meet such requirement on any Valuation Date
and such failure is not cured on or before the third Business Day after such
Valuation Date (the "APS Basic Maintenance Cure Date"), the Fund will be
required in certain circumstances to redeem certain of the shares of APS. See
"Redemption" below.
The "APS Basic Maintenance Amount" as of any Valuation Date is defined as
the dollar amount equal to:
(A) the sum of:
(i) the product of the number of APS Outstanding on such date
multiplied by $50,000:
(ii) the aggregate amount of dividends that will have accumulated
at the Applicable Rate (whether or not earned or declared) to (but not
including) the first Dividend Payment Date for the APS Outstanding that
follows such Valuation Date:
(iii) the amount equal to the Projected Dividend Amount (based on
the number of APS Outstanding on such date):
(iv) the amount of anticipated Fund expenses for the 90 days
subsequent to such Valuation Date;
(v) the amount of any premium payable pursuant to a Premium Call
Period; and
(vi) any current liabilities as of such Valuation Date to the
extent not reflected in any of (A)(i) through (A)(v) (including, without
limitation, any amounts described below as required to be treated as
liabilities in connection with
S-28
the Fund's transactions in futures and options and including any
payables for portfolio securities purchased as of such Valuation Date);
less
(B) either (i) the face value of any Fund assets irrevocably deposited
by the Fund for the payment of any of (A)(i) through (A)(vi), if such
assets mature prior to or on the date of payment of the liability for which
such assets are deposited and are either securities issued or guaranteed by
the United States Government or have a rating assigned by Moody's of P-1,
VMIG-1 or MIG-1 (or, with respect to S&P, SP-1+ or A-1) or (ii) otherwise,
the Discounted Value of such assets.
For purposes of the APS Basic Maintenance Amount in connection with S&P's
ratings of the APS, with respect to any transactions by the Fund in futures
contracts, the Fund shall include as liabilities 25% of the aggregate settlement
value, as marked to market, of any outstanding futures contracts based on
Treasury Bonds which contracts are owned by the Fund. For purposes of the APS
Basic Maintenance Amount in connection with Moody's rating of the APS, with
respect to any transactions by the Fund in securities operations, the Fund shall
include as liabilities (i) 10% of the exercise price of a call option written by
the Fund and (ii) the exercise price of any written put option.
The Discount Factors and guidelines for determining the market value of the
Fund's portfolio holdings, described above under the heading "Investment
Objective and Policies -- Rating Agency Guidelines," have been based on criteria
established in connection with rating each series of APS. These factors include,
but are not limited to, the sensitivity of the market value of the relevant
asset to changes in interest rates, the liquidity and depth of the market for
the relevant asset, the credit quality of the relevant asset (for example, the
lower the rating of a debt obligation, the higher the related discount factor)
and the frequency with which the relevant asset is marked to market. In no event
shall the Discounted Value of any asset of the Fund exceed its unpaid principal
balance or face amount as of the date of calculation. The Discount Factors
relating to any asset of the Fund and the APS Basic Maintenance Amount, the
assets eligible for inclusion in the calculation of the Discounted Value of the
Fund's portfolio and certain definitions and methods of calculation relating
thereto may be changed from time to time by the Fund without Shareholder
approval, but only in the event the Fund receives written confirmation from the
appropriate rating agency that any such change would not impair the rating then
assigned to the APS by such rating agency. A rating agency's Discount Factors
and guidelines will apply to the APS so long as such rating agency is rating the
APS.
On or before 5:00 P.M., New York City time, on the third Business Day after
a Valuation Date on which the Fund fails to meet the APS Basic Maintenance
Amount, and on the third Business Day after the APS Basic Maintenance Cure Date
with respect to such Valuation Date, the Fund is required to deliver to the
Auction Agent (so long as either Moody's or S&P is rating the APS) a report with
respect to the calculation of the APS Basic Maintenance Amount and the value of
its portfolio holdings as of the date of such failure or such cure date, as the
case may be (a "APS Basic Maintenance Report"). The Fund will also deliver an
APS Basic Maintenance Report to Moody's and S&P (if Moody's and S&P,
respectively, is then rating the APS) on any Valuation Date that (i) the
Discounted Value of Moody's Eligible Assets is greater than the APS Basic
Maintenance Amount by twenty-five percent (five percent if the Valuation Date is
every Business Day) or less or (ii) on any date which the Fund redeems Common
Shares. Within ten Business Days after delivery of such report relating to the
last Business Day of
S-29
each fiscal quarter of the Fund, commencing March 31, 1993, the Fund will
deliver a letter prepared by the Fund's independent accountants regarding the
accuracy of the calculation made by the Fund in its most recent APS Basic
Maintenance Report. If any such letter prepared by the Fund's independent
accountants shows that an error was made in the most recent APS Basic
Maintenance Report, the calculation or determination made by the Fund's
independent accounts will be conclusive and binding on the Fund.
MINIMUM LIQUIDITY LEVEL
Pursuant to S&P guidelines, so long as S&P is rating the APS, the Fund will
be required under the APS Provisions to have, as of each Valuation Date, Deposit
Securities with maturity or tender dates not later than the day preceding the
first respective Dividend Payment Dates (collectively "Dividend Coverage
Assets") for each share of APS Outstanding that follow such Valuation Date and
having a value not less than the Dividend Coverage Amount (the "Minimum
Liquidity Level"). So long as S&P is rating the APS, if, as of each Valuation
Date, the Fund does not have the required Dividend Coverage Assets, the Fund
will, as soon as practicable, adjust its portfolio in order to meet the Minimum
Liquidity Level. The "Dividend Coverage Amount," as of any Valuation Date, means
(A) the aggregate amount of dividends that will accumulate on each share of APS
to (but not including) the first Dividend Payment Date for each share of APS
Outstanding that follows such Valuation Day plus any liabilities that will
become payable prior to or on such payment date; less (B) the combined value of
Deposit Securities irrevocably deposited for the payment of dividends on the
APS. "Deposit Securities" generally means cash and portfolio securities rated at
least A-1+ or SP-1 by S&P and interest with respect to portfolio securities
which is payable to the Fund prior to the Dividend Payment Date. The definitions
of "Deposit Securities," "Dividend Coverage Assets" and "Dividend Coverage
Amount" may be changed from time to time by the Fund without Shareholder
approval, but only in the event the Fund receives written confirmation from S&P
that any such change would not impair the rating then assigned by S&P to the
APS.
REDEMPTION
Optional Redemption. Upon giving a notice of redemption, as provided
below, the Fund at its option may redeem the APS, in whole or in part, on the
Second Business Day next preceding any Dividend Payment Date applicable to those
APS called for redemption, out of funds legally available therefor, at the
Optional Redemption Price; provided that during a Special Dividend Period of 365
days or more none of the APS will be subject to optional redemption during any
Non-Call Period. Also, the APS may not be redeemed in part if after such partial
redemption fewer than 250 shares remain outstanding.
If fewer than all of the outstanding APS are to be redeemed as set forth
above, the number of shares to be redeemed shall be determined by the Board of
Trustees of the Fund, and such shares shall be redeemed pro rata from the
holders of record (initially Cede & Co. as nominee of the Securities Depository)
in proportion to the number of such shares held by such holders. Since the
nominee of the Securities Depository is the only record holder of APS, the
Securities Depository will determine the number of shares to be redeemed from
the account of the Agent Member of each beneficial owner. An Agent Member may
determine to redeem shares from some beneficial owners (which may
S-30
include an Agent Member holding shares for its own account) without redeeming
shares from the accounts of other beneficial owners.
The Fund may not give a notice of redemption relating to an optional
redemption as described above unless, on the date on which the Fund intends to
give such notice, (a) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to holders of APS by reason of the redemption of such
APS on such redemption date and (b) Moody's Eligible Assets (if Moody's is then
rating the APS) and S&P Eligible Assets (if S&P is then rating the APS) the
Discounted Value of each of which equals the APS Basic Maintenance Amount and
would at least equal or exceed the APS Basic Maintenance Amount immediately
subsequent to such redemption, if such redemption were to occur on such date,
and on the date of redemption.
Mandatory Redemption. The Fund will be required to redeem, at the
Mandatory Redemption Price, certain of the APS to the extent permitted under the
1940 Act and Massachusetts law, if the Fund fails to maintain the APS Basic
Maintenance Amount or the 1940 Act APS Asset Coverage in accordance with the
requirements of the rating agency or agencies then rating the APS and such
failure is not cured on or before the APS Basic Maintenance Cure Date or the
1940 Cure Date (herein respectively referred to as a "Cure Date"), as the case
may be. The number of APS to be redeemed will be equal to the lesser of (a) the
minimum number of APS the redemption of which, if deemed to have occurred
immediately prior to the opening of business on the Cure Date, together with all
other Preferred Shares subject to redemption or retirement, would result in the
satisfaction of the APS Basic Maintenance Amount or the 1940 Act APS Asset
Coverage, as the case may be, on such Cure Date (provided that, if there is no
such minimum number of APS and other Preferred Shares the redemption of which
would have such result, all of the APS and Preferred Shares then outstanding
will be redeemed), and (b) the maximum number of APS, together with all other
Preferred Shares subject to redemption or retirement, that can be redeemed out
of funds expected to be legally available therefor. In determining the APS
required to be redeemed in accordance with the foregoing, the Fund will allocate
the number required to be redeemed to satisfy the APS Basic Maintenance Amount
or the 1940 Act APS Asset Coverage, as the case may be, pro rata among the APS
and other Preferred Shares subject to redemption provisions similar to those
contained in this paragraph.
The Fund is required to effect such a mandatory redemption not earlier than
20 days and not later than 40 days after such Cure Date, except that if the Fund
does not have funds legally available for the redemption of all of the required
number of APS and other Preferred Shares which are subject to mandatory
redemption or the Fund otherwise is unable to effect such redemption on or prior
to 40 days after such Cure Date, the Fund will redeem those APS and other
Preferred Shares which it was unable to redeem on the earliest practicable date
on which it is able to effect such redemption. If fewer than all of the
outstanding APS are to be redeemed pursuant to a mandatory redemption, the
number of shares to be redeemed shall be redeemed pro rata from the holders of
such shares in proportion to the number of shares held by such holders, in the
same manner as described above in respect of optional redemptions of fewer than
all outstanding APS.
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Notice of Redemption. The Fund is required to give 30 days' Notice of
Redemption. In the event the Fund obtains appropriate exemptive or no-action
relief from the Securities and Exchange Commission, which is not assured, the
number of days' notice required for a mandatory redemption may be reduced by the
Board of Trustees of the Fund as to as few as two Business Days if Moody's and
S&P each has agreed in writing that the revised notice provision would not
adversely affect its then-current ratings of the APS. The Auction Agent will use
its reasonable efforts to provide telephonic notice to each holder of APS called
for redemption not later than the close of business on the Business Day on which
the Auction Agent determines the shares to be redeemed (as described above) (or,
during the occurrence of a Failure to Deposit with respect to such shares, not
later than the close of business on the Business Day immediately following the
day on which the Auction Agent receives Notice of Redemption from the Funds).
Such telephonic notice will be confirmed promptly in writing not later than the
close of business on the third Business Day preceding the redemption date by
notice sent by the Auction Agent to each holder of record of APS called for
redemption, the Broker-Dealers and the Securities Depository. Every Notice of
Redemption and other redemption notice with respect to APS will state: (1) the
redemption date, (2) the number of APS to be redeemed, (3) the redemption price,
(4) that dividends on the APS to be redeemed will cease to accumulate as of such
redemption date and (5) the provision of the APS Provisions pursuant to which
such shares are being redeemed. No defect in the Notice of Redemption or other
redemption notice or in the transmittal or the mailing thereof will affect the
validity of the redemption proceedings, except as required by applicable law. If
fewer than all shares held by any Holder are to be redeemed, the Notice of
Redemption mailed to such Holder shall also specify the number of shares to be
redeemed from such Holder.
Other Redemption Procedures. To the extent that any redemption for which
notice of redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption will be made as soon as
practicable to the extent such funds become available. Failure to redeem APS
will be deemed to exist at any time after the date specified for redemption in a
notice of redemption when the Fund shall have failed, for any reason whatsoever,
to deposit in trust with the Auction Agent the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, with respect to any shares for
which such notice of redemption has been given. Notwithstanding the fact that
the Fund may not have redeemed the APS for which a notice of redemption has been
given, dividends may be declared and paid on APS and will include those APS for
which notice of redemption has been given.
Upon the deposit of funds sufficient to redeem APS with the Auction Agent
and the giving of notice of redemption, dividends of such APS shares will cease
to accumulate and such shares will no longer be deemed outstanding for any
purpose, and all rights of the holders of the APS so called for redemption will
cease and terminate, except the right of the holders thereof to receive the
Optional Redemption Price or Mandatory Redemption Price, as the case may be, but
without any interest or other additional amount. Upon surrender in accordance
with the notice of redemption of the certificates for any APS so redeemed
(properly endorsed or assigned for transfer, if the Board of Trustees of the
Fund shall so require and the notice of redemption shall so state), the Optional
Redemption Price or Mandatory Redemption Price, as the case may be, shall be
paid by the Auction Agent to the holders of APS subject to redemption. In the
case that fewer than all of the APS represented by any such certificate are
redeemed, a new certificate shall be issued,
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representing the unredeemed shares, without cost to the holder thereof. The Fund
will be entitled to receive from the Auction Agent, promptly after the date
fixed for redemption, any cash deposited with the Auction Agent in excess of (i)
the aggregate Optional Redemption Price or Mandatory Redemption Price, as the
case may be, of the APS called for redemption on such date and (ii) all other
amounts to which holders of APS called for redemption may be entitled. Any funds
so deposited that are unclaimed at the end of 90 days from such redemption date
will, to the extent permitted by law, be repaid to the Fund, after which time
the holders of APS so called for redemption may look only to the Fund for
payment of the Optional Redemption Price or Mandatory Redemption Price, as the
case may be, and all other amounts to which they may be entitled. The Fund will
be entitled to receive, from time to time after the date fixed for redemption,
any interest on the funds so deposited.
Notwithstanding the foregoing, if any dividends on the APS are in arrears,
no APS shall be redeemed unless all outstanding APS are simultaneously redeemed,
and the Fund shall not purchase or otherwise acquire any APS; provided, however,
that the foregoing shall not prevent the purchase or acquisition of all
outstanding APS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, holders
of all outstanding APS.
Except as described above with respect to redemptions and under "The
Auction -- Orders by Existing Holders and Potential Holders," the APS Provisions
do not prohibit the Fund or any affiliate of the fund from purchasing or
otherwise acquiring any APS.
The Fund has the right to arrange for others to purchase from the holders
thereof APS which are to be redeemed as described above.
LIQUIDATION
Upon liquidation of the Fund, whether voluntary or involuntary, the holders
of APS then outstanding will be entitled to receive and to be paid out of the
assets of the Fund available for distribution to its Shareholders, before any
payment or distribution shall be made on the Common Shares of or any other class
of shares of beneficial interest of the Fund ranking junior to the APS upon
liquidation, an amount equal to the liquidation preference with respect to the
APS. The liquidation preference for the APS shall be $25,000 per share, plus an
amount equal to all dividends thereon (whether or not earned or declared)
accumulated but unpaid to the date of final distribution in same-day funds,
together with any applicable Additional Dividends in connection with the
liquidation of the Fund. After the payment to the holders of the APS of the full
preferential amounts provided for as described herein, the holders of the APS as
such shall have no right or claim to any of the remaining assets of the Fund. In
the event the assets of the Fund available for distribution to the holders of
the APS upon any liquidation of the Fund, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled, no such distribution shall be made on account of any shares of any
other class or series of Preferred Shares ranking on a parity with the APS with
respect to the distribution of assets upon such liquidation unless proportionate
distributive amounts shall be paid on account of the APS, ratably, in proportion
to the full distributable amounts for which holders of all such parity shares
are respectively entitled upon such liquidation. Subject to the rights of the
holders of shares of any series or class or classes of shares of beneficiary
interest ranking on a parity with the APS with respect to the
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distribution of assets upon liquidation of the Fund, after payment shall have
been made in full to the holders of the APS as described herein, but not prior
thereto, any other series or class or classes of shares of beneficiary interest
ranking junior to the APS with respect to the distribution of assets upon
liquidation shall, subject to the respective terms and provisions (if any)
applying thereto, be entitled to receive any and all assets remaining to be paid
or distributed, and the holders of the APS shall not be entitled to share
therein.
Neither the sale of all or substantially all the property or business of
the Fund, nor the merger or consolidation of the Fund into or with any other
corporation nor the merger or consolidation of any other corporation into or
with the Fund shall be a liquidation, whether voluntary or involuntary, for the
purposes of the foregoing paragraph.
VOTING RIGHTS
Holders of the APS will have equal voting rights with holders of Common
Shares (one vote per share) and will vote together with holders of Common Shares
as a single class.
In connection with the election of the Fund's Trustees, holders of
outstanding shares of Preferred Shares, including any APS, voting as a separate
class, shall be entitled to elect two of the Fund's Trustees, and the remaining
Trustees will be elected by holders of Common Shares. In addition, if at the
close of business on any Dividend Payment Date, accumulated dividends (whether
or not earned or declared) on Preferred Shares, including any outstanding APS,
shall be due and unpaid in an amount equal to two full years' dividends thereon,
and sufficient cash or specified securities shall not have been deposited with
the Auction Agent for the payment of such dividends, then, as the sole remedy of
holders of Preferred Shares, including any outstanding APS, the number of
Trustees constituting the Board of Trustees shall be automatically increased by
the smallest number that, when added to the two Trustees elected exclusively by
the holders of Preferred Shares, including any APS, as described above, would
constitute a majority of the Board of Trustees as so increased by such smallest
number; and at a special meeting of Shareholders which will be called and held
as soon as practicable, and at all subsequent meetings at which trustees are to
be elected, the holders of Preferred Shares, including any APS, voting as a
separate class on a one-vote-per-share basis (to the exclusion of the holders of
all other securities and class of capital shares of the Fund), will be entitled
to elect the smallest number of additional Trustees that, together with the two
Trustees which such holders will be in any event entitled to elect, constitutes
a majority of the total number of Trustees of the Fund as so increased. The
terms of office of all persons who are trustees of the Fund at the time of that
election will continue. If the Fund thereafter shall pay, or declare and set
apart for payment, in full all dividends payable on all outstanding shares of
Preferred Shares, including any APS for all past Dividend Periods, the voting
rights stated in the preceding sentence shall cease, and the terms of office of
all of the additional Trustees elected by the holders of shares of Preferred
Shares, including any APS (but not of the Trustees with respect to whose
election the holders of Common Shares were entitled to vote or the two Trustees
the holders of share of APS have the right to elect in any event), will
terminate automatically.
So long as any of the APS are Outstanding, the Fund will not, without the
affirmative vote of a majority of the outstanding APS, determined with reference
to a "majority of outstanding voting securities" as that term is defined in
Section 2(a)(42) of the 1940 Act
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(voting separately as one class): (a) authorize, create or issue any class or
series of shares of beneficial interest ranking prior to or on a parity with the
APS with respect to the payment of dividends or the distribution of assets upon
liquidation or increase the authorized amount of APS (except that the Board of
Trustees may, without the vote or consent of the Holders of APS, authorize and
create and the Fund may from time to time issue, classes or series of preferred
shares ranking on a parity with the APS with respect to the payment of dividends
and the distribution of assets upon liquidation subject to continuing compliance
by the Fund with 1940 Act APS Asset Coverage and APS Basic Maintenance Amount
requirements provided that the Fund obtains written confirmation from Moody's
(if Moody's is then rating the APS) and S&P (if S&P is then rating the APS) that
the issuance of any such additional class or series would not impair the rating
then assigned by such rating agency to the APS), (b) amend, alter or repeal the
provisions of the APS Provisions, whether by merger, consolidation or otherwise,
so as to affect any preference, right or power of such or the Holders thereof;
provided that (i) none of the actions permitted by the exception to (a) above
will be deemed to affect such preferences, rights or powers and (ii) the
authorization, creation and issuance of classes or series of shares of
beneficial interest ranking junior to the APS with respect to the payment of
dividends and the distribution of assets upon liquidation will be deemed to
affect such preferences, rights or powers only if Moody's or S&P is then rating
the APS and such issuance would, at the time thereof, cause the Fund not to
satisfy the 1940 Act APS Asset Coverage or the APS Basic Maintenance Amount, or
(c) file a voluntary application for relief under federal bankruptcy law for any
similar application under state law for so long as the Fund is solvent and does
not foresee becoming insolvent.
The Board of Trustees may, however, without the vote or consent of the
holders of APS, amend, alter or repeal any or all of the definitions required to
be contained in the APS Provisions by the rating agencies in the event the Fund
receives written confirmation from the appropriate rating agency that any such
amendment, alteration or repeal would not impair the ratings then assigned to
the APS by such rating agency. Unless a higher percentage is provided for under
"Certain Provisions of the Declaration of Trust -- Anti-takeover Provisions of
the Declaration of Trust," the affirmative vote of the holders of a majority of
the outstanding APS, voting as a separate class, will be required to approve any
plan of reorganization (as such term is defined under the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders under
Section 13(a) of the 1940 Act including, among other things, changes in the
Fund's investment objective or changes in the investment restrictions as
fundamental policies. The class vote of holders of APS described above will in
each case be in addition to a separate vote of the requisite percentage of
shares of Common Shares necessary to authorize the action in question.
The foregoing voting provisions will not apply with respect to APS if, at
or prior to the time when a vote is required, such APS shall have been (i)
redeemed or (ii) called for redemption and sufficient funds shall have been
deposited in trust to effect such redemption as provided under "Description of
APS -- Redemption."
S-35
OTHER INFORMATION
CUSTODY OF ASSETS
Except for segregated assets held by a futures commission merchant pursuant
to rules and regulations promulgated under the 1940 Act, all securities owned by
the Fund and all cash, including proceeds from the sale of shares of the Fund
and of securities in the Fund's investment portfolio, are held by State Street
Bank and Trust Company, 225 West Franklin Street, Boston, Massachusetts 02110,
as custodian. The custodian also provides accounting services to the Fund.
PROXY VOTING POLICY AND PROCEDURES AND PROXY VOTING RECORD
The Fund's Proxy Voting Policy and Procedures are included as Appendix E to
this Statement of Additional Information. Information on how the Fund voted
proxies relating to portfolio securities during the most recent twelve-month
period ended June 30 is available without charge, upon request, by calling (800)
341-2929 or by visiting our web site at www.vankampen.com. This information is
also available on the SEC's web site at http://www.sec.gov.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
An independent registered public accounting firm for the Fund performs an
annual audit of the Fund's financial statements. The Fund's Board of Trustees
has engaged Deloitte & Touche LLP, located at 180 North Stetson Avenue, Chicago,
Illinois 60601, to be the Fund's independent registered public accounting firm.
FINANCIAL STATEMENTS
Incorporated herein by reference and included in their respective
entireties are (i) the audited financial statements of the Acquiring Fund for
the fiscal year ended December 31, 2004, as included in Appendix C hereto, (ii)
the audited financial statements of the Target Fund for fiscal year ended
December 31, 2004, as included in Appendix D hereto.
PRO FORMA FINANCIAL STATEMENTS
Set forth in Appendix F hereto are unaudited pro forma financial statements
of the Acquiring Fund giving effect to the Reorganization which include: (i) Pro
Forma Condensed Statements of Assets and Liabilities at December 31, 2004, (ii)
Pro Forma Condensed Statement of Operations for the one year period ended
December 31, 2004 and (iii) Pro Forma Portfolio of Investments at December 31,
2004.
S-36
APPENDIX A
AGREEMENT AND PLAN OF REORGANIZATION
APPENDIX A
FORM OF
AGREEMENT AND PLAN OF REORGANIZATION
In order to consummate the Reorganization and in consideration of the
promises and the covenants and agreements hereinafter set forth, and intending
to be legally bound, Van Kampen XXXXXX, a registered closed-end investment
company, File No. 811-XXXX (the "Target Fund") and Van Kampen XXXXXX (the
"Acquiring Fund"), a registered closed-end investment company, File No.
811-XXXX, each hereby agree as follows:
1. Representations and Warranties of the Acquiring Fund.
The Acquiring Fund represents and warrants to, and agrees with, the
Target Fund that:
(a) The Acquiring Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of its jurisdiction of organization, and has the
power to own all of its assets and to carry out this
Agreement. The Acquiring Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
(b) The Acquiring Fund is duly registered under the Investment
Company Act of 1940, as amended (the "1940 Act") as a
[non-]diversified, closed-end management investment company
and such registration has not been revoked or rescinded and is
in full force and effect. The Acquiring Fund has elected and
qualified for the special tax treatment afforded regulated
investment companies ("RICs") under Section 851 of the
Internal Revenue Code (the "Code") at all times since its
inception and intends to continue to so qualify until
consummation of the reorganization contemplated hereby (the
"Reorganization") and thereafter.
(c) The Target Fund has been furnished with the Acquiring Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by Deloitte & Touche LLP, independent
registered public accounting firm, fairly present the
financial position of the Acquiring Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(d) An unaudited statement of assets, liabilities and capital of
the Acquiring Fund and an unaudited schedule of investments of
the Acquiring Fund, each as of the Valuation Time (as defined
in Section 5(d) of this Agreement), will be furnished to the
Target Fund, at or prior to the Closing Date (as defined in
Section 7(a) herein), for the purpose of determining the
number of Acquiring Fund Common Shares and Acquiring Fund APS
to be issued pursuant to Section 6 of this Agreement; each
will fairly present the financial position of the Acquiring
Fund as of the Valuation Time in conformity with generally
accepted accounting principles applied on a consistent basis.
(e) The Acquiring Fund has full power and authority to enter into
and perform its obligations under this Agreement. The
execution, delivery and performance of this Agreement has been
duly authorized by all necessary action of its Board of
Trustees, and this Agreement constitutes a valid and binding
contract enforceable in accordance with its terms, subject to
the effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar
A-1
laws relating to or affecting creditors' rights generally and
court decisions with respect thereto.
(f) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Acquiring
Fund, threatened against it which assert liability on the part
of the Acquiring Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Acquiring Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(g) The Acquiring Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
and is not a party to any contract or other commitment or
obligation, and is not subject to any order or decree which
would be violated by its execution of or performance under
this Agreement, except insofar as the Funds have mutually
agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(h) There are no material contracts outstanding to which the
Acquiring Fund is a party that have not been disclosed in the
N-14 Registration Statement (as defined in subsection (k)
below) or that will not otherwise be disclosed to the Target
Fund prior to the Valuation Time.
(i) The Acquiring Fund has no known liabilities of a material
amount, contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to in
subsection (c) above, those incurred in the ordinary course of
its business as an investment company, and those incurred in
connection with the Reorganization. As of the Valuation Time,
the Acquiring Fund will advise the Target Fund in writing of
all known liabilities, contingent or otherwise, whether or not
incurred in the ordinary course of business, existing or
accrued as of such time, except to the extent disclosed in the
financial statements referred to in subsection (c) above.
(j) No consent, approval, authorization or order of any court or
government authority is required for the consummation by the
Acquiring Fund of the Reorganization, except such as may be
required under the Securities Act of 1933, as amended (the
"1933 Act"), the Securities Exchange Act of 1934, as amended
(the "1934 Act") and the 1940 Act or state securities laws
(which term as used herein shall include the laws of the
District of Columbia and Puerto Rico).
(k) The registration statement filed by the Acquiring Fund on Form
N-14, which includes the proxy statement of the Target Fund
and the Acquiring Fund with respect to the transactions
contemplated herein (the "Joint Proxy Statement/Prospectus"),
and any supplement or amendment thereto or to the documents
therein (as amended or supplemented, the "N-14 Registration
Statement"), on its effective date, at the time of the
shareholders' meetings referred to in Section 8(a) of this
Agreement and at the Closing Date, insofar as it relates to
the Acquiring Fund, (i) complied or will comply in all
material respects with the provisions of the 1933 Act, the
1934 Act and the 1940 Act and the rules and regulations
thereunder and (ii) did not or will not contain any
A-2
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading; and the Joint
Proxy Statement/Prospectus included therein did not or will
not contain any untrue statement of a material fact or omit to
state any material fact necessary to make the statements
therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the
representations and warranties in this subsection only shall
apply to statements in or omissions from the N-14 Registration
Statement made in reliance upon and in conformity with
information furnished by the Acquiring Fund for use in the
N-14 Registration Statement.
(l) The Acquiring Fund is authorized to issue an unlimited number
of common shares of beneficial interest, par value $.01 per
share (the "Acquiring Fund Common Shares"), and XXXX preferred
shares of beneficial interest, par value $.01 per share. The
Board of Trustees of the Acquiring Fund has designated XXXX
preferred shares as Auction Preferred Shares ("Acquiring Fund
APS"). Each outstanding Acquiring Fund Common Share and each
Acquiring Fund APS of the Acquiring Fund is fully paid and,
except as provided in Section 5.1 of the Acquiring Fund's
Declaration of Trust, nonassessable, and has full voting
rights.
(m) The Acquiring Fund Common Shares and the Acquiring Fund APS to
be issued to the Target Fund pursuant to this Agreement will
have been duly authorized and, when issued and delivered
pursuant to this Agreement, will be legally and validly issued
and will be fully paid and, except as provided in Section 5.1
of the Acquiring Fund's Declaration of Trust, nonassessable
and will have full voting rights, and no shareholder of the
Acquiring Fund will have any preemptive right of subscription
or purchase in respect thereof.
(n) At or prior to the Closing Date, the Acquiring Fund Common
Shares to be transferred to the Target Fund for distribution
to the shareholders of the Target Fund on the Closing Date
will be duly qualified for offering to the public in all
states of the United States in which the sale of shares of the
Funds presently are qualified, and there will be a sufficient
number of such shares registered under the 1933 Act and, as
may be necessary, with each pertinent state securities
commission to permit the transfers contemplated by this
Agreement to be consummated.
(o) At or prior to the Closing Date, the Acquiring Fund APS to be
transferred to the Target Fund on the Closing Date will be
duly qualified for offering to the public in all states of the
United States in which the sale of APS of the Target Fund
presently are qualified, and there are a sufficient number of
Acquiring Fund APS registered under the 1933 Act and with each
pertinent state securities commission to permit the transfers
contemplated by this Agreement to be consummated.
(p) At or prior to the Closing Date, the Acquiring Fund will have
obtained any and all regulatory, trustee and shareholder
approvals necessary to issue the Acquiring Fund Common Shares
and the Acquiring Fund APS to the Target Fund.
(q) The Acquiring Fund has filed, or intends to file, or has
obtained extensions to file, all federal, state and local tax
returns which are required to be filed by it, and has paid or
has obtained extensions to pay, all federal, state and local
taxes shown on said returns to be due and owing and all
assessments received by it, up to and including the taxable
year in which the Closing Date occurs. All tax liabilities of
the Acquiring Fund have been adequately provided for on its
books, and no tax deficiency or liability of the Acquiring
Fund has been asserted and no question with respect thereto
has been raised by the Internal Revenue Service or by any
state or local tax authority for taxes in excess of those
already paid, up to and including the taxable year in which
the Closing Date occurs.
(r) The Acquiring Fund has elected to qualify and has qualified as
a RIC as of and since its inception; has been a RIC under the
Code at all times since the end of its first taxable year when
it so qualified; qualifies and will continue to qualify as a
RIC under the Code; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
2. Representations and Warranties of the Target Fund.
The Target Fund represents and warrants to, and agrees with, the
Acquiring Fund that:
(a) The Target Fund is a trust, with transferable shares, duly
organized, validly existing and in good standing in conformity
with the laws of the jurisdiction of its organization, and has
the power to own all of its assets and to carry out this
Agreement. The Target Fund has all necessary federal, state
and local authorizations to carry on its business as it is now
being conducted and to carry out this Agreement.
A-3
(b) The Target Fund is duly registered under the 1940 Act as a
[non-]diversified, closed-end management investment company,
and such registration has not been revoked or rescinded and is
in full force and effect. The Target Fund has elected and
qualified for the special tax treatment afforded RICs under
Section 851 of the Code at all times since its inception, and
intends to continue to so qualify through its taxable year
ending upon liquidation.
(c) As used in this Agreement, the term "Target Fund Investments"
shall mean (i) the investments of the Target Fund shown on the
schedule of its investments as of the Valuation Time furnished
to the Acquiring Fund; and (ii) all other assets owned by the
Target Fund or liabilities incurred as of the Valuation Time.
(d) The Target Fund has full power and authority to enter into and
perform its obligations under this Agreement. The execution,
delivery and performance of this Agreement has been duly
authorized by all necessary action of its Board of Trustees
and this Agreement constitutes a valid and binding contract
enforceable in accordance with its terms, subject to the
effects of bankruptcy, insolvency, moratorium, fraudulent
conveyance and similar laws relating to or affecting
creditors' rights generally and court decisions with respect
thereto.
(e) The Acquiring Fund has been furnished with the Target Fund's
Annual Report to Shareholders for the fiscal year ended XXXX,
2004, and the audited financial statements appearing therein,
having been audited by Deloitte & Touche LLP, independent
registered public accounting firm, fairly present the
financial position of the Target Fund as of the respective
dates indicated, in conformity with accounting principles
generally accepted in the United States applied on a
consistent basis.
(f) An unaudited statement of assets, liabilities and capital of
the Target Fund and an unaudited schedule of investments of
the Target Fund, each as of the Valuation Time, will be
furnished to the Acquiring Fund at or prior to the Closing
Date for the purpose of determining the number of shares of
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued to the Target Fund pursuant to Section 3 of this
Agreement; each will fairly present the financial position of
the Target Fund as of the Valuation Time in conformity with
generally accepted accounting principles applied on a
consistent basis.
(g) There are no material legal, administrative or other
proceedings pending or, to the knowledge of the Target Fund,
threatened against it which assert liability on the part of
the Target Fund or which materially affect its financial
condition or its ability to consummate the Reorganization. The
Target Fund is not charged with or, to the best of its
knowledge, threatened with any violation or investigation of
any possible violation of any provisions of any federal, state
or local law or regulation or administrative ruling relating
to any aspect of its business.
(h) There are no material contracts outstanding to which the
Target Fund is a party that have not been disclosed in the
N-14 Registration Statement or will not otherwise be disclosed
to the Acquiring Fund prior to the Valuation Time.
(i) The Target Fund is not obligated under any provision of its
Declaration of Trust, as amended, or its by-laws, as amended,
or a party to any contract or other commitment or obligation,
and is not subject to any order or decree which would be
violated by its execution of or performance under this
Agreement, except insofar as the Funds have
A-4
mutually agreed to amend such contract or other commitment or
obligation to cure any potential violation as a condition
precedent to the Reorganization.
(j) The Target Fund has no known liabilities of a material amount,
contingent or otherwise, other than those shown on its
statements of assets, liabilities and capital referred to
above, those incurred in the ordinary course of its business
as an investment company and those incurred in connection with
the Reorganization. As of the Valuation Time, the Target Fund
will advise the Acquiring Fund in writing of all known
liabilities, contingent or otherwise, whether or not incurred
in the ordinary course of business, existing or accrued as of
such time.
(k) The Target Fund has filed, or intends to file, or has obtained
extensions to file, all federal, state and local tax returns
which are required to be filed by it, and has paid or has
obtained extensions to pay, all federal, state and local taxes
shown on said returns to be due and owing and all assessments
received by it, up to and including the taxable year in which
the Closing Date occurs. All tax liabilities of the Target
Fund have been adequately provided for on its books, and no
tax deficiency or liability of the Target Fund has been
asserted and no question with respect thereto has been raised
by the Internal Revenue Service or by any state or local tax
authority for taxes in excess of those already paid, up to and
including the taxable year in which the Closing Date occurs.
(l) At both the Valuation Time and the Closing Date, the Target
Fund will have full right, power and authority to sell,
assign, transfer and deliver the Target Fund Investments. At
the Closing Date, subject only to the obligation to deliver
the Target Fund Investments as contemplated by this Agreement,
the Target Fund will have good and marketable title to all of
the Target Fund Investments, and the Acquiring Fund will
acquire all of the Target Fund Investments free and clear of
any encumbrances, liens or security interests and without any
restrictions upon the transfer thereof (except those imposed
by the federal or state securities laws and those
imperfections of title or encumbrances as do not materially
detract from the value or use of the Target Fund Investments
or materially affect title thereto).
(m) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Target Fund of the Reorganization, except such as may be
required under the 1933 Act, the 1934 Act, the 1940 Act or
state securities laws.
(n) The N-14 Registration Statement, on its effective date, at the
time of the shareholders' meetings called to vote on this
Agreement and on the Closing Date, insofar as it relates to
the Target Fund (i) complied or will comply in all material
respects with the provisions of the 1933 Act, the 1934 Act and
the 1940 Act and the rules and regulations thereunder, and
(ii) did not or will not contain any untrue statement of a
material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein
not misleading; and the Joint Proxy Statement/Prospectus
included therein did not or will not contain any untrue
statement of a material fact or omit to state any material
fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading;
provided, however, that the representations and warranties in
this subsection shall apply only to statements in or omissions
from the N-14 Registration Statement made in reliance upon and
in conformity with information furnished by the Target Fund
for use in the N-14 Registration Statement.
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(o) The Target Fund is authorized to issue an unlimited number of
common shares of beneficial interest, par value $.01 per share
(the "Target Fund Common Shares"), and XXXX preferred shares
of beneficial interest, par value $.01 per share. The Board of
Trustees of the Acquiring Fund has designated XXXX preferred
shares as Target Fund Preferred Shares (the "Target Fund
Preferred Shares"). Each outstanding Target Fund Common Share
and each of the outstanding Target Fund Preferred Shares is
fully paid and, except as provided in Section 5.1 of the
Target Fund's Declaration of Trust, nonassessable, and has
full voting rights.
(p) All of the issued and outstanding Target Fund Common Shares
and Target Fund Preferred Shares were offered for sale and
sold in conformity with all applicable federal and state
securities laws.
(q) The books and records of the Target Fund made available to the
Acquiring Fund and/or its counsel are substantially true and
correct and contain no material misstatements or omissions
with respect to the operations of the Target Fund.
(r) The Target Fund will not sell or otherwise dispose of any of
the Acquiring Fund Common Shares or Acquiring Fund APS to be
received in the Reorganization, except in distribution to the
shareholders of the Target Fund, as provided in Section 3 of
this Agreement.
(s) The Target Fund has elected to qualify and has qualified as a
"RIC" under the Code as of and since its inception; has been a
RIC under the Code at all times since the end of its first
taxable year when it so qualified; qualifies and will continue
to qualify as a RIC under the Code for its taxable year ending
upon its liquidation; and has satisfied the distribution
requirements imposed by the Code for each of its taxable
years.
3. The Reorganization.
(a) Subject to receiving the requisite approvals of the
shareholders of the Target Fund, and to the other terms and
conditions contained herein, (i) the Target Fund agrees to
convey, transfer and deliver to the Acquiring Fund and the
Acquiring Fund agrees to acquire from the Target Fund, on the
Closing Date, all of the Target Fund Investments (including
interest accrued as of the Valuation Time on debt
instruments), and assume substantially all of the liabilities
of the Target Fund, in exchange for that number of Target Fund
Common Shares and Target Fund Preferred Shares provided in
Section 4 of this Agreement. Pursuant to this Agreement, as
soon as practicable after the Closing Date, the Target Fund
will distribute all Acquiring Fund Common Shares and Acquiring
Fund APS received by it to its shareholders in exchange for
their Target Fund Common Shares and Target Fund Preferred
Shares. Such distributions shall be accomplished by the
opening of shareholder accounts on the share ledger records of
the Acquiring Fund in the amounts due the shareholders of the
Target Fund based on their respective holdings in the Target
Fund as of the Valuation Time.
(b) If it is determined that the portfolios of the Target Fund and
the Acquiring Fund, when aggregated, would contain investments
exceeding certain percentage limitations imposed upon the
Acquiring Fund with respect to such investments, the Target
Fund, if requested by the Acquiring Fund, will dispose of a
sufficient amount of such investments as may be necessary to
avoid violating such limitations as of the Closing Date.
Notwithstanding the foregoing, (a) nothing herein will require
the Target Fund to dispose of any portfolios, securities or
other investments, if, in the reasonable judgment of the
Target Fund's trustees or investment adviser, such disposition
would adversely affect the tax-free nature of the
Reorganization for federal income tax purposes or would
otherwise not be in the best interests of the Target Fund, and
(b) nothing will permit the Target Fund to dispose of any
portfolio securities or other investments if, in the
reasonable judgment of the Acquiring Fund's trustees or
investment adviser, such disposition would adversely affect
the tax-free nature of the Reorganization for federal income
tax purposes or would otherwise not be in the best interests
of the Acquiring Fund.
(c) Prior to the Closing Date, the Target Fund shall declare a
dividend or dividends which, together with all such previous
dividends, shall have the effect of distributing to their
respective shareholders all of their respective net investment
company taxable income to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard and in
connection with the Reorganization, the last dividend period
for the Target Fund Preferred Shares prior to the Closing Date
may be shorter than the dividend period for such Target Fund
Preferred Shares determined as set forth in the applicable
Certificate of Vote pertaining to such Target Fund Preferred
Shares.
(d) The Target Fund will pay or cause to be paid to the Acquiring
Fund any interest the Target Fund receives on or after the
Closing Date with respect to any of the Target Fund
Investments transferred to the Acquiring Fund hereunder.
A-6
(e) The Valuation Time shall be 4:00 p.m., Eastern time, on XXXX,
2005, or such earlier or later day and time as may be mutually
agreed upon in writing (the "Valuation Time").
(f) Recourse for liabilities assumed from the Target Fund by the
Acquiring Fund in the Reorganization will be limited to the
net assets acquired by the Acquiring Fund. The known
liabilities of the Target Fund, as of the Valuation Time,
shall be confirmed to the Acquiring Fund pursuant to Section
2(j) of this Agreement.
(g) The Target Fund will be terminated following the Closing Date
by terminating its registration under the 1940 Act and its
organization under Massachusetts law and will withdraw its
authority to do business in any state where it is required to
do so.
(h) The Acquiring Fund will file with the Secretary of State of
The Commonwealth of Massachusetts, as required, any amendment
to its Certificate of Vote establishing the powers, rights and
preferences of the Acquiring Fund APS prior to the closing of
the Reorganization.
4. Issuance and Valuation of Acquiring Fund Common Shares and Acquiring
Fund APS in the Reorganization.
Acquiring Fund Common Shares and Acquiring Fund APS of an aggregate net asset
value or aggregate liquidation preference, as the case may be, equal to the
value of the assets of the Target Fund acquired in the Reorganization determined
as hereinafter provided, reduced by the amount of liabilities of the Target Fund
assumed by the Acquiring Fund in the Reorganization, shall be issued by the
Acquiring Fund to the Target Fund in exchange for such assets of the Target
Fund. The Acquiring Fund will issue to the Target Fund (i) a number of Acquiring
Fund Common Shares, the aggregate net asset value of which will equal the
aggregate net asset value of the Target Fund Common Shares, determined as set
forth below, and (ii) a number of Acquiring Fund APS, the aggregate liquidation
preference and value of which will equal the aggregate liquidation preference
and value of the Target Fund Preferred Shares, determined as set forth below.
The net asset value of each of the Funds and the liquidation preference and
value of each of the Target Fund Preferred Shares and the Acquiring Fund APS
shall be determined as of the Valuation Time in accordance with the regular
procedures of the investment adviser, and no formula will be used to adjust the
net asset value so determined of any Fund to take into account differences in
realized and unrealized gains and losses. Values in all cases shall be
determined as of the Valuation Time. The value of the Target Fund Investments to
be transferred to the Acquiring Fund shall be determined pursuant to the regular
procedures of the investment adviser.
Such valuation and determination shall be made by the Acquiring Fund in
cooperation with the Target Fund and shall be confirmed in writing by the
Acquiring Fund to the Target Fund. The net asset value per share of the
Acquiring Fund Common Shares and the liquidation preference and value per share
of the Acquiring Fund APS shall be determined in accordance with such procedures
and the Acquiring Fund shall certify the computations involved. For purposes of
determining the net asset value of each of a Target Fund Common Share and an
Acquiring Fund Common Share, the value of the securities held by the applicable
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of the outstanding shares of Target Fund Preferred Shares or
Acquiring Fund APS, as the case may be, is divided by the total number of Target
Fund Common Shares or Acquiring Fund Common Shares, as the case may be,
outstanding at such time.
A-7
The Acquiring Fund shall issue to the Target Fund separate certificates or
share deposit receipts for the Acquiring Fund Common Shares and the Acquiring
Fund APS, each registered in the name of the Target Fund. The Target Fund shall
then distribute the Acquiring Fund Common Shares and the Acquiring Fund APS to
the holders of Target Fund Common Shares and Target Fund Preferred Shares by
redelivering the certificates or share deposit receipts evidencing ownership of
(i) the Acquiring Fund Common Shares to EquiServe Trust Company, N.A., as the
transfer agent and registrar for the Acquiring Fund Common Shares, for
distribution to the holders of Target Fund Common Shares on the basis of such
holder's proportionate interest in the aggregate net asset value of the Target
Fund Common Shares and (ii) the Acquiring Fund APS to Deutsche Bank Trust
Company Americas, as the transfer agent and registrar for the Acquiring Fund
APS, for distribution to the holders of Target Fund Preferred Shares on the
basis of such holder's proportionate interest in the aggregate liquidation
preference and value of the Target Fund Preferred Shares. With respect to any
Target Fund shareholder holding certificates evidencing ownership of Target Fund
Common Shares as of the Closing Date, and subject to the Acquiring Fund being
informed thereof in writing by the Target Fund, the Acquiring Fund will not
permit such shareholder to receive new certificates evidencing ownership of the
Acquiring Fund Common Shares or Acquiring Fund APS, exchange Acquiring Fund
Common Shares or Acquiring Fund APS credited to such shareholder's account for
shares of other investment companies managed by the Adviser or any of its
affiliates, or pledge or redeem such Acquiring Fund Common Shares or Acquiring
Fund APS, in any case, until notified by the Target Fund or its agent that such
shareholder has surrendered his or her outstanding certificates evidencing
ownership of Target Fund Common Shares or Target Fund Preferred Shares or, in
the event of lost certificates, posted adequate bond. The Target Fund, at its
own expense, will request its shareholders to surrender their outstanding
certificates evidencing ownership of Target Fund Common Shares or Target Fund
Preferred Shares, as the case may be, or post adequate bond therefor.
No fractional shares of Acquiring Fund Common Shares will be issued to
holders of Target Fund Common Shares unless such shares are held in a Dividend
Reinvestment Plan account. In lieu thereof, the Acquiring Fund's transfer agent,
EquiServe Trust Company, N.A., will aggregate all fractional Acquiring Fund
Common Shares to be issued in connection with the Reorganization (other than
those issued to a Dividend Reinvestment Plan account) and sell the resulting
full shares on the New York Stock Exchange at the current market price for
Acquiring Fund Common Shares for the account of all holders of such fractional
interests, and each such holder will receive such holder's pro rata share of the
proceeds of such sale upon surrender of such holder's certificates representing
Acquiring Fund Common Shares.
5. Payment of Expenses.
(a) With respect to expenses incurred in connection with the
Reorganization, the Target Fund and the Acquiring Fund will
share, in proportion to their respective projected declines in
total operating expenses, all expenses incurred in connection
with the Reorganization, including, but not limited to, all
costs related to the preparation and distribution of materials
distributed to each Fund's Board of Trustees; expenses
incurred in connection with the preparation of the Agreement
and Plan of Reorganization and a registration statement on
Form N-14; SEC and state securities commission filing fees and
legal and audit fees in connection with the Reorganization;
costs of printing and distributing the Joint Proxy Statement/
Prospectus; legal fees incurred preparing each Fund's board
materials, attending each Fund's board meetings and preparing
the minutes; auditing fees associated with each Fund's
financial statements; stock exchange fees, rating agency fees,
portfolio transfer taxes (if any) and any similar expenses
incurred in connection with the Reorganization.
(b) If for any reason the Reorganization is not consummated, no
party shall be liable to any other party for any damages
resulting therefrom, including, without limitation,
consequential damages, and the investment adviser shall pay
all expenses incurred by each Fund in connection with the
Reorganization.
A-8
6. Covenants of the Funds.
(a) Each Fund covenants to operate its business as presently
conducted between the date hereof and the Closing Date.
(b) The Target Fund agrees that following the consummation of the
Reorganization, it will terminate in accordance with the laws
of The Commonwealth of Massachusetts and any other applicable
law, it will not make any distributions of any Acquiring Fund
Common Shares or Acquiring Fund APS other than to its
respective shareholders and without first paying or adequately
providing for the payment of all of its respective liabilities
not assumed by the Acquiring Fund, if any, and on and after
the Closing Date it shall not conduct any business except in
connection with its termination.
(c) The Target Fund undertakes that if the Reorganization is
consummated, it will file an application pursuant to Section
8(f) of the 1940 Act for an order declaring that the Target
Fund has ceased to be a registered investment company.
(d) The Acquiring Fund will file the N-14 Registration Statement
with the Securities and Exchange Commission (the "Commission")
and will use its best efforts to provide that the N-14
Registration Statement becomes effective as promptly as
practicable. Each Fund agrees to cooperate fully with the
other, and each will furnish to the other the information
relating to itself to be set forth in the N-14 Registration
Statement as required by the 1933 Act, the 1934 Act the 1940
Act, and the rules and regulations thereunder and the state
securities laws.
(e) The Acquiring Fund has no plan or intention to sell or
otherwise dispose of the Target Fund Investments, except for
dispositions made in the ordinary course of business.
(f) Each of the Funds agrees that by the Closing Date all of its
federal and other tax returns and reports required to be filed
on or before such date shall have been filed and all taxes
shown as due on said returns either have been paid or adequate
liability reserves have been provided for the payment of such
taxes.
The intention of the parties is that the transaction
contemplated by this Agreement will qualify as a
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code. Neither the Acquiring Fund nor the
Target Fund shall take any action or cause any action to be
taken (including, without limitation, the filing of any tax
return) that is inconsistent with such treatment or results in
the failure of the transaction to qualify as a reorganization
within the meaning of Section 368(a) of the Internal Revenue
Code. At or prior to the Closing Date, the Acquiring Fund and
the Target Fund will take such action, or cause such action to
be taken, as is reasonably necessary to enable Skadden, Arps,
Slate, Meagher & Flom LLP ("Skadden"), special counsel to the
Funds, to render the tax opinion required herein (including,
without limitation, each party's execution of representations
reasonably requested by and addressed to Skadden.
In connection with this covenant, the Funds agree to
cooperate with each other in filing any tax return, amended
return or claim for refund, determining a liability for taxes
or a right to a refund of taxes or participating in or
conducting any audit or other proceeding in respect of taxes.
The Acquiring Fund agrees to retain for a period of ten (10)
years following the Closing Date all returns, schedules and
work papers and all material records or other documents
relating to tax matters of the Target Fund for each of such
Fund's taxable period first ending after the Closing Date and
for all prior taxable periods.
After the Closing Date, the Target Fund shall
prepare, or cause its agents to prepare, any federal, state or
local tax returns required to be filed by such fund with
respect to its final taxable year ending with its complete
liquidation and for any prior periods or taxable years and
further shall cause such tax returns to be duly filed with the
appropriate taxing authorities. Notwithstanding the
aforementioned provisions of this subsection, any expenses
incurred by the Target Fund (other than for payment of taxes)
in connection with the preparation and filing of said tax
returns after the Closing Date shall be borne by such Fund to
the extent such expenses have been accrued by such Fund in the
ordinary course without regard to the Reorganization; any
excess expenses shall be borne by the investment adviser or an
affiliate thereof.
A-9
(g) The Target Fund agrees to mail to its shareholders of record
entitled to vote at the special meeting of shareholders at
which action is to be considered regarding this Agreement, in
sufficient time to comply with requirements as to notice
thereof, a combined proxy statement and prospectus which
complies in all material respects with the applicable
provisions of Section 14(a) of the 1934 Act and Section 20(a)
of the 1940 Act, and the rules and regulations, respectively,
thereunder.
(h) Following the consummation of the Reorganization, the
Acquiring Fund will continue its business as a diversified,
closed-end management investment company registered under the
1940 Act.
7. Closing Date.
(a) Delivery of the assets of the Target Fund to be transferred,
together with any other Target Fund Investments, and the
Acquiring Fund Common Shares and Acquiring Fund APS to be
issued as provided in this Agreement, shall be made at such
place and time as the Funds shall mutually agree on the next
full business day following the Valuation Time, or at such
other time and date agreed to by the Funds, the date and time
upon which such delivery is to take place being referred to
herein as the "Closing Date." To the extent that any Target
Fund Investments, for any reason, are not transferable on the
Closing Date, the Target Fund shall cause such Target Fund
Investments to be transferred to the Acquiring Fund's account
with its custodian at the earliest practicable date
thereafter.
(b) The Target Fund will deliver to the Acquiring Fund on the
Closing Date confirmation or other adequate evidence as to the
tax basis of the Target Fund Investments delivered to the
Acquiring Fund hereunder.
(c) As soon as practicable after the close of business on the
Closing Date, the Target Fund shall deliver to the Acquiring
Fund a list of the names and addresses of all of the
shareholders of record of the Target Fund on the Closing Date
and the number of Target Fund Common Shares and Target Fund
Preferred Shares owned by each such shareholder, certified to
the best of its knowledge and belief by the transfer agent for
the Target Fund or by its President.
8. Conditions of the Target Fund.
The obligations of the Target Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Target Fund and by the affirmative vote of the
holders of a majority of each of the outstanding Target Fund
Common Shares and Target Fund Preferred Shares, each voting
separately as a class; and that the Acquiring Fund shall have
delivered to the Target Fund a copy of the resolution
approving this Agreement adopted by the Board of Trustees of
the Acquiring Fund, and a certificate setting forth the vote
of holders of Acquiring Fund Common Shares approving the
issuance of additional Acquiring Fund Common Shares, each
certified by its Secretary.
(b) That the Target Fund shall have received from the Acquiring
Fund a statement of assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of such Fund's investments, all as of
the Valuation Time, certified on the Target Fund's behalf by
its President (or any Vice President) or its Treasurer, and a
certificate signed by the Fund's President (or any Vice
President) and its Treasurer, dated as of the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date there has been no material adverse change in the
financial position of the Target Fund since the date of such
Fund's most recent Annual or Semi-Annual Report,
A-10
as applicable, other than changes in its portfolio securities
since that date or changes in the market value of its
portfolio securities.
(c) That the Acquiring Fund shall have furnished to the Target
Fund a certificate signed by the Acquiring Fund's President
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that, as of the Valuation Time and as
of the Closing Date, all representations and warranties of the
Acquiring Fund made in this Agreement are true and correct in
all material respects with the same effect as if made at and
as of such dates, and that the Acquiring Fund has complied
with all of the agreements and satisfied all of the conditions
on its part to be performed or satisfied at or prior to each
of such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) The Target Fund shall have received the opinion(s) of Skadden,
counsel for the Acquiring Fund, dated as of the Closing Date,
addressed to the Target Fund substantially in the form and to
the effect that:
(i) the Acquiring Fund is duly formed and validly
existing under the laws of its state of organization;
(ii) the Acquiring Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized and approved by all requisite action
of the Acquiring Fund, and this Agreement has been
duly executed and delivered by the Acquiring Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Acquiring Fund;
(iv) neither the execution or delivery by the Acquiring
Fund of this Agreement nor the consummation by the
Acquiring Fund of the transactions contemplated
hereby violate any provision of any statute or any
published regulation or any judgment or order
disclosed to counsel by the Acquiring Fund as being
applicable to the Acquiring Fund;
(v) the Acquiring Fund Common Shares and Acquiring Fund
APS have each been duly authorized and, upon issuance
thereof in accordance with this Agreement, each will
be validly issued, fully paid and, except as provided
in Section 5.1 of the Acquiring Fund's Declaration of
Trust, nonassessable; and
(vi) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Acquiring Fund of this Agreement and the consummation
of the transactions herein contemplated do not
require, under the laws of its state of organization
or any state in which the Acquiring Fund is qualified
to do business or the federal laws of the United
States, the consent, approval, authorization,
registration, qualification or order of, or filing
with, any court or governmental agency or body
(except such as have been obtained). Counsel need
express no opinion, however, as to any such consent,
approval, authorization, registration, qualification,
order or filing which may be required as a result of
the involvement of other parties to this Agreement in
the transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
A-11
(f) The Target Fund shall have obtained an opinion from Skadden,
Arps, dated as of the Closing Date, addressed to the Target
Fund, that the consummation of the transactions set forth in
this Agreement comply with the requirements of a
reorganization as described in Section 368(a) of the Internal
Revenue Code.
(g) That all proceedings taken by each of the Funds and its
counsel in connection with the Reorganization and all
documents incidental thereto shall be satisfactory in form and
substance to the others.
(h) That the N-14 Registration Statement shall have become
effective under the 1933 Act, and no stop order suspending
such effectiveness shall have been instituted or, to the
knowledge of the Acquiring Fund, be contemplated by the SEC.
9. Acquiring Fund Conditions.
The obligations of the Acquiring Fund hereunder shall be subject to the
following conditions:
(a) That this Agreement shall have been adopted, and the
Reorganization shall have been approved, by the Board of
Trustees of the Acquiring Fund and that the issuance of
additional Acquiring Fund Common Shares shall have been
approved by the affirmative vote of a majority of votes cast,
where total votes cast represented over 50% of all securities
entitled to vote; and the Target Fund shall have delivered to
the Acquiring Fund a copy of the resolution approving this
Agreement adopted by the Target Fund's Board of Trustees, and
a certificate setting forth the vote of the holders of Target
Fund Common Shares and Target Fund Preferred Shares obtained,
each certified by its Secretary.
(b) That the Target Fund shall have furnished to the Acquiring
Fund a statement of its assets, liabilities and capital, with
values determined as provided in Section 4 of this Agreement,
together with a schedule of investments with their respective
dates of acquisition and tax costs, all as of the Valuation
Time, certified on such Fund's behalf by its President (or any
Vice President) or its Treasurer, and a certificate signed by
such Fund's President
A-12
(or any Vice President) or its Treasurer, dated as of the
Closing Date, certifying that as of the Valuation Time and as
of the Closing Date there has been no material adverse change
in the financial position of the Target Fund since the date of
such Fund's most recent Annual Report or Semi-Annual Report,
as applicable, other than changes in the Target Fund
Investments since that date or changes in the market value of
the Target Fund Investments.
(c) That the Target Fund shall have furnished to the Acquiring
Fund a certificate signed by such Fund's President (or any
Vice President) or its Treasurer, dated the Closing Date,
certifying that as of the Valuation Time and as of the Closing
Date all representations and warranties of the Target Fund
made in this Agreement are true and correct in all material
respects with the same effect as if made at and as of such
dates and the Target Fund has complied with all of the
agreements and satisfied all of the conditions on its part to
be performed or satisfied at or prior to such dates.
(d) That there shall not be any material litigation pending with
respect to the matters contemplated by this Agreement.
(e) That the Acquiring Fund shall have received the opinion of
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, substantially in the
form and to the effect that:
(i) the Target Fund is duly formed and validly existing
under the laws of its state of organization;
(ii) the Target Fund is registered as a closed-end,
management investment company under the 1940 Act;
(iii) this Agreement and the Reorganization provided for
herein and the execution of this Agreement have been
duly authorized by all requisite action of the
Target Fund, and this Agreement has been duly
executed and delivered by the Target Fund and
(assuming this Agreement is a valid and binding
obligation of the other party hereto) is a valid and
binding obligation of the Target Fund;
(iv) neither the execution or delivery by the Target Fund
of this Agreement nor the consummation by the Target
Fund of the transactions contemplated hereby violate
any provision of any statute, or any published
regulation or any judgment or order disclosed to
them by the Target Fund as being applicable to the
Target Fund; and
(v) to their knowledge and subject to the qualifications
set forth below, the execution and delivery by the
Target Fund of the Agreement and the consummation of
the transactions herein contemplated do not require,
under the laws of its state of organization or any
state in which the Target Fund is qualified to do
business, or the federal laws of the United States,
the consent, approval, authorization, registration,
qualification or order of, or filing with, any court
or governmental agency or body (except such as have
been obtained under the 1933 Act, 1934 Act, the 1940
Act or the rules and regulations thereunder).
Counsel need express no opinion, however, as to any
such consent, approval, authorization, registration,
qualification, order or filing
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which may be required as a result of the involvement
of other parties to this Agreement in the
transactions herein contemplated because of their
legal or regulatory status or because of any other
facts specifically pertaining to them;
(f) That the Acquiring Fund shall have obtained an opinion from
Skadden, counsel for the Target Fund, dated as of the Closing
Date, addressed to the Acquiring Fund, that the consummation
of the transactions set forth in this Agreement comply with
the requirements of a reorganization as described in Section
368(a) of the Code.
(g) That the N-14 Registration Statement shall have become
effective under the 1933 Act and no stop order suspending such
effectiveness shall have been instituted or, to the knowledge
of the Target Fund, be contemplated by the SEC.
(h) That all proceedings taken by the Target Fund and its counsel
in connection with the Reorganization and all documents
incidental thereto shall be satisfactory in form and substance
to the Acquiring Fund.
(i) That prior to the Closing Date the Target Fund shall have
declared a dividend or dividends which, together with all such
previous dividends, shall have the effect of distributing to
its shareholders all of its net investment company taxable
income for the period to and including the Closing Date, if
any (computed without regard to any deduction for dividends
paid), and all of its net capital gain, if any, realized to
and including the Closing Date. In this regard, the last
dividend period for the Target Fund Preferred Shares may be
shorter than the dividend period for such APS determined as
set forth in the applicable Certificate of Vote.
10. Termination, Postponement and Waivers.
(a) Notwithstanding anything contained in this Agreement to the
contrary, this Agreement may be terminated and the
Reorganization abandoned at any time (whether before or after
adoption thereof by the shareholders of the Funds) prior to
the Closing Date, or the Closing Date may be postponed, (i) by
mutual consent of the Boards of Trustees of the
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Funds, (ii) by the Board of Trustees of the Target Fund if any
condition of the Target Fund's obligations set forth in
Section 8 of this Agreement has not been fulfilled or waived
by such Board; or (iii) by the Board of Trustees of the
Acquiring Fund if any condition of the Acquiring Fund's
obligations set forth in Section 9 of this Agreement have not
been fulfilled or waived by such Board.
(b) If the transactions contemplated by this Agreement have not
been consummated by December 31, 2005, this Agreement
automatically shall terminate on that date, unless a later
date is mutually agreed to by the Boards of Trustees of the
Funds.
(c) In the event of termination of this Agreement pursuant to the
provisions hereof, the same shall become void and have no
further effect, and there shall not be any liability on the
part of any Fund or persons who are their directors, trustees,
officers, agents or shareholders in respect of this Agreement.
(d) At any time prior to the Closing Date, any of the terms or
conditions of this Agreement may be waived by the Board of
Trustees of any Fund (whichever is entitled to the benefit
thereof), if, in the judgment of such Board after consultation
with its counsel, such action or waiver will not have a
material adverse effect on the benefits intended under this
Agreement to the shareholders of their respective fund, on
behalf of which such action is taken.
(e) The respective representations and warranties contained in
Sections 1 and 2 of this Agreement shall expire with, and be
terminated by, the consummation of the Reorganization, and
neither Fund nor any of its officers, trustees, agents or
shareholders shall have any liability with respect to such
representations or warranties after the Closing Date. This
provision shall not protect any officer, trustee, agent or
shareholder of either Fund against any liability to the entity
for which that officer, trustee, agent or shareholder so acts
or to its shareholders, to which that officer, trustee, agent
or shareholder otherwise would be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties in the conduct of such office.
(f) If any order or orders of the Commission with respect to this
Agreement shall be issued prior to the Closing Date and shall
impose any terms or conditions which are determined by action
of the Boards of Trustees of the Funds to be acceptable, such
terms and conditions shall be binding as if a part of this
Agreement without further vote or approval of the shareholders
of the Funds unless such terms and conditions shall result in
a change in the method of computing the number of Acquiring
Fund Common Shares or Acquiring Fund APS to be issued to the
Acquired Funds, as applicable, in which event, unless such
terms and conditions shall have been included in the proxy
solicitation materials furnished to the shareholders of the
Funds prior to the meetings at which the Reorganization shall
have been approved, this Agreement shall not be consummated
and shall terminate unless the Funds promptly shall call a
special meeting of shareholders at which such conditions so
imposed shall be submitted for approval.
11. Indemnification.
(a) Each party (an "Indemnitor") shall indemnify and hold the
other and its officers, trustees, agents and persons
controlled by or controlling any of them (each an "Indemnified
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Party") harmless from and against any and all losses, damages,
liabilities, claims, demands, judgments, settlements,
deficiencies, taxes, assessments, charges, costs and expenses
of any nature whatsoever (including reasonable attorneys'
fees) including amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and counsel fees
reasonably incurred by such Indemnified Party in connection
with the defense or disposition of any claim, action, suit or
other proceeding, whether civil or criminal, before any court
or administrative or investigative body in which such
Indemnified Party may be or may have been involved as a party
or otherwise or with which such Indemnified Party may be or
may have been threatened (collectively, the "Losses") arising
out of or related to any claim of a breach of any
representation, warranty or covenant made herein by the
Indemnitor, provided, however, that no Indemnified Party shall
be indemnified hereunder against any Losses arising directly
from such Indemnified Party's (i) willful misfeasance, (ii)
bad faith, (iii) gross negligence or (iv) reckless disregard
of the duties involved in the conduct of such Indemnified
Party's position.
(b) The Indemnified Party shall use its best efforts to minimize
any liabilities, damages, deficiencies, claims, judgments,
assessments, costs and expenses in respect of which indemnity
may be sought hereunder. The Indemnified Party shall give
written notice to Indemnitor within the earlier of ten (10)
days of receipt of written notice to Indemnified Party or
thirty (30) days from discovery by Indemnified Party of any
matters which may give rise to a claim for indemnification or
reimbursement under this Agreement. The failure to give such
notice shall not affect the right of Indemnified Party to
indemnity hereunder unless such failure has materially and
adversely affected the rights of the Indemnitor; provided that
in any event such notice shall have been given prior to the
expiration of the Survival Period. At any time after ten (10)
days from the giving of such notice, Indemnified Party may, at
its option, resist, settle or otherwise compromise, or pay
such claim unless it shall have received notice from
Indemnitor that Indemnitor intends, at Indemnitor's sole cost
and expense, to assume the defense of any such matter, in
which case Indemnified Party shall have the right, at no cost
or expense to Indemnitor, to participate in such defense. If
Indemnitor does not assume the defense of such matter, and in
any event until Indemnitor states in writing that it will
assume the defense, Indemnitor shall pay all costs of
Indemnified Party arising out of the defense until the defense
is assumed; provided, however, that Indemnified Party shall
consult with Indemnitor and obtain indemnitor's prior written
consent to any payment or settlement of any such claim.
Indemnitor shall keep Indemnified Party fully apprised at all
times as to the status of the defense. If Indemnitor does not
assume the defense, Indemnified Party shall keep Indemnitor
apprised at all times as to the status of the defense.
Following indemnification as provided for hereunder,
Indemnitor shall be subrogated to all rights of Indemnified
Party with respect to all third parties, firms or corporations
relating to the matter for which indemnification has been
made.
12. Other Matters.
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(a) All covenants, agreements, representations and warranties made
under this Agreement and any certificates delivered pursuant
to this Agreement shall be deemed to have been material and
relied upon by each of the parties, notwithstanding any
investigation made by them or on their behalf.
(b) All notices hereunder shall be sufficiently given for all
purposes hereunder if in writing and delivered personally or
sent by registered mail or certified mail, postage prepaid.
Notice to the Target Fund shall be addressed to the Target
Fund c/o Van Kampen Asset Management, 1221 Avenue of the
Americas, New York, New York 10020, Attention: General
Counsel, or at such other address as the Target Fund may
designate by written notice to the Acquiring Fund. Notice to
the Acquiring Fund shall be addressed to the Acquiring Fund
c/o Van Kampen Asset Management, 1221 Avenue of the Americas,
New York, New York 10020, Attention: General Counsel, or at
such other address and to the attention of such other person
as the Acquiring Fund may designate by written notice to the
Target Fund. Any notice shall be deemed to have been served or
given as of the date such notice is delivered personally or
mailed.
(c) This Agreement supersedes all previous correspondence and oral
communications between the parties regarding the
Reorganization, constitutes the only understanding with
respect to the Reorganization, may not be changed except by a
letter of agreement signed by each party and shall be governed
by and construed in accordance with the laws of the State of
Illinois applicable to agreements made and to be performed in
said state.
(d) It is expressly agreed that the obligations of the Funds
hereunder shall not be binding upon any of their respective
trustees, shareholders, nominees, officers, agents, or
employees personally, but shall bind only the trust property
of the respective Fund as provided in such Fund's Declaration
of Trust. The execution and delivery of this Agreement has
been authorized by the trustees of each Fund and signed by
authorized officers of each Fund, acting as such, and neither
such authorization by such trustees, nor such execution and
delivery by such officers shall be deemed to have been made by
any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property of
each Fund as provided in such Funds' Declaration of Trust.
This Agreement may be executed in any number of counterparts, each of
which, when executed and delivered, shall be deemed to be an original but all
such counterparts together shall constitute but one instrument.
IN WITNESS WHEREOF, the parties have hereunto caused this Agreement to
be executed and delivered by their duly authorized officers as of the day and
year first written above.
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VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
VAN KAMPEN XXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXX
-----------------------------------------
[Name]
[Title]
Attest: [Name]
[Title]
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APPENDIX B
__Federal Identification
No. 36-6900462
THE COMMONWEALTH OF MASSACHUSETTS
Office of the Massachusetts Secretary of State
Michael J. Connolly, Secretary
One Ashburton Place, Boston, Mass. 02108
CERTIFICATE OF VOTE OF TRUSTEES ESTABLISHING
PREFERRED SHARES
I, Weston B. Wetherell, Assistant Secretary, of Van Kampen
Merritt Limited Term High Income Trust (the "Fund") located at One Parkview
Plaza, Oakbrook Terrace, IL 60181, do hereby certify that at a meeting of the
trustees of the Fund held on October 6, 1992, the following vote establishing
and designating
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preferred shares of beneficial interest and determining the relative rights and
preferences thereof was duly adopted:
First: Pursuant to authority expressly vested in the Board of Trustees
of the Fund by Article VI of its Declaration of Trust (which, as amended or
restated from time to time is, together with this Certificate of Vote, herein
called the "Declaration of Trust"), the Board of Trustees hereby authorizes the
issuance of 900 shares of its authorized preferred shares of beneficial
interest, par value $.01 per share ("Preferred Shares"), liquidation preference
of $50,000 per share, designated Auction Preferred Shares ("APS").
Second: The preferences, voting powers, qualifications, and special or
relative rights or privileges of the preferred shares of beneficial interest are
as follows:
DESIGNATION
APS: Preferred shares of beneficial interest are hereby designated
"Auction Preferred Shares" (hereinafter, "APS"). Each share of APS shall be
issued on November 18, 1992; have an Applicable Rate for its Initial Dividend
Period (which period shall continue to and including Wednesday, December 16,
1992) equal to 3.40% per annum; have an initial Dividend Payment Date of
Thursday, December 17, 1992; and have such other preferences, limitations and
relative voting rights, in addition to those required by applicable law or set
forth in the Declaration of Trust applicable to preferred shares of beneficial
interest of the Fund, as are set forth in Part I and Part II of this Certificate
of Vote. The APS shall constitute a separate series of Preferred Shares and each
share of APS shall be identical except as provided in Section 3 of Part I of
this Certificate of Vote.
No holder of APS shall have, solely by reason of being such a holder of
APS any right to acquire, purchase or subscribe for any APS, common shares of
beneficial interest, par value $.01 per share, of the Fund or other securities
of the Fund which it may hereafter issue or sell (whether out of the number of
shares authorized by the Declaration of Trust, or out of any shares acquired by
the Fund after the issuance thereof, or otherwise).
PART I.
1. Number of Shares; Ranking. (a) No fractional APS shall be
issued.
(b) Any APS which at any time have been redeemed or
purchased by the Fund shall, after such redemption or purchase, have the status
of authorized but unissued Preferred Shares, without designation as to series.
(c) The APS shall rank on a parity with shares of any
other series of Preferred Shares (including any other series of APS) as to the
payment of
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dividends and the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund.
2. Dividends. (a) The Holder of any APS shall be entitled to
receive, when, as and if declared by the Board of Trustees, out of funds legally
available therefor, cumulative cash dividends at the Applicable Rate per annum
thereof, determined as set forth in paragraph (c) of this Section 2, and no
more, payable on the respective dates (each a "Dividend Payment Date")
determined as set forth in paragraph (b) of this Section 2. Dividends on any of
the APS shall accumulate at the Applicable Rate per annum from the Date of
Original Issue thereof.
(b) (i) Dividends shall be payable subject to
subparagraph (b)(ii) of this Section 2, on shares of:
(A) APS on Thursday, December 17, 1992
and each fourth Thursday thereafter,
provided that if the Fund, subject to the conditions set forth in Section 4 of
this Part I, designates any Subsequent Dividend Period as a Special Dividend
Period, dividends will be payable: (1) with respect to a Special Dividend Period
of less than 35 days, the day after the last day thereof and (2) with respect to
a Special Dividend Period of 35 days or more, the first Business Day of each
calendar month thereafter provided that, in any calendar month in which an
Auction Date is scheduled to occur, dividends shall be payable on the first
Business Day next succeeding such Auction Date.
After any Special Dividend Period, dividends on such APS shall be
payable, subject to subparagraph (b)(ii) of this Section 2, as provided in
Section 2(b)(i)(A) above, subject in each case to the options of the Fund to
further designate from time to time any Subsequent Dividend Period of any APS as
a Special Dividend Period.
(ii) In the case of dividends that
would otherwise be payable on a Monday, Tuesday, Wednesday, Thursday or
Friday as determined by subparagraph (b) (i) of this Section 2,
including clause (1), (2) or (3) of the proviso thereto, if (i) the
Monday or Tuesday that would otherwise be the Dividend Payment Date is
not a Business Day, then dividends shall be payable on the first
Business Day that falls after such Monday or Tuesday, or (ii) the
Wednesday, Thursday or Friday that would otherwise be the Dividend
Payment Date is not a Business Day, then dividends shall be payable on
the first Business Day that falls prior to such Wednesday, Thursday or
Friday.
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(iii) The Fund shall pay to the Auction
Agent not later than 12:00 noon, New York City time, on the Business
Day next preceding each Dividend Payment Date for such APS, an
aggregate amount of funds available on the next Business Day in The
City of New York, New York, equal to the dividends to be paid to all
Holders of such APS on such Dividend Payment Date.
(iv) All moneys paid to the Auction
Agent for the payment of dividends (or for the payment of any late
charges pursuant to subparagraph (c)(i) of this Section 2) shall be
held in trust for the payment of such dividends (and any such late
charge) by the Auction Agent for the benefit of the Holders specified
in subparagraph (b)(v) of this Section 2. Any moneys paid to the
Auction Agent in accordance with the foregoing but not applied by the
Auction Agent to the payment of dividends (and any late charge) will,
to the extent permitted by law, be repaid to the Fund at the end of 90
days from the date on which such moneys were so to have been applied.
(v) Each dividend on the APS shall be
paid on the Dividend Payment Date therefor to the Holders as their
names appear on the share books of the Fund on the Business Day next
preceding such Dividend Payment Date. Dividends in arrears for any past
Dividend Period may be declared and paid at any time, without reference
to any regular Dividend Payment Date, to the Holders as their names
appear on the share books of the Fund on such date, not exceeding 15
days preceding the payment date thereof, as may be fixed by the Board
of Trustees.
(c) (i) The dividend rate on any APS during the
period from and after the Date of Original Issue thereof to and including the
last day of the Initial Dividend Period therefor shall be equal to the rate per
annum set forth with respect to such APS under "Designation," above. For each
Subsequent Dividend Period of the APS Outstanding thereafter, the dividend rate
on the APS shall be equal to the rate per annum that results from an Auction for
such APS on the Auction Date next preceding such Subsequent Dividend Period;
provided, however, that if an Auction for any Subsequent Dividend Period of any
APS is not held for any reason or if a Failure to Deposit occurs and such
failure has not been cured as set forth below prior to any succeeding Subsequent
Dividend Period thereof, then, subject to the next succeeding provision, the
dividend rate on the APS for any such Subsequent Dividend Period shall be the
Maximum Rate (as defined herein) for such APS on the
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Auction Date for such Subsequent Dividend Period; provided, further, however,
that if any Failure to Deposit shall have occurred with respect to the APS
during any Rate Period thereof, and prior to 12:00 noon, New York City time, on
the third Business Day next succeeding the date on which such Failure to Deposit
occurred, such Failure to Deposit shall not have been cured in accordance with
the next succeeding sentence or the Fund shall not have paid to the Auction
Agent a late charge equal to the sum of (1) if such Failure to Deposit consisted
of the failure timely to pay to the Auction Agent the full amount of dividends
with respect to any Dividend Period on the APS, an amount computed by
multiplying (x) 200% of the "AA" Composite Commercial Paper Rate (or Treasury
Rate, if applicable) for the Rate Period during which such Failure to Deposit
occurs on the Dividend Payment Date for such Dividend Period by (y) a fraction,
the numerator of which shall be the number of days for which such Failure to
Deposit has not been cured in accordance with the next succeeding sentence
(including the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
Outstanding APS and (2) if such Failure to Deposit consisted of the failure
timely to pay to the Auction Agent the Redemption Price of the APS, if any, for
which Notice of Redemption has been given by the Fund pursuant to paragraph (b)
of Section 3 of this Part I, an amount computed by multiplying (x) 200% of the
"AA" Composite Commercial Paper Rate (or Treasury Rate, if applicable) for the
Rate Period during which such Failure to Deposit occurs on the redemption date
by (y) a fraction, the numerator of which shall be the number of days for which
such Failure to Deposit is not cured in accordance with this paragraph
(including the day such Failure to Deposit occurs and excluding the day such
Failure to Deposit is cured) and the denominator of which shall be 365, and
applying the rate obtained against the aggregate liquidation preference of the
Outstanding APS to be redeemed, then Auctions will be suspended until the
Failure to Deposit is so cured, and the dividend rate for the APS for each
Subsequent Dividend Period thereof commencing after such failure to and
including the Subsequent Dividend Period, if any, during which such Failure to
Deposit is so cured shall be a rate per annum equal to the Maximum Rate on the
Auction Date for such Subsequent Dividend Period (but with the prevailing rating
for such shares, for purposes of determining such Maximum Rate, being deemed to
be "Below "baa3"/BBB") (the rate per annum at which dividends are payable on the
APS for any Rate Period for such shares being herein referred to as the
"Applicable Rate" for such shares). A Failure to Deposit with respect to the APS
shall have been cured (if such Failure to Deposit is not solely due to the
willful failure of the Fund to make the required payment to the Auction Agent)
with respect to any Rate Period if, not later than 12:00 noon, New York City
time, on the fourth Business Day preceding the Auction Date for the Rate Period
subsequent to such Rate Period, the Fund shall have paid to the Auction Agent
(A) all
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accumulated and unpaid dividends on the APS and (B) without duplication, the
Redemption Price for the APS, if any, for which Notice of Redemption has been
given by the Fund pursuant to paragraph (b) of Section 3 of this Part I.
(ii) The amount of dividends per share
payable on the APS on any date on which dividends shall be payable on
the APS shall be computed by multiplying the Applicable Rate in effect
for such Dividend Period or Dividend Periods or part thereof for which
dividends have not been paid by a fraction, the numerator of which
shall be the number of days in such Dividend Period or Dividend Periods
or part thereof and the denominator of which shall be 365 if such
Dividend Period is a Rate Period, or is contained in a Rate Period, of
less than one year and 360 for all other Rate Periods, and applying the
rate obtained against $50,000.
(d) Any dividend payment made on the APS shall first
be credited against the earliest accumulated but unpaid dividends due with
respect to such APS.
(e) Except as set forth in the next sentence, no
dividends shall be declared or paid or set apart for payment on the shares of
any class or series of shares ranking, as to the payment of dividends, on a
parity with the APS for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the APS through the most recent
Dividend Payment Date for such APS. When dividends are not paid in full upon the
APS through their most recent respective Dividend Payment Dates or upon the
shares of any other class or series of shares ranking on a parity as to the
payment of dividends with the APS through their most recent respective dividend
payment dates, all dividends declared upon the APS and any other such class or
series of shares ranking on a parity as to the payment of dividends with the APS
shall be declared pro rata so that the amount of dividends declared per share on
the APS and such other class or series of shares shall in all cases bear to each
other the same ratio that accumulated dividends per share on the APS and such
other class or series of shares bear to each other (for purposes of this
sentence, the amount of dividends declared per share shall be based on the
Applicable Rate for such shares for the Dividend Periods during which dividends
were not paid in full). Holders of the APS shall not be entitled to any
dividend, whether payable in cash, property or shares, in excess of full
cumulative dividends, as herein provided, on the APS. No interest, or sum of
money in lieu of interest, shall be payable in respect of any dividend payment
or payments on the APS which may be in arrears, and, except to the extent set
forth in subsection (c)(i) of this
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Section 2, no additional sum of money shall be payable in respect of any such
arrearage.
(f) The Board of Trustees shall not declare any
dividend (except a dividend payable in Common Shares), or declare any other
distribution, upon the Common Shares, or purchase Common Shares, unless in every
such case the APS have, at the time of any such declaration or purchase, an
asset coverage (as defined in and determined pursuant to the 1940 Act) of at
least 200% (or such other asset coverage as may in the future be specified in or
under the 1940 Act as the minimum asset coverage for senior securities which are
stock of a closed-end investment company as a condition of declaring dividends
on its common stock) after deducting the amount of such dividend, distribution
or purchase price, as the case may be.
3. Redemption. (a) (i) Upon giving a Notice of Redemption, as
provided below, the Fund at its option may redeem any APS, in whole or in part,
on the Second Business Day next preceding any Dividend Payment Date applicable
to those shares of APS called for redemption, out of funds legally available
therefor, at the Optional Redemption Price; provided that during a Special
Dividend Period of 365 days or more no share of APS will be subject to optional
redemption during any Non-Call Period; provided, that the APS may not be
redeemed in part if after such partial redemption fewer than 250 shares of such
APS remain outstanding.
(ii) If fewer than all of the
outstanding APS are to be redeemed pursuant to subparagraph (a)(i) of
this Section 3, the number of APS to be redeemed shall be determined by
the Board of Trustees, and such shares shall be redeemed pro rata from
the Holders of such APS in proportion to the number of such shares held
by such Holders.
(iii) No APS shall be redeemed pursuant
to subparagraphs (a)(i) or (a)(ii) of this Section 3 unless, on the
date on which the Fund intends to give notice of such redemption
pursuant to paragraph (b) of this Section 3, (a) the Fund has available
Deposit Securities with maturity or tender dates not later than the day
preceding the applicable redemption date and having a value not less
than the amount (including the applicable premium, if any) due to
Holders of the APS by reason of the redemption of such shares on such
redemption date and (b) Moody's Eligible Assets (if Moody's is then
rating the APS) and S&P Eligible Assets (if S&P is then rating the
APS), the Discounted Value of each of which at least equal the APS
Basic Maintenance Amount, and would at least equal or be greater
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than the APS Basic Maintenance Amount immediately subsequent to such
redemption, if such redemption were to occur on such date, and on the
date of redemption.
(iv) Subject to Section 3(g), the Fund
shall redeem at the Mandatory Redemption Price certain of the APS if
the Fund fails to maintain the APS Basic Maintenance Amount or 1940 Act
APS Asset Coverage in accordance with the requirements of the rating
agency or agencies then rating the APS and such failure is not cured on
or before the APS Basic Maintenance Cure Date or the 1940 Act Cure
Date, as the case may be. The number of APS to be redeemed shall be
equal to the lesser of (i) the minimum number of APS the redemption of
which, if deemed to have occurred immediately prior to the opening of
business on the Cure Date, together with all other Preferred Shares
subject to redemption or retirement, would result in the satisfaction
of the APS Basic Maintenance Amount or the 1940 Act APS Asset Coverage,
as the case may be, on such Cure Date (provided that, if there is no
such minimum number of APS and other Preferred Shares the redemption of
which would have such result, all the APS and Preferred Shares then
outstanding shall be redeemed), and (ii) the maximum number of APS,
together with all other Preferred Shares subject to redemption or
retirement, that can be redeemed out of funds expected to be legally
available therefor. In determining the APS required to be redeemed in
accordance with the foregoing, the Fund shall allocate the number
required to be redeemed to satisfy the APS Basic Maintenance Amount or
the 1940 Act APS Asset Coverage, as the case may be, pro rata among the
APS and other Preferred Shares subject to redemption provisions similar
to those contained in this subparagraph (a)(iv) of this Section 3. The
Fund shall effect such redemption not earlier than 20 days and not
later than 40 days after such Cure Date, except that if the Fund does
not have funds legally available for the redemption of all of the
required number of APS and other Preferred Shares which are subject to
redemption provisions similar to those contained in this subparagraph
(a)(iv) of this Section 3 or the Fund otherwise is unable to effect
such redemption on or prior to 40 days after such Cure Date, the Fund
shall redeem those APS and other Preferred Shares which it was unable
to redeem on the earliest practicable date on which it is able to
effect such redemption. If fewer than all of the outstanding APS are to
be redeemed pursuant to this Section 3(a)(iv), the number of shares of
such APS to be redeemed shall be redeemed pro rata from
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the Holders of such shares in proportion to the number of shares held by
such Holders.
(c) The Fund is required to give 30 days' Notice of
Redemption. In the event the Fund obtains appropriate exemptive or no-action
relief from the Securities and Exchange Commission, the number of days' notice
required for a mandatory redemption may be reduced by the Board of Trustees of
the Fund to as few as two Business Days if Moody's and S&P each has agreed in
writing that the revised notice provision would not adversely affect its
then-current ratings of the APS. The Auction Agent will use its reasonable
efforts to provide telephonic notice to each holder of APS called for redemption
not later than the close of business on the Business Day on which the Auction
Agent determines the shares to be redeemed (as described above) (or, during the
occurrence of a Failure to Deposit with respect to such shares, not later than
the close of business on the Business Day immediately following the day on which
the Auction Agent receives Notice of Redemption from the Fund). Such telephonic
notice will be confirmed promptly in writing not later than the close of
business on the third Business Day preceding the redemption date by notice sent
by the Auction Agent to each holder of record of APS called for redemption, the
Broker-Dealers and the Securities Depository. Every Notice of Redemption and
other redemption notice with respect to APS will state: (1) the redemption date,
(2) the number of APS to be redeemed, (3) the redemption price, (4) that
dividends on the APS to be redeemed will cease to accumulate as of such
redemption date and (5) the provision of the APS Provisions pursuant to which
such shares are being redeemed. No defect in the Notice of Redemption or other
redemption notice or in the transmittal or the mailing thereof will affect the
validity of the redemption proceedings, except as required by applicable law. If
fewer than all the APS held by any Holder are to be redeemed, the Notice of
Redemption mailed to such Holder shall also specify the number of APS to be
redeemed from such Holder.
(d) Notwithstanding the provisions of paragraph (a)
of this Section 3, if any dividends on the APS are in arrears, no APS shall be
redeemed unless all outstanding APS are simultaneously redeemed, and the Fund
shall not purchase or otherwise acquire any APS; provided, however, that the
foregoing shall not prevent the purchase or acquisition of all outstanding
shares of APS pursuant to the successful completion of an otherwise lawful
purchase or exchange offer made on the same terms to, and accepted by, Holders
of all outstanding APS.
(e) Upon the deposit of funds sufficient to redeem
the APS with the Auction Agent and the giving of Notice of Redemption under
Paragraph (b) of this Section 3, dividends on such shares shall cease to
accumulate and such shares
B-9
shall no longer be deemed to be outstanding for any purpose, and all rights of
the Holders of the shares so called for redemption shall cease and terminate,
except the right of such Holders to receive the Optional Redemption Price or
Mandatory Redemption Price, as the case may be, but without any interest or
other additional amount, except as provided in Section 2(c)(i) and in Section
12. Upon surrender in accordance with the Notice of Redemption of the
certificates for any shares so redeemed (properly endorsed or assigned for
transfer, if the Board of Trustees shall so require and the Notice of Redemption
shall so state), the Optional Redemption Price or Mandatory Redemption Price, as
the case may be, shall be paid by the Auction Agent to the Holders of the APS
subject to redemption. In the case that fewer than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued,
representing the unredeemed shares, without cost to the Holder thereof. The Fund
shall be entitled to receive from the Auction Agent, promptly after the date
fixed for redemption, any cash deposited with the Auction Agent in excess of (i)
the aggregate Optional Redemption Price of the APS called for redemption on such
date and (ii) all other amounts to which Holders of the APS called for
redemption may be entitled. Any funds so deposited that are unclaimed at the end
of 90 days from such redemption date shall, to the extent permitted by law, be
repaid to the Fund, after which time the Holders of the APS so called for
redemption may look only to the Fund for payment of the Optional Redemption
Price or Mandatory Redemption Price, as the case may be, and all other amounts
to which they may be entitled. The Fund shall be entitled to receive, from time
to time after the date fixed for redemption, any interest on the funds so
deposited.
(f) To the extent that any redemption for which
Notice of Redemption has been given is not made by reason of the absence of
legally available funds therefor, such redemption shall be made as soon as
practicable to the extent such funds become available. Failure to redeem the APS
shall be deemed to exist at any time after the date specified for redemption in
a Notice of Redemption when the Fund shall have failed, for any reason
whatsoever, to deposit in trust with the Auction Agent the Redemption Price with
respect to any shares for which such Notice of Redemption has been given.
Notwithstanding the fact that the Fund may not have redeemed the APS for which a
Notice of Redemption has been given, dividends may be declared and paid on the
APS and shall include those APS for which a Notice of Redemption has been given.
(g) All moneys paid to the Auction Agent for payment
of the Optional Redemption Price or Mandatory Redemption Price, as the case may
be, of the APS called for redemption shall be held in trust by the Auction Agent
for the benefit of Holders of shares so to be redeemed.
B-10
(h) In effecting any redemption pursuant to this
Section 3, the Fund shall use its best efforts to comply with all applicable
procedural conditions precedent to effecting such redemption under the 1940 Act
and Massachusetts law, but shall effect no redemption except to the extent
permitted by the 1940 Act and Massachusetts law.
(i) In the case of any redemption pursuant to this
Section 3, only whole APS shall be redeemed, and in the event that any provision
of the Declaration of Trust would require redemption of a fractional share, the
Auction Agent shall be authorized to round up so that only whole shares are
redeemed.
4. Designation of Special Dividend Periods. (a) The Fund, at
its option, may designate any succeeding Subsequent Dividend Period of APS as a
Special Dividend Period; provided, however, that such designation shall be
effective only if (A) notice thereof shall have been given in accordance with
paragraph (b) and clause (i) of paragraph (c) of this Section 4, (B) any Failure
to Deposit that shall have occurred with respect to such APS, any Dividend
Period shall have been cured in accordance with the provisions of the third
sentence of paragraph (c)(i) of Section 2 of this Part I, (C) Sufficient
Clearing Bids (as defined in Section 1 of Part II hereof) for such APS shall
have existed in an Auction held on the Auction Date immediately preceding the
first day of such proposed Special Dividend Period, (D) if any Notice of
Redemption shall have been mailed by the Fund pursuant to paragraph (b) of
Section 3 of this Part I with respect to any APS, the Redemption Price with
respect to any APS shall have been deposited with the Auction Agent and (E) in
the event the Fund wishes to designate any succeeding Subsequent Dividend Period
for such APS as a Special Dividend Period consisting of more than 28 Rate Period
Days, the Fund has received written confirmation from S&P (if S&P is then rating
the APS) and Moody's (if Moody's is then rating the APS) that such designation
would not affect the rating then assigned by S&P and Moody's to such APS.
(b) If the Fund proposes to designate any succeeding
Subsequent Dividend Period of the APS as a Special Dividend Period of more than
28 Rate Period Days pursuant to paragraph (a) of this Section 4, not less than
20 nor more than 30 days prior to the date the Fund proposes to designate as the
first day of such Special Dividend Period (which shall be such day that would
otherwise be the first day of a Minimum Dividend Period), notice shall be (i)
published or caused to be published by the Fund in a newspaper of general
circulation to the financial community in The City of New York, New York, which
carries financial news, and (ii) communicated by the Fund by telephonic or other
means to the Auction Agent and confirmed in writing promptly thereafter. Each
such notice shall state (A) that the Fund may exercise its option to designate a
succeeding Subsequent Dividend
B-11
Period of such APS as a Special Dividend Period, specifying the first day
thereof and (B) that the Fund will by 11:00 a.m., New York City time, on the
second Business Day next preceding such date notify the Auction Agent of either
(x) its determination, subject to certain conditions, to exercise such option,
in which case the Fund shall specify the Special Dividend Period designated and
the terms of the Specific Redemption Provisions, if any, or (y) its
determination not to exercise such option.
(c) No later than 11:00 a.m., New York City time, on
the second Business Day next preceding the first day of any proposed Special
Dividend Period the Fund shall deliver to the Auction Agent either:
(i) a notice stating (A) that the Fund
has determined to designate the next succeeding Rate Period of such APS
as a Special Dividend Period, specifying the same and the first day
thereof, (B) the Auction Date immediately prior to the first day of
such Special Dividend Period, (C) the terms of the Specific Redemption
Provisions, if any, for such APS, (D) that such Special Dividend Period
shall not commence if (1) on such Auction Date Sufficient Clearing Bids
for such APS shall not exist (in which case the succeeding Rate Period
shall be a Minimum Dividend Period) or (2) a Failure to Deposit shall
have occurred prior to the first day of such Special Dividend Period
with respect to such APS and (E) the scheduled Dividend Payment Dates
for such APS during such Special Dividend Period; provided that, if
such Special Dividend Period consists of more than 28 Rate Period Days,
such notice will be accompanied by an APS Basic Maintenance Report
showing that, as of the third Business Day next preceding such proposed
Special Dividend Period, (1) Moody's Eligible Assets (if Moody's is
then rating such APS) and (2) S&P Eligible Assets (if S&P is then
rating such APS), the Discounted Value of which at least equals or is
greater than the APS Basic Maintenance Amount as of such Business Day
(assuming for purposes of the foregoing calculation that the Maximum
Rate is the Maximum Rate on such Business Day as if such Business Day
were the Auction Date for the proposed Special Dividend Period); or
(ii) a notice stating that the Fund has
determined not to exercise its option to designate a Special Dividend
Period for such APS and that the next succeeding Rate Period of such
APS shall be a Minimum Dividend Period.
B-12
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Special Dividend Period to the Auction Agent by 11:00 a.m., New
York City time, on the second Business Day next preceding the first day of such
proposed Special Dividend Period, the Fund shall be deemed to have delivered a
notice to the Auction Agent with respect to such Special Dividend Period to the
effect set forth in clause (ii) of the preceding sentence.
5. Voting Rights. (a) Except as otherwise provided in the
Declaration of Trust or as otherwise required by law, (i) each Holder of APS
shall be entitled to one vote for each of the APS held on each matter submitted
to a vote of shareholders of the Fund, and (ii) the holders of outstanding
Preferred Shares, including APS, and of Common Shares shall vote together as a
single class; provided that, at a meeting of the shareholders of the Fund held
for the election of the trustees, the holders of outstanding Preferred Shares,
including APS, represented in person or by proxy at said meeting, shall elect
two trustees of the Fund, each Preferred Share, including each of the APS,
entitling the holder thereof to one vote. Subject to paragraph (b) of this
Section 5, the holders of outstanding Common Shares shall elect the balance of
the trustees.
(b) During any period in which any one or more of the
conditions described below shall exist (such period being referred to herein as
a "Voting Period"), the number of trustees constituting the Board of Trustees
shall be automatically increased by the smallest number that, when added to the
two trustees elected exclusively by the holders of Preferred Shares, including
APS, would constitute a majority of the Board of Trustees as so increased by
such smallest number, and the holders of Preferred Shares, including APS, shall
be entitled, voting as a class on a one-vote-per-share basis (to the exclusion
of the holders of all other securities and class of capital shares of the Fund),
to elect such smallest number of additional trustees, together with the two
trustees that such holders are in any event entitled to elect. A Voting Period
shall commence:
(i) if at the close of business on any
Dividend Payment Date accumulated dividends (whether or not earned or
declared) on any outstanding APS equal to at least two full years'
dividends shall be due and unpaid and sufficient cash or specified
securities shall not have been deposited with the Auction Agent for the
payment of such accumulated dividends; or
(ii) if at any time holders of any other
Preferred Shares are entitled under the 1940 Act to elect a majority of
the trustees of the Fund.
B-13
Upon the termination of a Voting Period, the voting rights described in this
paragraph (b) of Section 5 shall cease, subject always, however, to the
revesting of such voting rights in the Holders upon the further occurrence of
any of the events described in this paragraph (b) of Section 5.
(c) (i) As soon as practicable after the accrual of
any right of the holders of Preferred Shares to elect additional trustees as
described in paragraph (b) of this Section 5, the Fund shall notify the Auction
Agent and the Auction Agent shall call a special meeting of such holders, by
mailing a notice of such special meeting to such holders, such meeting to be
held not less than 10 nor more than 20 days after the date of mailing of such
notice. If the Fund fails to send such notice to the Auction Agent or if the
Auction Agent does not call such a special meeting, it may be called by any such
holder on like notice. The record date for determining the holders entitled to
notice of and to vote at such special meeting shall be the close of business on
the fifth Business Day preceding the day on which such notice is mailed. At any
such special meeting and at each meeting of holders of Preferred Shares held
during a Voting Period at which trustees are to be elected, such holders, voting
together as a class (to the exclusion of the holders of all other securities and
classes of capital shares of the Fund), shall be entitled to elect the number of
trustees prescribed in paragraph (b) of this Section 5 on a one-vote-per-share
basis.
(ii) For purposes of determining any
rights of the Holders to vote on any matter, whether such right is
created by this Certificate of Vote, by the other provisions of the
Declaration of Trust, by statute or otherwise, no Holder shall be
entitled to vote and no APS shall be deemed to be "outstanding" for the
purpose of voting or determining the number of shares required to
constitute a quorum if, prior to or concurrently with the time of
determination of shares entitled to vote or shares deemed outstanding
for quorum purposes, as the case may be, the Redemption Price for the
redemption of such shares has been deposited in trust with the Auction
Agent for that purpose and the requisite Notice of Redemption with
respect to such shares shall have been given as provided in Section 3
of this Part I. None of the APS held by the Fund or any affiliate of
the Fund shall have any voting rights or be deemed to be outstanding
for voting or other purposes.
(iii) The terms of office of all persons
who are Trustees of the Fund at the time of a special meeting of
Holders and holders of other Preferred Shares to elect trustees shall
continue, notwithstanding the election at such meeting by the Holders
and such
B-14
other holders of the number of trustees that they are entitled to
elect, and the persons so elected by the Holders and such other
holders, together with the two incumbent trustees elected by the
Holders and such other holders of Preferred Shares and the remaining
incumbent trustees elected by the holders of the Common Shares, shall
constitute the duly elected trustees of the Fund.
(iv) Simultaneously with the termination
of a Voting Period, the terms of office of the additional trustees
elected by the Holders and holders of other Preferred Shares pursuant
to paragraph (b) of this Section 5 shall terminate, the remaining
trustees shall constitute the trustees of the Fund and the voting
rights of the Holders and such other holders to elect additional
trustees pursuant to paragraph (b) of this Section 5 shall cease,
subject to the provisions of the last sentence of paragraph (b) of this
Section 5.
(d) (i) So long as any of the APS are Outstanding,
the Fund shall not, without the affirmative vote of the Holders of the
outstanding APS determined with reference to a "majority of outstanding voting
securities" as that term is defined in Section 2(a)(42) of the 1940 Act (voting
separately as one class): (a) authorize, create or issue any class or series of
shares of beneficial interest ranking prior to or on a parity with the APS with
respect to the payment of dividends or the distribution of assets upon
dissolution, liquidation or winding up of the affairs of the Fund, or increase
the authorized amount of any APS (except that, notwithstanding the foregoing,
but subject to the provisions of Section 13, the Board of Trustees, without the
vote or consent of the Holders of APS, may from time to time authorize and
create, and the Fund may from time to time issue, classes or series of Preferred
Shares, including APS, ranking on a parity with the APS with respect to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up of the affairs of the Fund, subject to continuing
compliance by the Fund with 1940 Act APS Asset Coverage and APS Basic
Maintenance Amount requirements, provided that the Fund obtains written
confirmation from Moody's (if Moody's is then rating APS) and S&P (if S&P is
then rating APS) that the issuance of such class or series would not impair the
rating then assigned by such rating agency to the APS), (b) amend, alter or
repeal the provisions of the Declaration of Trust, including this Certificate of
Vote, whether by merger, consolidation or otherwise, so as to affect any
preference, right or power of such APS or the Holders thereof; provided that (i)
none of the actions permitted by the exception to (a) above will be deemed to
affect such preferences, rights or powers and (ii) the authorization, creation
and issuance of classes or series of shares ranking junior to the APS with
respect to the payment of dividends and the distribution of assets upon
dissolution,
B-15
liquidation or winding up of the affairs of the Fund, will be deemed to affect
such preferences, rights or powers only if Moody's or S&P is then rating the APS
and such issuance would, at the time thereof, cause the Fund not to satisfy the
1940 Act APS Asset Coverage or the APS Basic Maintenance Amount, or (c) file a
voluntary application for relief under Federal bankruptcy law or any similar
application under state law for so long as the Fund is solvent and does not
foresee becoming insolvent.
(ii) The Board of Trustees, without the
vote or consent of the Holders of APS, may from time to time amend,
alter or repeal any or all of the definitions of the terms listed
below, and any such amendment, alteration or repeal will not be deemed
to affect the preferences, rights or powers of the APS or the Holders
thereof, provided the Board of Trustees receives written confirmation
from Moody's (such confirmation being required to be obtained only in
the event Moody's is rating the APS and in no event being required to
be obtained in the case of the definitions of Deposit Securities,
Discounted Value and Receivables for portfolio Securities Sold as such
terms apply to S&P Eligible Assets, Dividend Coverage Amount, Dividend
Coverage Assets, Minimum Liquidity Level, S&P Discount Factor, S&P
Eligible Assets, S&P Exposure Period and Valuation Date as such term
applies to the definitions of Dividend Coverage Amount, Dividend
Coverage Assets and Minimum Liquidity Level) and S&P (such confirmation
being required to be obtained only in the event S&P is rating the APS
and in no event being required to be obtained in the case of the
definitions of Discounted Value and Receivables for portfolio
Securities Sold as such terms apply to Moody's Eligible Assets, Moody's
Discount Factor, Moody's Eligible Asset and Moody's Exposure Period)
that any such amendment, alteration or repeal would not impair the
ratings then assigned by Moody's or S&P, as the case may be, to the APS
(provided that, with respect to the Maximum Rate, such amendment or
alteration shall not, in any event, cause the Maximum Rate to fall
below the Maximum Rate that would have resulted absent such amendment
or alteration):
APS Basic
Maintenance Amount
APS Basic
Maintenance Cure Date
APS Basic
Maintenance Report
Deposit Securities
B-16
Discounted Value
Dividend Coverage Amount
Dividend Coverage Assets
Market Value
Maximum Rate
Minimum Liquidity Level
Moody's Discount Factor
Moody's Eligible Asset
Moody's Exposure Period
1940 Act Cure Date
1940 Act APS
Asset Coverage
Quarterly Valuation Date
S&P Discount Factor
S&P Eligible Asset
S&P Exposure Period
Valuation Date
(e) Unless otherwise required by law, the Holders of
the APS shall not have any relative rights or preferences or other special
rights other than those specifically set forth herein. The Holders of the APS
shall have no preemptive rights or rights to cumulative voting. In the event
that the Fund fails to pay any dividends on the APS, the exclusive remedy of the
Holders shall be the right to vote for trustees pursuant to the provisions of
this Section 5.
(f) Unless a higher percentage is provided for in the
Declaration of Trust, the affirmative vote of the Holders of a majority of the
outstanding APS, voting as a separate class, shall be required to approve any
plan of reorganization (as such term is used in the 1940 Act) adversely
affecting such shares or any action requiring a vote of security holders of the
Fund under Section 13(a) of the 1940 Act. In the event a vote of Holders of APS
is required pursuant to the provisions of Section 13(a) of the 1940 Act, the
Fund shall, not later than ten Business Days prior to the date on which such
vote is to be taken, notify Moody's (if Moody's is then rating the APS) and S&P
(if S&P is then rating the APS) that such vote is to be taken and the nature of
the action with respect to which such vote is to be taken. In addition, the Fund
shall notify Moody's (if Moody's is then rating the APS) and S&P (if S&P is then
rating the APS) of the results of any vote described in the proceeding sentence.
(g) Right to Vote with Respect to Certain Other
Matters. The affirmative vote of the holders of a majority (unless a higher
percentage vote is
B-17
required under the Declaration of Trust or under this Certificate of Vote) of
the outstanding APS, each voting as a separate class, is required with respect
to any matter that materially affects the APS in a manner different from that of
other series of classes of the Fund's shares, including without limitation any
proposal to do the following: (1) increase or decrease the aggregate number of
authorized APS; (2) effect an exchange, reclassification, or cancellation of all
or part of the APS; (3) effect an exchange, or create a right of exchange, of
all or any part of the APS; (4) change the rights or preferences of the APS; (5)
change the APS, whether with or without par value, into the same or a different
number of shares, either with or without par value, of the same or another class
or series; (6) create a new class or series of shares having rights and
preferences prior and superior to the APS, or increase the rights and
preferences or the number of authorized shares of a series having rights and
preferences prior or superior to the shares of the series; or (7) cancel or
otherwise affect distributions on the APS that have accrued but have not been
declared. To the extent that the interests of a the APS affected by a matter are
substantially identical to the interests of another series of Preferred Shares
affected by such matter (e.g., a vote of shareholders required under Section
13(a) of the 1940 Act), each such series shall vote together collectively as one
class. The vote of holders of APS described above will in each case be in
addition to a separate vote of the requisite percentage of Common Shares and APS
necessary to authorize the action in question.
6. Liquidation Rights. (a) Upon the dissolution, liquidation
or winding up of the affairs of the Fund, whether voluntary or involuntary, the
Holders of the APS then outstanding shall be entitled to receive and to be paid
out of the assets of the Fund available for distribution to its shareholders,
before any payment or distribution shall be made on the Common Shares or on any
other class of shares of the Fund ranking junior to the APS upon dissolution,
liquidation or winding up, an amount equal to the liquidation preference with
respect to such shares. The liquidation preference for the APS shall be $50,000
per share, plus an amount equal to all dividends thereon (whether or not earned
or declared) accumulated but unpaid to the date of final distribution in
same-day funds, together with any payments required to be made pursuant to
Section 12 in connection with the liquidation of the Fund.
(b) Neither the sale of all or substantially all the
property or business of the Fund, nor the merger or consolidation of the Fund
into or with any other corporation nor the merger or consolidation of any other
corporation into or with the Fund shall be a dissolution, liquidation or winding
up, whether voluntary or involuntary, for the purposes of this Section 6.
B-18
(c) After the payment to the Holders of the APS of
the full preferential amounts provided for in this Section 6, the Holders of the
APS as such shall have no right or claim to any of the remaining assets of the
Fund.
(d) In the event the assets of the Fund available for
distribution to the Holders of the APS upon any dissolution, liquidation or
winding up of the affairs of the Fund, whether voluntary or involuntary, shall
be insufficient to pay in full all amounts to which such Holders are entitled
pursuant to paragraph (a) of this Section 6, no such distribution shall be made
on account of any shares of any other class or series of Preferred Shares
ranking on a parity with the APS with respect to the distribution of assets upon
such dissolution, liquidation or winding up unless proportionate distributive
amounts shall be paid on account of the APS, ratably, in proportion to the full
distributable amounts for which holders of all such parity shares are
respectively entitled upon such dissolution, liquidation or winding up.
(e) Subject to the rights of the holders of shares of
any series or class or classes of shares ranking on a parity with the APS with
respect to the distribution of assets upon dissolution, liquidation or winding
up of the affairs of the Fund, after payment shall have been made in full to the
Holders of the APS as provided in paragraph (a) of this Section 6, but not prior
thereto, any other series or class or classes of shares ranking junior to the
APS with respect to the distribution of assets upon dissolution, liquidation or
winding up of the affairs of the Fund shall, subject to the respective terms and
provisions (if any) applying thereto, be entitled to receive any and all assets
remaining to be paid or distributed, and the Holders of the APS shall not be
entitled to share therein.
7. Auction Agent. For so long as any of the APS is
outstanding, the Auction Agent, duly appointed by the Fund to so act, shall be
in each case a commercial bank, trust company or other financial institution
independent of the Fund and its affiliates (which, however, may engage or have
engaged in business transactions with the Fund or its affiliates) and at no time
shall the Fund or any of its affiliates act as the Auction Agent in connection
with the Auction Procedures. If the Auction Agent resigns or for any reason its
appointment is terminated during any period that any of the APS is outstanding,
the Board of Trustees shall use its best efforts promptly thereafter to appoint
another qualified commercial bank, trust company or financial institution to act
as the Auction Agent.
8. 1940 Act APS Asset Coverage. The Fund shall maintain, as of
the last Business Day of each month in which any of the APS is outstanding, the
1940 Act APS Asset Coverage.
B-19
9. APS Basic Maintenance Amount. (a) So long as APS are
Outstanding, the Fund shall maintain, on each Valuation Date, and shall verify
to its satisfaction that it is maintaining on such Valuation Date, (i) S&P
Eligible Assets having an aggregate Discounted Value equal to or greater than
the APS Basic Maintenance Amount (if S&P is then rating the APS) and (ii)
Moody's Eligible Assets having an aggregate Discounted Value equal to or greater
than the APS Basic Maintenance Amount (if Moody's is then rating the APS). In
managing the Fund's portfolio, the Adviser will not alter the composition of the
Fund's portfolio if, in the reasonable belief of the Adviser, the effect of any
such alteration would be to cause the Fund to have Eligible Assets with an
aggregate Discounted Value, as of the immediately preceding Valuation Date, less
than the APS Basic Maintenance Amount as of such Valuation Date; provided,
however, that in the event that, as of the immediately preceding Valuation Date,
the aggregate Discounted Value of the Fund's Eligible Assets exceeded the APS
Basic Maintenance Amount by twenty-five percent (five percent if the Valuation
Date is every Business Day) or less, the Adviser will not alter the composition
of the Fund's portfolio in a manner reasonably expected to reduce the aggregate
Discounted Value of the Fund's Eligible Assets unless the Corporation shall have
confirmed that, after giving effect to such alteration, the aggregate Discounted
Value of the Fund's Eligible Assets would exceed the APS Basic Maintenance
Amount.
(b) On or before 5:00 p.m., New York City time, on
the third Business Day after a Valuation Date on which the Fund fails to satisfy
the APS Basic Maintenance Amount, and on the third Business Day after the APS
Basic Maintenance Cure Date with respect to such Valuation Date, the Fund shall
complete and deliver to S&P (if S&P is then rating the APS), Moody's (if Moody's
is then rating the APS) and the Auction Agent (if either S&P or Moody's is then
rating the APS) an APS Basic Maintenance Report as of the date of such failure
or such APS Basic Maintenance Cure Date, as the case may be, which will be
deemed to have been delivered to the Auction Agent if the Auction Agent receives
a copy or telecopy, telex or other electronic transcription thereof and on the
same day the Fund mails to the Auction Agent for delivery on the next Business
Day the full APS Basic Maintenance Report. The Fund will also deliver an APS
Basic Maintenance Report to Moody's and S&P on any Valuation Date that (i) the
Discounted Value of Moody's Eligible Assets and S&P Eligible Assets is greater
than the APS Basic Maintenance Amount by 25% (5% if the Valuation Date is every
Business Day) or less or (ii) on any date which the Fund redeems Common Shares.
A failure by the Fund to deliver an APS Basic Maintenance Report under
subparagraph (b) of this Section 9 shall be deemed to be delivery of an APS
Basic Maintenance Report indicating the Discounted Value for all assets of the
Fund is less than the APS Basic Maintenance Amount, as of the relevant Valuation
Date.
B-20
(c) Within ten Business Days after the date of
delivery of an APS Basic Maintenance Report in accordance with paragraph (b) of
this Section 9 relating to a Quarterly Valuation Date, the Fund shall cause the
Independent Accountant to confirm in writing to S&P (if S&P is then rating the
APS), Moody's (if Moody's is then rating the APS) and the Auction Agent (if
either S&P or Moody's is then rating the APS) (i) the mathematical accuracy of
the calculations reflected in such Report (and in any other APS Basic
Maintenance Report, randomly selected by the Independent Accountant, that was
delivered by the Fund during the quarter ending on such Quarterly Valuation
Date) and (ii) that, in such Report (and in such randomly selected Report), the
Fund determined in accordance with this Certificate of Vote whether the Fund
had, at such Quarterly Valuation Date (and at the Valuation Date addressed in
such randomly-selected Report), S&P Eligible Assets (if S&P is then rating the
APS) of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount and Moody's Eligible Assets (if Moody's is then rating the
APS) of an aggregate Discounted Value at least equal to the APS Basic
Maintenance Amount (such confirmation being herein called the "Accountant's
Confirmation").
(d) Within ten Business Days after the date of
delivery of an APS Basic Maintenance Report in accordance with paragraph (b) of
this Section 9 relating to any Valuation Date on which the Fund failed to
satisfy the APS Basic Maintenance Amount, and relating to the APS Basic
Maintenance Cure Date with respect to such failure to satisfy the APS Basic
Maintenance Amount, the Fund shall cause the Independent Accountant to provide
to S&P (if S&P is then rating the APS), Moody's (if Moody's is then rating the
APS) and the Auction Agent (if either S&P or Moody's is then rating the APS) an
Accountant's Confirmation as to such APS Basic Maintenance Report.
(e) If any Accountant's Confirmation delivered
pursuant to subparagraph (c) or (d) of this Section 9 shows that an error was
made in the APS Basic Maintenance Report for a particular Valuation Date for
which such Accountant's Confirmation was required to be delivered, or shows that
a lower aggregate Discounted Value for the aggregate of all S&P Eligible Assets
(if S&P is then rating the APS) or Moody's Eligible Assets (if Moody's is then
rating the APS), as the case may be, of the Fund was determined by the
Independent Accountant, the calculation or determination made by such
Independent Accountant shall be final and conclusive and shall be binding on the
Fund, and the Fund shall accordingly amend and deliver the APS Basic Maintenance
Report to S&P (if S&P is then rating the APS), Moody's (if Moody's is then
rating the APS) and the Auction Agent (if either S&P or Moody's is then rating
the APS) promptly following receipt by the Fund of such Accountant's
Confirmation.
B-21
(f) On or before 5:00 p.m., New York City time, on
the first Business Day after the Date of Original Issue of the APS, the Fund
shall complete and deliver to S&P (if S&P is then rating the APS) and to Moody's
(if Moody's is then rating the APS), an APS Basic Maintenance Report as of the
close of business on such Date of Original Issue. Within five Business Days of
such Date of Original Issue, the Fund shall cause the Independent Accountant to
confirm in writing to S&P (if S&P is then rating the APS) and to Moody's (if
Moody's is then rating the APS) (i) the mathematical accuracy of the
calculations reflected in such Report and (ii) that the amount of S&P Eligible
Assets or Moody's Eligible Assets, as the case may be, reflected thereon equals
or exceeds the APS Basic Maintenance Amount reflected thereon.
10. Minimum Liquidity Level. So long as S&P is rating the APS,
the Fund shall have, as of each Valuation Date, Dividend Coverage Assets, with
respect to each then Outstanding APS, having a value not less than the Dividend
Coverage Amount with respect to such share (the "Minimum Liquidity Level"). If,
as of each Valuation Date, the Fund does not have the required Dividend Coverage
Assets, the Fund shall, as soon as practicable, adjust its portfolio in order to
meet the Minimum Liquidity Level, but only so long as S&P is rating the APS. So
long as S&P is rating the APS, the Fund shall notify S&P on any Valuation Date
which the Fund does not have the required Dividend Coverage Assets and does not
adjust its portfolio as described in the immediately preceding sentence.
11. Restrictions on Certain Distributions. For so long as any
of the APS is Outstanding, and except as set forth in Sections 2(e) and 6(d) of
this Part I, (A) the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, Common
Shares or other shares, if any, ranking junior to the APS as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of the Common Shares or any other shares of the Fund
ranking junior to or on a parity with the APS as to the payment of dividends or
the distribution of assets upon dissolution, liquidation or winding up, or call
for redemption, redeem, purchase or otherwise acquire for consideration any
Common Shares or any other such junior shares (except by conversion into or
exchange for shares of the Fund ranking junior to the APS as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up), or any such parity shares (except by conversion into or exchange
for shares of the Fund ranking junior to or on a parity with APS as to the
payment of dividends and the distribution of assets upon dissolution,
liquidation or winding up), unless (i) full cumulative dividends on the APS
through its most recently ended Dividend Period shall have been paid or shall
have been declared and sufficient
B-22
funds for the payment thereof deposited with the Auction Agent and (ii) the Fund
has redeemed the full number of APS required to be redeemed by any provision for
mandatory redemption pertaining thereto, and (B) if either Moody's or S&P is
rating the APS, the Fund shall not declare, pay or set apart for payment any
dividend or other distribution (other than a dividend or distribution paid in
shares of, or options, warrants or rights to subscribe for or purchase, Common
Shares or other shares, if any, ranking junior to the APS as to the payment of
dividends and the distribution of assets upon dissolution, liquidation or
winding up) in respect of Common Shares or any other shares of the Fund ranking
junior to the APS as to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up, or call for redemption, redeem,
purchase or otherwise acquire for consideration any shares of Common Shares or
any other such junior shares (except by conversion into or exchange for shares
of the Fund ranking junior to the APS as to the payment of dividends and the
distribution of assets upon dissolution, liquidation or winding up), unless
immediately after such transaction the Discounted Value of Moody's Eligible
Assets and S&P Eligible Assets would each at least equal the APS Basic
Maintenance Amount.
12. [RESERVED]
13. Certain Other Restrictions. (a) For so long as any of the
APS is outstanding and Moody's is then rating such shares, the Fund will not,
unless it has received written confirmation from Moody's that any such action
would not impair the ratings then assigned by Moody's to the APS, engage in any
one or more of the following transactions:
(i) transactions in options on
securities, futures contracts or options on futures contracts except
that in connection with Moody's Hedging Transactions: (A) the Fund may
buy call or put option contracts on securities; (B) the Fund may write
covered call options on securities and may write calls which
cross-hedge only if (x) the Fund holds the security which the call
cross-hedges, (y) both the deliverable security underlying the call and
the Fund's asset being hedged are GNMA, FNMA, or FHLMC mortgage
pass-through certificates, excluding any interest-only or
principal-only strips, and (z) both the deliverable security and the
hedged asset have similar duration and interest rates; (C) the Fund may
write put options on securities; (D) the Fund may enter into futures
contracts on Treasury Bonds provided that the Fund shall not engage in
any such transaction which would cause the Fund at the time of such
transaction to own or have sold (1) outstanding futures contracts based
on
B-23
Treasury Bonds and options on such futures contracts having an
aggregate fair market value exceeding 70% of the aggregate fair market
value of the preferred stock portion of Moody's Eligible Assets owned
by the Fund and rated "aaa," "aa," and "a" by Moody's (or, if not rated
by Moody's but rated by S&P, rated AAA by S&P) or (2) outstanding
futures contracts based on Treasury Bonds and options on such futures
contracts having an aggregate fair market value exceeding 65% of the
aggregate fair market value of the preferred stock portion of Moody's
Eligible Assets owned by the Fund and rated "baa" by Moody's (or, if
not rated by Moody's but rated by S&P, rated A or AA by S&P); for
purposes of the foregoing clause (D), the Fund shall be deemed to own
the number of futures contracts that underlie any outstanding option
written by the Fund; and (E) the Fund may buy call or put options on
futures contracts or Treasury Bonds, may write put options on such
futures contracts (provided, that if the contract would require
delivery of a security, that security must be held by the Fund) and may
write call options on such futures if it owns the futures contract
subject to the option. For so long as the APS are rated by Moody's, the
Fund will engage in a Closing Transaction to close out any outstanding
futures contract by no later than the fifth Business Day of the month
in which such contract expires and will engage in a Closing Transaction
to close out any outstanding option on a futures contract by no later
than the first Business Day of the month in which such option expires.
The Fund may hedge only Moody's Eligible Assets. For so long as the APS
are rated by Moody's, the Fund will engage in transactions with respect
to futures contracts or options thereon having only the next settlement
date or the settlement date immediately thereafter. For purposes of
valuation of Moody's Eligible Assets: (A) if the Fund writes a call
option, the underlying asset will be valued as follows: (1) if the
option is exchange-traded and may be offset readily or if the option
expires before the earliest possible redemption of the APS, at the
lower of the Discounted Value of the underlying security of the option
and the exercise price of the option or (2) otherwise, it has no value;
(B) if the Fund writes a put option, the underlying asset will be
valued as follows: the lesser of (1) exercise price and (2) the
Discounted Value of the underlying security; (C) if the Fund is a
seller under a futures contract, the underlying security will be valued
at the lower of (1) settlement price and (2) the Discounted Value of
the underlying security; if a contract matures within the Moody's
Exposure Period, the security may be valued at the settlement price;
(D) if the Fund is
B-24
the buyer under a futures contract, the underlying security will be
valued at the lower of (1) the settlement price and (2) the Discounted
Value of the underlying security; if the contract matures within the
Moody's Exposure Period, the security may be valued at its Discounted
Value and (E) call or put option contracts which the Fund buys have no
value. For so long as APS are rated by Moody's: (A) the Fund will not
engage in options and futures transactions for leveraging or
speculative purposes; (B) the Fund will not write or sell any
anticipatory contracts pursuant to which the Fund hedges the
anticipated purchase of an asset prior to completion of such purchase;
(C) the Fund will not enter into an option or futures transaction
unless, after giving effect thereto, the Fund would continue to have
Moody's Eligible Assets with an aggregate Discounted Value equal to or
greater than the APS Basic Maintenance Amount; (D) the Fund will not
enter into an option or futures transaction unless after giving effect
to such transaction the Fund would continue to be in compliance with
the provisions relating to the APS Basic Maintenance Amount; (E) for
purposes of the APS Basic Maintenance Amount (1) assets in margin
accounts are not Moody's Eligible Assets, (2) 10% of the settlement
price of assets sold under a futures contract, the settlement price of
assets purchased under a futures contract, the settlement price of an
underlying futures contract if the Fund writes put options on futures
contracts will constitute liabilities of the Fund, (3) 25% of the
exercise price of a written call option involving a cross hedge will
constitute liabilities of the Fund and (4) if the Fund writes call
options on futures contracts and does not own the underlying futures
contract, 105% of the Market Value of the underlying futures contract
will constitute a liability of the Fund; (F) the Fund shall enter into
only exchange-traded futures where the exchange takes the opposite side
of the contract and shall write only exchange-traded options on
exchanges approved by Moody's; (G) where delivery may be made to the
Fund with any of a class of securities, the Fund shall assume for
purposes of the APS Basic Maintenance Amount that it takes delivery of
that security which yields it the least value; (H) the Fund will not
engage in forward contracts; (I) the Fund will enter into futures
contracts as seller only if it owns the underlying security; and (J)
there shall be a quarterly audit made of the Fund's futures and options
transactions by the Fund's independent accountants to confirm that the
Fund is in compliance with these standards; or
B-25
(ii) incur any indebtedness, without
prior written approval of Moody's that such indebtedness would not
adversely affect the then current rating by Moody's of the APS except
that the Fund may, without obtaining the written confirmation described
above, incur indebtedness for the purpose of clearing securities
transactions if the Discounted Value of Moody's Eligible Assets equals
or exceeds the APS Basic Maintenance Amount would continue to be
satisfied after giving effect to such indebtedness; provided, however,
that any such indebtedness shall be repaid within 60 days and will not
be extended or renewed; or
(iii) issue any class or series of
shares ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, or reissue any APS previously
purchased or redeemed by the Fund; or
(iv) lend portfolio securities; or
(b) For so long as any of the APS is Outstanding and
S&P is rating such shares, the Fund will not, unless the Fund has received
written confirmation from S&P that any such action would not impair the rating
then assigned by such rating agency to the APS, engage in any one or more of the
following transactions:
(i) transactions in any reverse
repurchase agreements; or
(ii) lend portfolio securities; or
(iii) borrow money, except that the Fund
may, without obtaining the written confirmation described above, borrow
money for the purposes of clearing securities transactions if the
Discounted Value of S&P Eligible Assets equals or exceeds the APS Basic
Maintenance Amount after giving effect to such borrowing; or
(iv) issue any class or series of shares
ranking prior to or on a parity with the APS with respect to the
payment of dividends or the distribution of assets upon dissolution,
liquidation or winding up of the Fund, or reissue any APS previously
B-26
purchased or redeemed by the Fund, or merge or consolidate with any
corporation; or
(v) engage in repurchase agreement
transactions in which the term of such repurchase obligation is longer
than 90 days, in which the underlying security is a security other than
United States Treasury securities (not inclusive of zero-coupon
securities), demand deposits, certificates of deposits or bankers
acceptance in which the counter-party or its affiliates have securities
rated A1+ by S&P with respect to such underlying security; or
(vi) engage in short sale transactions;
or
(vii) purchase or sell futures contracts
or options thereon or write unsecured put or uncovered call options on
portfolio securities except that (i) the Fund may engage in S&P Hedging
Transactions based on Treasury Bonds, provided that the Fund shall not
engage in any S&P Hedging Transaction based on Treasury Bonds (other
than Closing Transactions) which would cause the Fund at the time of
such transaction to own or have sold the lesser of (1) outstanding
futures contracts based on Treasury Bonds exceeding in number 25% of
the quotient of the fair market value of the Fund's total assets
divided by 100,000 or (2) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily
traded futures contracts based on Treasury Bonds in the month prior to
the time of effecting such transaction as reported by The Wall Street
Journal. For so long as the APS are rated by S&P, the Fund will engage
in Closing Transactions to close out any outstanding futures contracts
which the Fund owns or has sold or any outstanding option thereon owned
by the Fund in the event (A) the Fund does not have S&P Eligible Assets
with an aggregate Discounted Value equal to or greater than the APS
Basic Maintenance Amount on two consecutive Valuation Dates and (B) the
Fund is required to pay Variation Margin on the second such Valuation
Date. For so long as the APS are rated by S&P, the Fund will engage in
a Closing Transaction to close out any outstanding futures contract or
option thereon in the month prior to the delivery month under the terms
of such futures contract or option thereon unless the Fund holds
securities deliverable under such terms. For purposes of determining
S&P Eligible Assets to determine compliance with the APS Basic
Maintenance Amount, no amounts on deposit with the Fund's
B-27
custodian or broker representing Initial Margin or Variation Margin
shall constitute S&P Eligible Assets. For so long as the APS are rated
by S&P, when the Fund writes a futures contract or option thereon, it
will maintain an amount of cash, cash equivalents or short-term, money
market securities in a segregated account with the Fund's custodian, so
that the amount so segregated plus the amount of Initial Margin and
Variation Margin held in the account of the Fund's broker equals the
fair market value of the futures contract, except that in the event the
Fund writes a futures contract or option thereon which requires
delivery of an underlying security, the Fund shall hold such underlying
security. For so long as the APS are rated by S&P, if the Fund engages
in S&P hedging transactions the Valuation Date shall mean every
Business Day.
14. Notice. All notices or communications, unless otherwise
specified in the By-Laws of the Fund or this Certificate of Vote, shall be
sufficiently given if in writing and delivered in person or mailed by
first-class mail, postage prepaid. Notice shall be deemed given on the earlier
of the date received or the date seven days after which such notice is mailed.
15. Definitions. As used in Parts I and II hereof, the
following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"'AA' Composite Commercial Paper Rate," on any date for any Rate
Period, shall mean (i) (A) in the case of any Minimum Dividend Period or any
Rate Period between 7 and 28 Rate Period Days, the interest equivalent of the
30-day rate; provided, however, in the case of any Minimum Dividend Period of 7
days or any Rate Period with 7 Rate Period Days and if the "AA" Composite
Commercial Paper Rate is being used to determine the Applicable Rate when all of
the Outstanding APS are subject to Submitted Hold Orders, then the interest
equivalent of the 7-day rate, and (B) in the case of any Rate Period with more
than 28 Rate Period Days, the interest equivalent of the 180-day rate, on
commercial paper placed on behalf of issuers whose corporate bonds are rated
"AA" by S&P or the equivalent of such rating by S&P or another rating agency, as
made available on a discount basis or otherwise by the Federal Reserve Bank of
New York for the Business Day immediately preceding such date; or (ii) in the
event that the Federal Reserve Bank of New York does not make available any such
rate, then the arithmetic average of such rates, as quoted on a discount basis
or otherwise, by the Commercial Paper Dealers to the Auction Agent for the close
of business on the Business Day next preceding such date. If any Commercial
Paper Dealer does not quote a rate required to determine the "AA" Composite
Commercial Paper Rate, the "AA" Composite Commercial Paper Rate shall be
determined on the basis of the quotation or quotations furnished by the
remaining Commercial Paper Dealer or Commercial
B-28
Paper Dealers and any Substitute Commercial Paper Dealer or Substitute
Commercial Paper Dealers selected by the Fund to provide such rate or rates not
being supplied by any Commercial Paper Dealer or Commercial Paper Dealers, as
the case may be, or, if the Fund does not select any such Substitute Commercial
Paper Dealer or Substitute Commercial Paper Dealers, by the remaining Commercial
Paper Dealer or Commercial Paper Dealers. For purposes of this definition, the
"interest equivalent" of a rate stated on a discount basis (a "discount rate")
for commercial paper of a given days' maturity shall be equal to the quotient
(rounded upwards to the next higher one-thousandth (.001) of 1%) of (A) the
discount rate divided by (B) the difference between (x) 1.00 and (y) a fraction
the numerator of which shall be the product of the discount rate times the
number of days in which such commercial paper matures and the denominator of
which shall be 360.
"Accountant's Confirmation" shall have the meaning set forth in
paragraph (c) of Section 9 of this Part I.
[RESERVED]
[RESERVED]
"Applicable Rate" shall have the meaning specified in subparagraph
(c)(i) of Section 2 of this Part I.
"APS Basic Maintenance Amount," as of any Valuation Date, shall mean
the dollar amount equal to (i) the sum of (A) the product of the number of APS
Outstanding on such date multiplied by $50,000; (B) the aggregate amount of
dividends that will have accumulated at the Applicable Rate (whether or not
earned or declared) to (but not including) the first Dividend Payment Date for
the APS Outstanding that follows such Valuation Date; (C) the amount equal to
the Projected Dividend Amount (based on the number of APS Outstanding on such
date); (D) the amount of anticipated expenses of the Fund for the 90 days
subsequent to such Valuation Date; (E) the amount of any premium payable
pursuant to a Premium Call Period; and (F) any current liabilities as of such
Valuation Date to the extent not reflected in any of (i)(A) through (i)(E)
(including, without limitation, any amounts described in Section 13 of Part I as
required to be treated as liabilities in connection with the Fund's transactions
in futures and options and including any payables for portfolio securities
purchased as of such Valuation Date) less (ii) either (A) the face value of any
of the Fund's assets irrevocably deposited by the Fund for the payment of any of
(i)(A) through (i)(F), if such assets mature prior to or on the date of payment
of the liability for which such assets are deposited and are either securities
issued or guaranteed by the United States Government or have a rating assigned
by Moody's of P-1, VMIG-1 or MIG-1 (or, with respect to S&P, SP-1+ or A-1+) or
(B) otherwise, the Discounted Value of such assets. For purposes of the APS
Basic Maintenance Amount in connection with S&P's ratings of the APS, with
respect to any transactions by the Fund in futures contracts, the Fund shall
include as liabilities 25% of the aggregate settlement value, as marked to
market, of any outstanding futures contracts based on Treasury Bonds which
contracts are owned by the Fund. For purposes of the APS Basic Maintenance
Amount in connection with Moody's rating of the APS, with respect to
B-29
any transactions by the Fund in securities options, the Fund shall include as
liabilities (i) 10% of the exercise price of a call option written by the Fund
and (ii) the exercise price of any written put option.
"APS Basic Maintenance Cure Date," with respect to the failure by the
Fund to satisfy the APS Basic Maintenance Amount (as required by paragraph (a)
of Section 9 of this Part I) as of a given Valuation Date, shall mean the third
Business Day following such Valuation Date.
"APS Basic Maintenance Report" shall mean a report signed by the
President, Treasurer or any Senior Vice President or Vice President of the Fund
which sets forth, as of the related Valuation Date, the assets of the Fund, the
Market Value and the Discounted Value thereof (seriatim and in aggregate), and
the APS Basic Maintenance Amount.
"Auction" shall mean each periodic implementation of the Auction
Procedures.
"Auction Agency Agreement" shall mean the agreement between the Fund
and the Auction Agent which provides, among other things, that the Auction Agent
will follow the Auction Procedures for purposes of determining the Applicable
Rate for the APS so long as the Applicable Rate for such APS is to be based on
the results of an Auction.
"Auction Agent" shall mean the entity appointed as such by a resolution
of the Board of Trustees in accordance with Section 7 of this Part I.
"Auction Date," with respect to any Rate Period, shall mean the
Business Day next preceding the first day of such Rate Period; initially
Wednesday, December 16, 1992 for the APS; and thereafter each fourth Wednesday
for the APS, subject to change as set forth herein.
"Auction Procedures" shall mean the procedures for conducting Auctions
set forth in Part II hereof.
"Board of Trustees" shall mean the Board of Trustees of the Fund or any
duly authorized committee thereof.
"Business Day" shall mean a day on which the New York Stock Exchange is
open for trading and which is neither a Saturday, Sunday nor any other day on
which banks in The City of New York, New York, are authorized by law to close.
"Closing Transactions" means the termination of a futures contract or
option position by taking an equal position opposite thereto in the same
delivery month as such initial position being terminated.
"Commercial Paper Dealers" shall mean Goldman, Sachs Money Markets,
L.P., Lehman Commercial Paper Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated
B-30
and Smith Barney, Harris Upham & Co. or, in lieu of any thereof, their
respective affiliates or successors, if such entity is a commercial paper
dealer.
"Common Shares" shall mean the common shares of beneficial interest,
par value $.01 per share, of the Fund.
"Cure Date" shall mean the APS Basic Maintenance Cure Date or the 1940
Act Cure Date, as the case may be.
"Date of Original Issue," with respect to any APS, shall mean the date
on which the Fund initially issued such APS.
"Deposit Securities" shall mean cash and portfolio securities rated at
least A-1+ or SP-1+ by S&P, except that, for purposes of Section 3(a)(iii) of
this Part I, such portfolio securities shall be considered "Deposit Securities"
only if they are also rated P-1, MIG-1 or VMIG-1 by Moody's.
"Discounted Value" shall mean (i) with respect to an S&P Eligible
Asset, the quotient of the Market Value thereof divided by the applicable S&P
Discount Factor and (ii) with respect to a Moody's Eligible Asset, the quotient
of the Market Value thereof divided by the applicable Moody's Discount Factor,
provided that with respect to a Moody's Eligible Asset, Discounted Value shall
not exceed the par value of such Asset at any time.
"Dividend Coverage Amount," as of any Valuation Date, shall mean, with
respect to each of the APS, (i) the aggregate amount of dividends that will
accumulate on such APS to (but not including) the first Dividend Payment Date
for such share that follows such Valuation Date plus any liabilities that will
become payable prior to or on such payment date, less (ii) the combined value of
Deposit Securities irrevocably deposited for the payment of dividends on such
APS and interest with respect to portfolio securities which is payable to the
Fund prior to the Dividend Payment Date.
"Dividend Coverage Assets," as of any Valuation Date, shall mean, with
respect to each of the APS, Deposit Securities with maturity or tender dates not
later than the day preceding the first Dividend Payment Date for such share that
follows such Valuation Date and having a value not less than the Dividend
Coverage Amount with respect to such share.
"Dividend Payment Date," with respect to the APS, shall mean any date
on which dividends on such APS are payable pursuant to the provisions of
paragraph (b) of Section 2 of this Part I.
"Dividend Period," with respect to the APS, shall mean the period from
and including the Date of Original Issue of such APS to but excluding the
initial Dividend Payment Date for such APS and any period thereafter from and
including one Dividend Payment Date for such APS to but excluding the next
succeeding Dividend Payment Date for such APS.
B-31
"Failure to Deposit," with respect to the APS, shall mean a failure by
the Fund to pay to the Auction Agent, not later than 12:00 noon, New York City
time, (A) on the Business Day next preceding any Dividend Payment Date for such
APS, in funds available on such Dividend Payment Date in The City of New York,
New York, the full amount of any dividend (whether or not earned or declared) to
be paid on such Dividend Payment Date on any of the APS or (B) on the Business
Day next preceding any redemption date in funds available on such redemption
date for such APS in The City of New York, New York, the Redemption Price to be
paid on such redemption date for any of the APS after notice of redemption is
given pursuant to paragraph (b) of Section 3 of this Part I.
"FHLMC" means the Federal Home Loan Mortgage Corporation or any
successor thereto.
"FHLMC Certificate" means a publicly issued mortgage participation
certificate, the timely payment of interest on and the ultimate collection of
which is guaranteed by FHLMC, and which evidences a proportional undivided
interest in or participation interest in, specified pools of fixed-, variable-
or adjustable-rate, fully amortizing, level pay mortgage loans with terms up to
30 years, secured by first liens on one to four family residences.
"FNMA" means the Federal National Mortgage Association or any successor
thereto.
"FNMA Certificate" means a publicly issued mortgage pass-through
certificate, the full and timely payment of principal of and interest on which
is guaranteed by FNMA, and which evidences a proportional undivided interest in
specified pools of fixed-, variable- or adjustable-rate, fully amortizing, level
pay mortgage loans with terms up to 30 years, secured by first liens on one to
four family residences.
"Fund" shall mean Van Kampen Merritt Limited Term High Income Trust, a
Massachusetts business trust, which is the issuer of the APS.
"GNMA" means the Government National Mortgage Association or any
successor thereto.
"GNMA Certificate" means a publicly issued fully modified pass-through
certificate, the full and timely payment of principal of and interest on which
is fully guaranteed by GNMA, and which evidences a proportional undivided
interest in specified pools of fixed-, variable- or adjustable-rate, fully
amortizing, level pay mortgage loans with terms up to 30 years, secured by first
liens on one to four family residences.
"Holder," with respect to any of the APS, shall mean the registered
holder of such APS as the same appears on the share books of the Fund.
"Independent Accountant" shall mean a nationally recognized accountant,
or firm of accountants, that is with respect to the Fund an independent public
accountant or firm of
B-32
independent public accountants under the Securities Act of 1933, as amended from
time to time.
"Initial Dividend Period," with respect to any of the APS, shall mean
the period from and including the Date of Original Issue thereof to but
excluding the initial Dividend Payment Date which occurs in a month which
contains the first scheduled Auction Date for such APS.
"Interest Equivalent" means a yield on a 360-day basis of a discount
basis security which is equal to the yield on an equivalent interest-bearing
security.
"Initial Margin" means the amount of cash or securities deposited with
a custodian for the benefit of a futures commission merchant as a good-faith
deposit at the time of the initiation of a purchase or sale position with
respect to a futures contract or a sale position with respect to an option
position thereon.
"Market Value" of any asset of the Fund shall mean the market value
thereof determined by the Pricing Service designated from time to time by the
Board of Trustees. Market Value of any asset shall include any interest accrued
thereon. The Pricing Service values portfolio securities at the mean between the
quoted bid and asked price or the yield equivalent when quotations are readily
available. Securities for which quotations are not readily available are valued
at fair value as determined by the pricing service using methods which include
consideration of yields or prices of portfolio bonds of comparable quality, type
of issue, coupon, maturity and rating; indications as to value from dealers; and
general market conditions. The Pricing Service may employ electronic data
processing techniques and/or a matrix system to determine valuations. In the
event the Pricing Service is unable to value a security, the security shall be
valued at the lower of two dealer bids obtained by the Fund from dealers who are
members of the NASD and make a market in the security, at least one of which
shall be in writing.
"Mandatory Redemption Price" means $50,000 per share of APS plus an
amount equal to accumulated but unpaid dividends thereon to the date fixed for
redemption (whether or not earned or declared).
"Master Purchaser's Letter" has the meaning specified in Section 1 of
Part II hereof.
[RESERVED]
"Minimum Liquidity Level" shall have meaning set forth in Section 10 of
this Part I.
"Minimum Dividend Period" shall mean with respect to the APS, any Rate
Period consisting of 28 Rate Period Days.
"Moody's" shall mean Moody's Investors Service, Inc., a Delaware
corporation, and its successors.
B-33
"Moody's Discount Factor" shall mean, for purposes of determining the
Discounted Value of any Moody's Eligible Asset, the percentage determined by
reference to the rating on such asset and the Moody's Exposure Period (currently
53 days) in accordance with the table set forth below:
Moody's Discount Factors--Debt Securities
Rating Category
-----------------------------------------------------------------
Maturity of Collateral Aaa Aa A Baa Ba B* Caa
---------------------- --- -- - --- -- -- ---
1 year......................... 114% 119% 124% 130% 141% 151% 260%
2 years........................ 121% 126% 132% 138% 149% 161% 260%
3 years........................ 126% 132% 138% 144% 156% 168% 260%
4 years......................... 132% 138% 145% 151% 163% 176% 260%
5 years........................ 138% 144% 151% 157% 170% 184% 260%
7 years........................ 147% 154% 161% 168% 182% 196% 260%
10 years....................... 155% 163% 170% 177% 192% 207% 260%
15 years....................... 162% 169% 177% 185% 200% 216% 260%
20 years....................... 169% 177% 185% 194% 210% 226% 260%
30 years....................... 171% 179% 187% 195% 211% 228% 260%
-------------------------------------
* Senior debt securities of an issuer rated B3 shall be deemed to be Caa
rated securities for purposes of determining the applicable Moody's
Discount Factor.
The Moody's Discount Factors for Moody's Eligible Asset that are
preferred stocks are (a) 160% for Utility Preferred Stocks (as defined from time
to time by Moody's and provided in writing to the Fund) and (b) 235% for
Industrial/Financial Preferred Stocks (as defined from time to time by Moody's
and provided in writing to the Fund). With respect to any Moody's Eligible Asset
that is a fixed-income security other than a corporate debt obligation or a
preferred stock, the Moody's Discount Factor with respect thereto will be the
percentage provided in writing by Moody's.
Notwithstanding the foregoing, (i) No Moody's Discount Factor will be
applied to short-term portfolio securities so long as such portfolio securities
are rated at least P-1 by Moody's and mature or have a demand feature at par
exercisable within the Moody's Exposure Period and the Moody's Discount Factor
for such portfolio securities will be 125% as long as such portfolio securities
are rated at least A-1/AA or SP-1+/AA by S&P and mature or have a demand
feature at par exercisable within the Moody's Exposure Period and (ii) no
Moody's Discount Factor will be applied to cash.
"Moody's Eligible Asset" shall mean cash or any of the Fund's portfolio
securities; provided that no portfolio security that is a debt security shall be
deemed to be a Moody's Eligible Asset unless (1) such security is rated Caa or
higher by Moody's; (2) the senior unsecured rating of the issuer's corporate
bonds is higher than B3; (3) such security provides for the periodic payment of
interest in cash in U.S. dollars; (4) such security does not provide for
conversion or exchange into equity capital at any time over their lives; (5) the
cash flow from the collateral must be controlled by the indenture trustee; (6)
for debt
B-34
securities rated Ba1 and below, no more than 10% of the original amount of such
issue may constitute Moody's Eligible Assets; (7) for the purposes of Moody's
hedging transactions which are cross hedges, FHLMC Certificates, FNMA
Certificates and GNMA Certificates will constitute Moody's Eligible Assets (but
shall not be included in the calculation of the APS Basic Maintenance Amount);
and (8) such security has been registered under the Securities Act of 1933, as
amended. Debt securities which are issued in connection with a reorganization
under federal bankruptcy law shall not constitute Moody's Eligible Assets. In
addition, portfolio holdings and issue size must be within the following
diversification and issue size requirements in order to be included within
Moody's Eligible Assets:
ISSUER:
Non-Utility Utility
Max. Single Max. Single
Collateral Ratings(1) Issuer (%)2, 3 Issuer (%)2, 3
------------------ -------------- --------------
"aaa", Aaa 100 100
"aa", Aa 20 20
"a", A 10 10
CS, "baa", Baa 6 4
Ba 4 4
B1-B2 3 3
B3 (Caa subordinate) 2 2
INDUSTRY:
Non-Utility Utility
Max. Single Max. Single
Collateral Ratings(1) Issuer (%)3, 5 Issuer (%)3, 5, 6
------------------ -------------- -----------------
"aaa", Aaa 100 100
"aa", Aa 60 60
"a", A 40 50
CS, "baa", Baa4 20 50
Ba 12 12
B1-B2 8 8
B3 (Caa subordinate) 5 5
STATE:
Non-Utility Utility
Max. Single Max. Single
Collateral Ratings(1) Issuer (%)3 Issuer (%)3
------------------ ----------- -----------
"aaa" n/a 100
"aa" n/a 20
"a" n/a 10
CS, "baa"4 n/a 7
B-35
ISSUE-SIZE:
Minimum Issue Size
Collateral Ratings(1) ($ in millions)
------------------ ------------------
"aaa", Aaa 100
"aa", Aa
100
"a", A
100
CS, "baa", Baa4
100
Ba 50(7)
B1-B2 50(7)
B3 (Caa subordinate) 50(7)
------------------
(1) Refers to the senior debt rating of collateral.
(2) Companies subject to common ownership of 25% or more are considered as
one name.
(3) Percentages represent a portion of the aggregate market value of the
corporate portfolio.
(4) CS refers to common stock which is diversified independently from its
rating level.
(5) Industries are determined according to Moody's Industry Classification
(see Appendix A).
(6) In the case of utility common stock, utility preferred stock and utility
bonds, the definition of industry refers to sub-industries (electric,
water, hydro-power, gas, diversified). However, in the case that a
portfolio of utility bonds is diversified according to Moody's state
diversification requirements for the eligible only to the extent that the
combined sum represents a percentage portion of the Moody's Eligible
Assets less than or equal to the percentage limits in the diversification
tables above.
(7) Collateral bonds from issues ranging $50 million to $100 million are
limited to 20% of the collateral pool.
Portfolio securities that are preferred stocks will not be included in
the calculation of Discounted Value of the Fund's portfolio unless (a) dividends
on such preferred stock are cumulative, (b) such securities provide for the
periodic payment of dividends thereon in cash in U.S. dollars and do not provide
for conversion or exchange into, or have warrants attached entitling the holder
to receive, equity capital at any time over the respective lives of such
securities, (c) the issuer of such a preferred stock has common stock listed on
either the New York Stock Exchange or the American Stock Exchange, (d) the
issuer of such a preferred stock has a senior debt rating from Moody's of Baa1
or higher or a preferred stock rating from Moody's of "baa3" or higher and (e)
such preferred stock has paid consistent cash dividends in U.S. dollars over the
last 3 years or has a minimum rating of "a1" (if the issuer of such preferred
stock has other preferred issues outstanding that have been paying dividends
consistently for the last three years, then a preferred stock without such a
dividend history would also be eligible). In addition, the preferred stocks must
have the following
B-36
diversification requirements: (1) the preferred stock issue must be greater than
$50 million and (2) the minimum holding by the Fund of each issue of preferred
stock is $500,000 and the maximum holding of preferred stock of each issuer is
$5 million. In addition, no preferred stocks issued by transportation companies
will be considered as Moody's Eligible Assets.
Where the Fund sells an asset and agrees to repurchase such asset in
the future, the Discounted Value of such asset will constitute a Moody's
Eligible Asset and the amount the Fund is required to pay upon repurchase of
such asset will count as a liability for the purposes of the APS Basic
Maintenance Amount. Where the Fund purchases an asset and agrees to sell it to a
third party in the future, cash receivable by the Fund thereby will constitute a
Moody's Eligible Asset if the long-term debt of such other party is rated at
least A2 by Moody's and such agreement has a term of 30 days or less; otherwise
the Discounted Value of such asset will constitute a Moody's Eligible Asset. For
the purposes of calculation of Moody's Eligible Assets, portfolio securities
which have been called for redemption by the issuer thereof shall be valued at
the lower of Market Value or the call price of such portfolio securities.
Notwithstanding the foregoing, an asset will not be considered a
Moody's Eligible Asset to the extent that it has been irrevocably deposited for
the payment of (i)(A) through (i)(F) under the definition of APS Basic
Maintenance Amount or it is subject to any material lien, mortgage, pledge,
security interest or security agreement of any kind (collectively, "Liens"),
except for (a) Liens which are being contested in good faith by appropriate
proceedings and which Moody's has indicated to the Fund will not affect the
status of such asset as a Moody's Eligible Asset, (b) Liens for taxes that are
not then due and payable or that can be paid thereafter without penalty, (c)
Liens to secure payment for services rendered or cash advanced to the Fund by
the Adviser, the Fund's Custodian, Transfer Agent, Registrar or the Auction
Agent and (d) Liens by virtue of any repurchase agreement.
"Moody's Exposure Period" shall mean the period commencing on a given
Valuation Date and ending 52 days thereafter.
"Moody's Hedging Transactions" shall mean transactions in options on
securities, futures contracts based on Treasury Bonds and options on such
futures contracts.
[RESERVED]
"1940 Act" shall mean the Investment Company Act of 1940, as amended
from time to time.
"1940 Act APS Asset Coverage" shall mean asset coverage, as defined in
Section 18(h) of the 1940 Act, of at least 200% with respect to all outstanding
senior securities of the Fund which are stock, including all outstanding APS (or
such other asset coverage as may in the future be specified in or under the 1940
Act as the minimum asset coverage for senior
B-37
securities which are stock of a closed-end investment company as a condition of
declaring dividends on its common stock).
"1940 Act Cure Date," with respect to the failure by the Fund to
maintain the 1940 Act APS Asset Coverage (as required by Section 8 of this Part
I) as of the last Business Day of each month, shall mean the last Business Day
of the following month.
"Non-call Period" shall have the meaning set forth below under
"Specific Redemption Provisions."
"Notice of Redemption" shall mean any notice with respect to the
redemption of the APS pursuant to Section 3 of this Part I.
"Optional Redemption Price" shall mean (i) $50,000 per share of APS in
the case of a six-month Dividend Period or a Special Dividend Period of less
than 365 days or (ii) with respect to a Special Dividend Period of 365 days or
more the Optional Redemption Price set forth in the Specific Redemption
Provisions in connection therewith; in each case plus an amount equal to
accumulated but unpaid dividends thereon to the date of redemption (whether or
not earned or declared).
"Preferred Shares" shall mean the authorized preferred shares of
beneficial interest, par value $.01 per share, of the Fund, and includes the
APS.
"Premium Call Period" shall have the meaning set forth below under
"Specific Redemption Provisions."
"Pricing Service" means Van Kampen Merritt Investment Advisory Corp.,
acting pursuant to a Fund Pricing Agreement between the Fund and Van Kampen
Merritt Investment Advisory Corp. and any successor pricing service approved in
writing by Moody's (if Moody's is then rating the APS) and S&P (if S&P is then
rating the APS).
"Projected Dividend Amount" means, with respect to the APS, on any
Valuation Date in the event the then current Dividend Period will end within 53
calendar days of such date, from and after the last day of such Dividend Period
until 53 calendar days less the number of days remaining in the current Dividend
Period at an Applicable Rate equal to the Maximum Rate for such Dividend Period
multiplied by the larger of the factors (currently 304%) that the Fund has been
informed by Moody's and S&P is applicable to the Projected Dividend Amount and
designed to take into account increases in dividend rates over such period.
"Quarterly Valuation Date" shall mean the last Business Day of each
fiscal quarter of the Fund in each fiscal year of the Fund, commencing March 31,
1993.
B-38
"Rate Period," with respect to any of the APS, shall mean the Initial
Dividend Period thereof and any Subsequent Dividend Period, including any
Special Dividend Period, for such APS.
"Rate Period Days," for any Rate Period, if such Rate Period is less
than one year, shall mean the number of days (without giving effect to
subparagraph (b)(ii) of Section 2 of this Part I) in such Rate Period.
[RESERVED]
"Redemption Price" shall mean the Optional Redemption Price or the
Mandatory Redemption Price, as applicable.
[RESERVED]
"S&P" shall mean Standard & Poor's Fund, a New York corporation, and
its successors.
"S&P Discount Factor" shall mean, for purposes of determining the
Discounted Value of any S&P Eligible Asset that is a corporate debt security,
the percentage determined by reference to the rating on such asset in accordance
with the table set forth below:
Rating S&P Discount Factors--
Category Corporate Debt Securities
-------- -------------------------
AAA 150%
AA 155%
A 160%
BBB 165%
BB 170%
B 180%
B- 190%
CCC+ 205%
CCC 220%
The S&P Discount Factors for S&P Eligible Assets that are preferred
stocks are: (a) 240% for Sinking Fund Preferred Stock, Fixed Rate Perpetual
Preferred Stock and Floating Rate Preferred Stock (as defined from time to time
by S&P and provided to the Fund in writing) and (b) 400% for Adjustable Rate
Preferred Stock (as defined from time to time by S&P and provided to the Fund in
writing). The S&P Discount Factors for portfolio securities other than corporate
debt securities and preferred stock will be the percentages provided in writing
by S&P.
B-39
Notwithstanding the foregoing, the S&P Discount Factor for short-term
portfolio securities which are money market instruments and (a) which mature
within 30 days or less will be 105%, (b) which mature between 31 and 90 days
will be 110%, (c) which mature between 91 and 180 days will be 115%, (d) which
mature between 181 and 270 days will be 120% and (e) which mature between 271
and 365 days will be 125%. (Money market instruments are defined as bankers
acceptances, certificates of deposit, commercial paper, demand or time deposits,
Eurodollar deposits, next-day federal funds and repurchase agreements, in each
case issued by any institution which at the time of investment is a permitted
bank where permitted bank means any bank, domestic or foreign, the commercial
paper of which is rated "A-1+" by S&P. Eurodollar deposits are eligible money
market instruments when issued by a permitted bank through its head office
and/or any branch where the sovereign rating of the country (where the branch is
located) is rated the same or higher than the issuing bank). The Discount Factor
for Commercial Paper rated "A-1" by S&P is 160%, with diversification across a
minimum of three issuers. The Discount Factor for Commercial paper rated "A-2"
by S&P is 165%, with diversification across a minimum of five issuers.
Commercial paper rated "A-1" and "A-2" may comprise no more than 20% of S&P
Eligible Assets. No Discount Factor is applied to cash or Commercial Paper rated
"A-1+" by S&P, provided such Commercial Paper matures in not more than 30 days
and is held in lieu of cash until maturity. For portfolio securities which are
debt securities issued by utilities, the Discount Factor is 180% for such
securities rated "A" or better by S&P and 185% for such securities rated "BBB"
or better by S&P, provided that (i) such debt securities are from original
issues of at least $100 million with a remaining term to maturity of 30 years or
less, (ii) such debt securities provide for periodic interest payments in cash
over the security's life, (iii) total exposure in stocks and bonds of any one
issuer with a "BBB" senior debt rating is limited to 5% of total assets, and
total exposure in stocks and bonds of any one issuer with an "A" or better
senior debt rating is limited to 10% of total assets, and (iv) 25% or less of
the utility common stock and utility debt securities may be rated "BBB-" or have
debt with a "BBB-" senior implied rating.
"S&P Eligible Assets" means cash or any of the Fund's portfolio
securities which are corporate bonds, preferred stocks or money market
instruments; provided that portfolio securities that are corporate debt
securities will not be included in the calculation of the Discounted Value of
the Fund's portfolio for purposes of S&P rating of the APS unless there exist
publicly available financial statements for the issuer of such security and
unless such security (a) is rated CCC or higher by S&P, (b) provides for the
periodic payment of interest thereon in cash, (c) does not provide for
conversion or exchange into equity capital at any time over their respective
lives, (d) has been registered under the Securities Act of 1933, as amended, (e)
has not had notice given in respect thereof that any such corporate debt
obligation is the subject of an offer by the issuer thereof of exchange or
tender for cash, securities or any other type of consideration (except that
corporate debt obligations in an amount not exceeding 10% of the value of the
Fund's portfolio at any time shall not be subject to the provisions of this
clause (e)) and (f) has a remaining term to maturity of less than 30 years. In
addition, such portfolio debt securities must be within the following
diversification requirements in order to be included in such calculation:
B-40
Maximum Percent
Maximum Percentage of Value
Minimum Original of Value of Fund Assets
Issue Size of of Fund Assets Invested in any
Each Issue Invested in any One S&P Industry
S&P Rating(1) ($ in million) One Issuer(2),(3) Category(2),(3)
---------- ---------------- --------------------- ----------------
AAA........... $100 10.0% 50.0%
AA............ $100 10.0% 33.3%
A............. $100 10.0% 33.3%
BBB........... $100 5.0% 20.0%
BB............ $100 4.0% 12.0%
B............. $100 3.0% 8.0%
CCC........... $100 3.0% 8.0%
(1) Rating designations include (+) or (-) modifiers to the S&P rating
where appropriate, except that corporate debt obligations rated CCC-
may not be included in the calculations of the APS Basic Maintenance
Amount.
(2) The referenced percentages represent maximum cumulative totals for the
related rating category and each lower rating category. Industries are
determined with respect to the current industry categories of S&P (See
Appendix B).
(3) To the extent the relevant limitation is less restrictive than that set
forth under the Fund's Investment Restrictions, under which investments
in a single issuer are limited to 5% of the Fund's total assets and
investments in a single industry are limited to 25% of the Fund's total
assets, the more restrictive limitation shall apply. For the purposes
of calculating the percentage limitations regarding issuer and industry
concentrations the issuers and related industries of any preferred
stocks in the Fund's portfolio are included.
(4) 20% of the aggregate value of all corporate debt obligations in these
rating categories may be from issues with an original issue size of
greater than or equal to $50 million and less than $100 million.
(5) Corporate debt obligations in this rating category are limited to 20%
of assets constituting S&P Eligible Assets and must have implied senior
debt ratings of B- or higher.
Portfolio securities that are preferred stock will not be included in
the calculation of Discounted Value of the Fund's portfolio for purposes of
S&P's rating of the Preferred Shares unless (a) dividends on such preferred
stock are cumulative, (b) such securities provide for the periodic payment of
dividends thereon in cash and do not provide for conversion or exchange into, or
have warrants attached entitling the holder to receive, equity capital at any
time over the respective lives of such securities, (c) the issuer of such a
preferred stock has common stock listed on either the New York Stock Exchange or
the American Stock Exchange or, if such issuer is a special purpose corporation,
the parent corporation of such issuer has its common stock listed on either such
Exchange, (d) the issuer of such a preferred stock has a senior debt rating from
S&P of BBB or higher or a preferred
B-41
stock rating of BBB or higher (except that 25% of the value of the Fund's assets
may be invested in preferred stocks rated BBB-) and (e) such preferred stock has
paid consistent cash dividends over the last 3 years (new preferred stock issues
without such a dividend history must have an S&P rating of A or higher). In
addition, the preferred stocks must have the following diversification
requirements: (1) the preferred stock issue must be greater than $50 million in
size or the issuer of such stock must have issues of the same tenor exceeding
$50 million and such issuer must have an aggregate market capitalization of $500
million; (2) the minimum holding by the Fund of each issue of preferred stock
(except for floating rate preferred issues) is $500,000 and the maximum holding
by the Fund of each issue of preferred stock is $5 million; (3) the maximum
percent of the value of the Fund's assets which may be invested in any one
issuer (A) with a senior debt S&P rating of BBB is 2.5% and (B) with a senior
debt S&P rating of A or better is 5%; (4) the maximum percentage of value of the
Fund's assets that may be invested in any one S&P industry category is 20%
(except for the utility industry, as to which no such percentage limitation
shall apply); and (5) the maximum percent of the value of the Fund's assets
invested in adjustable rate preferred stocks is 10%. In addition, with respect
to floating rate preferred stock issues, (i) the Fund may not purchase an issue
with a dividend period greater than 49 days (except new issues, which may have
an initial dividend period of up to 64 days) and (ii) no issue of floating rate
preferred stock which has incurred a failed auction or remarketing may be
purchased by the Fund or will constitute an S&P Eligible Asset.
"S&P Exposure Period" shall mean the maximum period of time following a
Valuation Date that the Fund has under this Certificate of Vote to cure any
failure to maintain, as of such Valuation Date, the Discounted Value for its
portfolio at least equal to the APS Basic Maintenance Amount (as described in
paragraph (a) of Section 9 of this Part I).
"S&P Hedging Transactions" means futures contracts on Treasury Bonds,
put and call options on such contracts purchased by the Fund and covered call
options and secured put options on portfolio securities written by the Fund.
"Special Dividend Period," with respect to any of the APS, shall mean
any Subsequent Dividend Period commencing on the date designated by the Fund in
accordance with Section 4 of this Part I and ending on the last day of the last
Dividend Period thereof, with such number of consecutive days or whole years as
the Board of Trustees shall specify, including the terms of any Specific
Redemption Provisions, if any.
"Special Securities" means securities which can, at the option of the
holder, be surrendered at face value in payment of any federal estate tax or
which can provide tax benefits to the holder and are priced to reflect such tax
benefits or which were originally issued at a deep or substantial discount.
"Specific Redemption Provisions" means, with respect to any Special
Dividend Period of 365 or more days, either, or any combination of, (i) period
(a "Non-Call Period") determined by the Board of Trustees, after consultation
with the Broker-Dealers, during
B-42
which the shares subject to such Special Dividend Period are not subject to
redemption at the option of the Fund and (ii) a period (a "Premium Call
Period"), consisting of a number of whole years and determined by the Board of
Trustees, after consultation with the Broker-Dealers, during each year of which
the shares subject to such Special Dividend Period shall be redeemable at the
Fund's option at a price per share equal to $50,000 plus accumulated but unpaid
dividends plus a premium expressed as a percentage of $50,000 as determined by
the Board of Trustees after consultation with the Broker-Dealers; provided that
during any Special Dividend Period of 365 or more days if on the date of
determination of the Applicable Rate for such APS, such Applicable Rate equaled
or exceeded the Treasury Rate, the Fund may redeem APS without regard to any
Non-Call Period or Premium Call Period at the Mandatory Redemption Price.
"Subsequent Dividend Period," with respect to any of the APS, shall
mean the period from and including the first day following the Initial Dividend
Period thereof to but excluding the next Dividend Payment Date which follows a
scheduled Auction for such APS and any period thereafter from and including one
Dividend Payment Date which follows a scheduled Auction for such APS to but
excluding the next succeeding Dividend Payment Date which follows a scheduled
Auction for such APS; provided, however, that if any Subsequent Dividend Period
is also a Special Dividend Period, such term shall mean the period commencing on
the first day of such Special Dividend Period and ending on the last day of the
last Dividend Period thereof.
"Substitute Commercial Paper Dealer" shall mean The First Boston
Company or Morgan Stanley & Co. Incorporated or their respective affiliates or
successors, if such entity is a Commercial Paper Dealer; provided that none of
such entities shall be a Commercial Paper Dealer.
"Substitute U.S. Government Securities Dealer" shall mean The First
Boston Company and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their
respective affiliates or successors, if such entity is a U.S. Government
securities dealer; provided that none of such entities shall be a U.S.
Government Securities Dealer.
"Ten Year Average Yield" means the average yield to maturity for
actively traded, marketable U.S. Treasury fixed-rate securities (adjusted to
constant maturities of ten years).
"Ten Year Constant Maturity Rate", on any date, means the arithmetic
average of the two most recent weekly per annum Ten Year Average Yields (or the
one weekly per annum Ten Year Average Yield, if only one such Yield shall be
published during the Calendar Period with respect to such date), as published
weekly by the Federal Reserve Board during the Calendar Period with respect to
such date. In the event that the Federal Reserve Board does not publish such a
weekly per annum Ten Year Average Yield during such Calendar Period, then the
Ten Year Constant Maturity Rate with respect to such date shall be the
arithmetic average of the two most recent weekly per annum Ten Year Average
Yields (or the one weekly per annum Ten Year Average Yield, if only one such
Yield shall be published during such Calendar Period), as published weekly
during such Calendar Period
B-43
by any Federal Reserve Bank or by any U.S. Government department or agency
selected by the Fund. In the event that a per annum Ten Year Average Yield shall
not be published by the Federal Reserve Board or by any Federal Reserve Bank or
by any U.S. Government department or agency during such Calendar Period, then
the Ten Year Constant Maturity Rate with respect to such date will be the
arithmetic average of the two most recent weekly per annum average yields to
maturity (or the one weekly per annum average yield to maturity, if only one
such yield shall be published during such Calendar Period) for all of the
actively traded marketable U.S. Treasury fixed interest rate securities (other
than Special Securities) then having maturities of not less than eight nor more
than 12 years, as published during such Calendar Period by the Federal Reserve
Board or, if the Federal Reserve Board shall not publish such yields, by any
Federal Reserve Bank or by any U.S. Government department or agency selected by
the Company. In the event that the Fund determines in good faith that for any
reason the Auction Agent cannot determine the Ten Year Constant Maturity Rate
with respect to such date as provided above in this paragraph, then the Ten Year
Constant Maturity Rate with respect to such date will be the arithmetic average
of the per annum average yields to maturity based upon the closing bids during
such Calendar Period for each of the issues of actively traded marketable U.S.
Treasury fixed interest rate securities (other than Special Securities) with a
final maturity date not less than eight nor more than 12 years from the date of
each such quotation, as quoted daily for each business day in New York City (or
less frequently if daily quotations shall not be generally available) to the
Auction Agent by the U.S. Government Securities Dealers.
"Thirty Year Average Yield" means the average yield to maturity for
actively traded, marketable U.S. Treasury fixed-interest-rate securities
(adjusted to constant maturities of ten years).
"Thirty Year Constant Maturity Rate", on any date, means the arithmetic
average of the two most recent weekly per annum Thirty Year Average Yields (or
the one weekly per annum Thirty Year Average Yield, if only one such Yield shall
be published during the relevant Calendar Period), as published weekly by the
Federal Reserve Board during the Calendar Period with respect to such date. In
the event that the Federal Reserve Board does not publish such a weekly per
annum Thirty Year Average Yield during such Calendar Period, then the Thirty
Year Constant Maturity Rate with respect to such date shall be the arithmetic
average of the two most recent weekly per annum Thirty Year Average Yields (or
the one weekly per annum Thirty Year Average Yield, if only one such Yield shall
be published during such Calendar Period), as published weekly during such
Calendar Period by any Federal Reserve Board or by any U.S. Government
department or agency selected by the Fund. In the event that a per annum Thirty
Year Average Yield shall not be published by the Federal Reserve Board or by any
Federal Reserve Bank or by any U.S. Government department or agency during such
Calendar Period, then the Thirty Year Constant Maturity Rate with respect to
such date will be the arithmetic average of the two most recent weekly per annum
average yields to maturity (or the one weekly per annum average yield to
maturity, if only one such yield shall be published during such Calendar Period)
for all of the actively traded marketable U.S. Treasury fixed interest rate
securities (other than Special Securities) then having maturities of not less
than 28 nor more than 30 years, as published
B-44
during such Calendar Period by the Federal Reserve Board or, if the Federal
Reserve Board shall not publish such yields, by any Federal Reserve Bank or by
any U.S. Government department or agency selected by the Fund. In the event that
the Fund determines in good faith that for any reason the Auction Agent cannot
determine the Thirty Year Constant Maturity Rate with respect to such date as
provided above in this paragraph, then the Thirty Year Constant Maturity Rate
with respect to such date will be the arithmetic average of the per annum
average yields to maturity based upon the closing bids during such Calendar
Period for each of the issues of actively traded marketable U.S. Treasury fixed
interest rate securities (other than Special Securities) with a final maturity
date not less than 28 nor more than 30 years from the date of each such
quotation, as quoted daily for each business day in New York City (or less
frequently if daily quotations shall not be generally available) to the Auction
Agent by U.S. Government Securities Dealers.
"Treasury Bonds" shall mean United States Treasury Bonds backed by the
full faith and credit of the United States government with remaining maturities
of 10 years or more.
"Treasury Rate," on any date, shall mean the interest equivalent of the
rate for direct obligations of the United States having a maturity which is
equal to, or, if not equal to, next shorter than, 3 months, as published weekly
by the Board of Governors of the Federal Reserve System in "Federal Reserve
Statistical Release H.15(519), Selected Interest Rates" or any successor
publication, within five Business Days preceding such date. If such statistical
release is not published or is otherwise not available, the Treasury Rate will
be the arithmetic mean of the secondary market bid rates as of approximately
3:30 p.m., New York City time, on the Business Day next preceding such date, of
U.S. Government Securities Dealers furnished to the Auction Agent for the issue
of direct obligations of the United States, in an aggregate principal amount of
at least $1 million with a remaining maturity equal to, or next shorter than, 3
months, as the case may be. If any U.S. Government Securities Dealer does not
quote a rate required to determine the Treasury Rate, the Ten Year Constant
Maturity Rate or the Thirty Year Constant Maturity Rate, such rate will be
determined on the basis of the quotation or quotations furnished by the
remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers (if any) or any Substitute U.S. Government Securities Dealer or U.S.
Government Securities Dealers ("Substitute U.S. Government Securities Dealers")
selected by the Fund to provide such rate or rates not being supplied by any
U.S. Government Securities Dealer or U.S. Government Securities Dealers, by the
remaining U.S. Government Securities Dealer or U.S. Government Securities
Dealers; provided that, in the event the Company is unable to cause such
quotations to be furnished to the Auction Agent by such sources, the Company may
cause the Treasury Rate to be furnished to the Auction Agent by such alternative
source or sources as the Company in good faith deems to be reliable. For
purposes of this definition, "interest equivalent" means the equivalent yield on
a 360-day basis of a discount basis security to an interest-bearing security.
"U.S. Government Securities Dealer" shall mean Goldman, Sachs & Co.,
Lehman Government Securities Incorporated, Smith Barney, Harris Upham & Co. and
Morgan
B-45
Guaranty Trust Company of New York or their respective affiliates or
successors, if such entity is a U.S. Government securities dealer.
"Valuation Date" shall mean, for purposes of determining whether the
Fund is maintaining the APS Basic Maintenance Amount and the Minimum Liquidity
Level, each Friday, or during any period in which the Fund shall have open
positions in future contracts or open short positions in future contracts, each
Business Day.
"Variation Margin" shall mean, in connection with outstanding purchase
or sale positions in futures contracts and outstanding sales positions with
respect to options thereon, the amount of cash and securities paid to and
received from a futures commission merchant (subsequent to the Initial Margin
payment) from time to time as the value of such position fluctuates.
"Voting Period" shall have the meaning set forth in paragraph (b) of
Section 5 of this Part I.
PART II.
1. Certain Definitions. Capitalized terms not defined in
Section 1 of this Part II shall have the respective meaning specified in Part I
hereof. As used in this Part II, the following terms shall have the following
meanings, unless the context otherwise requires:
"Affiliate" shall mean any Person known to the Auction Agent to be
controlled by, in control of or under common control with the Fund; provided
that no Broker-Dealer controlled by, in control of or under common control with
the Fund shall be deemed to be an Affiliate nor shall any fund or any Person
controlled by, in control of or under common control with such fund one of the
trustees or executive officers of which is also a trustee of the Fund be deemed
to be an Affiliate solely because such trustee or executive officer is also a
trustee of the Fund.
"Agent Member" shall mean a member of or participant in the Securities
Depository that will act on behalf of a Bidder and is identified as such in such
Bidder's Master Purchaser's Letter.
"Applicable Percentage" for any of the APS on any Auction Date shall
mean the percentage, determined as set forth below, based on the prevailing
rating of such APS in effect at the close of business on the Business Day next
preceding such Auction Date.
Prevailing Rating Percentage
----------------- ----------
"aa3"/AA- or higher......................... 150%
"a3"/A1..................................... 200%
"baa3"/BBB-................................. 250%
Below "baa3"/BBB-........................... 300%
B-46
For purposes of this definition, the "prevailing rating" of the APS
shall be (i) "aa3"/AA- or higher if such APS have a rating of "aa3" or better by
Moody's and AA- or better by S&P or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below, (ii) if not "aa3"/AA- or higher, then "a3"/A- if such APS have a
rating of "a3" or better by Moody's and A- or better by S&P or the equivalent of
such ratings by such agencies or a substitute rating agency or substitute rating
agencies selected as provided below, (iii) if not "aa3"/AA- or higher or
"a3"/A-, then "baa3"/BBB- if such APS have a rating of "baa3" or better by
Moody's and BBB- or better by S&P or the equivalent of such ratings by such
agencies or a substitute rating agency or substitute rating agencies selected as
provided below and (iv) if not "aa3"/AA- or higher, "a3"/A- or "baa3"/BBB-, then
Below "baa3"/BBB-; provided, however, that if the APS are rated by only one
rating agency, the prevailing rating will be determined without reference to the
rating of any other rating agency. The Fund shall take all reasonable action
necessary to enable either S&P or Moody's to provide a rating for the APS. If
neither S&P nor Moody's shall make such a rating available, Goldman, Sachs & Co.
or its successor as Broker-Dealer shall select a nationally recognized
statistical rating organization (as that term is used in the rules and
regulations of the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended from time to time) to act as a substitute
rating agency in respect of the APS and the Fund shall take all reasonable
action to enable such rating agency or agencies to provide a rating for such
APS.
"Available APS" shall have the meaning specified in paragraph (a) of
Section 4 of this Part II.
"Bid" and "Bids" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Bidder" and "Bidders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Broker-Dealer" shall mean any broker-dealer, commercial bank or other
entity permitted by law to perform the functions required of a Broker-Dealer in
this Part II, that is a member of, or a participant in, the Securities
Depository or is an affiliate of such member or participant, has been selected
by the Fund and has entered into a Broker-Dealer Agreement that remains
effective.
"Broker-Dealer Agreement" shall mean an agreement between the Auction
Agent and a Broker-Dealer pursuant to which such Broker-Dealer agrees to follow
the procedures specified in this Part II.
"Existing Holder," when used with respect to the APS, shall mean a
Person who has signed a Master Purchaser's Letter and is listed as the
beneficial owner of such APS in the records of the Auction Agent.
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"Hold Order" and "Hold Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Master Purchaser's Letter" shall mean a letter, addressed to the Fund,
the Auction Agent, a Broker-Dealer and an Agent Member in which a Person agrees,
among other things, to offer to purchase, to purchase, to offer to sell and/or
to sell APS as set forth in this Part II.
"Maximum Rate," for any of the APS on any Auction Date, shall mean the
product of (i) the higher of (a) the "AA" Composite Commercial Paper Rate, (b)
the Treasury Rate, (c) the Ten Year Constant Maturity Rate and (d) the Thirty
Year Constant Maturity Rate on such Auction Date for the next Rate Period and
(ii) the Applicable Percentage on such Auction Date.
"Order" and "Orders" shall have the respective meanings specified in
paragraph (a) of Section 2 of this Part II.
"Outstanding" shall mean, as of any Auction Date with respect to any of
the APS, the number of APS theretofore issued by the Fund except, without
duplication, (i) any APS theretofore cancelled or delivered to the Auction Agent
for cancellation or redeemed by the Fund or as to which a notice of redemption
shall have been given by the Fund, (ii) any APS as to which the Fund or any
Affiliate thereof shall be an Existing Holder and (iii) any APS represented by
any certificate in lieu of which a new certificate has been executed and
delivered by the Fund.
"Person" shall mean and include an individual, a partnership, a fund, a
trust, an unincorporated association, a joint venture or other entity or a
government or any agency or political subdivision thereof.
"Potential Holder," when used with respect to any of the APS, shall
mean any Person, including any Existing Holder of such APS, (i) who shall have
executed a Master Purchaser's Letter and (ii) who may be interested in acquiring
such APS (or, in the case of an Existing Holder of APS, additional shares of
such APS).
"Securities Depository" shall mean The Depository Trust Company and its
successors and assigns or any other securities depository selected by the Fund
which agrees to follow the procedures required to be followed by such securities
depository in connection with the APS.
"Sell Order" and "Sell Orders" shall have the respective meanings
specified in paragraph (a) of Section 2 of this Part II.
"Submission Deadline" shall mean 1:30 p.m., New York City time, on any
Auction Date or such other time on any Auction Date by which Brokers-Dealers are
required to submit Orders to the Auction Agent as specified by the Auction Agent
from time to time.
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"Submitted Bid" and "Submitted Bids" shall have the respective meanings
specified in paragraph (a) of Section 4 of this Part II.
"Submitted Hold Order" and "Submitted Hold Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Order" and "Submitted Orders" shall have the respective
meanings specified in paragraph (a) of Section 4 of this Part II.
"Submitted Sell Order" and "Submitted Sell Orders" shall have the
respective meanings specified in paragraph (a) of Section 4 of this Part II.
"Sufficient Clearing Bids" shall have the meaning specified in
paragraph (a) of Section 4 of this Part II.
"Winning Bid Rate" shall have the meaning specified in paragraph (a) of
Section 4 of this Part II.
2. Orders by Existing Holders and Potential Holders. Prior to
the Submission Deadline on each Auction Date:
(i) each Existing Holder of APS subject
to an Auction on such Auction Date may submit to a Broker-Dealer by
telephone or otherwise information as to:
(A) the number of Outstanding shares, if
any, of such APS held by such Existing Holder which such Existing
Holder desires to continue to hold without regard to the Applicable
Rate for such APS for the next succeeding Rate Period of such APS;
(B) the number of Outstanding shares, if
any, of such APS which such Existing Holder offers to sell if the
Applicable Rate for such APS for the next succeeding Rate Period of
such APS shall be less than the rate per annum specified by such
Existing Holder; and/or
(C) the number of Outstanding shares,
if any, of such APS held by such Existing Holder which such Existing
Holder offers to sell without regard to the Applicable Rate for such
APS for the next succeeding Rate Period of such APS;
and
(ii) one or more Broker-Dealers, using
lists of Potential Holders, shall in good faith for the purpose of
conducting
B-49
a competitive Auction in a commercially reasonable manner, contact
Potential Holders (by telephone or otherwise), including Persons that
are not Existing Holders, on such lists to determine the number of APS,
if any, which each such Potential Holder offers to purchase if the
Applicable Rate for such APS for the next succeeding Rate Period of
such APS shall not be less than the rate per annum specified by such
Potential Holder.
For the purposes hereof, the communication to a Broker-Dealer of information
referred to in clause (i)(A), (i)(B), (i)(C) or (ii) of this paragraph (a) is
hereinafter referred to as an "Order" and collectively as "Orders" and each
Existing Holder and each Potential Holder placing an Order is hereinafter
referred to as a "Bidder" and collectively as "Bidders"; an Order containing the
information referred to in clause (i)(A) of this paragraph (a) is hereinafter
referred to as a "Hold Order" and collectively as "Hold Orders"; an Order
containing the information referred to in clause (i)(B) or (ii) of this
paragraph (a) is hereinafter referred to as a "Bid" and collectively as "Bids";
and an Order containing the information referred to in clause (i)(C) of this
paragraph (a) is hereinafter referred to as a "Sell Order" and collectively as
"Sell Orders."
(b) (i) A bid by an Existing Holder of any of
the APS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
(A) the number of Outstanding APS specified
in such Bid if the Applicable Rate for such APS determined on such
Auction Date shall be less than the rate specified therein:
(B) such number or a lesser number of
Outstanding APS to be determined as set forth in clause (iv) of
paragraph (a) of Section 5 of this Part II if the Applicable Rate for
such APS determined on such Auction Date shall be equal to the rate
specified therein; or
(C) the number of Outstanding APS specified
in such Bid if the rate specified therein shall be higher than the
Maximum Rate for such APS, or such number or a lesser number of
Outstanding APS to be determined as set forth in clause (iii) of
paragraph (b) of Section 5 of this Part II if the rate specified
therein shall be higher than the Maximum Rate for such APS and
Sufficient Clearing Bids for such APS do not exist.
(ii) A Sell Order by an Existing Holder
of APS subject to an Auction on any Auction Date shall constitute an
irrevocable offer to sell:
B-50
(A) the number of Outstanding APS specified
in such Sell Order; or
(B) such number or a lesser number of
Outstanding APS as set forth in clause (iii) of paragraph (b) of
Section 5 of this Part II if Sufficient Clearing Bids for such APS do
not exist.
(iii) A Bid by a Potential Holder of
shares of APS subject to an Auction on any Auction Date shall
constitute an irrevocable offer to purchase:
(A) the number of Outstanding APS specified
in such Bid if the Applicable Rate for such APS determined on such
Auction Date shall be higher than the rate specified therein; or
(B) such number or a lesser number of
Outstanding APS as set forth in clause (v) of paragraph (a) of Section
5 of this Part II if the Applicable Rate for such APS determined on
such Auction Date shall be equal to the rate specified therein.
(c) No Order for any number of APS other than whole
shares shall be valid.
3. Submission of Orders by Broker-Dealers to Auction Agent.
(a) Each Broker-Dealer shall submit in writing to the Auction Agent prior to the
Submission Deadline on each Auction Date all Orders for the APS subject to an
Auction on such Auction Date obtained by such Broker-Dealer and shall specify
with respect to each Order for such shares:
(i) the name of the Bidder placing such
Order;
(ii) the aggregate number of APS that
are the subject of such Order;
(iii) to the extent that such Bidder is
an Existing Holder of APS:
(A) the number of APS, if any, subject to
any Hold Order placed by such Existing Holder;
B-51
(B) the number of APS, if any, subject to
any Bid placed by such Existing Holder and the rate specified in such
Bid; and
(C) the number of APS, if any, subject to
any Sell Order placed by such Existing Holder; and
(iv) to the extent such Bidder is a
Potential Holder of APS, the rate and number of APS specified in such
Potential Holder's Bid.
(b) If any rate specified in any Bid contains more
than three figures to the right of the decimal point, the Auction Agent shall
round such rate up to the next highest one thousandth (.001) of 1%.
(c) In connection with a Rate Period of less than
90 days, if an Order or Orders covering all of the Outstanding APS held by any
Existing Holder is not submitted to the Auction Agent prior to the Submission
Deadline, the Auction Agent shall deem a Hold Order to have been submitted on
behalf of such Existing Holder covering the number of Outstanding APS held by
such Existing Holder and not subject to Orders submitted to the Auction Agent.
In connection with a Rate Period of 90 days or more, if an Order or Orders
covering all of the Outstanding APS held by any Existing Holder is not submitted
to the Auction Agent prior to the Submission Deadline, the Auction Agent shall
deem a Sell Order to have been submitted on behalf of such Existing Holder
covering the number of Outstanding APS held by such Existing Holder and not
subject to Orders submitted to the Auction Agent.
(d) If any Existing Holder submits through a
Broker-Dealer to the Auction Agent one or more Orders covering in the aggregate
more than the number of Outstanding APS subject to an Auction held by such
Existing Holder, such Orders shall be considered valid in the following order of
priority:
(i) all Hold Orders for APS shall be
considered valid, but only up to and including in the aggregate the
number of Outstanding APS held by such Existing Holder, and if the
number of APS subject to such Hold Orders exceeds the number of
Outstanding APS held by such Existing Holder, the number of shares
subject to each such Hold Order shall be reduced pro rata to cover the
number of Outstanding APS held by such Existing Holder;
(ii) (A) any Bid for APS shall be
considered valid up to and including the excess of the number of
Outstanding
B-52
APS held by such Existing Holder over the number of APS subject to any
Hold Orders referred to in clause (i) above;
(B) subject to subclause (A), if more than
one Bid for such APS with the same rate is submitted on behalf of such
Existing Holder and the number of Outstanding APS subject to such Bids
is greater than such excess, such Bids shall be considered valid up to
and including the amount of such excess, and the number of APS subject
to each Bid with the same rate shall be reduced pro rata to cover the
number of APS equal to such excess;
(C) subject to subclauses (A) and (B), if
more than one Bid for APS with different rates is submitted on behalf
of such Existing Holder, such Bids shall be considered valid in the
ascending order of their respective rates up to and including the
amount of such excess; and
(D) in any such event, the number, if any,
of such Outstanding APS subject to any portion of Bids considered not
valid in whole or in part under the clause (ii) shall be treated as the
subject of a Bid for such APS by a Potential Holder at the rate therein
specified; and
(iii) all Sell Orders for APS shall be
considered valid up to and including the excess of the number of
Outstanding APS held by such Existing Holder over the sum of the APS
subject to valid Hold Orders referred to in clause (i) above and valid
Bids by such Existing Holder referred to in clause (ii) above.
(e) If more than one Bid for one or more APS is
submitted on behalf of any Potential Holder, each such Bid submitted
shall be a separate Bid with the rate and number of shares therein
specified.
(f) An Order submitted by a Broker-Dealer to the
Auction Agent prior to the Submission Deadline on any Auction Date
shall be irrevocable.
4. Determination of Sufficient Clearing Bids, Winning Bid Rate
and Applicable Rate. Not earlier than the Submission Deadline on each Auction
Date, the Auction Agent shall assemble all valid Orders submitted or deemed
submitted to it by the Broker-Dealers (each such Order as submitted or deemed
submitted by a Broker-Dealer being hereinafter referred to individually as a
"Submitted Hold Order," a "Submitted Bid" or a "Submitted Sell Order," as the
case may be, or as a "Submitted Order" and collectively as "Submitted Hold
Orders," "Submitted Bids" or "Submitted Sell Orders," as the case may be, or as
"Submitted Orders" and shall for the APS for which an Auction is being held
determine:
B-53
(i) the excess of the number of
Outstanding APS over the number of Outstanding APS subject to Submitted
Hold Orders (such excess being hereinafter referred to as the
"Available APS");
(ii) from the Submitted Orders for such
APS whether:
(A) the number of Outstanding APS subject
to Submitted Bids by Potential Holders specifying one or more rates
equal to or lower than the Maximum Rate for such APS
exceeds or is equal to the sum of
(B) the number of Outstanding APS subject
to Submitted Bids by Existing Holders specifying one or more rates
higher than the Maximum Rate for such APS; and
(C) the number of Outstanding APS subject
to Submitted Sell Orders
(in the event such excess or such equality exists (other than because the number
of APS in subclauses (B) and (C) above is zero because all of the Outstanding
APS are subject to Submitted Hold Orders), such Submitted Bids in subclause (A)
above being hereinafter referred to collectively as "Sufficient Clearing Bids");
and
(iii) if Sufficient Clearing Bids for
the APS exist, the lowest rate specified in such Submitted Bids (the
"Winning Bid Rate") which if:
(A) (I) each such Submitted Bid from
Existing Holders specifying such lowest rate and (II) all other such
Submitted Bids from Existing Holders specifying lower rates were
rejected, thus entitling such Existing Holders to continue to hold the
APS that are subject to such Submitted Bids; and
(B) (I) each such Submitted Bid from
Potential Holders specifying such lowest rate and (II) all other such
Submitted Bids from Potential Holders specifying lower rates were
accepted;
would result in such Existing Holders described in subclause (A) above
continuing to hold an aggregate number of Outstanding APS which, when added to
the number of
B-54
Outstanding APS to be purchased by such Potential Holders described in subclause
(B) above, would equal not less than the Available APS.
(b) Promptly after the Auction Agent has made the
determinations pursuant to paragraph (a) of this Section 4, the Auction Agent
shall advise the Fund of the Maximum Rate for the APS for which an Auction is
being held on the Auction Date and, based on such determination, the Applicable
Rate for such APS for the next succeeding Rate Period thereof as follows:
(i) if Sufficient Clearing Bids for such
APS exist, that the Applicable Rate for such APS for the next
succeeding Rate Period thereof shall be equal to the Winning Bid Rate
for such APS to determined;
(ii) if Sufficient Clearing Bids for
such APS do not exist (other than because all of the Outstanding shares
of such APS are subject to Submitted Hold Orders), that the Applicable
Rate for such APS for the next succeeding Rate Period, which shall be a
Minimum Dividend Period, thereof shall be equal to the Maximum Rate for
such APS; or
(iii) if all of the Outstanding APS are
subject to Submitted Hold Orders, that the Applicable Rate for such APS
for the next succeeding Rate Period thereof shall be equal to (A) the
"AA" Composite Commercial Paper Rate on such Auction Date for such Rate
Period, if such Rate Period is less than one year or (B) the Treasury
Rate on such Auction Date for such Rate Period, if such Rate Period is
one year or greater.
5. Acceptance and Rejection of Submitted Bids and Submitted
Sell Orders and Allocation of Shares. Existing Holders shall continue to hold
the APS that are subject to Submitted Hold Orders, and, based on the
determinations made pursuant to paragraph (a) of Section 4 of this Part II, the
Submitted Bids and Submitted Sell Orders shall be accepted or rejected and the
Auction Agent shall take such other action as set forth below:
(a) If Sufficient Clearing Bids for any of the APS
have been made, all Submitted Sell Orders shall be accepted and, subject to the
provisions of paragraphs (d) and (e) of this Section 5, Submitted Bids shall be
accepted or rejected as follows in the following order of priority and all other
Submitted Bids for such APS shall be rejected:
B-55
(i) Existing Holders' Submitted Bids for
the APS specifying any rate that is higher than the Winning Bid Rate
for such APS shall be accepted, thus requiring each such Existing
Holder to sell the APS subject to such Submitted Bids;
(ii) Existing Holders' Submitted Bids
for the APS specifying any rate that is lower than the Winning Bid Rate
for such APS shall be rejected, thus entitling each such Existing
Holder to continue to hold the APS subject to such Submitted Bids;
(iii) Potential Holders' Submitted Bids
for the APS specifying any rate that is lower than the Winning Bid Rate
shall be accepted;
(iv) each Existing Holder's Submitted
Bid for the APS specifying a rate that is equal to the Winning Bid Rate
for the APS shall be rejected, thus entitling such Existing Holder to
continue to hold the APS subject to such Submitted Bid, unless the
number of Outstanding APS subject to all such Submitted Bids shall be
greater than the number of APS ("remaining shares") in the excess of
the Available APS over the number of the APS subject to Submitted Bids
described in clauses (ii) and (iii) of this paragraph (a), in which
event such Submitted Bid of such Existing Holder shall be rejected in
part, and such Existing Holder shall be entitled to continue to hold
the APS subject to such Submitted Bid, but only in an amount equal to
the number of APS obtained by multiplying the number of remaining
shares by a fraction, the numerator of which shall be the number of
Outstanding APS held by such Existing Holder subject to such Submitted
Bid and the denominator of which shall be the aggregate number of
Outstanding APS subject to such Submitted Bids made by all such
Existing Holders that specified a rate equal to the Winning Bid Rate
for such APS; and
(v) each Potential Holder's Submitted
Bid for the APS specifying a rate that is equal to the Winning Bid Rate
for such APS shall be accepted but only in an amount equal to the
number of APS obtained by multiplying the number of shares in the
excess of the Available APS over the number of the APS subject to
Submitted Bids described in clauses (ii) through (iv) of this paragraph
(a) by a fraction, the numerator of which shall be the number of
Outstanding APS subject to such Submitted Bid and the denominator of
which shall be the aggregate number of Outstanding APS subject to
B-56
such Submitted Bids made by all such Potential Holders that specified a
rate equal to the Winning Bid Rate for such APS; and
(b) If Sufficient Clearing Bids for any of the APS
have not been made (other than because all of the Outstanding APS are subject to
Submitted Hold Orders), subject to the provisions of paragraph (d) of this
Section 5, Submitted Orders for such APS shall be accepted or rejected as
follows in the following order of priority and all other Submitted Bids for such
APS shall be rejected:
(i) Existing Holders' Submitted Bids for
the APS specifying any rate that is equal to or lower than the Maximum
Rate for such APS shall be rejected, thus entitling such Existing
Holders to continue to hold the APS subject to such Submitted Bids;
(ii) Potential Holders' Submitted Bids
for the APS specifying any rate that is equal to or lower than the
Maximum Rate for such APS shall be accepted; and
(iii) Each Existing Holder's Submitted
Bid for the APS specifying any rate that is higher than the Maximum
Rate of such APS and the Submitted Sell Orders for the APS of each
Existing Holder shall be accepted, thus entitling each Existing Holder
that submitted any such Submitted Bid or Submitted Sell Order to sell
the APS subject to such Submitted Bid or Submitted Sell Order, but in
both cases only in an amount equal to the number of APS obtained by
multiplying the number of APS subject to Submitted Bids described in
clause (ii) of this paragraph (b) by a fraction, the numerator of which
shall be the number of Outstanding APS held by such Existing Holder
subject to such Submitted Bid or Submitted Sell Order and the
denominator of which shall be the aggregate number of Outstanding APS
subject to all such Submitted Bids and Submitted Sell Orders.
(c) If all of the Outstanding APS are subject to
Submitted Hold Orders, all Submitted Bids for such APS shall be rejected.
(d) If, as a result of the procedures described in
clause (iv) or (v) of paragraph (a) or clause (iii) of paragraph (b) of this
Section 5, any Existing Holder would be entitled or required to sell, or any
Potential Holder would be entitled or required to purchase, a fraction of a
share of APS on any Auction Date, the Auction Agent shall, in such manner as it
shall determine in its sole discretion, round up or down the number of APS to be
purchased or sold by any Existing Holder or Potential Holder on such Auction
Date as a result of such procedures so that the number of APS so purchased or
sold by each Existing Holder
B-57
or Potential Holder on such Auction Date shall be whole shares of APS.
(e) If, as a result of the procedures described in
clause (v) of paragraph (a) of this Section 5, any Potential Holder would be
entitled or required to purchase less than a whole share of APS on any Auction
Date, the Auction Agent shall, in such manner as it shall determine in its sole
discretion, allocate shares of such APS for purchase among Potential Holders so
that only whole shares of such APS are purchased on such Auction Date as a
result of such procedures by any Potential Holder, even if such allocation
results in one or more Potential Holders not purchasing the APS on such Auction
Date.
(f) Based on the results of each Auction for the APS,
the Auction Agent shall determine the aggregate number of APS to be purchased
and the aggregate number of APS to be sold by Potential Holders and Existing
Holders on whose behalf each Broker-Dealer submitted Bids or Sell Orders and,
with respect to each Broker-Dealer, to the extent that such aggregate number of
shares to be purchased and such aggregate number of shares to be sold differ,
determine to which other Broker-Dealer or Broker-Dealers acting for one or more
purchasers of APS such Broker-Dealer shall deliver, or from which other
Broker-Dealer or Broker-Dealers acting for one or more sellers of APS such
Broker-Dealer shall receive, as the case may be, shares of APS.
6. [RESERVED]
7. Miscellaneous. (a) To the extent permitted by applicable
law, the Board of Trustees may interpret or adjust the provisions of this
Certificate of Vote to resolve any inconsistency or ambiguity or to remedy any
formal defect, and may amend this Certificate of Vote with respect to the APS
prior to the issuance of such APS.
(b) An Existing Holder may sell, transfer or
otherwise dispose of the APS only in whole shares and only pursuant to a Bid or
Sell Order in accordance with the procedures described in this Part II or to or
through a Broker-Dealer or to a Person that has delivered a signed copy of a
Master Purchaser's Letter to the Auction Agent; provided that, in the case of
all transfers other than pursuant to Auctions, such Existing Holder, its
Broker-Dealer or its Agent Member advises the Auction Agent of such transfer.
B-58
(c) All of the APS outstanding from time to time
shall be represented by one global certificate registered in the name of the
Securities Depository or its nominee.
(d) Neither the Fund nor any affiliate thereof may
submit an Order in any Auction, except that any Broker-Dealer that is an
affiliate of the Fund may submit Orders in an Auction, but only if such Orders
are not for its own account.
B-59
APPENDIX A
MOODY'S INDUSTRY CLASSIFICATION
1. Aerospace and Defense: Major Contractor, Subsystems, Research,
Aircraft Manufacturing, Arms, Ammunition
2. Automobile: Automotive Equipment, Auto Manufacturing, Auto Parts
Manufacturing, Personal Use Trailers, Motor Homes, Dealers
3. Banking: Bank Holding, Savings and Loans, Consumer Credit, Small
Loan, Agency, Factoring, Receivables
4. Beverage, Food and Tobacco: Beer and Ale, Distillers, Wines and
Liquors, Distributors, Soft Drink Syrup, Bottlers, Bakery, Mill Sugar, Canned
Foods, Corn Refiners, Dairy Products, Meat Products, Poultry Products, Snacks,
Packaged Foods, Distributors, Candy, Gum, Seafood, Frozen Food, Cigarettes,
Cigars, Leaf/Snuff, Vegetable Oil
5. Buildings and Real Estate: Brick, Cement, Climate Controls,
Contracting, Engineering, Construction, Hardware, Forest Products
(Building-related Only), Plumbing, Roofing, Wallboard, Real Estate, Real Estate
Development, REITs, Land Development
6. Chemicals, Plastics and Rubber: Chemicals (Non-Agriculture),
Industrial Gases, Sulphur, Plastics, Plastic Products, Abrasives, Coatings,
Paints, Varnish, Fabricating
7. Containers, Packaging and Glass: Glass, Fiberglass, Containers
made of: Glass, Metal, Paper, Plastic, Wood or Fiberglass
8. Personal and Non-Durable Consumer Products (Manufacturing Only):
Soaps, Perfumes, Cosmetics, Toiletries, Cleaning Supplies, School Supplies
9. Diversified/Conglomerate Manufacturing
10. Diversified/Conglomerate Service
11. Diversified Natural Resources, Precious Metals and Minerals:
Fabricating, Distribution, Mining and Sales
B-60
12. Ecological: Pollution Control, Waste Removal, Waste Treatment,
Waste Disposal
13. Electronics: Computer Hardware, Electric Equipment, Components,
Controllers, Motors, Household Appliances, Information Service Communication
Systems, Radios, TVs, Tape Machines, Speakers, Printers, Drivers, Technology
14. Finance: Investment Brokerage, Leasing, Syndication, Securities
15. Farming and Agriculture: Livestock, Grains, Produce; Agricultural
Chemicals, Agricultural Equipment, Fertilizers
16. Grocery: Grocery Stores, Convenience Food Stores
17. Healthcare, Education and Childcare: Ethical Drugs, Proprietary
Drugs, Research, Health Care Centers, Nursing Homes, HMOs, Hospitals, Hospital
Supplies, Medical Equipment
18. Home and Office Furnishings, Housewares, and Durable Consumer
Products: Carpets, Floor Coverings, Furniture, Cooking, Ranges
19. Hotels, Motels, Inns and Gaming
20. Insurance: Life, Property and Casualty, Broker, Agent, Surety
21. Leisure, Amusement, Motion Pictures, Entertainment: Boating,
Bowling, Billiards, Musical Instruments, Fishing, Photo Equipment, Records,
Tapes, Sports, Outdoor Equipment (Camping), Tourism, Resorts, Games, Toy
Manufacturing, Motion Picture Production Theaters, Motion Picture Distribution
22. Machinery (Non-Agriculture, Non-Construction, Non-Electronic);
Industrial, Machine Tools, Steam Generators
23. Mining, Steel, Iron and Non-Precious Metals: Coal, Copper, Lead,
Uranium, Zinc, Aluminum, Stainless Steel, Integrated Steel, Ore Production,
Refractories, Steel Mill Machinery, Mini-Mills, Fabricating, Distribution and
Sales
B-61
24. Oil and Gas: Crude Producer, Retailer, Well Supply, Services and
Drilling
25. Personal, Food and Miscellaneous Services
26. Printing, Publishing and Broadcasting: Graphic Arts, Paper, Paper
Products, Business Forms, Magazines, Books, Periodicals, Newspapers, Textbooks,
Radio, TV, Cable, Broadcasting Equipment
27. Cargo Transport: Rail, Shipping, Railroads, Rail-car Builders,
Ship Builders, Containers, Container Builders, Parts, Overnight Mail, Trucking,
Truck Manufacturing, Trailer Manufacturing, Air Cargo, Transport
28. Retail Stores: Apparel, Toy, Variety, Drugs, Department, Mail
Order Catalog, Showroom
29. Telecommunications: Local, Long Distance, Independent, Telephone,
Telegraph, Satellite, Equipment, Research, Cellular
30. Textiles and Leather: Producer, Synthetic Fiber, Apparel
Manufacturer, Leather Shoes
31. Personal Transportation: Air, Bus, Rail, Car Rental
32. Utilities: Electric, Water, Hydro Power, Gas, Diversified
33. Sovereigns: Semi-sovereigns, Canadian Provinces, Supra-national
Agencies
B-62
APPENDIX B
S&P INDUSTRY CLASSIFICATIONS
AEROSPACE AND DEFENSE FOOD SERVICE
Aircraft manufacturer/components Food service/restaurant
Arms and ammunition Vending
AIR TRANSPORT FOREIGN CORPORATIONS
AUTOMOTIVE FOREIGN GOVERNMENTS OR PROVINCES
Manufacturers FOREST PRODUCTS
Parts and equipment Building materials
Tire and rubber Paper products and containers
BEVERAGE AND TOBACCO HEALTHCARE
BROADCAST RADIO AND TELEVISION Medical equipment/supply
BROKERAGES/SECURITIES DEALERS/ Hospital management
INVESTMENT HOUSES HOME FURNISHINGS
BUILDING AND DEVELOPMENT Appliances
Builders Furniture/fixtures
Land development/real estate Housewares
Mobile homes HOTELS/MOTELS/INNS & CASINOS
Real Estate Investment Trusts INDUSTRIAL EQUIPMENT
BUSINESS EQUIPMENT AND SERVICES Machinery
Graphic arts Manufacturing/Industrial
Office equipment/computers Specialty instruments
Data processing service bureaus INSURANCE
Computer software LEISURE
CABLE TELEVISION Leisure goods
CHEMICALS/PLASTICS Leisure activities/motion pictures
Coatings/paints/varnishes NONFERROUS METALS/MINERALS
CLOTHING/TEXTILES Aluminum producers
CONGLOMERATES Other metal/mineral producers
CONTAINERS AND GLASS PRODUCTS Mining (incl. coal)
COSMETICS/TOILETRIES OIL AND GAS
DRUGS Producers/refiners
ECOLOGICAL SERVICES AND EQUIPMENT Gas pipelines
Waste disposal services and equipment PUBLISHING
ELECTRONICS/ELECTRIC RAIL INDUSTRIES
Equipment Railroads
Components Rail equipment
EQUIPMENT LEASING RETAILERS (OTHER THAN FOOD/DRUG)
Auto leasing/rentals STEEL
Equipment leasing SUPRANATIONAL AGENCIES
Data processing equipment SURFACE TRANSPORT
B-63
service/leasing Shipping/shipbuilding
FARMING/AGRICULTURE Trucking
Agricultural products and equipment TELECOMMUNICATIONS/CELLULAR
Fertilizers COMMUNICATIONS
FINANCIAL INTERMEDIARIES UTILITIES
Banking Electric
Finance companies Local gas
FOOD/DRUG RETAILERS Water
B-64
IN WITNESS WHEREOF, the undersigned has caused this Certificate of Vote
to be executed as of November ___, 1992.
------------------------
Weston B. Wetherell
Assistant Secretary
State of )
) ss
County of )
Then personally appeared before me Weston B. Wetherell, who
acknowledged the foregoing instrument to be his free act and deed and the free
act and deed in his capacity as Assistant Secretary of Van Kampen Merritt
Limited Term High Income Trust.
Before me,
------------------------
Notary Public
My commission expires:
------------------------
APPENDIX C
ACQUIRING FUND ANNUAL REPORT
DATED
DECEMBER 31, 2004
C-1
Item 1. Reports to Shareholders.
The Trust's annual report transmitted to shareholders pursuant to Rule 30e-1
under the Investment Company Act of 1940 is as follows:
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen High
Income Trust II performed during the annual period. The portfolio
management team will provide an overview of the market conditions and
discuss some of the factors that affected investment performance during
the reporting period. In addition, this report includes the trust's
financial statements and a list of trust investments as of December 31,
2004.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO
PASS. THERE IS NO ASSURANCE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. TRUSTS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT THE MARKET VALUES OF SECURITIES OWNED BY THE TRUST WILL DECLINE AND
THAT THE VALUE OF TRUST SHARES MAY THEREFORE BE LESS THAN WHAT YOU PAID
FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS TRUST.
---------------------------------------------------------------------------------------
NOT FDIC INSURED OFFER NO BANK GUARANTEE MAY LOSE VALUE
---------------------------------------------------------------------------------------
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT
---------------------------------------------------------------------------------------
C-2
Performance Summary as of 12/31/04
HIGH INCOME TRUST II
SYMBOL: VLT
-----------------------------------------------------------
AVERAGE ANNUAL BASED ON BASED ON
TOTAL RETURNS NAV MARKET
Since Inception (4/28/89) 5.87% 6.39%
10-year 6.70 7.26
5-year 4.76 9.19
1-year 14.09 10.83
-----------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
VANKAMPEN.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS, NET
ASSET VALUE (NAV) AND COMMON SHARE MARKET PRICE WILL FLUCTUATE AND TRUST SHARES,
WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
NAV per share is determined by dividing the value of the trust's portfolio
securities, cash and other assets, less all liabilities, by the total number of
common shares outstanding. The common share market price is the price the market
is willing to pay for shares of the trust at a given time. Common share market
price is influenced by a range of factors, including supply and demand and
market conditions. Total return assumes an investment at the beginning of the
period, reinvestment of all distributions for the period in accordance with the
trust's dividend reinvestment plan, and sale of all shares at the end of the
period.
The J.P. Morgan Global High Yield Index is generally representative of
high-yield securities. The index does not include any expenses, fees or sales
charges, which would lower performance. The index is unmanaged and should not be
considered an investment. It is not possible to invest directly in an index.
C-3
Trust Report
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004
Van Kampen High Income Trust II is managed by the Adviser's High Yield team.(1)
Current team members include Gordon Loery, Executive Director of the Adviser;
Josh Givelber, Vice President and Chad Liu, Vice Presidents of the Adviser; and
Sheila Finnerty, Managing Director of the Adviser.
MARKET CONDITIONS
The CSFB High Yield Index, a broad index for the high yield market, returned
11.95% for the 12-month period ended December 31, 2004. In discussing the high
yield market during 2004, it is worth noting that 2003 was one of the best years
ever for this asset class, with the CSFB Index returning almost 28%. That banner
year was driven by strong economic news and significantly improved corporate
earnings, combined with declining defaults and record inflows into the asset
class. The strong returns of 2003 continued through the end of January 2004.
Beginning in February 2004, however, the market's technical (i.e.,
supply/demand) situation changed. Though fundamental factors such as earnings
and default rate remained as strong as they had been during the prior 15-month
rally, demand receded as market participants grew concerned over the lack of job
creation in the U.S. economy. Many investors took profits and became more
risk-averse. Then, in early April, significant interest rate increases caused a
pronounced sell-off in high yield and throughout the fixed income markets. In
addition, because of the sustained rally in high yield that had previously taken
place, many of these bonds were priced at a premium. In a sense, we believe the
high yield market had run out of room to rally. At the same time, the high yield
market's new issue calendar continued to be robust, which had a negative impact
on the market's technical situation. This difficult environment persisted
through May 2004.
In June, the high yield sector rebounded, experiencing a solid seven-month run
through the end of 2004. The strong fundamental factors detailed above continued
during this time and the supply/demand situation improved as buyers returned to
the market. For each of the last seven months of 2004, high yield posted gains
of 1% or more, and was the best performing fixed-income asset class for the
year. As a measure of the high yield market's improvement over the 12-month
period, the spread of the CSFB High Yield Index declined compared with
Treasuries of similar maturity, from 486 basis points to 346 basis points. In a
similar vein, the average yield to maturity of high yield bonds declined from
8.34% at the end of 2003 to 7.56% at the close of 2004.
(1)Team members may change without notice at any time.
C-4
PERFORMANCE ANALYSIS
A closed-end fund's return can be calculated based upon either the market price
or the net asset value (NAV) of its shares. NAV per share is determined by
dividing the value of the trust's portfolio securities, cash and other assets,
less all liabilities, by the total number of common shares outstanding, while
market price reflects the supply and demand for the shares. As a result, the two
returns can differ significantly. On an NAV basis, the trust outperformed its
benchmark, the J.P. Morgan Global High Yield Index, though it underperformed the
index on a market-value basis. (See table below.)
During the period, three strategic decisions helped the trust's performance
most. First, the trust enjoyed favorable security selection within the housing
industry. Going back to late 2003, the trust had held several homebuilding
issues that performed well, while the performance of building products companies
had lagged. Early in 2004, we felt that homebuilding bonds had become
overpriced, and based on our analysis we sold most of the trust's allocation,
replacing these bonds with building products issues that performed extremely
well over the remainder of the period. Second, the trust benefited from its lack
of participation in airline bonds. Airlines were the worst performing sector
within the high yield market during the 12-month period. Third, our security
selection in the wireless communications and telecom sectors added to
performance as we avoided several credits that had poor business results while
our selections within this sector generally posted solid earnings.
The main detractor from performance during the period was security selection
within the utility, service and gaming/leisure sectors. In addition, the trust's
underweight in the metals/mining sector hurt performance as higher metal prices
led this sector to strong gains during 2004.
On an ongoing basis, we seek to maintain a balanced and well-diversified
portfolio. The trust's portfolio consists of approximately 150 issuers. This
level of diversification can reduce overall credit risk, yet also allow
sufficient average security size for strategic overweights. We continue to
maintain an average credit quality of single B, similar to the benchmark.
Beginning in late in 2003 and early 2004, we reduced the trust's allocation in
BBB and higher BB credits
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004
------------------------------------------------------------
BASED ON J.P. MORGAN GLOBAL
BASED ON NAV MARKET PRICE HIGH YIELD INDEX
14.09% 10.83% 11.70%
------------------------------------------------------------
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. Investment return, net asset value and common share market price will
fluctuate and trust shares, when sold, may be worth more or less than their
original cost. See Performance Summary for additional performance information
and index definition.
C-5
as many of these issues had performed well when interest rates declined and
Treasuries and other fixed-income securities rallied. The performance of these
higher rated bonds generally correlates with that of Treasuries, and the trust
sold several BBB and BB credits before interest rates spiked in the spring and
Treasuries were negatively impacted. In their place, we purchased lower quality
credits, which historically have performed better than BBB and BB bonds in a
rising interest rate environment. In terms of issuer size, we generally focus on
larger companies because of their financial flexibility, ability to withstand
less-favorable financial markets and superior access to capital markets.
As we have stated, we believe the fundamentals of the high yield market remain
positive, with favorable earnings, lower default rates and modestly tightening
high yield credit spreads. Many of these positive factors have already been
"priced into" the market during the past two years, however, and high yield
seems to us to be fairly valued. We believe that in 2005, high yield returns
should be driven primarily by coupon income rather than price appreciation. We
look for the trust's holdings to earn their coupon in the coming months and are
hopeful that market fundamentals will remain favorable through the end of 2005.
There is no guarantee that any securities will continue to perform well or be
held by the trust in the future.
C-6
RATINGS ALLOCATION AS OF 12/31/04
BBB/Baa 1.4%
BB/Ba 39.7
B/B 53.2
CCC/Caa 5.5
Non-Rated 0.2
SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF 12/31/04
Energy 8.8%
Gaming & Leisure 7.8
Chemicals 7.7
Forest Products 7.7
Utility 7.0
Diversified Media 5.9
Healthcare 5.7
Housing 5.5
Cable 5.3
Food & Tobacco 4.6
Services 4.3
Transportation 4.1
Wireless Communications 3.8
Telecommunications 3.8
Manufacturing 2.7
Consumer Products 2.5
Information Technology 2.4
Food & Drug 2.4
Metals 1.6
Retail 1.0
Financial 0.9
Aerospace 0.6
Broadcasting 0.4
-----
Total Long-Term Investments 96.5%
Short-Term Investments 3.5
-----
Total Investments 100.0%
Subject to change daily. Provided for informational purposes only and should not
be deemed as a recommendation to buy or sell the securities mentioned or
securities in the sectors shown above. Ratings allocation percentages are as a
percentage of long-term investments. Summary of investments by industry
classification percentages are as a percentage of total investments. Securities
are classified by sectors that represent broad groupings of related industries.
Ratings allocations based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Van Kampen is a wholly owned subsidiary of a global
securities firm which is engaged in a wide range of financial services
including, for example, securities trading and brokerage activities, investment
banking, research and analysis, financing and financial advisory services.
C-7
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Van Kampen trust provides a complete schedule of portfolio holdings
in its semiannual and annual reports within 60 days of the end of the
trust's second and fourth fiscal quarters by filing the schedule
electronically with the Securities and Exchange Commission (SEC). The
semiannual reports are filed on Form N-CSRS and the annual reports are
filed on Form N-CSR. Van Kampen also delivers the semiannual and annual
reports to trust shareholders, and makes these reports available on its
public web site, www.vankampen.com. In addition to the semiannual and
annual reports that Van Kampen delivers to shareholders and makes
available through the Van Kampen public web site, each trust files a
complete schedule of portfolio holdings with the SEC for the trust's
first and third fiscal quarters on Form N-Q. Van Kampen does not deliver
the reports for the first and third fiscal quarters to shareholders, nor
are the reports posted to the Van Kampen public web site. You may,
however, obtain the Form N-Q filings (as well as the Form N-CSR and
N-CSRS filings) by accessing the SEC's web site, http://www.sec.gov. You
may also review and copy them at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You
can also request copies of these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the
SEC, Washington, DC 20549-0102.
In addition to filing a complete schedule of portfolio holdings with the
SEC each fiscal quarter, each Van Kampen trust makes portfolio holdings
information available by periodically providing the information on its
public web site, www.vankampen.com. Each Van Kampen trust provides a
complete schedule of portfolio holdings on the public web site on a
calendar-quarter basis approximately 30 days after the close of the
calendar quarter. Van Kampen closed-end funds do not presently provide
partial lists of their portfolio holdings on a monthly basis, but may do
so in the future.
You may obtain copies of a trust's fiscal quarter filings, or its monthly
or calendar-quarter web site postings, by contacting Van Kampen Client
Relations at 1-800-847-2424.
C-8
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The trust's policies and procedures with respect to the voting of proxies
relating to the trust's portfolio securities and information on how the
trust voted proxies relating to portfolio securities during the most
recent twelve-month period ended June 30 is available without charge,
upon request, by calling 1-800-847-2424 or by visiting our web site at
www.vankampen.com. This information is also available on the Securities
and Exchange Commission's web site at http://www.sec.gov.
C-9
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------
CORPORATE BONDS 162.8%
AEROSPACE 1.0%
$ 355 K & F Acquisition, Inc., 144A--Private Placement
(a).............................................. 7.750% 11/15/14 $ 368,312
-----------
BROADCASTING 0.6%
220 Salem Communications Corp. ...................... 7.750 12/15/10 238,975
-----------
CABLE 9.0%
425 Cablevision Systems Corp., 144A--Private
Placement (a) (b)................................ 6.669 04/01/09 452,625
755 Charter Communications Holdings LLC.............. 9.625 11/15/09 666,287
115 DirecTV Holdings LLC............................. 8.375 03/15/13 129,519
635 Echostar DBS Corp. .............................. 6.375 10/01/11 652,462
740 Kabel Deutschland GmbH, 144A--Private Placement
(Germany) (a).................................... 10.625 07/01/14 854,700
635 PanAmSat Corp., 144A--Private Placement (a)...... 9.000 08/15/14 711,994
-----------
3,467,587
-----------
CHEMICALS 13.1%
460 Equistar Chemicals LP............................ 10.125 09/01/08 532,450
250 Equistar Chemicals LP............................ 10.625 05/01/11 291,250
180 FMC Corp. ....................................... 10.250 11/01/09 207,450
145 Huntsman Advanced Materials LLC, 144A--Private
Placement (a).................................... 11.000 07/15/10 173,275
200 Innophos, Inc.,144A--Private Placement (a)....... 8.875 08/15/14 217,000
145 ISP Chemco, Inc. ................................ 10.250 07/01/11 164,575
675 ISP Holdings, Inc. .............................. 10.625 12/15/09 750,937
105 Koppers, Inc. ................................... 9.875 10/15/13 120,225
570 Lyondell Chemical Co. ........................... 10.500 06/01/13 681,150
40 Millennium America, Inc. ........................ 7.000 11/15/06 41,800
385 Millennium America, Inc. ........................ 9.250 06/15/08 439,862
395 Nalco Co. ....................................... 7.750 11/15/11 428,575
365 Rhodia SA (France)............................... 8.875 06/01/11 369,562
445 Rockwood Specialties Group, Inc. ................ 10.625 05/15/11 513,975
101 Westlake Chemical Corp. ......................... 8.750 07/15/11 114,635
-----------
5,046,721
-----------
CONSUMER PRODUCTS 3.7%
200 Amscan Holdings, Inc. ........................... 8.750 05/01/14 201,000
155 Oxford Industrials, Inc. ........................ 8.875 06/01/11 167,206
620 Phillips Van-Heusen Corp. ....................... 7.250 02/15/11 654,100
235 Rayovac Corp. ................................... 8.500 10/01/13 262,025
116 Tempur Pedic, Inc. .............................. 10.250 08/15/10 133,980
-----------
1,418,311
-----------
DIVERSIFIED MEDIA 10.1%
602 Advanstar Communications, Inc. (b)............... 9.790 08/15/08 632,494
550 CanWest Media, Inc. (Canada)..................... 10.625 05/15/11 620,125
485 Houghton Mifflin Co. ............................ 9.875 02/01/13 533,500
See Notes to Financial Statements
C-10
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------
DIVERSIFIED MEDIA (CONTINUED)
$ 475 Interpublic Group of Cos., Inc. ................. 6.250% 11/15/14 $ 483,008
465 Marquee, Inc., 144A--Private Placement (a) (b)... 6.540 08/15/10 491,737
111 PEI Holdings, Inc. .............................. 11.000 03/15/10 129,870
640 Primedia, Inc. .................................. 8.875 05/15/11 680,000
295 Vertis, Inc. .................................... 9.750 04/01/09 321,550
-----------
3,892,284
-----------
ENERGY 14.9%
245 BRL Universal Equipment.......................... 8.875 02/15/08 258,781
340 CHC Helicopter Corp. (Canada).................... 7.375 05/01/14 360,400
105 CITGO Petroleum Corp., 144A--
Private Placement (a)............................ 6.000 10/15/11 105,000
670 El Paso Production Holding Co. .................. 7.750 06/01/13 705,175
640 Frontier Oil Corp., 144A--Private Placement
(a).............................................. 6.625 10/01/11 656,000
70 Hanover Compressor Co. .......................... 8.625 12/15/10 76,825
285 Hanover Compressor Co. .......................... 9.000 06/01/14 318,487
275 Hanover Equipment Trust.......................... 8.500 09/01/08 297,000
120 Hanover Equipment Trust.......................... 8.750 09/01/11 130,800
410 Hilcorp Energy Finance Corp., 144A--Private
Placement (a).................................... 10.500 09/01/10 465,350
140 Magnum Hunter Resources, Inc. ................... 9.600 03/15/12 159,600
275 Pacific Energy Partners.......................... 7.125 06/15/14 294,250
615 Plains Exploration & Production Co. ............. 7.125 06/15/14 673,425
227 Port Arthur Finance Corp. ....................... 12.500 01/15/09 266,255
135 Tesoro Petroleum Corp. .......................... 9.625 04/01/12 155,925
760 Vintage Petroleum, Inc. ......................... 7.875 05/15/11 813,200
-----------
5,736,473
-----------
FINANCIAL 1.4%
510 Refco Finance Holdings LLC, 144A--Private
Placement (a).................................... 9.000 08/01/12 561,000
-----------
FOOD & DRUG 4.0%
510 Delhaize America, Inc. .......................... 8.125 04/15/11 597,069
115 Jean Coutu Group (PJC), Inc., 144A--Private
Placement (Canada) (a)........................... 7.625 08/01/12 122,187
530 Jean Coutu Group (PJC), Inc., 144A--Private
Placement (Canada) (a)........................... 8.500 08/01/14 545,900
1,180 Jitney-Jungle Stores America, Inc. (c) (d) (e)... 12.000 03/01/06 0
270 Rite Aid Corp. .................................. 8.125 05/01/10 286,875
-----------
1,552,031
-----------
FOOD & TOBACCO 7.9%
550 Constellation Brands, Inc. ...................... 8.000 02/15/08 600,875
255 Michael Foods, Inc. ............................. 8.000 11/15/13 270,300
155 Pilgrim's Pride Corp. ........................... 9.250 11/15/13 174,375
570 Pilgrim's Pride Corp. ........................... 9.625 09/15/11 644,100
305 Smithfield Foods, Inc. .......................... 7.000 08/01/11 327,112
See Notes to Financial Statements
C-11
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------
FOOD & TOBACCO (CONTINUED)
$ 160 Smithfield Foods, Inc. .......................... 7.625% 02/15/08 $ 172,000
760 Smithfield Foods, Inc. .......................... 8.000 10/15/09 845,500
-----------
3,034,262
-----------
FOREST PRODUCTS 13.0%
755 Abitibi-Consolidated, Inc. (Canada).............. 6.000 06/20/13 723,856
245 Abitibi-Consolidated, Inc. (Canada).............. 8.550 08/01/10 266,744
410 Georgia-Pacific Corp. ........................... 8.875 02/01/10 479,187
575 Graphic Packaging International, Inc. ........... 9.500 08/15/13 656,937
415 MDP Acquisitions PLC (Ireland)................... 9.625 10/01/12 464,800
175 Norampac, Inc. (Canada).......................... 6.750 06/01/13 185,062
1,020 Owens-Brockway Glass Containers, Inc. ........... 8.875 02/15/09 1,113,075
365 Pliant Corp. .................................... 13.000 06/01/10 357,700
790 Tembec Industries, Inc. (Canada)................. 7.750 03/15/12 768,275
-----------
5,015,636
-----------
GAMING & LEISURE 13.2%
325 Ceasars Entertainment............................ 8.875 09/15/08 368,875
240 Gaylord Entertainment Co., 144A--Private
Placement (a).................................... 6.750 11/15/14 242,400
690 Harrahs Operating Co., Inc. ..................... 7.875 12/15/05 719,325
129 HMH Properties, Inc. ............................ 7.875 08/01/08 133,192
200 Host Marriott LP................................. 7.125 11/01/13 214,750
500 Intrawest Corp., 144A--Private Placement (Canada)
(a).............................................. 7.500 10/15/13 534,375
355 Isle of Capri Casinos, Inc. ..................... 7.000 03/01/14 363,875
115 MGM Mirage, Inc. ................................ 5.875 02/27/14 113,562
830 MGM Mirage, Inc. ................................ 6.000 10/01/09 854,900
645 Mohegan Tribal Gaming Authority.................. 7.125 08/15/14 682,087
380 Park Place Entertainment Corp. .................. 7.875 12/15/05 395,200
465 Station Casinos, Inc. ........................... 6.000 04/01/12 476,044
-----------
5,098,585
-----------
HEALTHCARE 9.6%
290 AmerisourceBergen Corp. ......................... 8.125 09/01/08 324,075
255 Community Health Systems, Inc., 144A--Private
Placement (a).................................... 6.500 12/15/12 258,188
845 Extendicare Health Services, Inc. ............... 6.875 05/01/14 866,125
295 Fisher Scientific International, Inc. ........... 8.125 05/01/12 328,925
125 Fisher Scientific International, Inc., 144A--
Private Placement (a)............................ 6.750 08/15/14 134,688
410 Fresenius Medical Care Capital Trust II.......... 7.875 02/01/08 445,875
180 Fresenius Medical Care Capital Trust IV.......... 7.875 06/15/11 201,600
380 HCA, Inc. ....................................... 6.375 01/15/15 382,239
65 National Nephrology Associates, Inc., 144A--
Private Placement (a)............................ 9.000 11/01/11 75,563
See Notes to Financial Statements
C-12
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------
HEALTHCARE (CONTINUED)
$ 335 Team Health Inc. ................................ 9.000% 04/01/12 $ 329,138
325 Tenet Healthcare Corp., 144A--
Private Placement (a)............................ 9.875 07/01/14 355,875
-----------
3,702,291
-----------
HOUSING 9.2%
59 CB Richard Ellis Service, Inc. .................. 9.750 05/15/10 67,555
405 CB Richard Ellis Service, Inc. .................. 11.250 06/15/11 467,775
465 Interface, Inc. ................................. 9.500 02/01/14 509,175
455 Nortek, Inc., 144A--Private Placement (a)........ 8.500 09/01/14 477,750
650 Ply Gem Industries, Inc., 144A--
Private Placement (a)............................ 9.000 02/15/12 663,000
250 Propex Fabrics, Inc., 144A--
Private Placement (a)............................ 10.000 12/01/12 260,625
330 RMCC Acquisition Co., 144A--
Private Placement (a)............................ 9.500 11/01/12 330,825
280 Technical Olympic USA, Inc. ..................... 9.000 07/01/10 301,000
215 Technical Olympic USA, Inc. ..................... 9.000 07/01/10 231,125
230 Technical Olympic USA, Inc. ..................... 10.375 07/01/12 258,750
-----------
3,567,580
-----------
INFORMATION TECHNOLOGY 4.1%
335 Iron Mountain, Inc. ............................. 7.750 01/15/15 341,700
570 Iron Mountain, Inc. ............................. 8.625 04/01/13 608,475
590 Xerox Corp. ..................................... 7.125 06/15/10 640,150
-----------
1,590,325
-----------
MANUFACTURING 4.5%
115 Flowserve Corp. ................................. 12.250 08/15/10 127,650
395 Johnsondiversey, Inc. ........................... 9.625 05/15/12 443,388
325 Manitowoc, Inc. ................................. 10.500 08/01/12 375,375
755 Trimas Corp. .................................... 9.875 06/15/12 804,075
-----------
1,750,488
-----------
METALS 2.8%
159 Doe Run Resources Corp. (Acquired 02/15/01 to
10/15/04, Cost $139,441) (f) (g)................. 11.750 11/01/08 135,862
105 Foundation PA Coal Co., 144A--
Private Placement (a)............................ 7.250 08/01/14 112,350
155 General Cable Corp. ............................. 9.500 11/15/10 175,925
325 UCAR Finance, Inc. .............................. 10.250 02/15/12 372,938
248 United States Steel Corp. ....................... 9.750 05/15/10 283,960
-----------
1,081,035
-----------
RETAIL 1.7%
215 General Nutrition Center, Inc. .................. 8.500 12/01/10 204,250
435 Petro Stopping Center Financial.................. 9.000 02/15/12 462,188
-----------
666,438
-----------
See Notes to Financial Statements
C-13
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
---------------------------------------------------------------------------------------------
SERVICES 7.3%
$1,140 Allied Waste North America, Inc. ................ 8.875% 04/01/08 $ 1,225,500
380 Buhrmann US, Inc. ............................... 8.250 07/01/14 386,175
295 MSW Energy Holdings II LLC....................... 7.375 09/01/10 311,225
65 MSW Energy Holdings LLC.......................... 8.500 09/01/10 71,500
295 United Rentals North America, Inc. .............. 6.500 02/15/12 289,100
540 United Rentals North America, Inc. .............. 7.750 11/15/13 531,900
-----------
2,815,400
-----------
TELECOMMUNICATIONS 6.4%
450 Axtel SA (Mexico)................................ 11.000 12/15/13 487,125
640 Cincinnati Bell, Inc. ........................... 7.250 07/15/13 660,800
220 Exodus Communications, Inc. (c) (d) (e).......... 11.250 07/01/08 0
320 Qwest Communications International, Inc., 144A--
Private Placement (a) (b)........................ 6.040 02/15/09 325,600
525 Qwest Corp. ..................................... 6.625 09/15/05 538,125
425 Qwest Corp., 144A--Private Placement (a)......... 7.875 09/01/11 463,250
-----------
2,474,900
-----------
TRANSPORTATION 7.0%
335 AutoNation, Inc. ................................ 9.000 08/01/08 384,413
435 Laidlaw International, Inc. ..................... 10.750 06/15/11 510,038
795 Sonic Automotive, Inc. .......................... 8.625 08/15/13 851,644
820 TRW Automotive, Inc. ............................ 9.375 02/15/13 955,300
-----------
2,701,395
-----------
UTILITY 11.9%
365 AES Corp. ....................................... 7.750 03/01/14 397,850
18 AES Corp. ....................................... 8.875 02/15/11 20,655
54 AES Corp. ....................................... 9.375 09/15/10 63,045
245 Calpine Corp., 144A--Private Placement (a)....... 8.500 07/15/10 211,313
50 CMS Energy Corp. ................................ 7.500 01/15/09 53,500
295 CMS Energy Corp. ................................ 8.500 04/15/11 336,669
405 Dynegy Holdings, Inc. ........................... 6.875 04/01/11 391,838
295 Dynegy Holdings, Inc., 144A--
Private Placement (a)............................ 9.875 07/15/10 331,138
170 IPALCO Enterprises, Inc. ........................ 8.625 11/14/11 191,250
350 Monongahela Power Co. ........................... 5.000 10/01/06 358,071
220 Nevada Power Co. ................................ 8.250 06/01/11 253,825
360 Nevada Power Co. ................................ 9.000 08/15/13 423,000
300 PSEG Energy Holdings, Inc. ...................... 7.750 04/16/07 318,750
200 Reliant Energy, Inc. ............................ 6.750 12/15/14 199,750
145 Southern Natural Gas Co. ........................ 8.875 03/15/10 163,125
580 TNP Enterprises, Inc. ........................... 10.250 04/01/10 622,050
200 Trans Continental Gas Pipe Line Corp. ........... 8.875 07/15/12 244,250
-----------
4,580,079
-----------
See Notes to Financial Statements
C-14
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS 6.4%
$ 120 Centennial Communications Corp. ................. 8.125% 02/01/14 $ 123,900
750 Nextel Communications, Inc. ..................... 6.875 10/31/13 817,500
210 Rogers Wireless Communications, Inc.,
144A--Private Placement (Canada) (a)............. 7.500 03/15/15 222,600
155 Rogers Wireless Communications, Inc.,
144A--Private Placement (Canada) (a)............. 8.000 12/15/12 164,688
185 Rural Cellular Corp. (b)......................... 6.990 03/15/10 192,400
425 Rural Cellular Corp. ............................ 8.250 03/15/12 451,563
500 SBA Communications Corp., 144A--Private Placement
(a).............................................. 8.500 12/01/12 512,500
-----------
2,485,151
-----------
TOTAL CORPORATE BONDS 162.8%................................................ 62,845,259
-----------
DESCRIPTION VALUE
-------------------------------------------------------------------------------------------
EQUITIES 0.6%
DecisionOne Corp. (2,450 common shares) (e) (h).............................. 0
DecisionOne Corp. (5,386 common stock warrants) (e) (h)...................... 0
Doe Run Resources Corp. (1 common stock warrant) (e) (h)..................... 0
HCI Direct, Inc. (30,357 common shares) (e) (h).............................. 236,785
Hosiery Corp. of America, Inc. (500 common shares) (e) (h)................... 0
VS Holdings, Inc. (8,891 common shares) (e) (h).............................. 1,600
-----------
TOTAL EQUITIES............................................................... 238,385
-----------
TOTAL LONG-TERM INVESTMENTS 163.4%
(Cost $61,924,613)......................................................... 63,083,644
REPURCHASE AGREEMENT 5.9%
State Street Bank & Trust Co. ($2,287,000 par collateralized by U.S.
Government obligations in a pooled cash account, interest rate of 2.15%,
dated 12/31/04, to be sold on 01/03/05 at $2,287,410)
(Cost $2,287,000)............................................................ 2,287,000
-----------
TOTAL INVESTMENTS 169.3%
(Cost $64,211,613)......................................................... 65,370,644
See Notes to Financial Statements
C-15
VAN KAMPEN HIGH INCOME TRUST II
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
DESCRIPTION VALUE
-----------------------------------------------------------------------------------------------
OTHER ASSETS IN EXCESS OF LIABILITIES 2.7%...................................... $ 1,032,876
PREFERRED SHARES (INCLUDING ACCRUED DISTRIBUTIONS) (72.0%)...................... (27,803,516)
-----------
NET ASSETS APPLICABLE TO COMMON SHARES 100.0%................................... $38,600,004
===========
Percentages are calculated as a percentage of net assets applicable to common
shares.
(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) Variable rate security. Interest rate shown is that in effect at December
31, 2004.
(c) Non-income producing as security is in default.
(d) This borrower has filed for protection in federal bankruptcy court.
(e) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(f) Payment-in-kind security.
(g) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers. Restricted securities comprise 0.4% of net
assets applicable to common shares.
(h) Non-income producing security.
See Notes to Financial Statements
C-16
VAN KAMPEN HIGH INCOME TRUST II
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Total Investments (Cost $64,211,613)........................ $ 65,370,644
Cash........................................................ 997
Receivables:
Interest.................................................. 1,208,648
Investments Sold.......................................... 201,491
Other....................................................... 798
------------
Total Assets............................................ 66,782,578
------------
LIABILITIES:
Payables:
Income Distributions--Common Shares....................... 44,391
Investment Advisory Fee................................... 39,325
Other Affiliates.......................................... 4,750
Trustees' Deferred Compensation and Retirement Plans........ 208,091
Accrued Expenses............................................ 82,501
------------
Total Liabilities....................................... 379,058
Preferred Shares (including accrued distributions).......... 27,803,516
------------
NET ASSETS APPLICABLE TO COMMON SHARES...................... $ 38,600,004
============
NET ASSET VALUE PER COMMON SHARE
($38,600,004 divided by 8,109,000 shares outstanding)....... $ 4.76
============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 8,109,000 shares issued and
outstanding).............................................. $ 81,090
Paid in Surplus............................................. 64,211,619
Net Unrealized Appreciation................................. 1,159,031
Accumulated Undistributed Net Investment Income............. (234,620)
Accumulated Net Realized Loss............................... (26,617,116)
------------
NET ASSETS APPLICABLE TO COMMON SHARES...................... $ 38,600,004
============
PREFERRED SHARES ($.01 par value, authorized 100,000,000
shares, 1,112 issued with liquidation preference of
$25,000 per share)........................................ $ 27,800,000
============
NET ASSETS INCLUDING PREFERRED SHARES....................... $ 66,400,004
============
See Notes to Financial Statements
C-17
VAN KAMPEN HIGH INCOME TRUST II
FINANCIAL STATEMENTS continued
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Interest.................................................... $4,958,932
Other....................................................... 88,180
----------
Total Income............................................ 5,047,112
----------
EXPENSES:
Investment Advisory Fee..................................... 453,820
Preferred Share Maintenance................................. 82,351
Trustees' Fees and Related Expenses......................... 48,336
Professional Fees........................................... 44,081
Legal....................................................... 16,509
Custody..................................................... 12,371
Other....................................................... 127,171
----------
Total Expenses.......................................... 784,639
----------
NET INVESTMENT INCOME....................................... $4,262,473
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $ 755,174
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 616,691
End of the Period......................................... 1,159,031
----------
Net Unrealized Appreciation During the Period............... 542,340
----------
NET REALIZED AND UNREALIZED GAIN............................ $1,297,514
==========
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS..................... $ (410,282)
==========
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHARES FROM
OPERATIONS................................................ $5,149,705
==========
See Notes to Financial Statements
C-18
VAN KAMPEN HIGH INCOME TRUST II
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 4,262,473 $ 4,201,818
Net Realized Gain/Loss.................................. 755,174 (5,545,510)
Net Unrealized Appreciation During the Period........... 542,340 11,684,955
Distributions to Preferred Shareholders:
Net Investment Income................................. (410,282) (317,415)
Return of Capital Distribution........................ -0- (8,277)
----------- -----------
Change in Net Assets Applicable to Common Shares from
Operations............................................ 5,149,705 10,015,571
Distributions to Common Shareholders:
Net Investment Income................................. (3,600,383) (3,587,601)
Return of Capital Distribution........................ -0- (93,545)
----------- -----------
NET CHANGE IN NET ASSETS APPLICABLE TO COMMON SHARES
FROM INVESTMENT ACTIVITIES............................ 1,549,322 6,334,425
NET ASSETS APPLICABLE TO COMMON SHARES:
Beginning of the Period................................. 37,050,682 30,716,257
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of ($234,620) and ($613,037),
respectively)......................................... $38,600,004 $37,050,682
=========== ===========
See Notes to Financial Statements
C-19
VAN KAMPEN HIGH INCOME TRUST II
FINANCIAL HIGHLIGHTS
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
-----------------------------
2004 2003 2002
-----------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD................... $ 4.57 $ 3.79 $ 4.77
------- ------- -------
Net Investment Income.................................... .52 .52 .60
Net Realized and Unrealized Gain/Loss.................... .16 .75 (.89)
Common Share Equivalent of Distributions Paid to
Preferred Shareholders:
Net Investment Income.................................. (.05) (.04) (.07)
Return of Capital Distributions........................ -0- -0-* -0-*
------- ------- -------
Total from Investment Operations........................... .63 1.23 (.36)
Distributions Paid to Common Shareholders:
Net Investment Income.................................. (.44) (.44) (.58)
Return of Capital Distributions........................ -0- (.01) (.04)
------- ------- -------
NET ASSET VALUE, END OF THE PERIOD......................... $ 4.76 $ 4.57 $ 3.79
======= ======= =======
Common Share Market Price at End of the Period............. $ 5.14 $ 5.08 $ 4.07
Total Return (a)........................................... 10.83% 37.20% -19.86%
Net Assets Applicable to Common Shares at End of the Period
(In millions)............................................ $ 38.6 $ 37.1 $ 30.7
Ratio of Expenses to Average Net Assets Applicable to
Common Shares (b)........................................ 2.12% 2.25% 2.28%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (b).......................... 11.51% 12.29% 14.50%
Portfolio Turnover......................................... 86% 74% 81%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net Assets Including Preferred
Shares (b)............................................... 1.21% 1.24% 1.18%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (d).......................... 10.40% 11.34% 12.93%
SENIOR SECURITIES:
Total Preferred Shares Outstanding......................... 1,112 1,112 1,112
Asset Coverage Per Preferred Share (e)..................... $59,715 $58,320 $52,652
Involuntary Liquidating Preference Per Preferred Share..... $25,000 $25,000 $25,000
Average Market Value Per Preferred Share................... $25,000 $25,000 $25,000
* Amount is less than $.01.
(a) Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for
the period in accordance with the Trust's dividend reinvestment plan, and
sale of all shares at the closing common share market price at the end of
the period indicated.
(b) Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(c) As required, effective January 1, 2001, the Trust has adopted the
provisions of the AICPA Audit and Accounting Guide for Investment Companies
and began amortizing premium on fixed income securities. The effect of this
change for the period ended December 31, 2001 was to decrease net
investment income per share by $.02, increase net realized and unrealized
gains and losses per share by $.02 and decrease the ratio of net investment
income to average net assets applicable to common shares by .40%. Per
share, ratios and supplemental data for periods prior to December 31, 2001
have not been restated to reflect this change in presentation.
(d) Ratios reflect the effect of dividend payments to preferred shareholders.
(e) Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
C-20
Year Ended December 31,
-----------------------------------------------------------------------------
2001 (c) 2000 1999 1998 1997 1996 1995
-----------------------------------------------------------------------------
$ 5.40 $ 6.56 $ 7.59 $ 8.44 $ 8.31 $ 8.12 $ 7.32
------- ------- ------- -------- -------- -------- --------
.90 1.10 1.14 1.18 1.20 1.23 1.27
(.61) (1.11) (1.00) (.77) .18 .21 .81
(.18) (.33) (.27) (.30) (.29) (.29) (.32)
-0-* -0-* -0- -0- -0- -0- -0-
------- ------- ------- -------- -------- -------- --------
.11 (.34) (.13) .11 1.09 1.15 1.76
(.73) (.76) (.90) (.96) (.96) (.96) (.96)
(.01) (.06) -0- -0- -0- -0- -0-
------- ------- ------- -------- -------- -------- --------
$ 4.77 $ 5.40 $ 6.56 $ 7.59 $ 8.44 $ 8.31 $ 8.12
======= ======= ======= ======== ======== ======== ========
$ 5.75 $ 5.69 $ 5.75 $ 8.625 $ 9.8125 $ 9.375 $ 8.75
13.57% 12.13% -25.28% -2.73% 15.34% 18.91% 30.33%
$ 38.7 $ 43.8 $ 53.2 $ 61.6 $ 68.4 $ 67.4 $ 65.8
2.14% 2.03% 1.97% 1.92% 1.83% 1.89% 1.96%
16.83% 18.16% 16.32% 14.54% 14.43% 15.19% 16.19%
63% 40% 56% 65% 98% 94% 124%
1.15% 1.07% 1.10% 1.14% 1.10% 1.12% 1.15%
13.40% 12.66% 12.41% 10.85% 10.93% 11.58% 12.09%
1,360 1,520 1,800 900 900 900 900
$53,426 $53,812 $54,557 $118,418 $126,015 $124,849 $123,135
$25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
$25,000 $25,000 $25,000 $ 50,000 $ 50,000 $ 50,000 $ 50,000
See Notes to Financial Statements
C-21
VAN KAMPEN HIGH INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Income Trust II (the "Trust") is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Trust's investment objective is to provide high current
income, while seeking to preserve shareholders' capital through investment in a
professionally managed diversified portfolio of high yield, fixed income
securities. The Trust commenced investment operations on April 28, 1989.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. Securities which are not valued by independent pricing
services or dealers are valued at fair value using 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.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust 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 Trust will
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
after payment is made. At December 31, 2004, the Trust had no when-issued and
delayed delivery purchase commitments.
The Trust may invest in repurchase agreements, which are short-term
investments in which the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Trust 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 Asset Management (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 Trust 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 Trust.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
discount is accreted and premium is amortized over the expected life of each
applicable security. Other
C-22
VAN KAMPEN HIGH INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
income is comprised primarily of consent fees. Consent fees are earned as
compensation for agreeing to changes in the terms of debt instruments.
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
of Subchapter M 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.
The Trust 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, 2004, the Trust had an accumulated capital loss
carryforward for tax purposes of $26,614,115 which will expire according to the
following table:
AMOUNT EXPIRATION
$1,997,967.................................................. December 31, 2007
3,362,300.................................................. December 31, 2008
5,094,823.................................................. December 31, 2009
9,494,354.................................................. December 31, 2010
5,789,566.................................................. December 31, 2011
875,105................................................... December 31, 2012
At December 31, 2004, the cost and related gross unrealized appreciation and
depreciation are as follows:
Cost of investments for tax purposes........................ $64,512,750
===========
Gross tax unrealized appreciation........................... $ 3,818,330
Gross tax unrealized depreciation........................... (2,960,436)
-----------
Net tax unrealized appreciation on investments.............. $ 857,894
===========
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually to common shareholders. Distributions from net
realized gains for book purposes may include short-term capital gains which are
included in ordinary income for tax purposes.
The tax character of distributions paid during the years ended December 31,
2004 and 2003 were as follows:
2004 2003
Distributions paid from:
Ordinary income........................................... $4,011,590 $3,889,082
Return of capital......................................... -- 101,822
---------- ----------
$4,011,590 $3,990,904
========== ==========
Due to inherent differences in the recognition of income, expenses and
realized gains/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting for the 2004 fiscal year have been
identified and appropriately reclassified. Permanent
C-23
VAN KAMPEN HIGH INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
differences of $216,540 relating to book to tax amortization differences were
reclassified from accumulated undistributed net investment income to accumulated
net realized loss and permanent differences of $87,760 relating to fee income
received from tender offers were reclassified from accumulated undistributed net
investment income to accumulated net realized loss. Also, a permanent book and
tax difference relating to the true-up of prior year adjustments totaling $2,171
was reclassified from accumulated undistributed net investment income to
accumulated net realized loss in the amount of $1,890 and capital in the amount
of $281.
As of December 31, 2004, the components of distributable earnings on a tax
basis were as follows:
Undistributed ordinary income............................... $332,847
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of the deferral of losses relating to wash sale
transactions.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .70% of the average daily net assets of the Trust.
For the year ended December 31, 2004, the Trust recognized expenses of
approximately $3,900 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom LLP, of which a trustee of the Trust is a partner of such
firm and he and his law firm provide legal services as legal counsel to the
Trust.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each trust. For the year ended December
31, 2004, the Trust recognized expenses of approximately $24,300 representing
Van Kampen Investments Inc.'s or its affiliates (collectively "Van Kampen") cost
of providing accounting and legal services to the Trust, which are reported as
part of "Other" and "Legal" expenses, respectively, in the Statement of
Operations.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
also officers of Van Kampen.
The Trust 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 upon retirement for a
ten-year period and are based upon each trustee's years of service to the Trust.
The maximum annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments were $53,450,774 and $53,375,108, respectively.
C-24
VAN KAMPEN HIGH INCOME TRUST II
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
4. AUCTION PREFERRED SHARES
As of December 31, 2004, the Trust has outstanding 1,112 Auction Preferred
Shares ("APS"). Dividends are cumulative and the dividend rate is currently
reset every 28 days through an auction process. The rate in effect on December
31, 2004 was 2.308%. During the year ended December 31, 2004, the rates ranged
from 1.068% to 2.308%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense.
The APS are redeemable at the option of the Trust in whole or in part at the
liquidation value of $25,000 per share plus accumulated and unpaid dividends.
The Trust is subject to certain asset coverage tests and the APS are subject to
mandatory redemption if the tests are not met.
5. INDEMNIFICATIONS
The Trust enters into contracts that contain a variety of indemnifications. The
Trust's maximum exposure under these arrangements is unknown. However, the Trust
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
C-25
VAN KAMPEN HIGH INCOME TRUST II
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of Van Kampen High Income Trust II
We have audited the accompanying statement of assets and liabilities of Van
Kampen High Income Trust II (the "Trust"), including the portfolio of
investments, as of December 31, 2004, the related statement of operations for
the year then ended, the statements of changes in net assets for each of the two
years in the period then ended, and the financial highlights for each of the
five years in the period then ended. These financial statements and financial
highlights are the responsibility of the Trust's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits. The Fund's financial highlights for the periods ended prior
to December 31, 2000, were audited by other auditors whose report, dated
February 10, 2000, expressed an unqualified opinion on those financial
highlights.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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, as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2004, by
correspondence with the Trust's custodian. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen High Income Trust II as of December 31, 2004, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the five years in the period then ended, in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 11, 2005
C-26
VAN KAMPEN HIGH INCOME TRUST II
DIVIDEND REINVESTMENT PLAN
The Trust offers a Dividend Reinvestment Plan (the "Plan") pursuant to which
Common Shareholders who are participants in the Plan may have all distributions
of dividends and capital gains automatically reinvested in Common Shares of the
Trust. All Common Shareholders are deemed to be participants in the Plan unless
they specifically elect not to participate. Common Shareholders who elect not to
participate in the Plan will receive all distributions of dividends and capital
gains in cash paid by check mailed directly to the Common Shareholder by the
Trust's dividend disbursing agent.
HOW THE PLAN WORKS
State Street Bank and Trust Company, as your Plan Agent, serves as agent for
the Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid subsequent to written
notice of the change sent to all Common Shareholders of the Trust at least 90
days before the record date for the dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent, with the written consent of the
Trust, by providing at least 90 days written notice to all Participants in the
Plan.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or distributions.
C-27
VAN KAMPEN HIGH INCOME TRUST II
DIVIDEND REINVESTMENT PLAN continued
RIGHT TO WITHDRAW
All Common Shareholders of the Trust are deemed to be participants in the
Plan unless they specifically elect not to participate. You may withdraw from
the Plan at any time by calling 1-800-341-2929 or by writing State Street Bank
and Trust Company. If you withdraw, you will receive, without charge, a share
certificate issued in your name for all full Common Shares credited to your
account under the Plan, and a cash payment will be made for any fractional
Common Share credited to your account under the Plan. You may again elect to
participate in the Plan at any time by calling 1-800-341-2929 or writing to the
Trust at:
2800 Post Oak Blvd.
Houston, TX 77056
Attn: Closed-End Funds
C-28
VAN KAMPEN HIGH INCOME TRUST II
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
BOARD OF TRUSTEES
DAVID C. ARCH
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUSAN H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT
1221 Avenue of the Americas
New York, New York 10020
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
C-29
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION
The business and affairs of the Trust are managed under the direction of the
Trust's Board of Trustees and the Trust's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Trust
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management (the "Adviser"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). The
term "Fund Complex" includes each of the investment companies advised by the
Adviser or its affiliates as of the date of this Statement of Additional
Information. Trustees serve until reaching their retirement age or until their
successors are duly elected and qualified. Officers are annually elected by the
trustees.
INDEPENDENT TRUSTEES:
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee Trustee Chairman and Chief 83 Trustee/Director/Managing
Blistex Inc. since 1989 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Director of
the Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago. Director of
St. Vincent de Paul
Center, a Chicago based
day care facility serving
the children of low
income families. Board
member of the Illinois
Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 81 Trustee/Director/Managing
33971 Selva Road since 2003 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
C-30
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer (64) Trustee Trustee President of CAC, L.L.C., 83 Trustee/Director/Managing
CAC, L.L.C. since 1989 a private company General Partner of funds
4350 LaJolla Village Drive offering capital in the Fund Complex.
Suite 980 investment and management Director of Stericycle,
San Diego, CA 92122-6223 advisory services. Prior Inc., Ventana Medical
to February 2001, Vice Systems, Inc., and GATX
Chairman and Director of Corporation, and Trustee
Anixter International, of The Scripps Research
Inc., a global Institute and the
distributor of wire, University of Chicago
cable and communications Hospitals and Health
connectivity products. Systems. Prior to January
Prior to July 2000, 2004, Director of
Managing Partner of TeleTech Holdings Inc.
Equity Group Corporate and Arris Group, Inc.
Investment (EGI), a Prior to May 2002,
company that makes Director of Peregrine
private investments in Systems Inc. Prior to
other companies. February 2001, Director
of IMC Global Inc. Prior
to July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM).
C-31
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of 81 Trustee/Director/Managing
Heidrick & Struggles since 2003 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 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
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (52) Trustee Trustee Director and President of 81 Trustee/Director/Managing
1744 R Street, NW since 2003 the German Marshall Fund General Partner of funds
Washington, DC 20009 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (69) Trustee Trustee Prior to 1998, President 83 Trustee/Director/Managing
736 North Western Avenue since 1992 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
C-32
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (68) Trustee Trustee President of Nelson 81 Trustee/Director/Managing
423 Country Club Drive since 2003 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (64) Trustee Trustee President Emeritus and 83 Trustee/Director/Managing
1126 E. 59th Street since 1994 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey, Ph.D. Trustee Trustee Chief Communications 81 Trustee/Director/Managing
(63) since 2003 Officer of the National General Partner of funds
815 Cumberstone Road Academy of in the Fund Complex.
Harwood, MD 20776 Sciences/National Director of Fluor Corp.,
Research Council, an an engineering,
independent, federally procurement and
chartered policy construction
institution, from 2001 to organization, since
November 2003 and Chief January 2004 and Director
Operating Officer from of Neurogen Corporation,
1993 to 2001. Director of a pharmaceutical company,
the Institute for Defense since January 1998.
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, Director
of the Rocky Mountain
Institute and Trustee of
Colorado College. Prior
to 1993, Executive
Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
C-33
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
INTERESTED TRUSTEES:*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief 81 Trustee/Director/Managing
1221 Avenue of the Americas President since Executive Officer of General Partner of funds
New York, NY 10020 and Chief 2003; funds in the Fund in the Fund Complex.
Executive President Complex. Chairman,
Officer and Chief President, Chief
Executive Executive Officer and
Officer Director of the Adviser
since 2002 and Van Kampen Advisors
Inc. since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
C-34
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (58) Trustee Trustee Advisory Director of 83 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm 83 Trustee/Director/Managing
333 West Wacker Drive since 1989 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom LLP, legal in the Fund Complex.
counsel to funds in the
Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act). Messrs. Merin and Powers are interested persons
of funds in the Fund Complex and the Adviser by reason of their current or
former positions with Morgan Stanley or its affiliates. Mr. Whalen is an
interested person of certain funds in the Fund Complex by reason of he and
his firm currently providing legal services as legal counsel to such funds
in the Fund Complex.
C-35
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
OFFICERS:
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER TRUST SERVED DURING PAST 5 YEARS
Stefanie V. Chang (38) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Amy R. Doberman (42) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeitus Investment Management,
Inc. from January 1997 to July 2000.
James W. Garrett (36) Chief Financial Officer Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Treasurer since 2005 Chief Financial Officer and Treasurer of the Morgan Stanley
New York, NY 10020 Institutional Funds since 2002 and funds in the Fund Complex
since January 2005.
Joseph J. McAlinden (62) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Chief since 2002 Stanley Investment Advisors Inc., and Morgan Stanley
New York, NY 10020 Investment Officer Investment Management Inc. and Director of Morgan Stanley
Trust for over 5 years. Executive Vice President and Chief
Investment Officer of funds in the Fund Complex. Managing
Director and Chief Investment Officer of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc. since
December 2002.
C-36
VAN KAMPEN HIGH INCOME TRUST II
TRUSTEE AND OFFICER INFORMATION continued
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER TRUST SERVED DURING PAST 5 YEARS
Ronald E. Robison (66) Executive Vice Officer Principal Executive Officer of funds in the Fund Complex
1221 Avenue of the Americas President and since 2003 since May 2003. Chief Executive Officer and Chairman of
New York, NY 10020 Principal Executive Investor Services. Executive Vice President and Principal
Officer Executive Officer of funds in the Fund Complex. Managing
Director of Morgan Stanley. Chief Administrative Officer,
Managing Director and Director of Morgan Stanley Investment
Advisors Inc., Morgan Stanley Services Company Inc. and
Managing Director and Director of Morgan Stanley
Distributors Inc. Chief Executive Officer and Director of
Morgan Stanley Trust. Executive Vice President and Principal
Executive Officer of the Institutional and Retail Morgan
Stanley Funds; Director of Morgan Stanley SICAV; previously
Chief Global Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1998 August 2004. Director and Managing Director of Van Kampen
Oakbrook Terrace, IL 60181 Investments, the Adviser, Van Kampen Advisors Inc. and
certain other subsidiaries of Van Kampen Investments. Prior
August 2004, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
C-37
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
We are required by federal law to provide you with a copy of our Privacy
Policy annually.
The following Policy applies to current and former individual clients of Van
Kampen Investments Inc., Van Kampen Asset Management, Van Kampen Advisors Inc.,
Van Kampen Funds Inc., Van Kampen Investor Services Inc. and Van Kampen Exchange
Corp., as well as current and former individual investors in Van Kampen mutual
funds, unit investment trusts, and related companies.
This Policy is not applicable to partnerships, corporations, trusts or other
non-individual clients or account holders, nor is this Policy applicable to
individuals who are either beneficiaries of a trust for which we serve as
trustee or participants in an employee benefit plan administered or advised by
us. This Policy is, however, applicable to individuals who select us to be a
custodian of securities or assets in individual retirement accounts, 401(k)
accounts, 529 Educational Savings Accounts, accounts subject to the Uniform
Gifts to Minors Act, or similar accounts.
Please note that we may amend this Policy at any time, and will inform you
of any changes to this Policy as required by law.
WE RESPECT YOUR PRIVACY
We appreciate that you have provided us with your personal financial
information. We strive to maintain the privacy of such information while we help
you achieve your financial objectives. This Policy describes what non-public
personal information we collect about you, why we collect it, and when we may
share it with others.
We hope this Policy will help you understand how we collect and share
non-public personal information that we gather about you. Throughout this
Policy, we refer to the non-public information that personally identifies you or
your accounts as "personal information."
1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU?
To serve you better and manage our business, it is important that we collect and
maintain accurate information about you. We may obtain this information from
applications and other forms you submit to us, from your dealings with us, from
consumer reporting agencies, from our Web sites and from third parties and other
sources.
For example:
-- We may collect information such as your name, address, e-mail address,
telephone/fax numbers, assets, income and investment objectives through
applications and other forms you submit to us.
-- We may obtain information about account balances, your use of
account(s) and the types of products and services you prefer to receive
from us through your dealings and transactions with us and other
sources.
-- We may obtain information about your creditworthiness and credit
history from consumer reporting agencies.
-- We may collect background information from and through third-party
vendors to verify representations you have made and to comply with
various regulatory requirements.
-- If you interact with us through our public and private Web sites, we
may collect information that you provide directly through online
communications (such as an e-mail address). We may also collect
information about your Internet service provider, your domain name,
your computer's operating system and Web browser,
(continued on back)
C-38
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY continued
your use of our Web sites and your product and service preferences,
through the use of "cookies." "Cookies" recognize your computer each time
you return to one of our sites, and help to improve our sites' content and
personalize your experience on our sites by, for example, suggesting
offerings that may interest you. Please consult the Terms of Use of these
sites for more details on our use of cookies.
2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU?
To provide you with the products and services you request, to serve you better
and to manage our business, we may disclose personal information we collect
about you to our affiliated companies and to non-affiliated third parties as
required or permitted by law.
A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose
personal information that we collect about you to our affiliated companies
except to enable them to provide services on our behalf or as otherwise required
or permitted by law.
B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal
information that we collect about you to non-affiliated third parties except to
enable them to provide services on our behalf, to perform joint marketing
agreements with other financial institutions, or as otherwise required or
permitted by law. For example, some instances where we may disclose information
about you to non-affiliated third parties include: for servicing and processing
transactions, to offer our own products and services, to protect against fraud,
for institutional risk control, to respond to judicial process or to perform
services on our behalf. When we share personal information with these companies,
they are required to limit their use of personal information to the particular
purpose for which it was shared and they are not allowed to share personal
information with others except to fulfill that limited purpose.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE
COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures to help
safeguard the personal information we collect about you. We have internal
policies governing the proper handling of client information. Third parties that
provide support or marketing services on our behalf may also receive personal
information, and we require them to adhere to confidentiality standards with
respect to such information.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling
1-800-847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
Copyright (C)2004 Van Kampen Funds Inc. All rights reserved.
Member NASD/SIPC. 902, 911, 104
VLT ANR 3/05 RN05-00264P-Y12/04
(VAN KAMPEN INVESTMENTS LOGO)
C-39
APPENDIX D
TARGET FUND ANNUAL REPORT
DATED
DECEMBER 31, 2004
D-1
Item 1. Report to Shareholders.
The Trust's annual report transmitted to shareholders pursuant to
Rule 30e-1 under the Investment Company Act of 1940 is as follows:
Welcome, Shareholder
In this report, you'll learn about how your investment in Van Kampen High
Income Trust performed during the annual period. The portfolio management
team will provide an overview of the market conditions and discuss some
of the factors that affected investment performance during the reporting
period. In addition, this report includes the trust's financial
statements and a list of trust investments as of December 31, 2004.
MARKET FORECASTS PROVIDED IN THIS REPORT MAY NOT NECESSARILY COME TO
PASS. THERE IS NO ASSURANCE THAT THE TRUST WILL ACHIEVE ITS INVESTMENT
OBJECTIVE. TRUSTS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY
THAT THE MARKET VALUES OF SECURITIES OWNED BY THE TRUST WILL DECLINE AND
THAT THE VALUE OF THE TRUST SHARES MAY THEREFORE BE LESS THAN WHAT YOU
PAID FOR THEM. ACCORDINGLY, YOU CAN LOSE MONEY INVESTING IN THIS TRUST.
---------------------------------------------------------------------------------------
NOT FDIC INSURED OFFER NO BANK GUARANTEE MAY LOSE VALUE
---------------------------------------------------------------------------------------
NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY NOT A DEPOSIT
---------------------------------------------------------------------------------------
D-2
Performance Summary as of 12/31/04
HIGH INCOME TRUST
SYMBOL: VIT
------------------------------------------------------------
AVERAGE ANNUAL BASED ON BASED ON
TOTAL RETURNS NAV MARKET PRICE
Since Inception (1/26/89) 5.79% 6.31%
10-year 6.94 8.02
5-year 5.16 9.49
1-year 13.47 7.41
------------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. FOR THE MOST RECENT MONTH-END PERFORMANCE FIGURES, PLEASE VISIT
VANKAMPEN.COM OR SPEAK WITH YOUR FINANCIAL ADVISOR. INVESTMENT RETURNS, NET
ASSET VALUE (NAV) AND COMMON SHARE MARKET PRICE WILL FLUCTUATE AND TRUST SHARES,
WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
NAV per share is determined by dividing the value of the trust's portfolio
securities, cash and other assets, less all liabilities, by the total number of
common shares outstanding. The common share market price is the price the market
is willing to pay for shares of the trust at a given time. Common share market
price is influenced by a range of factors, including supply and demand and
market conditions. Total return assumes an investment at the beginning of the
period, reinvestment of all distributions for the period in accordance with the
trust's dividend reinvestment plan, and sale of all shares at the end of the
period.
The J.P. Morgan Global High Yield Index is generally representative of
high-yield securities. The index does not include any expenses, fees or sales
charges, which would lower performance. The index is unmanaged and should not be
considered an investment. It is not possible to invest directly in an index.
D-3
Trust Report
FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004
Van Kampen High Income Trust is managed by the Adviser's High Yield team.(1)
Current team members include Gordon Loery, Executive Director of the Adviser;
Josh Givelber and Chad Liu, Vice Presidents of the Adviser; and Sheila Finnerty,
Managing Director of the Adviser.
MARKET CONDITIONS
The CSFB High Yield Index, a broad index for the high yield market, returned
11.95% for the 12-month period ended December 31, 2004. In discussing the high
yield market during 2004, it is worth noting that 2003 was one of the best years
ever for this asset class, with the CSFB Index returning almost 28%. That banner
year was driven by strong economic news, significantly improved corporate
earnings, combined with declining defaults and record inflows into the asset
class. The strong returns of 2003 continued through the end of January 2004.
Beginning in February 2004, however, the market's technical (i.e.,
supply/demand) situation changed. Though fundamental factors such as earnings
and default rate remained as strong as they had been during the prior 15-month
rally, demand receded as market participants grew concerned over the lack of job
creation in the U.S. economy. Many investors took profits and became more
risk-averse. Then, in early April, significant interest rate increases caused a
pronounced sell-off in high yield and throughout the fixed income markets. In
addition, because of the sustained rally in high yield that had previously taken
place, many of these bonds were priced at a premium. In a sense, we believe the
high yield market had run out of room to rally. At the same time, the high yield
market's new issue calendar continued to be robust, which had a negative impact
on the market's technical situation. This difficult environment persisted
through May 2004.
In June, the high yield sector rebounded, experiencing a solid seven-month run
through the end of 2004. The strong fundamental factors detailed above continued
during this time and the supply/demand situation improved as buyers returned to
the market. For each of the last seven months of 2004, high yield posted gains
of 1% or more, and was the best performing fixed-income asset class for the
year. As a measure of the high yield market's improvement over the 12-month
period, the spread of the CSFB High Yield Index declined compared with
Treasuries of similar maturity, from 486 basis points to 346 basis points. In a
similar vein, the average yield to maturity of high yield bonds declined from
8.34% at the end of 2003 to 7.56% at the close of 2004.
(1)Team members may change without notice at any time.
D-4
PERFORMANCE ANALYSIS
A closed-end fund's return can be calculated based upon either the market price
or the net asset value (NAV) of its shares. NAV per share is determined by
dividing the value of the trust's portfolio securities, cash and other assets,
less all liabilities, by the total number of common shares outstanding, while
market price reflects the supply and demand for the shares. As a result, the two
returns can differ significantly. On an NAV basis, the trust outperformed its
benchmark, the JP Morgan Global High Yield Index, though it underperformed the
Index on a market-value basis. (See table below.)
During the period, three strategic decisions helped the trust's performance.
First, the trust enjoyed favorable security selection within the housing
industry. Going back to late 2003, the trust had held several homebuilding
issues that performed well, while the performance of building products companies
had lagged. Early in 2004, we felt that homebuilding bonds had become
overpriced, and based on our analysis we sold most of our allocation, replacing
these bonds with building products issues that performed extremely well over the
remainder of the period. Second, the trust benefited from its lack of
participation in airline bonds. Airlines were the worst performing sector within
the high yield market during the 12-month period. Third, our security selection
in the wireless communications and telecom sectors added to performance as we
avoided several credits that had poor business results while our selections
within this sector generally posted solid earnings.
The main detractor from performance during the period was security selection
within the utility, service and gaming/leisure sectors. In addition, the trust's
underweight in the metals/mining sector hurt performance as higher metal prices
led this sector to strong gains during 2004.
On an ongoing basis, we seek to maintain a balanced and well-diversified
portfolio. The trust's portfolio consists of approximately 150 issuers. This
level of diversification may help to reduce overall credit risk, yet also allows
sufficient average security size for strategic overweights. We continue to
maintain an average credit quality of single B, similar to the benchmark.
Beginning in late in 2003 and early 2004, we reduced the trust's allocation in
BBB and higher BB
TOTAL RETURN FOR THE 12-MONTH PERIOD ENDED DECEMBER 31, 2004
------------------------------------------------------
BASED ON BASED ON JP MORGAN GLOBAL
NAV MARKET PRICE HIGH YIELD INDEX
13.47% 7.41% 11.70%
------------------------------------------------------
PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH IS NO GUARANTEE OF
FUTURE RESULTS, AND CURRENT PERFORMANCE MAY BE LOWER OR HIGHER THAN THE FIGURES
SHOWN. INVESTMENT RETURN, NET ASSET VALUE AND COMMON SHARE MARKET PRICE WILL
FLUCTUATE AND TRUST SHARES, WHEN SOLD, MAY BE WORTH MORE OR LESS THAN THEIR
ORIGINAL COST. SEE PERFORMANCE SUMMARY FOR ADDITIONAL PERFORMANCE INFORMATION
AND INDEX DEFINITION.
D-5
credits as many of these issues had performed well when interest rates declined
and Treasuries and other fixed-income securities rallied. The performance of
these higher rated bonds generally correlates with that of Treasuries, and the
trust sold several BBB and BB credits before interest rates spiked in the spring
and Treasuries were negatively impacted. In their place, we purchased lower
quality credits, which historically have performed better than BBB and BB bonds
in a rising interest rate environment. In terms of issuer size, we generally
focus on larger companies because of their financial flexibility, ability to
withstand less-favorable financial markets and superior access to capital
markets.
As we have stated, we believe the fundamentals of the high yield market remain
positive, with favorable earnings, lower default rates and modestly tightening
high yield credit spreads. Many of these positive factors have already been
"priced into" the market during the past two years, however, and high yield
seems to us to be fairly valued. We believe that in 2005, high yield returns
should be driven primarily by coupon income rather than price appreciation. We
look for the trust's holdings to earn their coupon in the coming months and are
hopeful that market fundamentals will remain favorable through the end of 2005.
There is no guarantee that any securities will continue to perform well or be
held by the trust in the future.
D-6
RATINGS ALLOCATION AS OF 12/31/04
BBB/Baa 1.4%
BB/Ba 39.7
B/B 53.1
CCC/Caa 5.6
Non-Rated 0.2
SUMMARY OF INVESTMENTS BY INDUSTRY CLASSIFICATION AS OF 12/31/04
Energy 8.8%
Chemicals 7.7
Gaming & Leisure 7.7
Forest Products 7.6
Utility 7.0
Diversified Media 6.0
Healthcare 5.6
Housing 5.5
Cable 5.3
Food & Tobacco 4.6
Services 4.3
Transportation 4.1
Wireless Communications 3.8
Telecommunications 3.8
Manufacturing 2.7
Consumer Products 2.4
Information Technology 2.4
Food & Drug 2.4
Metals 1.7
Retail 1.0
Financial 0.9
Aerospace 0.6
Broadcasting 0.4
-----
Total Long-Term Investments 96.3%
Short-Term Investments 3.7
-----
Total Investments 100.0%
Subject to change daily. Provided for informational purposes only and should not
be deemed as a recommendation to buy or sell the securities mentioned or
securities in the sectors shown above. Ratings allocation percentages are as a
percentage of long-term investments. Summary of investments by industry
classification percentages are as a percentage of total investments. Securities
are classified by sectors that represent broad groupings of related industries.
Ratings allocation based upon ratings as issued by Standard and Poor's and
Moody's, respectively. Van Kampen is a wholly owned subsidiary of a global
securities firm which is engaged in a wide range of financial services
including, for example, securities trading and brokerage activities, investment
banking, research and analysis, financing and financial advisory services.
D-7
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
Each Van Kampen trust provides a complete schedule of portfolio holdings
in its semiannual and annual reports within 60 days of the end of the
trust's second and fourth fiscal quarters by filing the schedule
electronically with the Securities and Exchange Commission (SEC). The
semiannual reports are filed on Form N-CSRS and the annual reports are
filed on Form N-CSR. Van Kampen also delivers the semiannual and annual
reports to trust shareholders, and makes these reports available on its
public web site, www.vankampen.com. In addition to the semiannual and
annual reports that Van Kampen delivers to shareholders and makes
available through the Van Kampen public web site, each trust files a
complete schedule of portfolio holdings with the SEC for the trust's
first and third fiscal quarters on Form N-Q. Van Kampen does not deliver
the reports for the first and third fiscal quarters to shareholders, nor
are the reports posted to the Van Kampen public web site. You may,
however, obtain the Form N-Q filings (as well as the Form N-CSR and
N-CSRS filings) by accessing the SEC's web site, http://www.sec.gov. You
may also review and copy them at the SEC's Public Reference Room in
Washington, DC. Information on the operation of the SEC's Public
Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. You
can also request copies of these materials, upon payment of a duplicating
fee, by electronic request at the SEC's e-mail address
(publicinfo@sec.gov) or by writing the Public Reference section of the
SEC, Washington, DC 20549-0102.
In addition to filing a complete schedule of portfolio holdings with the
SEC each fiscal quarter, each Van Kampen trust makes portfolio holdings
information available by periodically providing the information on its
public web site, www.vankampen.com. Each Van Kampen trust provides a
complete schedule of portfolio holdings on the public web site on a
calendar-quarter basis approximately 30 days after the close of the
calendar quarter. Van Kampen closed-end funds do not presently provide
partial lists of their portfolio holdings on a monthly basis, but may do
so in the future.
You may obtain copies of a trust's fiscal quarter filings, or its monthly
or calendar-quarter web site postings, by contacting Van Kampen Client
Relations at 1-800-847-2424.
D-8
PROXY VOTING POLICIES AND PROCEDURES AND PROXY VOTING RECORD
The trust's policies and procedures with respect to the voting of proxies
relating to the trust's portfolio securities and information on how the
trust voted proxies relating to portfolio securities during the most
recent twelve-month period ended June 30 is available without charge,
upon request, by calling 1-800-847-2424 or by visiting our web site at
www.vankampen.com. This information is also available on the Securities
and Exchange Commission's web site at http://www.sec.gov.
D-9
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
CORPORATE BONDS 162.8%
AEROSPACE 1.0%
$ 475 K & F Acquisition, Inc., 144A-- Private Placement
(a).............................................. 7.750% 11/15/14 $ 492,812
-----------
BROADCASTING 0.6%
295 Salem Communications Corp. ...................... 7.750 12/15/10 320,444
-----------
CABLE 9.0%
575 Cablevision Systems Corp., 144A--Private
Placement (a) (b)................................ 6.669 04/01/09 612,375
1,005 Charter Communications Holdings LLC.............. 9.625 11/15/09 886,912
160 DirecTV Holdings LLC............................. 8.375 03/15/13 180,200
855 Echostar DBS Corp. .............................. 6.375 10/01/11 878,512
1,000 Kabel Deutschland GmbH, 144A--Private Placement
(Germany) (a).................................... 10.625 07/01/14 1,155,000
850 PanAmSat Corp., 144A--Private Placement (a)...... 9.000 08/15/14 953,062
-----------
4,666,061
-----------
CHEMICALS 13.1%
610 Equistar Chemicals LP............................ 10.125 09/01/08 706,075
350 Equistar Chemicals LP............................ 10.625 05/01/11 407,750
245 FMC Corp. ....................................... 10.250 11/01/09 282,362
190 Huntsman Advanced Materials LLC, 144A--Private
Placement (a).................................... 11.000 07/15/10 227,050
265 Innophos, Inc.,144A--Private Placement (a)....... 8.875 08/15/14 287,525
190 ISP Chemco, Inc. ................................ 10.250 07/01/11 215,650
900 ISP Holdings, Inc. .............................. 10.625 12/15/09 1,001,250
145 Koppers, Inc. ................................... 9.875 10/15/13 166,025
780 Lyondell Chemical Co. ........................... 10.500 06/01/13 932,100
55 Millennium America, Inc. ........................ 7.000 11/15/06 57,475
520 Millennium America, Inc. ........................ 9.250 06/15/08 594,100
535 Nalco Co. ....................................... 7.750 11/15/11 580,475
495 Rhodia SA (France)............................... 8.875 06/01/11 501,187
600 Rockwood Specialties Group, Inc. ................ 10.625 05/15/11 693,000
137 Westlake Chemical Corp. ......................... 8.750 07/15/11 155,495
-----------
6,807,519
-----------
CONSUMER PRODUCTS 3.7%
270 Amscan Holdings, Inc. ........................... 8.750 05/01/14 271,350
210 Oxford Industrials, Inc. ........................ 8.875 06/01/11 226,537
830 Phillips Van-Heusen Corp. ....................... 7.250 02/15/11 875,650
315 Rayovac Corp. ................................... 8.500 10/01/13 351,225
158 Tempur Pedic, Inc. .............................. 10.250 08/15/10 182,490
-----------
1,907,252
-----------
DIVERSIFIED MEDIA 10.1%
830 Advanstar Communications, Inc. (b)............... 9.790 08/15/08 870,975
750 CanWest Media, Inc. (Canada)..................... 10.625 05/15/11 845,625
See Notes to Financial Statements
D-10
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
DIVERSIFIED MEDIA (CONTINUED)
$ 655 Houghton Mifflin Co. ............................ 9.875% 02/01/13 $ 720,500
635 Interpublic Group of Cos., Inc. ................. 6.250 11/15/14 645,706
625 Marquee, Inc., 144A--Private Placement (a) (b)... 6.540 08/15/10 660,937
150 PEI Holdings, Inc. .............................. 11.000 03/15/10 175,500
860 Primedia, Inc. .................................. 8.875 05/15/11 913,750
400 Vertis, Inc. .................................... 9.750 04/01/09 436,000
-----------
5,268,993
-----------
ENERGY 14.9%
335 BRL Universal Equipment.......................... 8.875 02/15/08 353,844
455 CHC Helicopter Corp. (Canada).................... 7.375 05/01/14 482,300
140 CITGO Petroleum Corp., 144A--Private Placement
(a).............................................. 6.000 10/15/11 140,000
905 El Paso Production Holding Co. .................. 7.750 06/01/13 952,512
860 Frontier Oil Corp., 144A--Private Placement
(a).............................................. 6.625 10/01/11 881,500
90 Hanover Compressor Co. .......................... 8.625 12/15/10 98,775
385 Hanover Compressor Co. .......................... 9.000 06/01/14 430,237
375 Hanover Equipment Trust.......................... 8.500 09/01/08 405,000
160 Hanover Equipment Trust.......................... 8.750 09/01/11 174,400
550 Hilcorp Energy Finance Corp., 144A--Private
Placement (a).................................... 10.500 09/01/10 624,250
188 Magnum Hunter Resources, Inc. ................... 9.600 03/15/12 214,320
375 Pacific Energy Partners.......................... 7.125 06/15/14 401,250
850 Plains Exploration & Production Co. ............. 7.125 06/15/14 930,750
305 Port Arthur Finance Corp. ....................... 12.500 01/15/09 358,234
180 Tesoro Petroleum Corp. .......................... 9.625 04/01/12 207,900
1,025 Vintage Petroleum, Inc. ......................... 7.875 05/15/11 1,096,750
-----------
7,752,022
-----------
FINANCIAL 1.4%
680 Refco Finance Holdings LLC, 144A--Private
Placement (a).................................... 9.000 08/01/12 748,000
-----------
FOOD & DRUG 4.0%
690 Delhaize America, Inc. .......................... 8.125 04/15/11 807,800
150 Jean Coutu Group (PJC), Inc., 144A--Private
Placement (Canada) (a)........................... 7.625 08/01/12 159,375
725 Jean Coutu Group (PJC), Inc., 144A--Private
Placement (Canada) (a)........................... 8.500 08/01/14 746,750
1,570 Jitney-Jungle Stores America, Inc. (c) (d) (e)... 12.000 03/01/06 0
360 Rite Aid Corp. .................................. 8.125 05/01/10 382,500
-----------
2,096,425
-----------
FOOD & TOBACCO 7.9%
750 Constellation Brands, Inc. ...................... 8.000 02/15/08 819,375
340 Michael Foods, Inc. ............................. 8.000 11/15/13 360,400
210 Pilgrim's Pride Corp. ........................... 9.250 11/15/13 236,250
765 Pilgrim's Pride Corp. ........................... 9.625 09/15/11 864,450
See Notes to Financial Statements
D-11
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
FOOD & TOBACCO (CONTINUED)
$ 380 Smithfield Foods, Inc. .......................... 7.000% 08/01/11 $ 407,550
220 Smithfield Foods, Inc. .......................... 7.625 02/15/08 236,500
1,050 Smithfield Foods, Inc. .......................... 8.000 10/15/09 1,168,125
-----------
4,092,650
-----------
FOREST PRODUCTS 12.9%
1,020 Abitibi-Consolidated, Inc. (Canada).............. 6.000 06/20/13 977,925
330 Abitibi-Consolidated, Inc. (Canada).............. 8.550 08/01/10 359,287
535 Georgia-Pacific Corp. ........................... 8.875 02/01/10 625,281
775 Graphic Packaging International, Inc. ........... 9.500 08/15/13 885,437
560 MDP Acquisitions PLC (Ireland)................... 9.625 10/01/12 627,200
235 Norampac, Inc. (Canada).......................... 6.750 06/01/13 248,512
1,350 Owens-Brockway Glass Containers, Inc. ........... 8.875 02/15/09 1,473,187
495 Pliant Corp. .................................... 13.000 06/01/10 485,100
1,065 Tembec Industries, Inc. (Canada)................. 7.750 03/15/12 1,035,712
-----------
6,717,641
-----------
GAMING & LEISURE 13.1%
425 Ceasars Entertainment............................ 8.875 09/15/08 482,375
320 Gaylord Entertainment Co., 144A--Private
Placement (a).................................... 6.750 11/15/14 323,200
920 Harrahs Operating Co., Inc. ..................... 7.875 12/15/05 959,100
176 HMH Properties, Inc. ............................ 7.875 08/01/08 181,720
275 Host Marriott LP................................. 7.125 11/01/13 295,281
650 Intrawest Corp., 144A--Private Placement (Canada)
(a).............................................. 7.500 10/15/13 694,687
480 Isle of Capri Casinos, Inc. ..................... 7.000 03/01/14 492,000
150 MGM Mirage, Inc. ................................ 5.875 02/27/14 148,125
1,120 MGM Mirage, Inc. ................................ 6.000 10/01/09 1,153,600
865 Mohegan Tribal Gaming Authority.................. 7.125 08/15/14 914,738
490 Park Place Entertainment Corp. .................. 7.875 12/15/05 509,600
625 Station Casinos, Inc. ........................... 6.000 04/01/12 639,844
-----------
6,794,270
-----------
HEALTHCARE 9.6%
390 AmerisourceBergen Corp. ......................... 8.125 09/01/08 435,825
340 Community Health Systems, Inc., 144A--Private
Placement (a).................................... 6.500 12/15/12 344,250
1,140 Extendicare Health Services, Inc. ............... 6.875 05/01/14 1,168,500
400 Fisher Scientific International, Inc. ........... 8.125 05/01/12 446,000
160 Fisher Scientific International, Inc., 144A--
Private Placement (a)............................ 6.750 08/15/14 172,400
560 Fresenius Medical Care Capital Trust II.......... 7.875 02/01/08 609,000
235 Fresenius Medical Care Capital Trust IV.......... 7.875 06/15/11 263,200
515 HCA, Inc. ....................................... 6.375 01/15/15 518,034
85 National Nephrology Associates, Inc., 144A--
Private Placement (a)............................ 9.000 11/01/11 98,813
See Notes to Financial Statements
D-12
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
HEALTHCARE (CONTINUED)
$ 450 Team Health Inc. ................................ 9.000% 04/01/12 $ 442,125
435 Tenet Healthcare Corp., 144A--Private Placement
(a).............................................. 9.875 07/01/14 476,325
-----------
4,974,472
-----------
HOUSING 9.3%
104 CB Richard Ellis Service, Inc. .................. 9.750 05/15/10 119,080
545 CB Richard Ellis Service, Inc. .................. 11.250 06/15/11 629,475
625 Interface, Inc. ................................. 9.500 02/01/14 684,375
615 Nortek, Inc., 144A--Private Placement (a)........ 8.500 09/01/14 645,750
875 Ply Gem Industries, Inc., 144A--Private Placement
(a).............................................. 9.000 02/15/12 892,500
340 Propex Fabrics, Inc., 144A--Private Placement
(a).............................................. 10.000 12/01/12 354,450
445 RMCC Acquisition Co., 144A--Private Placement
(a).............................................. 9.500 11/01/12 446,113
370 Technical Olympic USA, Inc. ..................... 9.000 07/01/10 397,750
290 Technical Olympic USA, Inc. ..................... 9.000 07/01/10 311,750
310 Technical Olympic USA, Inc. ..................... 10.375 07/01/12 348,750
-----------
4,829,993
-----------
INFORMATION TECHNOLOGY 4.1%
445 Iron Mountain, Inc. ............................. 7.750 01/15/15 453,900
770 Iron Mountain, Inc. ............................. 8.625 04/01/13 821,975
800 Xerox Corp. ..................................... 7.125 06/15/10 868,000
-----------
2,143,875
-----------
MANUFACTURING 4.5%
155 Flowserve Corp. ................................. 12.250 08/15/10 172,050
530 Johnsondiversey, Inc. ........................... 9.625 05/15/12 594,925
439 Manitowoc, Inc. ................................. 10.500 08/01/12 507,045
1,010 Trimas Corp. .................................... 9.875 06/15/12 1,075,650
-----------
2,349,670
-----------
METALS 2.8%
202 Doe Run Resources Corp. (Acquired 02/15/01 to
10/15/04, Cost $177,470) (f) (g)................. 11.750 11/01/08 172,915
140 Foundation PA Coal Co., 144A--Private Placement
(a).............................................. 7.250 08/01/14 149,800
210 General Cable Corp. ............................. 9.500 11/15/10 238,350
440 UCAR Finance, Inc. .............................. 10.250 02/15/12 504,900
337 United States Steel Corp. ....................... 9.750 05/15/10 385,865
-----------
1,451,830
-----------
RETAIL 1.7%
290 General Nutrition Center, Inc. .................. 8.500 12/01/10 275,500
590 Petro Stopping Center Financial.................. 9.000 02/15/12 626,875
-----------
902,375
-----------
SERVICES 7.3%
45 Allied Waste North America, Inc. ................ 7.875 04/15/13 46,350
1,500 Allied Waste North America, Inc. ................ 8.875 04/01/08 1,612,500
510 Buhrmann US, Inc. ............................... 8.250 07/01/14 518,288
See Notes to Financial Statements
D-13
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
SERVICES (CONTINUED)
$ 405 MSW Energy Holdings II LLC....................... 7.375% 09/01/10 $ 427,275
85 MSW Energy Holdings LLC.......................... 8.500 09/01/10 93,500
390 United Rentals North America, Inc. .............. 6.500 02/15/12 382,200
740 United Rentals North America, Inc. .............. 7.750 11/15/13 728,900
-----------
3,809,013
-----------
TELECOMMUNICATIONS 6.4%
605 Axtel SA (Mexico)................................ 11.000 12/15/13 654,913
860 Cincinnati Bell, Inc. ........................... 7.250 07/15/13 887,950
280 Exodus Communications, Inc. (c) (d) (e).......... 11.250 07/01/08 0
430 Qwest Communications International, Inc., 144A--
Private Placement (a) (b)........................ 6.040 02/15/09 437,525
710 Qwest Corp. ..................................... 6.625 09/15/05 727,750
575 Qwest Corp., 144A--Private Placement (a)......... 7.875 09/01/11 626,750
-----------
3,334,888
-----------
TRANSPORTATION 7.0%
450 AutoNation, Inc. ................................ 9.000 08/01/08 516,375
585 Laidlaw International, Inc. ..................... 10.750 06/15/11 685,913
1,065 Sonic Automotive, Inc. .......................... 8.625 08/15/13 1,140,881
1,100 TRW Automotive, Inc. ............................ 9.375 02/15/13 1,281,500
-----------
3,624,669
-----------
UTILITY 11.9%
485 AES Corp. ....................................... 7.750 03/01/14 528,650
23 AES Corp. ....................................... 8.875 02/15/11 26,393
73 AES Corp. ....................................... 9.375 09/15/10 85,228
330 Calpine Corp., 144A--Private Placement (a)....... 8.500 07/15/10 284,625
65 CMS Energy Corp. ................................ 7.500 01/15/09 69,550
405 CMS Energy Corp. ................................ 8.500 04/15/11 462,206
605 Dynegy Holdings, Inc. ........................... 6.875 04/01/11 585,338
345 Dynegy Holdings, Inc., 144A--Private Placement
(a).............................................. 9.875 07/15/10 387,263
235 IPALCO Enterprises, Inc. ........................ 8.625 11/14/11 264,375
485 Monongahela Power Co. ........................... 5.000 10/01/06 496,184
290 Nevada Power Co. ................................ 8.250 06/01/11 334,588
490 Nevada Power Co. ................................ 9.000 08/15/13 575,750
385 PSEG Energy Holdings, Inc. ...................... 7.750 04/16/07 409,063
20 PSEG Energy Holdings, Inc. ...................... 8.625 02/15/08 22,050
270 Reliant Energy, Inc. ............................ 6.750 12/15/14 269,663
195 Southern Natural Gas Co. ........................ 8.875 03/15/10 219,375
785 TNP Enterprises, Inc. ........................... 10.250 04/01/10 841,913
270 Trans Continental Gas Pipe Line Corp. ........... 8.875 07/15/12 329,738
-----------
6,191,952
-----------
WIRELESS COMMUNICATIONS 6.5%
160 Centennial Communications Corp. ................. 8.125 02/01/14 165,200
1,025 Nextel Communications, Inc. ..................... 6.875 10/31/13 1,117,250
295 Rogers Wireless Communications, Inc.,
144A--Private Placement (Canada) (a)............. 7.500 03/15/15 312,700
See Notes to Financial Statements
D-14
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
PAR
AMOUNT
(000) DESCRIPTION COUPON MATURITY VALUE
-------------------------------------------------------------------------------------------
WIRELESS COMMUNICATIONS (CONTINUED)
$ 205 Rogers Wireless Communications, Inc.,
144A--Private Placement (Canada) (a)............. 8.000% 12/15/12 $ 217,813
250 Rural Cellular Corp. (b)......................... 6.990 03/15/10 260,000
575 Rural Cellular Corp. ............................ 8.250 03/15/12 610,938
670 SBA Communications Corp., 144A--Private Placement
(a).............................................. 8.500 12/01/12 686,750
-----------
3,370,651
-----------
TOTAL CORPORATE BONDS 162.8%................................................ 84,647,477
-----------
DESCRIPTION VALUE
-------------------------------------------------------------------------------------------
EQUITIES 0.5%
DecisionOne Corp. (3,033 common shares) (e) (h).............................. 0
DecisionOne Corp. (6,670 common stock warrants) (e) (h)...................... 0
Doe Run Resources Corp. (1 common stock warrant) (e) (h)..................... 0
HCI Direct, Inc. (30,357 common shares) (e) (h).............................. 236,784
Hosiery Corp of America, Inc. (500 common shares) (e) (h).................... 0
VS Holdings, Inc. (11,316 common shares) (e) (h)............................. 2,037
-----------
TOTAL EQUITIES............................................................... 238,821
-----------
TOTAL LONG-TERM INVESTMENTS 163.3%
(Cost $83,043,939)......................................................... 84,886,298
REPURCHASE AGREEMENT 6.2%
State Street Bank & Trust Co. ($3,230,000 par collateralized by U.S.
Government obligations in a pooled cash account, interest rate of 2.15%,
dated 12/31/04, to be sold on 01/03/05 at $3,230,579)
(Cost $3,230,000).......................................................... 3,230,000
-----------
TOTAL INVESTMENTS 169.5%
(Cost $86,273,939)......................................................... 88,116,298
OTHER ASSETS IN EXCESS OF LIABILITIES 2.9%.................................. 1,530,879
PREFERRED SHARES (INCLUDING ACCRUED DISTRIBUTIONS) (72.4%).................. (37,657,654)
-----------
NET ASSETS APPLICABLE TO COMMON SHARES 100.0%............................... $51,989,523
===========
See Notes to Financial Statements
D-15
VAN KAMPEN HIGH INCOME TRUST
PORTFOLIO OF INVESTMENTS -- DECEMBER 31, 2004 continued
Percentages are calculated as a percentage of net assets applicable to common
shares.
(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) Variable rate security. Interest rate shown is that in effect at December
31, 2004.
(c) Non-income producing as security is in default.
(d) This borrower has filed for protection in federal bankruptcy court.
(e) Market value is determined in accordance with procedures established in good
faith by the Board of Trustees.
(f) Payment-in-kind security.
(g) These securities are restricted and may be resold only in transactions
exempt from registration which are normally those transactions with
qualified institutional buyers. Restricted securities comprise 0.3% of net
assets applicable to common shares.
(h) Non-income producing security.
See Notes to Financial Statements
D-16
VAN KAMPEN HIGH INCOME TRUST
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
December 31, 2004
ASSETS:
Total Investments (Cost $86,273,939)........................ $ 88,116,298
Cash........................................................ 155
Receivables:
Interest.................................................. 1,624,213
Investments Sold.......................................... 271,724
Other....................................................... 1,074
------------
Total Assets............................................ 90,013,464
------------
LIABILITIES:
Payables:
Investment Advisory Fee................................... 53,061
Income Distributions--Common Shares....................... 17,316
Other Affiliates.......................................... 3,628
Trustees' Deferred Compensation and Retirement Plans........ 214,548
Accrued Expenses............................................ 77,734
------------
Total Liabilities....................................... 366,287
Preferred Shares (including accrued distributions).......... 37,657,654
------------
NET ASSETS APPLICABLE TO COMMON SHARES...................... $ 51,989,523
============
NET ASSET VALUE PER COMMON SHARE
($51,989,523 divided by 13,710,760 shares outstanding)...... $ 3.79
============
NET ASSETS CONSIST OF:
Common Shares ($.01 par value with an unlimited number of
shares authorized, 13,710,760 shares issued and
outstanding).............................................. $ 137,108
Paid in Surplus............................................. 84,024,777
Net Unrealized Appreciation................................. 1,842,359
Accumulated Undistributed Net Investment Income............. (282,849)
Accumulated Net Realized Loss............................... (33,731,872)
------------
NET ASSETS APPLICABLE TO COMMON SHARES...................... $ 51,989,523
============
PREFERRED SHARES ($.01 par value, authorized 1,000,000
shares, 376 issued with liquidation preference of $100,000
per share)................................................ $ 37,600,000
============
NET ASSETS INCLUDING PREFERRED SHARES....................... $ 89,589,523
============
See Notes to Financial Statements
D-17
VAN KAMPEN HIGH INCOME TRUST
FINANCIAL STATEMENTS continued
Statement of Operations
For the Year Ended December 31, 2004
INVESTMENT INCOME:
Interest.................................................... $6,666,820
Other....................................................... 117,015
----------
Total Income............................................ 6,783,835
----------
EXPENSES:
Investment Advisory Fee..................................... 612,483
Preferred Share Maintenance................................. 110,325
Trustees' Fees and Related Expenses......................... 50,900
Legal....................................................... 19,006
Custody..................................................... 13,585
Other....................................................... 184,968
----------
Total Expenses.......................................... 991,267
----------
NET INVESTMENT INCOME....................................... $5,792,568
==========
REALIZED AND UNREALIZED GAIN/LOSS:
Net Realized Gain........................................... $1,201,689
----------
Unrealized Appreciation/Depreciation:
Beginning of the Period................................... 1,289,421
End of the Period......................................... 1,842,359
----------
Net Unrealized Appreciation During the Period............... 552,938
----------
NET REALIZED AND UNREALIZED GAIN............................ $1,754,627
==========
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS..................... $ (575,670)
==========
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON SHARES FROM
OPERATIONS................................................ $6,971,525
==========
See Notes to Financial Statements
D-18
VAN KAMPEN HIGH INCOME TRUST
FINANCIAL STATEMENTS continued
Statements of Changes in Net Assets (Unaudited)
FOR THE FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, 2004 DECEMBER 31, 2003
-------------------------------------
FROM INVESTMENT ACTIVITIES:
Operations:
Net Investment Income................................... $ 5,792,568 $ 5,701,677
Net Realized Gain/Loss.................................. 1,201,689 (7,269,381)
Net Unrealized Appreciation During the Period........... 552,938 15,491,653
Distributions to Preferred Shareholders:
Net Investment Income................................. (575,670) (452,433)
----------- -----------
Change in Net Assets Applicable to Common Shares from
Operations............................................ 6,971,525 13,471,516
Distributions to Common Shareholders:
Net Investment Income................................. (4,934,906) (4,881,353)
Return of Capital Distribution........................ -0- (122,439)
----------- -----------
NET CHANGE IN NET ASSETS APPLICABLE TO COMMON SHARES
FROM INVESTMENT ACTIVITIES............................ 2,036,619 8,467,724
NET ASSETS APPLICABLE TO COMMON SHARES:
Beginning of the Period................................. 49,952,904 41,485,180
----------- -----------
End of the Period (Including accumulated undistributed
net investment income of ($282,849) and ($735,678),
respectively)......................................... $51,989,523 $49,952,904
=========== ===========
See Notes to Financial Statements
D-19
VAN KAMPEN HIGH INCOME TRUST
FINANCIAL HIGHLIGHTS
THE FOLLOWING SCHEDULE PRESENTS FINANCIAL HIGHLIGHTS FOR ONE COMMON SHARE OF THE
TRUST OUTSTANDING THROUGHOUT THE PERIODS INDICATED.
--------------------------------
2004 2003 2002
--------------------------------
NET ASSET VALUE, BEGINNING OF THE PERIOD................. $ 3.64 $ 3.03 $ 3.78
-------- -------- --------
Net Investment Income.................................. .42 .41 .47
Net Realized and Unrealized Gain/Loss.................. .13 .59 (.69)
Common Share Equivalent of Distributions Paid to
Preferred Shareholders:
Net Investment Income................................ (.04) (.03) (.06)
-------- -------- --------
Total from Investment Operations......................... .51 .97 (.28)
Distributions Paid to Common Shareholders:
Net Investment Income................................ (.36) (.35) (.46)
Return of Capital Distributions...................... -0- (.01) (.01)
-------- -------- --------
NET ASSET VALUE, END OF THE PERIOD....................... $ 3.79 $ 3.64 $ 3.03
======== ======== ========
Common Share Market Price at End of the Period........... $ 4.10 $ 4.16 $ 3.10
Total Return (a)......................................... 7.41% 47.66% -22.99%
Net Assets Applicable to Common Shares at End of the
Period (In millions)................................... $ 52.0 $ 50.0 $ 41.5
Ratio of Expenses to Average Net Assets Applicable to
Common Shares (b)...................................... 1.99% 2.10% 2.15%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (b)........................ 11.61% 12.36% 14.42%
Portfolio Turnover....................................... 86% 73% 82%
SUPPLEMENTAL RATIOS:
Ratio of Expenses to Average Net Assets Including
Preferred Shares (b)................................... 1.13% 1.16% 1.12%
Ratio of Net Investment Income to Average Net Assets
Applicable to Common Shares (d)........................ 10.46% 11.38% 12.75%
SENIOR SECURITIES:
Total Preferred Shares Outstanding....................... 376 376 376
Asset Coverage Per Preferred Share (e)................... $238,423 $232,928 $210,413
Involuntary Liquidating Preference Per Preferred Share... $100,000 $100,000 $100,000
Average Market Value Per Preferred Share................. $100,000 $100,000 $100,000
(a)Total return assumes an investment at the common share market price at the
beginning of the period indicated, reinvestment of all distributions for the
period in accordance with the Trust's dividend reinvestment plan, and sale of
all shares at the closing common share market price at the end of the period
indicated.
(b)Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(c)As required, effective January 1, 2001, the Trust has adopted the provisions
of the AICPA Audit and Accounting Guide for Investment Companies and began
amortizing premium on fixed income securities. The effect of this change for
the year ended December 31, 2001 was to decrease net investment income per
share by $.02, increase net realized and unrealized gains and losses per
share by $.02 and decrease the ratio of net investment income to average net
assets applicable to common shares by .38%. Per share, ratios and
supplemental data for periods prior to December 31, 2001 have not been
restated to reflect this change in presentation.
(d)Ratios reflect the effect of dividend payments to preferred shareholders.
(e)Calculated by subtracting the Trust's total liabilities (not including the
preferred shares) from the Trust's total assets and dividing this by the
number of preferred shares outstanding.
D-20
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
2001 (c) 2000 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------
$ 4.22 $ 5.10 $ 5.86 $ 6.47 $ 6.35 $ 6.19 $ 5.62
-------- -------- -------- -------- -------- -------- --------
.71 .85 .88 .91 .93 .94 .98
(.44) (.85) (.75) (.58) .13 .15 .54
(.15) (.26) (.22) (.24) (.24) (.23) (.25)
-------- -------- -------- -------- -------- -------- --------
.12 (.26) (.09) .09 .82 .86 1.27
(.56) (.61) (.67) (.70) (.70) (.70) (.70)
-0- (.01) -0- -0- -0- -0- -0-
-------- -------- -------- -------- -------- -------- --------
$ 3.78 $ 4.22 $ 5.10 $ 5.86 $ 6.47 $ 6.35 $ 6.19
======== ======== ======== ======== ======== ======== ========
$ 4.54 $ 4.125 $ 4.50 $ 6.375 $ 7.375 $ 6.75 $ 6.375
23.76% 4.08% -21.20% -4.33% 20.29% 17.34% 29.17%
$ 51.8 $ 57.9 $ 70.0 $ 80.4 $ 88.7 $ 87.0 $ 84.8
1.98% 1.95% 1.92% 1.85% 1.76% 1.87% 1.92%
16.80% 18.05% 16.13% 14.56% 14.60% 15.32% 16.39%
64% 62% 57% 65% 102% 92% 119%
1.07% 1.04% 1.07% 1.09% 1.05% 1.11% 1.12%
13.32% 12.48% 12.09% 10.77% 10.90% 11.58% 12.16%
450 500 588 588 588 588 588
$215,081 $215,271 $219,005 $236,742 $250,850 $247,974 $244,242
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
$100,000 $100,000 $100,000 $100,000 $100,000 $100,000 $100,000
See Notes to Financial Statements
D-21
VAN KAMPEN HIGH INCOME TRUST
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004
1. SIGNIFICANT ACCOUNTING POLICIES
Van Kampen High Income Trust (the "Trust") is registered as a diversified,
closed-end management investment company under the Investment Company Act of
1940, as amended. The Trust's investment objective is to provide high current
income, while seeking to preserve shareholders' capital through investment in a
professionally managed diversified portfolio of high yield, fixed income
securities. The Trust commenced investment operations on January 26, 1989.
The following is a summary of significant accounting policies consistently
followed by the Trust in the preparation of its financial statements. The
preparation of financial statements in conformity with accounting principals
generally accepted in the United States of America 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. Securities which are not valued by independent pricing
services or dealers are valued at fair value using 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.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Trust 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 Trust will
segregate assets with the custodian having an aggregate value at least equal to
the amount of the when-issued or delayed delivery purchase commitments until
after payment is made. At December 31, 2004, the Trust had no when-issued and
delayed delivery purchase commitments.
The Trust may invest in repurchase agreements, which are short-term
investments in which the Trust acquires ownership of a debt security and the
seller agrees to repurchase the security at a future time and specified price.
The Trust 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 Asset Management (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 Trust 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 Trust.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
discount is accreted and premium is amortized over the expected life of each
applicable security. Other
D-22
VAN KAMPEN HIGH INCOME TRUST
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
income is comprised primarily of consent fees. Consent fees are earned as
compensation for agreeing to changes in the terms of debt instruments.
D. FEDERAL INCOME TAXES It is the Trust's policy to comply with the requirements
of Subchapter M 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.
The Trust 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, 2004, the Trust had an accumulated capital loss carry
forward for tax purposes of $33,728,272 which will expire according to the
following schedule.
AMOUNT EXPIRATION
$ 2,385,010................................................. December 31, 2007
4,010,584................................................. December 31, 2008
6,489,257................................................. December 31, 2009
12,317,287................................................. December 31, 2010
7,532,784................................................. December 31, 2011
993,350................................................. December 31, 2012
At December 31, 2004, the cost and related gross unrealized appreciation and
depreciation are as follows:
Cost of investments for tax purposes........................ $86,670,128
===========
Gross tax unrealized appreciation........................... $ 5,161,971
Gross tax unrealized depreciation........................... (3,715,801)
-----------
Net tax unrealized appreciation on investments.............. $ 1,446,170
===========
E. DISTRIBUTION OF INCOME AND GAINS The Trust declares and pays monthly
dividends from net investment income to common shareholders. Net realized gains,
if any, are distributed annually to common shareholders. Distributions from net
realized gains for book purposes may include short-term capital gains which are
included in ordinary income for tax purposes. The tax character of
distributions paid during the years ended December 31, 2004 and 2003 was as
follows:
2004 2003
Distributions paid from:
Ordinary income........................................... $5,483,867 $5,315,792
Return of capital......................................... -- 122,439
---------- ----------
$5,483,867 $5,438,231
========== ==========
Due to inherent differences in the recognition of income, expenses and
realized gain/losses under accounting principles generally accepted in the
United States of America and federal income tax purposes, permanent differences
between book and tax basis reporting for the 2004 fiscal year have been
identified and appropriately reclassified. Permanent
D-23
VAN KAMPEN HIGH INCOME TRUST
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
differences of $289,912 relating to book to tax amortization differences were
reclassified from accumulated undistributed net investment income to accumulated
net realized loss and permanent differences of $116,450 relating to fee income
received from tender offers were reclassified from accumulated undistributed net
investment income to accumulated net realized loss. Also, a permanent book and
tax difference relating to the true-up of prior year adjustments totaling $2,625
was reclassified from accumulated undistributed net investment income to
accumulated net realized loss in the amount of $2,265 and capital in the amount
of $360.
As of December 31, 2004, the components of distributable earnings on a tax
basis were as follows:
Undistributed ordinary income............................... $416,226
Net realized gains or losses may differ for financial and tax reporting
purposes primarily as a result of the deferral of losses relating to wash sale
transactions.
2. INVESTMENT ADVISORY AGREEMENT AND OTHER TRANSACTIONS WITH AFFILIATES
Under the terms of the Trust's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Trust for an annual fee payable
monthly of .70% of the average daily net assets of the Trust.
For the year ended December 31, 2004, the Trust recognized expenses of
approximately $6,900 representing legal services provided by Skadden, Arps,
Slate, Meagher & Flom LLP, of which a trustee of the Trust is a partner of such
firm and he and his law firm provide legal services as legal counsel to the
Trust.
Under separate Accounting Services and Legal Services agreements, the
Adviser provides accounting and legal services to the Trust. The Adviser
allocates the cost of such services to each trust. For the year ended December
31, 2004, the Trust recognized expenses of approximately $24,600 representing
Van Kampen Investments Inc.'s or its affiliates' (collectively "Van Kampen")
cost of providing accounting and legal services to the Trust, which are reported
as part of "Other" and "Legal" expenses, respectively, in the Statement of
Operations.
Certain officers and trustees of the Trust are also officers and directors
of Van Kampen. The Trust does not compensate its officers or trustees who are
also officers of Van Kampen.
The Trust 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 upon retirement for a
ten-year period and are based upon each trustee's years of service to the Trust.
The maximum annual benefit per trustee under the plan is $2,500.
3. INVESTMENT TRANSACTIONS
During the period, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $72,271,452 and $71,704,851,
respectively.
D-24
VAN KAMPEN HIGH INCOME TRUST
NOTES TO FINANCIAL STATEMENTS -- DECEMBER 31, 2004 continued
4. AUCTION MARKET PREFERRED SHARES
The Trust has outstanding 376 shares of Auction Market Preferred Shares ("AMPS")
at a liquidation value of $100,000 per share. Dividends are cumulative and the
rate is currently reset through an auction process every 28 days. The rate in
effect on December 31, 2004 was 2.30%. During the year ended December 31, 2004,
the rates ranged from 1.00% to 2.30%.
The Trust pays annual fees equivalent to .25% of the preferred share
liquidation value for the remarketing efforts associated with the preferred
auctions. These fees are included as a component of Preferred Share Maintenance
expense. The AMPS are redeemable at the option of the Trust in whole or in part
at a price of $100,000 per share plus accumulated and unpaid dividends. The
Trust is subject to certain asset coverage tests, and the AMPS are subject to
mandatory redemption if the tests are not met.
5. INDEMNIFICATIONS
The Trust enters into contracts that contain a variety of indemnifications. The
Trust's maximum exposure under these arrangements is unknown. However, the Trust
has not had prior claims or losses pursuant to these contracts and expects the
risk of loss to be remote.
D-25
VAN KAMPEN HIGH INCOME TRUST
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trustees and Shareholders of
Van Kampen High Income Trust
We have audited the accompanying statement of assets and liabilities of Van
Kampen High Income Trust (the "Trust"), including the portfolio of investments,
as of December 31, 2004, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the five years in
the period then ended. These financial statements and financial highlights are
the responsibility of the Trust's management. Our responsibility is to express
an opinion on these financial statements and financial highlights based on our
audits. The Fund's financial highlights for the periods ended prior to December
31, 2000, were audited by other auditors whose report, dated February 10, 2000,
expressed an unqualified opinion on those financial highlights.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Fund's
internal control over financial reporting. Accordingly, we express no such
opinion. An audit also 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, as well
as evaluating the overall financial statement presentation. Our procedures
included confirmation of securities owned as of December 31, 2004, by
correspondence with the Trust's custodian. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of Van
Kampen High Income Trust as of December 31, 2004, the results of its operations
for the year then ended, the changes in its net assets for each of the two years
in the period then ended, and the financial highlights for each of the five
years in the period then ended, in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 11, 2005
D-26
VAN KAMPEN HIGH INCOME TRUST
DIVIDEND REINVESTMENT PLAN
The Trust offers a Dividend Reinvestment Plan (the "Plan") in which Common
Shareholders may elect to have dividends and capital gains distributions
automatically reinvested in Common Shares of the Trust. The service is entirely
voluntary and you may join or withdraw at any time.
HOW TO PARTICIPATE
If you wish to elect to participate in the Plan and your shares are held in
your own name, call 1-800-341-2929 for more information and a brochure. If your
shares are held in the name of a brokerage firm, bank, or other nominee, you
should contact your nominee to see if it would participate in the Plan on your
behalf. If you wish to participate in the Plan, but your brokerage firm, bank,
or nominee is unable to participate on your behalf, you should request that your
shares be re-registered in your own name which will enable your participation in
the Plan.
HOW THE PLAN WORKS
State Street Bank and Trust Company, as your Plan Agent, serves as agent for
the Common Shareholders in administering the Plan. After the Trust declares a
dividend or determines to make a capital gains distribution, the Plan Agent
will, as agent for the participants, receive the cash payment and use it to buy
Common Shares in the open market, on the New York Stock Exchange or elsewhere,
for the participants' accounts. The Trust will not issue any new Common Shares
in connection with the Plan. All reinvestments are in full and fractional Common
Shares, carried to three decimal places.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Trust reserves the right to amend or terminate the Plan as
applied to any dividend or capital gains distribution paid subsequent to written
notice of the change sent to all Common Shareholders of the Trust at least 90
days before the record date for the dividend or distribution. The Plan also may
be amended or terminated by the Plan Agent, with the written consent of the
Trust, by providing at least 90 days written notice to all Participants in the
Plan.
COSTS OF THE PLAN
The Plan Agent's fees for the handling of the reinvestment of dividends and
distributions will be paid by the Trust. However, each participant will pay a
pro rata share of brokerage commissions incurred with respect to the Plan
Agent's open market purchases in connection with the reinvestment of dividends
and distributions. No other charges will be made to participants for reinvesting
dividends or capital gains distributions, except for certain brokerage
commissions, as described above.
D-27
VAN KAMPEN HIGH INCOME TRUST
DIVIDEND REINVESTMENT PLAN continued
TAX IMPLICATIONS
You will receive tax information annually for your personal records and to
help you prepare your federal income tax return. The automatic reinvestment of
dividends and capital gains distributions does not relieve you of any income tax
which may be payable on dividends or capital gains distributions.
RIGHT TO WITHDRAW
You may withdraw from the Plan at any time by calling 1-800-341-2929 or by
writing State Street Bank and Trust Company. If you withdraw, you will receive,
without charge, a share certificate issued in your name for all full Common
Shares credited to your account under the Plan, and a cash payment will be made
for any fractional Common Share credited to your account under the Plan. You may
again elect to participate in the Plan at any time by calling 1-800-341-2929 or
writing to the Trust at:
2800 Post Oak Blvd.
Houston, TX 77056
Attn: Closed-End Funds
D-28
VAN KAMPEN HIGH INCOME TRUST
BOARD OF TRUSTEES AND IMPORTANT ADDRESSES
BOARD OF TRUSTEES
DAVID C. ARCH
JERRY D. CHOATE
ROD DAMMEYER
LINDA HUTTON HEAGY
R. CRAIG KENNEDY
HOWARD J KERR
MITCHELL M. MERIN*
JACK E. NELSON
RICHARD F. POWERS, III*
HUGO F. SONNENSCHEIN
WAYNE W. WHALEN* - Chairman
SUSAN H. WOOLSEY
INVESTMENT ADVISER
VAN KAMPEN ASSET MANAGEMENT
1221 Avenue of the Americas
New York, New York 10020
CUSTODIAN AND TRANSFER AGENT
STATE STREET BANK
AND TRUST COMPANY
c/o EquiServe
P.O. Box 43011
Providence, Rhode Island 02940-3011
LEGAL COUNSEL
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM LLP
333 West Wacker Drive
Chicago, Illinois 60606
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
DELOITTE & TOUCHE LLP
180 North Stetson Avenue
Chicago, Illinois 60601
* "Interested persons" of the Trust, as defined in the Investment Company Act
of 1940, as amended.
D-29
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION
The business and affairs of the Trust are managed under the direction of the
Trust's Board of Trustees and the Trust's officers appointed by the Board of
Trustees. The tables below list the trustees and executive officers of the Trust
and their principal occupations during the last five years, other directorships
held by trustees and their affiliations, if any, with Van Kampen Investments
Inc. ("Van Kampen Investments"), Van Kampen Asset Management (the "Adviser"),
Van Kampen Funds Inc. (the "Distributor"), Van Kampen Advisors Inc., Van Kampen
Exchange Corp. and Van Kampen Investor Services Inc. ("Investor Services"). The
term "Fund Complex" includes each of the investment companies advised by the
Adviser or its affiliates as of the date of this Statement of Additional
Information. Trustees serve until reaching their retirement age or until their
successors are duly elected and qualified. Officers are annually elected by the
trustees.
INDEPENDENT TRUSTEES:
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
David C. Arch (59) Trustee Trustee Chairman and Chief 83 Trustee/Director/Managing
Blistex Inc. since 1988 Executive Officer of General Partner of funds
1800 Swift Drive Blistex Inc., a consumer in the Fund Complex.
Oak Brook, IL 60523 health care products
manufacturer. Director of
the Heartland Alliance, a
nonprofit organization
serving human needs based
in Chicago. Director of
St. Vincent de Paul
Center, a Chicago based
day care facility serving
the children of low
income families. Board
member of the Illinois
Manufacturers'
Association.
Jerry D. Choate (66) Trustee Trustee Prior to January 1999, 81 Trustee/Director/Managing
33971 Selva Road since 2003 Chairman and Chief General Partner of funds
Suite 130 Executive Officer of the in the Fund Complex.
Dana Point, CA 92629 Allstate Corporation Director of Amgen Inc., a
("Allstate") and Allstate biotechnological company,
Insurance Company. Prior and Director of Valero
to January 1995, Energy Corporation, an
President and Chief independent refining
Executive Officer of company.
Allstate. Prior to August
1994, various management
positions at Allstate.
D-30
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Rod Dammeyer (64) Trustee Trustee President of CAC, L.L.C., 83 Trustee/Director/Managing
CAC, L.L.C. since 1988 a private company General Partner of funds
4350 LaJolla Village Drive offering capital in the Fund Complex.
Suite 980 investment and management Director of Stericycle,
San Diego, CA 92122-6223 advisory services. Prior Inc., Ventana Medical
to February 2001, Vice Systems, Inc., and GATX
Chairman and Director of Corporation, and Trustee
Anixter International, of The Scripps Research
Inc., a global Institute and the
distributor of wire, University of Chicago
cable and communications Hospitals and Health
connectivity products. Systems. Prior to January
Prior to July 2000, 2004, Director of
Managing Partner of TeleTech Holdings Inc.
Equity Group Corporate and Arris Group, Inc.
Investment (EGI), a Prior to May 2002,
company that makes Director of Peregrine
private investments in Systems Inc. Prior to
other companies. February 2001, Director
of IMC Global Inc. Prior
to July 2000, Director of
Allied Riser
Communications Corp.,
Matria Healthcare Inc.,
Transmedia Networks,
Inc., CNA Surety, Corp.
and Grupo Azcarero Mexico
(GAM).
D-31
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Linda Hutton Heagy (56) Trustee Trustee Managing Partner of 81 Trustee/Director/Managing
Heidrick & Struggles since 2003 Heidrick & Struggles, an General Partner of funds
233 South Wacker Drive executive search firm. in the Fund Complex.
Suite 7000 Trustee on the University
Chicago, IL 60606 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
1997, Partner of Ray &
Berndtson, Inc., an
executive recruiting
firm. Prior to 1996,
Trustee of The
International House
Board, a fellowship and
housing organization for
international graduate
students. Prior to 1995,
Executive Vice President
of ABN AMRO, N.A., a bank
holding company. Prior to
1992, Executive Vice
President of La Salle
National Bank.
R. Craig Kennedy (52) Trustee Trustee Director and President of 81 Trustee/Director/Managing
1744 R Street, NW since 2003 the German Marshall Fund General Partner of funds
Washington, DC 20009 of the United States, an in the Fund Complex.
independent U.S.
foundation created to
deepen understanding,
promote collaboration and
stimulate exchanges of
practical experience
between Americans and
Europeans. Formerly,
advisor to the Dennis
Trading Group Inc., a
managed futures and
option company that
invests money for
individuals and
institutions. Prior to
1992, President and Chief
Executive Officer,
Director and member of
the Investment Committee
of the Joyce Foundation,
a private foundation.
Howard J Kerr (69) Trustee Trustee Prior to 1998, President 83 Trustee/Director/Managing
736 North Western Avenue since 1992 and Chief Executive General Partner of funds
P.O. Box 317 Officer of Pocklington in the Fund Complex.
Lake Forest, IL 60045 Corporation, Inc., an Director of the Lake
investment holding Forest Bank & Trust.
company. Director of the
Marrow Foundation.
D-32
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Jack E. Nelson (68) Trustee Trustee President of Nelson 81 Trustee/Director/Managing
423 Country Club Drive since 2003 Investment Planning General Partner of funds
Winter Park, FL 32789 Services, Inc., a in the Fund Complex.
financial planning
company and registered
investment adviser in the
State of Florida.
President of Nelson Ivest
Brokerage Services Inc.,
a member of the NASD,
Securities Investors
Protection Corp. and the
Municipal Securities
Rulemaking Board.
President of Nelson Sales
and Services Corporation,
a marketing and services
company to support
affiliated companies.
Hugo F. Sonnenschein (64) Trustee Trustee President Emeritus and 83 Trustee/Director/Managing
1126 E. 59th Street since 1994 Honorary Trustee of the General Partner of funds
Chicago, IL 60637 University of Chicago and in the Fund Complex.
the Adam Smith Director of Winston
Distinguished Service Laboratories, Inc.
Professor in the
Department of Economics
at the University of
Chicago. Prior to July
2000, President of the
University of Chicago.
Trustee of the University
of Rochester and a member
of its investment
committee. Member of the
National Academy of
Sciences, the American
Philosophical Society and
a fellow of the American
Academy of Arts and
Sciences.
Suzanne H. Woolsey, Ph.D. Trustee Trustee Chief Communications 81 Trustee/Director/Managing
(63) since 2003 Officer of the National General Partner of funds
815 Cumberstone Road Academy of in the Fund Complex.
Harwood, MD 20776 Sciences/National Director of Fluor Corp.,
Research Council, an an engineering,
independent, federally procurement and
chartered policy construction
institution, from 2001 to organization, since
November 2003 and Chief January 2004 and Director
Operating Officer from of Neurogen Corporation,
1993 to 2001. Director of a pharmaceutical company,
the Institute for Defense since January 1998.
Analyses, a federally
funded research and
development center,
Director of the German
Marshall Fund of the
United States, Director
of the Rocky Mountain
Institute and Trustee of
Colorado College. Prior
to 1993, Executive
Director of the
Commission on Behavioral
and Social Sciences and
Education at the National
Academy of
Sciences/National
Research Council. From
1980 through 1989,
Partner of Coopers &
Lybrand.
D-33
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
INTERESTED TRUSTEES:*
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Mitchell M. Merin* (51) Trustee, Trustee President and Chief 81 Trustee/Director/Managing
1221 Avenue of the Americas President since Executive Officer of General Partner of funds
New York, NY 10020 and Chief 2003; funds in the Fund in the Fund Complex.
Executive President Complex. Chairman,
Officer and Chief President, Chief
Executive Executive Officer and
Officer Director of the Adviser
since 2002 and Van Kampen Advisors
Inc. since December 2002.
Chairman, President and
Chief Executive Officer
of Van Kampen Investments
since December 2002.
Director of Van Kampen
Investments since
December 1999. Chairman
and Director of Van
Kampen Funds Inc. since
December 2002. President,
Director and Chief
Operating Officer of
Morgan Stanley Investment
Management since December
1998. President and
Director since April 1997
and Chief Executive
Officer since June 1998
of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc.
Chairman, Chief Executive
Officer and Director of
Morgan Stanley
Distributors Inc. since
June 1998. Chairman since
June 1998, and Director
since January 1998 of
Morgan Stanley Trust.
Director of various
Morgan Stanley
subsidiaries. President
of the Morgan Stanley
Funds since May 1999.
Previously Chief
Executive Officer of Van
Kampen Funds Inc. from
December 2002 to July
2003, Chief Strategic
Officer of Morgan Stanley
Investment Advisors Inc.
and Morgan Stanley
Services Company Inc. and
Executive Vice President
of Morgan Stanley
Distributors Inc. from
April 1997 to June 1998.
Chief Executive Officer
from September 2002 to
April 2003 and Vice
President from May 1997
to April 1999 of the
Morgan Stanley Funds.
D-34
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
NUMBER OF
TERM OF FUNDS IN
OFFICE AND FUND
POSITION(S) LENGTH OF COMPLEX
NAME, AGE AND ADDRESS HELD WITH TIME PRINCIPAL OCCUPATION(S) OVERSEEN OTHER DIRECTORSHIPS
OF INDEPENDENT TRUSTEE TRUST SERVED DURING PAST 5 YEARS BY TRUSTEE HELD BY TRUSTEE
Richard F. Powers, III* (58) Trustee Trustee Advisory Director of 83 Trustee/Director/Managing
1 Parkview Plaza since 1999 Morgan Stanley. Prior to General Partner of funds
P.O. Box 5555 December 2002, Chairman, in the Fund Complex.
Oakbrook Terrace, IL 60181 Director, President,
Chief Executive Officer
and Managing Director of
Van Kampen Investments
and its investment
advisory, distribution
and other subsidiaries.
Prior to December 2002,
President and Chief
Executive Officer of
funds in the Fund
Complex. Prior to May
1998, Executive Vice
President and Director of
Marketing at Morgan
Stanley and Director of
Dean Witter, Discover &
Co. and Dean Witter
Realty. Prior to 1996,
Director of Dean Witter
Reynolds Inc.
Wayne W. Whalen* (65) Trustee Trustee Partner in the law firm 83 Trustee/Director/Managing
333 West Wacker Drive since 1988 of Skadden, Arps, Slate, General Partner of funds
Chicago, IL 60606 Meagher & Flom LLP, legal in the Fund Complex.
counsel to funds in the
Fund Complex.
* Such trustee is an "interested person" (within the meaning of Section
2(a)(19) of the 1940 Act). Messrs. Merin and Powers are interested persons
of funds in the Fund Complex and the Adviser by reason of their current or
former positions with Morgan Stanley or its affiliates. Mr. Whalen is an
interested person of certain funds in the Fund Complex by reason of he and
his firm currently providing legal services as legal counsel to such funds
in the Fund Complex.
D-35
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
OFFICERS:
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER TRUST SERVED DURING PAST 5 YEARS
Stefanie V. Chang (38) Vice President Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Secretary since 2003 Vice President of funds in the Fund Complex.
New York, NY 10020
Amy R. Doberman (42) Vice President Officer Managing Director and General Counsel, U.S. Investment
1221 Avenue of the Americas since 2004 Management; Managing Director of Morgan Stanley Investment
New York, NY 10020 Management, Inc., Morgan Stanley Investment Advisers Inc.
and the Adviser. Vice President of the Morgan Stanley
Institutional and Retail Funds since July 2004 and Vice
President of funds in the Fund Complex as of August 2004.
Previously, Managing Director and General Counsel of
Americas, UBS Global Asset Management from July 2000 to July
2004 and General Counsel of Aeitus Investment Management,
Inc. from January 1997 to July 2000.
James W. Garrett (36) Chief Financial Officer Officer Executive Director of Morgan Stanley Investment Management.
1221 Avenue of the Americas and Treasurer since 2005 Chief Financial Officer and Treasurer of the Morgan Stanley
New York, NY 10020 Institutional Funds since 2002 and funds in the Fund Complex
since January 2005.
Joseph J. McAlinden (62) Executive Vice Officer Managing Director and Chief Investment Officer of Morgan
1221 Avenue of the Americas President and Chief since 2002 Stanley Investment Advisors Inc., and Morgan Stanley
New York, NY 10020 Investment Officer Investment Management Inc. and Director of Morgan Stanley
Trust for over 5 years. Executive Vice President and Chief
Investment Officer of funds in the Fund Complex. Managing
Director and Chief Investment Officer of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc. since
December 2002.
D-36
VAN KAMPEN HIGH INCOME TRUST
TRUSTEE AND OFFICER INFORMATION continued
TERM OF
OFFICE AND
POSITION(S) LENGTH OF
NAME, AGE AND HELD WITH TIME PRINCIPAL OCCUPATION(S)
ADDRESS OF OFFICER TRUST SERVED DURING PAST 5 YEARS
Ronald E. Robison (66) Executive Vice Officer Principal Executive Officer of funds in the Fund Complex
1221 Avenue of the Americas President and since 2003 since May 2003. Chief Executive Officer and Chairman of
New York, NY 10020 Principal Executive Investor Services. Executive Vice President and Principal
Officer Executive Officer of funds in the Fund Complex. Managing
Director of Morgan Stanley. Chief Administrative Officer,
Managing Director and Director of Morgan Stanley Investment
Advisors Inc., Morgan Stanley Services Company Inc. and
Managing Director and Director of Morgan Stanley
Distributors Inc. Chief Executive Officer and Director of
Morgan Stanley Trust. Executive Vice President and Principal
Executive Officer of the Institutional and Retail Morgan
Stanley Funds; Director of Morgan Stanley SICAV; previously
Chief Global Operations Officer and Managing Director of
Morgan Stanley Investment Management Inc.
John L. Sullivan (49) Chief Compliance Officer Chief Compliance Officer of funds in the Fund Complex since
1 Parkview Plaza Officer since 1998 August 2004. Director and Managing Director of Van Kampen
Oakbrook Terrace, IL 60181 Investments, the Adviser, Van Kampen Advisors Inc. and
certain other subsidiaries of Van Kampen Investments. Prior
August 2004, Vice President, Chief Financial Officer and
Treasurer of funds in the Fund Complex and head of Fund
Accounting for Morgan Stanley Investment Management. Prior
to December 2002, Executive Director of Van Kampen
Investments, the Adviser and Van Kampen Advisors Inc.
D-37
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY
We are required by federal law to provide you with a copy of our Privacy
Policy annually.
The following Policy applies to current and former individual clients of Van
Kampen Investments Inc., Van Kampen Asset Management, Van Kampen Advisors Inc.,
Van Kampen Funds Inc., Van Kampen Investor Services Inc. and Van Kampen Exchange
Corp., as well as current and former individual investors in Van Kampen mutual
funds, unit investment trusts, and related companies.
This Policy is not applicable to partnerships, corporations, trusts or other
non-individual clients or account holders, nor is this Policy applicable to
individuals who are either beneficiaries of a trust for which we serve as
trustee or participants in an employee benefit plan administered or advised by
us. This Policy is, however, applicable to individuals who select us to be a
custodian of securities or assets in individual retirement accounts, 401(k)
accounts, 529 Educational Savings Accounts, accounts subject to the Uniform
Gifts to Minors Act, or similar accounts.
Please note that we may amend this Policy at any time, and will inform you
of any changes to this Policy as required by law.
WE RESPECT YOUR PRIVACY
We appreciate that you have provided us with your personal financial
information. We strive to maintain the privacy of such information while we help
you achieve your financial objectives. This Policy describes what non-public
personal information we collect about you, why we collect it, and when we may
share it with others.
We hope this Policy will help you understand how we collect and share
non-public personal information that we gather about you. Throughout this
Policy, we refer to the non-public information that personally identifies you or
your accounts as "personal information."
1. WHAT PERSONAL INFORMATION DO WE COLLECT ABOUT YOU?
To serve you better and manage our business, it is important that we collect and
maintain accurate information about you. We may obtain this information from
applications and other forms you submit to us, from your dealings with us, from
consumer reporting agencies, from our Web sites and from third parties and other
sources.
For example:
-- We may collect information such as your name, address, e-mail address,
telephone/fax numbers, assets, income and investment objectives through
applications and other forms you submit to us.
-- We may obtain information about account balances, your use of
account(s) and the types of products and services you prefer to receive
from us through your dealings and transactions with us and other
sources.
-- We may obtain information about your creditworthiness and credit
history from consumer reporting agencies.
-- We may collect background information from and through third-party
vendors to verify representations you have made and to comply with
various regulatory requirements.
-- If you interact with us through our public and private Web sites, we
may collect information that you provide directly through online
communications (such as an e-mail address). We may also collect
information about your Internet service provider, your domain name,
your computer's operating system and Web browser,
(continued on back)
D-38
VAN KAMPEN
AN IMPORTANT NOTICE CONCERNING OUR U.S. PRIVACY POLICY continued
your use of our Web sites and your product and service preferences,
through the use of "cookies." "Cookies" recognize your computer each
time you return to one of our sites, and help to improve our sites'
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suggesting offerings that may interest you. Please consult the Terms of
Use of these sites for more details on our use of cookies.
2. WHEN DO WE DISCLOSE PERSONAL INFORMATION WE COLLECT ABOUT YOU?
To provide you with the products and services you request, to serve you better
and to manage our business, we may disclose personal information we collect
about you to our affiliated companies and to non-affiliated third parties as
required or permitted by law.
A. INFORMATION WE DISCLOSE TO OUR AFFILIATED COMPANIES. We do not disclose
personal information that we collect about you to our affiliated companies
except to enable them to provide services on our behalf or as otherwise required
or permitted by law.
B. INFORMATION WE DISCLOSE TO THIRD PARTIES. We do not disclose personal
information that we collect about you to non-affiliated third parties except to
enable them to provide services on our behalf, to perform joint marketing
agreements with other financial institutions, or as otherwise required or
permitted by law. For example, some instances where we may disclose information
about you to non-affiliated third parties include: for servicing and processing
transactions, to offer our own products and services, to protect against fraud,
for institutional risk control, to respond to judicial process or to perform
services on our behalf. When we share personal information with these companies,
they are required to limit their use of personal information to the particular
purpose for which it was shared and they are not allowed to share personal
information with others except to fulfill that limited purpose.
3. HOW DO WE PROTECT THE SECURITY AND CONFIDENTIALITY OF PERSONAL INFORMATION WE
COLLECT ABOUT YOU?
We maintain physical, electronic and procedural security measures to help
safeguard the personal information we collect about you. We have internal
policies governing the proper handling of client information. Third parties that
provide support or marketing services on our behalf may also receive personal
information, and we require them to adhere to confidentiality standards with
respect to such information.
The Statement of Additional Information includes additional information about
Fund trustees and is available, without charge, upon request by calling
1-800-847-2424.
Van Kampen Funds Inc.
1 Parkview Plaza, P.O. Box 5555
Oakbrook Terrace, IL 60181-5555
www.vankampen.com
Copyright (C)2004 Van Kampen Funds Inc. All rights reserved.
Member NASD/SIPC. 920, 911, 104
VIT ANR 3/05 RN05-00263P-Y12/04
(VAN KAMPEN INVESTMENTS LOGO)
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APPENDIX E
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
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APPENDIX A
MORGAN STANLEY INVESTMENT MANAGEMENT
PROXY VOTING POLICY AND PROCEDURES
I. POLICY STATEMENT
Introduction -- Morgan Stanley Investment Management's ("MSIM") policy and
procedures for voting proxies ("Proxy Voting Policy and Procedures") with
respect to securities held in the accounts of clients applies to those MSIM
entities that provide discretionary investment management services and for which
a MSIM entity has authority to vote proxies. The policy and procedures and
general guidelines in this section will be reviewed and, updated, as necessary,
to address new or revised proxy voting issues. The MSIM entities covered by
these policies and procedures currently include the following: Morgan Stanley
Investment Advisors Inc., Morgan Stanley AIP GP LP, Morgan Stanley Investment
Management Inc., Morgan Stanley Investment Management Limited, Morgan Stanley
Investment Management Company, Morgan Stanley Asset & Investment Trust
Management Co., Limited, Morgan Stanley Investment Management Private Limited,
Morgan Stanley Hedge Fund Partners GP LP, Morgan Stanley Hedge Fund Partners LP,
Van Kampen Asset Management, and Van Kampen Advisors Inc. (each an "MSIM
Affiliate" and collectively referred to as the "MSIM Affiliates").
Each MSIM Affiliate will use its best efforts to vote proxies as part of
its authority to manage, acquire and dispose of account assets. With respect to
the MSIM registered management investment companies (Van Kampen, Institutional
and Advisor Funds)(collectively referred to as the "MSIM Funds"), each MSIM
Affiliate will vote proxies pursuant to authority granted under its applicable
investment advisory agreement or, in the absence of such authority, as
authorized by the Board of Directors or Trustees of the MSIM Funds. A MSIM
Affiliate will not vote proxies if the "named fiduciary" for an ERISA account
has reserved the authority for itself, or in the case of an account not governed
by ERISA, the Investment Management or Investment Advisory Agreement does not
authorize the MSIM Affiliate to vote proxies. MSIM Affiliates will, in a prudent
and diligent manner, vote proxies in the best interests of clients, including
beneficiaries of and participants in a client's benefit plan(s) for which the
MSIM Affiliates manage assets, consistent with the objective of maximizing
long-term investment returns ("Client Proxy Standard"). In certain situations, a
client or its fiduciary may provide a MSIM Affiliate with a proxy voting policy.
In these situations, the MSIM Affiliate will comply with the client's policy
unless to do so would be inconsistent with applicable laws or regulations or the
MSIM Affiliate's fiduciary responsibility.
Proxy Research Services -- To assist the MSIM Affiliates in their
responsibility for voting proxies and the overall global proxy voting process,
Institutional Shareholder Services ("ISS") and the Investor Responsibility
Research Center ("IRRC") have been retained as experts in the proxy voting and
corporate governance area. ISS and IRRC are independent advisers that specialize
in providing a variety of fiduciary-level proxy-related services to
institutional investment managers, plan sponsors, custodians, consultants, and
other institutional investors. The services provided to MSIM Affiliates include
in-depth research, global issuer analysis, and voting recommendations. While the
MSIM Affiliates may review and utilize the ISS recommendations in making proxy
voting decisions, they are in no way obligated to follow the ISS
recommendations. In addition to research, ISS
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provides vote execution, reporting, and recordkeeping. MSIM's Proxy Review
Committee (see Section IV.A. below) will carefully monitor and supervise the
services provided by the proxy research services.
Voting Proxies for Certain Non-US Companies -- While the proxy voting
process is well established in the United States and other developed markets
with a number of tools and services available to assist an investment manager,
voting proxies of non-US companies located in certain jurisdictions,
particularly emerging markets, may involve a number of problems that may
restrict or prevent a MSIM Affiliate's ability to vote such proxies. These
problems include, but are not limited to: (i) proxy statements and ballots being
written in a language other than English; (ii) untimely and/or inadequate notice
of shareholder meetings; (iii) restrictions on the ability of holders outside
the issuer's jurisdiction of organization to exercise votes; (iv) requirements
to vote proxies in person, (v) the imposition of restrictions on the sale of the
securities for a period of time in proximity to the shareholder meeting; and
(vi) requirements to provide local agents with power of attorney to facilitate
the MSIM Affiliate's voting instructions. As a result, clients' non-U.S. proxies
will be voted on a best efforts basis only, after weighing the costs and
benefits to MSIM's clients of voting such proxies, consistent with the Client
Proxy Standard. ISS has been retained to provide assistance to the MSIM
Affiliates in connection with voting their clients' non-US proxies.
II. GENERAL PROXY VOTING GUIDELINES
To ensure consistency in voting proxies on behalf of its clients, MSIM
Affiliates will follow (subject to any exception set forth herein) these Proxy
Voting Policies and Procedures, including the guidelines set forth below. These
guidelines address a broad range of issues, including board size and
composition, executive compensation, anti-takeover proposals, capital structure
proposals and social responsibility issues and are meant to be general voting
parameters on issues that arise most frequently. The MSIM Affiliates, however,
may, pursuant to the procedures set forth in Section IV. below, vote in a manner
that is not in accordance with the following general guidelines, provided the
vote is approved by the Proxy Review Committee and is consistent with the Client
Proxy Standard.
III. GUIDELINES
A. MANAGEMENT PROPOSALS
1. When voting on routine ballot items, unless otherwise determined by
the Proxy Review Committee, the following proposals will be voted in
support of management.
- Selection or ratification of auditors.
- Approval of financial statements, director and auditor reports.
- General updating/corrective amendments to the charter.
- Proposals to limit Directors' liability and/or broaden
indemnification of Directors.
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- Proposals requiring that a certain percentage (up to 66 2/3%) of the
company's Board members be independent Directors.
- Proposals requiring that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
- Proposals recommending set retirement ages or requiring specific
levels of stock ownership by Directors.
- Proposals to eliminate cumulative voting.
- Proposals to eliminate preemptive rights.
- Proposals for confidential voting and independent tabulation of
voting results.
- Proposals related to the conduct of the annual meeting except those
proposals that relate to the "transaction of such other business
which may come before the meeting."
2. Election of Directors. In situations where no conflict exists, and
where no specific governance deficiency has been noted, unless
otherwise determined by the Proxy Review Committee, proxies will be
voted in support of nominees of management.
Unless otherwise determined by the Proxy Review Committee, a withhold
vote will be made where:
(i) A nominee has, or any time during the previous five years had,
a relationship with the issuer (e.g., investment banker,
counsel or other professional service provider, or familial
relationship with a senior officer of the issuer) that may
impair his or her independence.;
(ii) A direct conflict exists between the interests of the nominee
and the public shareholders; or
(iii) Where the nominees standing for election have not taken
action to implement generally accepted governance practices
for which there is a "bright line" test. These would include
elimination of dead hand or slow hand poison pills, requiring
Audit, Compensation or Nominating Committees to be composed
of independent directors and requiring a majority independent
board.
3. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, unless
otherwise determined by the Proxy Review Committee, will be voted in
support of management.
CAPITALIZATION CHANGES
- Proposals relating to capitalization changes that eliminate other
classes of stock and voting rights.
- Proposals to increase the authorization of existing classes of
common stock (or securities convertible into common stock) if: (i) a
clear and legitimate
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business purpose is stated; (ii) the number of shares requested is
reasonable in relation to the purpose for which authorization is
requested; and (iii) the authorization does not exceed 100% of
shares currently authorized and at least 30% of the new
authorization will be outstanding.
- Proposals to create a new class of preferred stock or for issuances
of preferred stock up to 50% of issued capital.
- Proposals for share repurchase plans.
- Proposals to reduce the number of authorized shares of common or
preferred stock, or to eliminate classes of preferred stock.
- Proposals to effect stock splits.
- Proposals to effect reverse stock splits if management
proportionately reduces the authorized share amount set forth in the
corporate charter. Reverse stock splits that do not adjust
proportionately to the authorized share amount will generally be
approved if the resulting increase in authorized shares coincides
with the proxy guidelines set forth above for common stock
increases.
COMPENSATION
- Proposals relating to Director fees, provided the amounts are not
excessive relative to other companies in the country or industry.
- Proposals for employee stock purchase plans that permit discounts up
to 15%, but only for grants that are part of a broad based employee
plan, including all non-executive employees.
- Proposals for the establishment of employee stock option Plans and
other employee ownership plans.
- Proposals for the establishment of employee retirement and severance
plans
ANTI-TAKEOVER MATTERS
- Proposals to modify or rescind existing supermajority vote
requirements to amend the charters or bylaws.
- Proposals relating to the adoption of anti-greenmail provisions
provided that the proposal: (i) defines greenmail; (ii) prohibits
buyback offers to large block holders not made to all shareholders
or not approved by disinterested shareholders; and (iii) contains no
anti-takeover measures or other provisions restricting the rights of
shareholders.
4. The following non-routine proposals, which potentially may have a
substantive financial or best interest impact on a shareholder, unless
otherwise determined by
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the Proxy Review Committee, will be voted against (notwithstanding
management support).
- Proposals to establish cumulative voting rights in the election of
directors.
- Proposals relating to capitalization changes that add classes of
stock which substantially dilute the voting interests of existing
shareholders.
- Proposals to increase the authorized number of shares of existing
classes of stock that carry preemptive rights or supervoting rights.
- Proposals to create "blank check" preferred stock.
- Proposals relating to changes in capitalization by 100% or more.
- Compensation proposals that allow for discounted stock options that
have not been offered to employees in general.
- Proposals to amend bylaws to require a supermajority shareholder
vote to pass or repeal certain provisions.
- Proposals to indemnify auditors.
5. The following types of non-routine proposals, which potentially may
have a substantive financial or best interest impact on an issuer,
will be voted as determined by the Proxy Review Committee.
CORPORATE TRANSACTIONS
- Proposals relating to mergers, acquisitions and other special
corporate transactions (i.e., takeovers, spin-offs, sales of assets,
reorganizations, restructurings and recapitalizations) will be
examined on a case-by-case basis. In all cases, ISS and IRRC
research and analysis will be used along with MSIM Affiliates'
research and analysis, including, among other things, MSIM internal
company-specific knowledge.
- Proposals relating to change-in-control provisions in non-salary
compensation plans, employment contracts, and severance agreements
that benefit management and would be costly to shareholders if
triggered.
- Proposals relating to shareholders rights plans that allow
appropriate offers to shareholders to be blocked by the board or
trigger provisions that prevent legitimate offers from proceeding.
- Proposals relating to Executive/Director stock option plans.
Generally, stock option plans should meet the following criteria:
(i) The stock option plan should be incentive based;
(ii) For mature companies, should be no more than 5% of the issued
capital at the time of approval;
(iii) For growth companies, should be no more than 10% of the
issued capital at the time of approval.
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ANTI-TAKEOVER PROVISIONS
- Proposals requiring shareholder ratification of poison pills.
- Proposals relating to anti-takeover and related provisions that
serve to prevent the majority of shareholders from exercising their
rights or effectively deter the appropriate tender offers and other
offers.
B. SHAREHOLDER PROPOSALS
1. The following shareholder proposals will be supported, unless
otherwise determined by the Proxy Review Committee:
- Proposals requiring auditors to attend the annual meeting of
shareholders.
- Proposals requiring non-U.S. companies to have a separate Chairman
and CEO.
- Proposals requiring that members of the company's compensation,
nominating and audit committees be comprised of independent or
unaffiliated Directors.
- Proposals requiring that a certain percentage of the company's
members be comprised of independent and unaffiliated Directors.
- Proposals requiring diversity of Board membership relating to broad
based social, religious or ethnic groups.
- Proposals requiring confidential voting.
- Proposals to reduce or eliminate supermajority voting requirements.
- Proposals requiring shareholder approval for a shareholder rights
plan or poison pill.
- Proposals to require the company to expense stock options.
2. The following shareholder proposals will be voted as determined by the
Proxy Review Committee.
- Proposals that limit tenure of directors.
- Proposals to limit golden parachutes.
- Proposals requiring directors to own large amounts of stock to be
eligible for election.
- Proposals that request or require disclosure of executive
compensation in addition to the disclosure required by the
Securities and Exchange Commission ("SEC") regulations.
- Proposals that limit retirement benefits or executive compensation.
- Proposals requiring shareholder approval for bylaw or charter
amendments.
- Proposals requiring shareholder approval of executive compensation.
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- Proposals requiring shareholder approval of golden parachutes.
- Proposals to eliminate certain anti-takeover related provisions.
- Proposals to prohibit payment of greenmail.
3. The following shareholder proposals generally will not be supported,
unless otherwise determined by the Proxy Review Committee.
- Proposals to declassify the Board of Directors (if management
supports a classified board).
- Proposals requiring a U.S. company to have a separate Chairman and
CEO.
- Proposal requiring that the company prepare reports that are costly
to provide or that would require duplicative efforts or expenditures
that are of a non-business nature or would provide no pertinent
information from the perspective of institutional shareholders.
- Proposals to add restrictions related to social, political or
special interest issues that impact the ability of the company to do
business or be competitive and that have a significant financial or
best interest impact to the shareholders.
- Proposals that require inappropriate endorsements or corporate
actions.
- Proposals requiring adherence to workplace standards that are not
required or customary in market(s) to which the proposals relate.
IV. ADMINISTRATION OF PROXY POLICY AND PROCEDURES
A. PROXY REVIEW COMMITTEE
1. The MSIM Proxy Review Committee ("Committee") is responsible for
creating and implementing MSIM's Proxy Voting Policy and Procedures
and, in this regard, has expressly adopted them.
(a) The Committee, which is appointed by MSIM's Chief Investment Officer
("CIO"), consists of senior investment professionals who represent
the different investment disciplines and geographic locations of the
firm. The Committee is responsible for establishing MSIM's proxy
voting policy and guidelines and determining how MSIM will vote
proxies on an ongoing basis.
(b) The Committee will periodically review and have the authority to
amend, as necessary, these Proxy Voting Policy and Procedures and
establish and direct voting positions consistent with the Client
Proxy Standard.
(c) The Committee will meet at least monthly to (among other matters):
(1) address any outstanding issues relating to MSIM's Proxy Voting
Policy and Procedures; and (2) review proposals at upcoming
shareholder meetings of MSIM portfolio companies in accordance with
this Policy including, as appropriate, the voting results of prior
shareholder meetings of the same issuer where a similar proposal was
presented to shareholders. The Committee, or its designee, will
timely communicate to ISS MSIM's Proxy
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Voting Policy and Procedures (and any amendments to them and/or any
additional guidelines or procedures it may adopt).
(d)The Committee will meet on an ad hoc basis to (among other matters):
(1) authorize "split voting" (i.e., allowing certain shares of the
same issuer that are the subject of the same proxy solicitation and
held by one or more MSIM portfolios to be voted differently than
other shares) and/or "override voting" (i.e., voting all MSIM
portfolio shares in a manner contrary to the Proxy Voting Policy and
Procedures); (2) review and approve upcoming votes, as appropriate,
for matters for which specific direction has been provided in these
Policy and Procedures; and (3) determine how to vote matters for
which specific direction has not been provided in these Policy and
Procedures. Split votes will generally not be approved within a
single Global Investor Group team. The Committee may take into
account ISS and IRRC recommendations and research as well as any
other relevant information they may request or receive.
(e)In addition to the procedures discussed above, if the Committee
determines that an issue raises a potential material conflict of
interest, or gives rise to the appearance of a potential material
conflict of interest, the Committee will request a special committee
to review, and recommend a course of action with respect to, the
conflict(s) in question ("Special Committee"). The Special Committee
shall be comprised of the Chairman of the Proxy Review Committee, the
Compliance Director for the area of the firm involved or his/her
designee, a senior portfolio manager (if practicable, one who is a
member of the Proxy Review Committee) designated by the Proxy Review
Committee and MSIM's Chief Investment Officer or his/her designee.
The Special Committee may request the assistance of MSIM's General
Counsel or his/her designee and will have sole discretion to cast a
vote. In addition to the research provided by ISS and IRRC, the
Special Committee may request analysis from MSIM Affiliate investment
professionals and outside sources to the extent it deems appropriate.
(f)The Committee and the Special Committee, or their designee(s), will
document in writing all of their decisions and actions, which
documentation will be maintained by the Committee and the Special
Committee, or their designee(s), for a period of at least 6 years. To
the extent these decisions relate to a security held by a MSIM U.S.
registered investment company, the Committee and Special Committee,
or their designee(s), will report their decisions to each applicable
Board of Trustees/Directors of those investment companies at each
Board's next regularly scheduled Board meeting. The report will
contain information concerning decisions made by the Committee and
Special Committee during the most recently ended calendar quarter
immediately preceding the Board meeting.
(g)The Committee and Special Committee, or their designee(s), will
timely communicate to applicable portfolio managers, the Compliance
Departments and, as necessary to ISS, decisions of the Committee and
Special Committee so that, among other things, ISS will vote proxies
consistent with their decisions.
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B. IDENTIFICATION OF MATERIAL CONFLICTS OF INTEREST
1. If there is a possibility that a vote may involve a material conflict
of interest, the vote must be decided by the Special Committee in
consultation with MSIM's General Counsel or his/her designee.
2. A material conflict of interest could exist in the following
situations, among others:
(a)The issuer soliciting the vote is a client of MSIM or an affiliate of
MSIM and the vote is on a material matter affecting the issuer;
(b)The proxy relates to Morgan Stanley common stock or any other
security issued by Morgan Stanley or its affiliates; or
(c)Morgan Stanley has a material pecuniary interest in the matter
submitted for a vote (e.g., acting as a financial advisor to a party
to a merger or acquisition for which Morgan Stanley will be paid a
success fee if completed).
C. PROXY VOTING REPORTS
(a)MSIM will promptly provide a copy of these Policy and Procedures to
any client requesting them. MSIM will also, upon client request,
promptly provide a report indicating how each proxy was voted with
respect to securities held in that client's account.
(b)MSIM's legal department is responsible for filing an annual Form N-PX
on behalf of each registered management investment company for which
such filing is required, indicating how all proxies were voted with
respect to such investment company's holdings.
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APPENDIX F
PRO FORMA FINANCIAL STATEMENTS
F-1
PRO FORMA FINANCIAL STATEMENTS
The following presents the pro forma financial statements for the combination of
the Van Kampen High Income Trust and the Van Kampen High Income Trust II. The
statements are presented as of December 31, 2004, the most recent interim period
for which financial information is currently available.
The unaudited Pro Forma Portfolio of Investments and Pro Forma Statement of
Assets and Liabilities reflect the financial position as if the transaction
occurred on December 31, 2004. The Pro Forma Statement of Operations reflects
the expenses for the twelve months ended December 31, 2004. The pro forma
statements give effect to the proposed exchange of Van Kampen High Income Trust
II shares for the assets and liabilities of the Van Kampen High Income Trust,
with Van Kampen High Income Trust II being the surviving entity. The proposed
transaction will be accounted for as a tax-free reorganization in accordance
with accounting principles generally accepted in the United States. The
historical cost basis of the investments is carried over to the surviving
entity. It is not anticipated that Van Kampen High Income Trust II will sell any
securities of Van Kampen High Income Trust acquired in the reorganization other
than in the ordinary course of business.
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VAN KAMPEN HIGH INCOME TRUST (VIT) - VAN KAMPEN HIGH INCOME TRUST II (VLT)
PROFORMA PORTFOLIO OF INVESTMENTS
DECEMBER 31, 2004
(UNAUDITED)
VIT VLT PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT VIT VLT PROFORMA
(000) (000) (000) DESCRIPTION COUPON MATURITY MARKET VALUE MARKET VALUE MARKET VALUE
------------------------------------------------------------------------------------------------------------------------------------
CORPORATE BONDS 162.8%
AEROSPACE 0.9%
$ 475 $ 355 $ 830 K & F Acquisition, Inc., 144A - Private
Placement (a) 7.750% 11/15/14 $ 492,812 $ 368,312 $ 861,124
---------- ---------- -----------
BROADCASTING 0.6%
295 220 515 Salem Communications Corp. 7.750 12/15/10 320,444 238,975 559,419
---------- ---------- -----------
CABLE 9.0%
575 425 1,000 Cablevision Systems Corp., 144A - Private
Placement (a) (b) 6.669 04/01/09 612,375 452,625 1,065,000
1,005 755 1,760 Charter Communications Holdings LLC 9.625 11/15/09 886,912 666,287 1,553,199
160 115 275 DirecTV Holdings LLC 8.375 03/15/13 180,200 129,519 309,719
855 635 1,490 Echostar DBS Corp. 6.375 10/01/11 878,512 652,462 1,530,974
1,000 740 1,740 Kabel Deutschland GmbH, 144A - Private
Placement (Germany) (a) 10.625 07/01/14 1,155,000 854,700 2,009,700
850 635 1,485 PanAmSat Corp., 144A - Private Placement
(a) 9.000 08/15/14 953,062 711,994 1,665,056
---------- ---------- -----------
4,666,061 3,467,587 8,133,648
---------- ---------- -----------
CHEMICALS 13.1%
610 460 1,070 Equistar Chemicals LP 10.125 09/01/08 706,075 532,450 1,238,525
350 250 600 Equistar Chemicals LP 10.625 05/01/11 407,750 291,250 699,000
245 180 425 FMC Corp. 10.250 11/01/09 282,362 207,450 489,812
190 145 335 Huntsman Advanced Materials LLC, 144A -
Private Placement (a) 11.000 07/15/10 227,050 173,275 400,325
265 200 465 Innophos, Inc.,144A - Private Placement (a) 8.875 08/15/14 287,525 217,000 504,525
190 145 335 ISP Chemco, Inc. 10.250 07/01/11 215,650 164,575 380,225
900 675 1,575 ISP Holdings, Inc. 10.625 12/15/09 1,001,250 750,937 1,752,187
145 105 250 Koppers, Inc. 9.875 10/15/13 166,025 120,225 286,250
780 570 1,350 Lyondell Chemical Co. 10.500 06/01/13 932,100 681,150 1,613,250
55 40 95 Millennium America, Inc. 7.000 11/15/06 57,475 41,800 99,275
520 385 905 Millennium America, Inc. 9.250 06/15/08 594,100 439,862 1,033,962
535 395 930 Nalco Co. 7.750 11/15/11 580,475 428,575 1,009,050
495 365 860 Rhodia SA (France) 8.875 06/01/11 501,187 369,562 870,749
600 445 1,045 Rockwood Specialties Group, Inc. 10.625 05/15/11 693,000 513,975 1,206,975
137 101 238 Westlake Chemical Corp. 8.750 07/15/11 155,495 114,635 270,130
---------- ---------- -----------
6,807,519 5,046,721 11,854,240
---------- ---------- -----------
CONSUMER PRODUCTS 3.7%
270 200 470 Amscan Holdings, Inc. 8.750 05/01/14 271,350 201,000 472,350
210 155 365 Oxford Industrials, Inc. 8.875 06/01/11 226,537 167,206 393,743
830 620 1,450 Phillips Van-Heusen Corp. 7.250 02/15/11 875,650 654,100 1,529,750
315 235 550 Rayovac Corp. 8.500 10/01/13 351,225 262,025 613,250
158 116 274 Tempur Pedic, Inc. 10.250 08/15/10 182,490 133,980 316,470
---------- ---------- -----------
1,907,252 1,418,311 3,325,563
---------- ---------- -----------
DIVERSIFIED MEDIA 10.1%
830 602 1,432 Advanstar Communications, Inc. (b) 9.790 08/15/08 870,975 632,494 1,503,469
750 550 1,300 CanWest Media, Inc. (Canada) 10.625 05/15/11 845,625 620,125 1,465,750
655 485 1,140 Houghton Mifflin Co. 9.875 02/01/13 720,500 533,500 1,254,000
635 475 1,110 Interpublic Group of Cos., Inc. 6.250 11/15/14 645,706 483,008 1,128,714
625 465 1,090 Marquee, Inc., 144A - Private Placement (a)
(b) 6.540 08/15/10 660,937 491,737 1,152,674
150 111 261 PEI Holdings, Inc. 11.000 03/15/10 175,500 129,870 305,370
860 640 1,500 Primedia, Inc. 8.875 05/15/11 913,750 680,000 1,593,750
400 295 695 Vertis, Inc. 9.750 04/01/09 436,000 321,550 757,550
---------- ---------- -----------
5,268,993 3,892,284 9,161,277
---------- ---------- -----------
ENERGY 14.9%
335 245 580 BRL Universal Equipment 8.875 02/15/08 353,844 258,781 612,625
455 340 795 CHC Helicopter Corp. (Canada) 7.375 05/01/14 482,300 360,400 842,700
140 105 245 CITGO Petroleum Corp., 144A - Private
Placement (a) 6.000 10/15/11 140,000 105,000 245,000
905 670 1,575 El Paso Production Holding Co. 7.750 06/01/13 952,512 705,175 1,657,687
860 640 1,500 Frontier Oil Corp., 144A - Private
Placement (a) 6.625 10/01/11 881,500 656,000 1,537,500
90 70 160 Hanover Compressor Co. 8.625 12/15/10 98,775 76,825 175,600
385 285 670 Hanover Compressor Co. 9.000 06/01/14 430,237 318,487 748,724
375 275 650 Hanover Equipment Trust 8.500 09/01/08 405,000 297,000 702,000
160 120 280 Hanover Equipment Trust 8.750 09/01/11 174,400 130,800 305,200
550 410 960 Hilcorp Energy Finance Corp., 144A -
Private Placement (a) 10.500 09/01/10 624,250 465,350 1,089,600
188 140 328 Magnum Hunter Resources, Inc. 9.600 03/15/12 214,320 159,600 373,920
375 275 650 Pacific Energy Partners 7.125 06/15/14 401,250 294,250 695,500
850 615 1,465 Plains Exploration & Production Co. 7.125 06/15/14 930,750 673,425 1,604,175
305 227 532 Port Arthur Finance Corp. 12.500 01/15/09 358,234 266,255 624,489
180 135 315 Tesoro Petroleum Corp. 9.625 04/01/12 207,900 155,925 363,825
1,025 760 1,785 Vintage Petroleum, Inc. 7.875 05/15/11 1,096,750 813,200 1,909,950
---------- ---------- -----------
7,752,022 5,736,473 13,488,495
---------- ---------- -----------
FINANCIAL 1.4%
F-3
680 510 1,190 Refco Finance Holdings LLC, 144A - Private
Placement (a) 9.000 08/01/12 748,000 561,000 1,309,000
---------- ---------- -----------
FOOD & DRUG 4.0%
690 510 1,200 Delhaize America, Inc. 8.125 04/15/11 807,800 597,069 1,404,869
150 115 265 Jean Coutu Group (PJC), Inc., 144A -
Private Placement (Canada) (a) 7.625 08/01/12 159,375 122,187 281,562
725 530 1,255 Jean Coutu Group (PJC), Inc., 144A -
Private Placement (Canada) (a) 8.500 08/01/14 746,750 545,900 1,292,650
1,570 1,180 2,750 Jitney-Jungle Stores America, Inc. (c) (d)
(e) 12.000 03/01/06 0 0 0
360 270 630 Rite Aid Corp. 8.125 05/01/10 382,500 286,875 669,375
---------- ---------- -----------
2,096,425 1,552,031 3,648,456
---------- ---------- -----------
FOOD & TOBACCO 7.9%
750 550 1,300 Constellation Brands, Inc. 8.000 02/15/08 819,375 600,875 1,420,250
340 255 595 Michael Foods, Inc. 8.000 11/15/13 360,400 270,300 630,700
765 570 1,335 Pilgrim's Pride Corp. 9.625 09/15/11 864,450 644,100 1,508,550
210 155 365 Pilgrim's Pride Corp. 9.250 11/15/13 236,250 174,375 410,625
220 160 380 Smithfield Foods, Inc. 7.625 02/15/08 236,500 172,000 408,500
1,050 760 1,810 Smithfield Foods, Inc. 8.000 10/15/09 1,168,125 845,500 2,013,625
380 305 685 Smithfield Foods, Inc. 7.000 08/01/11 407,550 327,112 734,662
---------- ---------- -----------
4,092,650 3,034,262 7,126,912
---------- ---------- -----------
FOREST PRODUCTS 13.0%
330 245 575 Abitibi-Consolidated, Inc. (Canada) 8.550 08/01/10 359,287 266,744 626,031
1,020 755 1,775 Abitibi-Consolidated, Inc. (Canada) 6.000 06/20/13 977,925 723,856 1,701,781
535 410 945 Georgia-Pacific Corp. 8.875 02/01/10 625,281 479,187 1,104,468
775 575 1,350 Graphic Packaging International, Inc. 9.500 08/15/13 885,437 656,937 1,542,374
560 415 975 MDP Acquisitions PLC (Ireland) 9.625 10/01/12 627,200 464,800 1,092,000
235 175 410 Norampac, Inc. (Canada) 6.750 06/01/13 248,512 185,062 433,574
1,350 1,020 2,370 Owens-Brockway Glass Containers, Inc. 8.875 02/15/09 1,473,187 1,113,075 2,586,262
495 365 860 Pliant Corp. 13.000 06/01/10 485,100 357,700 842,800
1,065 790 1,855 Tembec Industries, Inc. (Canada) 7.750 03/15/12 1,035,712 768,275 1,803,987
---------- ---------- -----------
6,717,641 5,015,636 11,733,277
---------- ---------- -----------
GAMING & LEISURE 13.1%
425 325 750 Ceasars Entertainment 8.875 09/15/08 482,375 368,875 851,250
320 240 560 Gaylord Entertainment Co., 144A - Private
Placement (a) 6.750 11/15/14 323,200 242,400 565,600
920 690 1,610 Harrahs Operating Co., Inc. 7.875 12/15/05 959,100 719,325 1,678,425
176 129 305 HMH Properties, Inc. 7.875 08/01/08 181,720 133,192 314,912
275 200 475 Host Marriott LP 7.125 11/01/13 295,281 214,750 510,031
650 500 1,150 Intrawest Corp., 144A - Private Placement
(Canada) (a) 7.500 10/15/13 694,687 534,375 1,229,062
480 355 835 Isle of Capri Casinos, Inc. 7.000 03/01/14 492,000 363,875 855,875
1,120 830 1,950 MGM Mirage, Inc. 6.000 10/01/09 1,153,600 854,900 2,008,500
150 115 265 MGM Mirage, Inc. 5.875 02/27/14 148,125 113,562 261,687
865 645 1,510 Mohegan Tribal Gaming Authority 7.125 08/15/14 914,738 682,087 1,596,825
490 380 870 Park Place Entertainment Corp. 7.875 12/15/05 509,600 395,200 904,800
625 465 1,090 Station Casinos, Inc. 6.000 04/01/12 639,844 476,044 1,115,888
---------- ---------- -----------
6,794,270 5,098,585 11,892,855
---------- ---------- -----------
HEALTHCARE 9.6%
390 290 680 AmerisourceBergen Corp. 8.125 09/01/08 435,825 324,075 759,900
340 255 595 Community Health Systems, Inc., 144A -
Private Placement (a) 6.500 12/15/12 344,250 258,188 602,438
1,140 845 1,985 Extendicare Health Services, Inc. 6.875 05/01/14 1,168,500 866,125 2,034,625
400 295 695 Fisher Scientific International, Inc. 8.125 05/01/12 446,000 328,925 774,925
160 125 285 Fisher Scientific International, Inc., 144A
- Private Placement (a) 6.750 08/15/14 172,400 134,688 307,088
560 410 970 Fresenius Medical Care Capital Trust II 7.875 02/01/08 609,000 445,875 1,054,875
235 180 415 Fresenius Medical Care Capital Trust IV 7.875 06/15/11 263,200 201,600 464,800
515 380 895 HCA, Inc. 6.375 01/15/15 518,034 382,239 900,273
85 65 150 National Nephrology Associates, Inc., 144A
- Private Placement (a) 9.000 11/01/11 98,813 75,563 174,376
450 335 785 Team Health Inc. 9.000 04/01/12 442,125 329,138 771,263
435 325 760 Tenet Healthcare Corp., 144A - Private
Placement (a) 9.875 07/01/14 476,325 355,875 832,200
---------- ---------- -----------
4,974,472 3,702,291 8,676,763
---------- ---------- -----------
HOUSING 9.3%
104 59 163 CB Richard Ellis Service, Inc. 9.750 05/15/10 119,080 67,555 186,635
545 405 950 CB Richard Ellis Service, Inc. 11.250 06/15/11 629,475 467,775 1,097,250
625 465 1,090 Interface, Inc. 9.500 02/01/14 684,375 509,175 1,193,550
615 455 1,070 Nortek, Inc., 144A - Private Placement (a) 8.500 09/01/14 645,750 477,750 1,123,500
875 650 1,525 Ply Gem Industries, Inc., 144A - Private
Placement (a) 9.000 02/15/12 892,500 663,000 1,555,500
340 250 590 Propex Fabrics, Inc., 144A - Private
Placement (a) 10.000 12/01/12 354,450 260,625 615,075
445 330 775 RMCC Acquisition Co., 144A - Private
Placement (a) 9.500 11/01/12 446,113 330,825 776,938
370 280 650 Technical Olympic USA, Inc. 9.000 07/01/10 397,750 301,000 698,750
290 215 505 Technical Olympic USA, Inc. 9.000 07/01/10 311,750 231,125 542,875
310 230 540 Technical Olympic USA, Inc. 10.375 07/01/12 348,750 258,750 607,500
---------- ---------- -----------
4,829,993 3,567,580 8,397,573
---------- ---------- -----------
INFORMATION TECHNOLOGY 4.1%
770 570 1,340 Iron Mountain, Inc. 8.625 04/01/13 821,975 608,475 1,430,450
445 335 780 Iron Mountain, Inc. 7.750 01/15/15 453,900 341,700 795,600
F-4
800 590 1,390 Xerox Corp. 7.125 06/15/10 868,000 640,150 1,508,150
---------- ---------- -----------
2,143,875 1,590,325 3,734,200
---------- ---------- -----------
MANUFACTURING 4.5%
155 115 270 Flowserve Corp. 12.250 08/15/10 172,050 127,650 299,700
530 395 925 Johnsondiversey, Inc. 9.625 05/15/12 594,925 443,388 1,038,313
439 325 764 Manitowoc, Inc. 10.500 08/01/12 507,045 375,375 882,420
1,010 755 1,765 Trimas Corp. 9.875 06/15/12 1,075,650 804,075 1,879,725
---------- ---------- -----------
2,349,670 1,750,488 4,100,158
---------- ---------- -----------
METALS 2.8%
202 159 361 Doe Run Resources Corp. (Acquired 02/15/01
to 10/15/04, Cost $316,911) (f) (g) 11.750 11/01/08 172,915 135,862 308,777
140 105 245 Foundation PA Coal Co., 144A - Private
Placement (a) 7.250 08/01/14 149,800 112,350 262,150
210 155 365 General Cable Corp. 9.500 11/15/10 238,350 175,925 414,275
440 325 765 UCAR Finance, Inc. 10.250 02/15/12 504,900 372,938 877,838
337 248 585 United States Steel Corp. 9.750 05/15/10 385,865 283,960 669,825
---------- ---------- -----------
1,451,830 1,081,035 2,532,865
---------- ---------- -----------
RETAIL 1.7%
290 215 505 General Nutrition Center, Inc. 8.500 12/01/10 275,500 204,250 479,750
590 435 1,025 Petro Stopping Center Financial 9.000 02/15/12 626,875 462,188 1,089,063
---------- ---------- -----------
902,375 666,438 1,568,813
---------- ---------- -----------
SERVICES 7.3%
1,500 1,140 2,640 Allied Waste North America, Inc. 8.875 04/01/08 1,612,500 1,225,500 2,838,000
45 45 Allied Waste North America, Inc. 7.875 04/15/13 46,350 46,350
510 380 890 Buhrmann US, Inc. 8.250 07/01/14 518,288 386,175 904,463
405 295 700 MSW Energy Holdings II LLC 7.375 09/01/10 427,275 311,225 738,500
85 65 150 MSW Energy Holdings LLC 8.500 09/01/10 93,500 71,500 165,000
390 295 685 United Rentals North America, Inc. 6.500 02/15/12 382,200 289,100 671,300
740 540 1,280 United Rentals North America, Inc. 7.750 11/15/13 728,900 531,900 1,260,800
---------- ---------- -----------
3,809,013 2,815,400 6,624,413
---------- ---------- -----------
TELECOMMUNICATIONS 6.4%
605 450 1,055 Axtel SA (Mexico) 11.000 12/15/13 654,913 487,125 1,142,038
860 640 1,500 Cincinnati Bell, Inc. 7.250 07/15/13 887,950 660,800 1,548,750
280 220 500 Exodus Communications, Inc. (c) (d) (e) 11.250 07/01/08 0 0 0
430 320 750 Qwest Communications International, Inc.,
144A - Private Placement (a) (b) 6.040 02/15/09 437,525 325,600 763,125
710 525 1,235 Qwest Corp. 6.625 09/15/05 727,750 538,125 1,265,875
575 425 1,000 Qwest Corp., 144A - Private Placement (a) 7.875 09/01/11 626,750 463,250 1,090,000
---------- ---------- -----------
3,334,888 2,474,900 5,809,788
---------- ---------- -----------
TRANSPORTATION 7.0%
450 335 785 AutoNation, Inc. 9.000 08/01/08 516,375 384,413 900,788
585 435 1,020 Laidlaw International, Inc. 10.750 06/15/11 685,913 510,038 1,195,951
1,065 795 1,860 Sonic Automotive, Inc. 8.625 08/15/13 1,140,881 851,644 1,992,525
1,100 820 1,920 TRW Automotive, Inc. 9.375 02/15/13 1,281,500 955,300 2,236,800
---------- ---------- -----------
3,624,669 2,701,395 6,326,064
---------- ---------- -----------
UTILITY 11.9%
73 54 127 AES Corp. 9.375 09/15/10 85,228 63,045 148,273
23 18 41 AES Corp. 8.875 02/15/11 26,393 20,655 47,048
485 365 850 AES Corp. 7.750 03/01/14 528,650 397,850 926,500
330 245 575 Calpine Corp., 144A - Private Placement (a) 8.500 07/15/10 284,625 211,313 495,938
65 50 115 CMS Energy Corp. 7.500 01/15/09 69,550 53,500 123,050
405 295 700 CMS Energy Corp. 8.500 04/15/11 462,206 336,669 798,875
605 405 1,010 Dynegy Holdings, Inc. 6.875 04/01/11 585,338 391,838 977,176
345 295 640 Dynegy Holdings, Inc., 144A - Private
Placement (a) 9.875 07/15/10 387,263 331,138 718,401
235 170 405 IPALCO Enterprises, Inc. 8.625 11/14/11 264,375 191,250 455,625
485 350 835 Monongahela Power Co. 5.000 10/01/06 496,184 358,071 854,255
290 220 510 Nevada Power Co. 8.250 06/01/11 334,588 253,825 588,413
490 360 850 Nevada Power Co. 9.000 08/15/13 575,750 423,000 998,750
385 300 685 PSEG Energy Holdings, Inc. 7.750 04/16/07 409,063 318,750 727,813
20 20 PSEG Energy Holdings, Inc. 8.625 02/15/08 22,050 22,050
270 200 470 Reliant Energy, Inc. 6.750 12/15/14 269,663 199,750 469,413
195 145 340 Southern Natural Gas Co. 8.875 03/15/10 219,375 163,125 382,500
785 580 1,365 TNP Enterprises, Inc. 10.250 04/01/10 841,913 622,050 1,463,963
270 200 470 Trans Continental Gas Pipe Line Corp. 8.875 07/15/12 329,738 244,250 573,988
---------- ---------- -----------
6,191,952 4,580,079 10,772,031
---------- ---------- -----------
WIRELESS COMMUNICATIONS 6.5%
160 120 280 Centennial Communications Corp. 8.125 02/01/14 165,200 123,900 289,100
1,025 750 1,775 Nextel Communications, Inc. 6.875 10/31/13 1,117,250 817,500 1,934,750
205 155 360 Rogers Wireless Communications, Inc., 144A
- Private Placement (Canada) (a) 8.000 12/15/12 217,813 164,688 382,501
295 210 505 Rogers Wireless Communications, Inc., 144A
- Private Placement (Canada) (a) 7.500 03/15/15 312,700 222,600 535,300
250 185 435 Rural Cellular Corp. (b) 6.990 03/15/10 260,000 192,400 452,400
575 425 1,000 Rural Cellular Corp. 8.250 03/15/12 610,938 451,563 1,062,501
670 500 1,170 SBA Communications Corp., 144A - Private
Placement (a) 8.500 12/01/12 686,750 512,500 1,199,250
---------- ---------- -----------
3,370,651 2,485,151 5,855,802
---------- ---------- -----------
TOTAL CORPORATE BONDS 162.8% 84,647,477 62,845,259 147,492,736
---------- ---------- -----------
F-5
VIT VLT PROFORMA VIT VLT PROFORMA
Shares SHARES SHARES DESCRIPTION MARKET VALUE MARKET VALUE MARKET VALUE
Equities 0.5%
3,033 2,450 5,483 DecisionOne Corp. (common shares) (e) (h) 0 0 0
6,670 5,386 12,056 DecisionOne Corp. (common stock warrants) (e) (h) 0 0 0
1 1 2 Doe Run Resources Corp. (common stock warrant) (e) (h) 0 0 0
30,357 30,357 60,714 HCI Direct, Inc. (common shares) (e) (h) 236,784 236,785 473,569
500 500 1,000 Hosiery Corp. of America, Inc. (common shares) (e) (h) 0 0 0
11,316 8,891 20,207 VS Holdings, Inc. (common shares) (e) (h) 2,037 1,600 3,637
------------ ------------ ------------
TOTAL EQUITIES 238,821 238,385 477,206
------------ ------------ ------------
TOTAL LONG-TERM INVESTMENTS 163.3%
(Cost $144,968,552) 84,886,298 63,083,644 147,969,942
REPURCHASE AGREEMENT 6.1%
VIT VLT PROFORMA
PAR AMOUNT PAR AMOUNT PAR AMOUNT
(000) (000) (000)
$ 3,230 $ 2,287 $ 5,517 State Street Bank & Trust Co.
(collateralized by U.S. Government
obligations in a pooled cash account,
interest rate of 2.15%, dated 12/31/04, to
be sold on 01/03/05 at $5,517,989) 3,230,000 2,287,000 5,517,000
(Cost $5,517,000) ------------ ------------ ------------
TOTAL INVESTMENTS 169.4%
(Cost $150,485,552) 88,116,298 65,370,644 153,486,942
OTHER ASSETS IN EXCESS OF LIABILITIES 2.8% 1,530,879 1,032,876 2,563,755
PREFERRED SHARES (INCLUDING ACCRUED DISTRIBUTIONS) (72.2%) (37,657,654) (27,803,516) (65,461,170)
------------ ------------ ------------
NET ASSETS APPLICABLE TO COMMON SHARES 100.0% $ 51,989,523 $ 38,600,004 $ 90,589,527
============ ============ ============
Percentages are calculated as a percentage of net assets applicable to common
shares.
(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) Variable rate security. Interest rate shown is that in effect
at December 31, 2004.
(c) Non-income producing as security is in default.
(d) This borrower has filed for protection in federal bankruptcy
court.
(e) Market value is determined in accordance with procedures
established in good faith by the Board of Trustees.
(f) Payment-in-kind security.
(g) These securities are restricted and may be resold only in
transactions exempt from registration which are normally those
transactions with qualified institutional buyers. Restricted
securities comprise 0.3% of net assets applicable to common
shares.
(h) Non-income producing security.
F-6
VAN KAMPEN HIGH INCOME TRUST - VAN KAMPEN HIGH INCOME TRUST II
PROFORMA CONDENSED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 2004
(UNAUDITED)
AMOUNTS IN THOUSANDS
VAN KAMPEN VAN KAMPEN
HIGH INCOME TRUST HIGH INCOME TRUST II ADJUSTMENTS PROFORMA
----------------- -------------------- ----------- ---------
ASSETS:
Total Investments
(Cost of $86,274, $64,212 and $150,486, respectively) $ 88,116 $ 65,371 $ 153,487
Cash - 1 1
Receivables:
Interest 1,624 1,209 2,833
Investments Sold 272 201 473
Other 1 1 2
--------- --------- --------- ---------
Total Assets 90,013 66,783 156,796
--------- --------- --------- ---------
LIABILITIES:
Payables
Investment Advisory Fee 53 39 92
Income Distributions - Common Shares 17 44 61
Other Affiliates 3 5 8
Trustees' Deferred Compensation and Retirement Plans 215 208 423
Accrued Expenses 78 83 161
Merger Cost - - $381 (2) 381
--------- --------- --------- ---------
Total Liabilities 366 379 381 1,126
Preferred Shares (including accrued distributions) 37,657 27,804 65,461
--------- --------- --------- ---------
NET ASSETS APPLICABLE TO COMMON SHARES $ 51,990 $ 38,600 $ (381) $ 90,209
========= ========= ========= =========
NET ASSET VALUE PER COMMON SHARE
Net Assets Applicable to Common Shares $ 51,990 $ 38,600 $ (381) $ 90,209
Common Shares Outstanding(1) 13,711 8,109 (2,755) 19,065
Net Asset Value Per Common Share $ 3.79 $ 4.76 $ 4.73
========= ========= =========
NET ASSETS CONSIST OF:
Common Shares ($.01 par value)(1) $ 137 $ 81 $ (28) 190
Paid in Surplus(1) 84,025 64,211 (353) 147,883
Net Unrealized Appreciation 1,842 1,159 3,001
Accumulated Undistributed Net Investment Income (282) (234) (516)
Accumulated Net Realized Loss (33,732) (26,617) (60,349)
--------- --------- ========= ---------
NET ASSETS APPLICABLE TO COMMON SHARES $ 51,990 $ 38,600 $ (381) $ 90,209
========= ========= ========= =========
PREFERRED SHARES $ 37,600 $ 27,800 $ 65,400
========= ========= ========= =========
NET ASSETS INCLUDING PREFERRED SHARES $ 89,590 $ 66,400 $ (381) $ 155,609
========= ========= ========= =========
(1) The pro forma statements presume the issuance by the Van Kampen High Income
Trust II of approximately 10,956,001 common shares in exchange for the assets
and liabilities of the Van Kampen High Income Trust.
(2) A non-recurring cost associated with this transaction of approximately
$381,000 will be incurred. Approximately $213,000, or $.026 will be borne by the
common shareholders of the Van Kampen High Income Trust II, while approximately
$168,000, or $.012 will be borne by the common shareholders of the Van Kampen
High Income Trust.
F-7
VAN KAMPEN HIGH INCOME TRUST - VAN KAMPEN HIGH INCOME TRUST II
PROFORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
(UNAUDITED)
AMOUNTS IN THOUSANDS
VAN KAMPEN VAN KAMPEN
HIGH INCOME TRUST HIGH INCOME TRUST II ADJUSTMENTS(1) PROFORMA
----------------- -------------------- -------------- --------
INVESTMENT INCOME:
Interest $ 6,667 $ 4,959 $ 11,626
Other 117 88 205
----------------- -------------------- ------------- --------
Total Income 6,784 5,047 11,831
----------------- -------------------- ------------- --------
EXPENSES:
Investment Advisory Fee 612 454 1,066
Preferred Share Maintenance 110 82 (15) 177
Trustees' Fees and Related Expenses 51 48 (61) 38
Legal 19 17 (12) 24
Custody 14 13 (1) 26
Other 185 171 (119) 237
----------------- -------------------- ------------- --------
Total Expenses 991 785 (208) 1,568
----------------- -------------------- ------------- --------
NET INVESTMENT INCOME $ 5,793 $ 4,262 $ 208 $ 10,263
================= ==================== ============= ========
REALIZED AND UNREALIZED GAIN:
Net Realized Gain $ 1,202 $ 755 $ 1,957
Net Unrealized Appreciation During the Period 553 542 1,095
----------------- -------------------- ------------- --------
NET REALIZED AND UNREALIZED GAIN $ 1,755 $ 1,297 $ 3,052
================= ==================== ============= ========
DISTRIBUTIONS TO PREFERRED SHAREHOLDERS $ (576) $ (410) $ (986)
================= ==================== ============= ========
NET INCREASE IN NET ASSETS APPLICABLE TO COMMON
SHARES FROM OPERATIONS $ 6,972 $ 5,149 $ 208 $ 12,329
================= ==================== ============= ========
(1) Reflects the reduction in operating expenses as a result of the elimination
of certain duplicative expenses and the result of operating a larger, more
efficient fund.
F-8
VAN KAMPEN HIGH INCOME TRUST - VAN KAMPEN HIGH INCOME TRUST II
NOTES TO PRO FORMA FINANCIAL STATEMENTS
December 31, 2004
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The Acquiring Trust, Van Kampen High Income Trust II (the "Acquiring Trust") is
registered as a diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Acquiring Trust's investment
objective is to provide high current income, while seeking to preserve
shareholders' capital through investment in a professionally managed diversified
portfolio of high yield, fixed income securities. The Acquiring Trust commenced
investment operations on April 28, 1989.
The following is a summary of significant accounting policies
consistently followed by the Acquiring Trust in the preparation of its financial
statements. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
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.
B. SECURITY TRANSACTIONS Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis.
The Acquiring Trust 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 Acquiring Trust will segregate assets with the custodian having an aggregate
value at least equal to the amount of the when-issued or delayed delivery
purchase commitments until after payment is made. At December 31, 2004, the
Acquiring Trust had no when-issued and delayed delivery purchase commitments.
The Acquiring Trust may invest in repurchase agreements, which are
short-term investments in which the Acquiring Trust acquires ownership of a debt
security and the seller agrees to repurchase the security at a future time and
specified price. The Acquiring Trust 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 Asset Management
(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 Acquiring Trust 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
Acquiring Trust.
C. INVESTMENT INCOME Interest income is recorded on an accrual basis. Bond
discount is accreted and premium is amortized over the expected life of each
applicable security. Other income is comprised primarily of consent fees.
Consent fees are earned as compensation for agreeing to changes in the terms of
debt instruments.
D. FEDERAL INCOME TAXES It is the Acquiring Trust'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.
E. DISTRIBUTION OF INCOME AND GAINS The Acquiring Trust declares and pays
monthly dividends from net investment income to common shareholders. Net
realized gains, if any, are distributed annually to common shareholders.
Distributions from net realized gains for book purposes may include short-term
capital gains which are included in ordinary income for tax purposes.
F-9
PART C: OTHER INFORMATION
ITEM 15. INDEMNIFICATION
Section 5.3 of the Registrant's Declaration of Trust, a copy of which is
filed as an exhibit hereto, provides for indemnification, as set forth below:
"Section 5.3 Mandatory Indemnification.
(a) Subject to the exceptions and limitations contained in paragraph
(b) below:
(i) every person who is or has been a Trustee or officer of the
Trust shall be indemnified by the Trust to the fullest extent
permitted by law against all liability and against all expenses
reasonably incurred or paid by him in connection with any claim,
action, suit or proceeding in which he becomes involved as a party or
otherwise by virtue of his being or having been a Trustee or officer
and against amounts paid or incurred by him in the settlement thereof;
(ii) the words, "claim," "action," "suit," or "proceeding" shall
apply to all claims, actions, suits or proceedings (civil, criminal,
administrative or other, including appeals), actual or threatened; and
the words "liability" and "expenses" shall include, without
limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
(i) against any liability to the Trust or its Shareholders by
reason of a final adjudication by the court or other body before which
the proceeding was brought that he engaged in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office;
(ii) with respect to any matter as to which he shall have been
finally adjudicated not to have acted in good faith in the reasonable
belief that his action was in the best interest of the Trust;
(iii) in the event of a settlement or other disposition not
involving a final adjudication as provided in paragraph (b)(i) or
(b)(ii) resulting in a payment by a Trustee or officer, unless there
has been either a determination that such Trustee or officer did not
engage in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or a
reasonable determination, based upon a review of readily available
facts (as opposed to a full trial-type inquiry) that he did not engage
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in such conduct:
(A) by vote of a majority of the Disinterested Trustees
acting on the matter (provided that a majority of the
Disinterested Trustees then in office act on the matter); or
(B) by written opinion of independent legal counsel.
(C) The rights of indemnification herein provided by be
insured against by policies maintained by the Trust, shall be
severable, shall not effect any other rights to which any Trustee
or officer may now or hereafter be entitled, shall continue as to
a Person who has ceased to be such Trustee or officer and shall
inure to the benefit of the heirs, executors, administrators, and
assigns of such Person. Nothing contained herein shall affect any
rights to indemnification to which personnel of the Trust other
than Trustees and officers may be entitled by contract or
otherwise under law.
(D) Expenses of preparation and presentation of a defense to
any claim, action, suit, or proceeding of the character described
in paragraph (a) of this Section 5.3 shall be advanced by the
Trust prior to final disposition thereof upon receipt of an
undertaking by or on behalf of the recipient to repay such amount
if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either
(i) such undertaking is secured by a surety bond or
some other appropriate security or the Trust shall be
insured against losses arising out of any such advances; or
(ii) a majority of the Disinterested Trustees acting on
the matter (provided that a majority of the Disinterested
Trustees then in office act on the matter) or an independent
legal counsel in a written opinion shall determine, based
upon a review of readily available facts (as opposed to a
full trial-type inquiry), that there is reason to believe
that the recipient ultimately will be found entitled to
indemnification.
As used in this Section 5.3, a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending."
ITEM 16. EXHIBITS
1. (a) Declaration of Trust and amendments thereto of the Registrant+
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(b) Certificate of Vote Establishing Preferred Shares and amendments
thereto+++
2. Bylaws of the Registrant+
3. Not applicable
4. Form of Agreement and Plan of Reorganization++++
5. (a) Form of specimen share certificate for Common Shares of the
Registrant+
(b) Form of specimen share certificate for APS of the Registrant+
6. Investment Advisory Agreement between the Registrant and Van
Kampen Asset Management+
7. Not Applicable
8. (a) Form of Trustee Deferred Compensation Plan+
(b) Form of Trustee Retirement Plan+
9. Custodian Contract and amendments thereto+
10. Not Applicable
11. Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
LLP+
12. Tax opinion of Skadden, Arps, Slate, Meagher & Flom LLP++
13. (a) Transfer Agency Agreement+
(b) Auction Agency Agreement+
(c) Form of Broker-Dealer Agreement+
(d) (i) Letter of Representation+
(ii) Form of Letter of Representations+
(e) Support Services Agreement+
(f) Fund Accounting Agreement and amendments thereto+
(g) Amended and Restated Legal Services Agreement+
14. Consent of independent registered public accounting firm+
15. Not Applicable
16. Power of Attorney+
17. (a) Code of Ethics of Investment Adviser+
(b) Code of Ethics of the Funds+
99. (a) Form of Proxy card for the Target Fund+
(b) Form of Proxy card for the Registrant+
+ Filed herewith.
++ To be filed by further amendment.
+++ Filed herewith as Appendix B to the Reorganization Statement of Additional
Information.
++++ Filed herewith as Appendix A to the Reorganization Statement of Additional
Information.
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-14, File Number 333-123443, filed with the Commission on March 18,
2005
ITEM 17. UNDERTAKINGS
(1) The undersigned Registrant agrees that prior to any public reoffering
of the securities registered through use of a prospectus which is part of this
Registration Statement by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) of the Securities Act of 1933, as amended, the
reoffering prospectus will contain information called for by the applicable
registration form for reofferings by persons who may be deemed underwriters, in
addition to the information called for by other items of the applicable form.
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(2) The undersigned Registrant agrees that every prospectus that is filed
under paragraph (1) above will be filed as part of an amendment to the
registration statement and will not be used until the amendment is effective,
and that, in determining any liability under the Securities Act of 1933, as
amended, each post-effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of securities at
that time shall be deemed to be the initial bona fide offering of them.
(3) The undersigned Registrant agrees that, if the Reorganization
discussed in the registration statement closes, it shall file by post-effective
amendment either a copy of the Internal Revenue Service private letter ruling
applied for or an opinion supporting the tax matters discussed in the
registration statement.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York,
and the Sate of New York, on May 5, 2005.
VAN KAMPEN HIGH INCOME TRUST II
By: /s/ Lou Anne McInnis
------------------------------------
Lou Anne McInnis
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
SIGNATURES TITLE
---------- -----
Principal Executive Officer:
/s/ Ronald E. Robison* Executive Vice President and
------------------------------------------- Principal Executive Officer
Ronald E. Robison
Principal Financial Officer:
/s/ James W. Garrett*
------------------------------------------- Chief Financial
James W. Garrett Officer and Treasurer
Trustees:
/s/ David C. Arch* Trustee
-------------------------------------------
David C. Arch
/s/ Jerry D. Choate* Trustee
-------------------------------------------
Jerry D. Choate
/s/ Rod Dammeyer* Trustee
-------------------------------------------
Rod Dammeyer
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/s/ Linda Hutton Heagy* Trustee
-------------------------------------------
Linda Hutton Heagy
/s/ R. Craig Kennedy* Trustee
-------------------------------------------
R. Craig Kennedy
/s/ Howard J Kerr* Trustee
-------------------------------------------
Howard J Kerr
/s/ Mitchell M. Merin* Trustee
-------------------------------------------
Mitchell M. Merin
/s/ Jack E. Nelson* Trustee
-------------------------------------------
Jack E. Nelson
/s/ Richard F. Powers, III* Trustee
-------------------------------------------
Richard F. Powers, III
/s/ Hugo F. Sonnenschein* Trustee
-------------------------------------------
Hugo F. Sonnenschein
/s/ Wayne W. Whalen* Trustee
-------------------------------------------
Wayne W. Whalen
/s/ Suzanne H. Woolsey* Trustee
-------------------------------------------
Suzanne H. Woolsey
* Signed by Lou Anne McInnis pursuant to a power of attorney previously filed.
/s/ Lou Anne McInnis May 5, 2005
-------------------------------------------
Lou Anne McInnis
Attorney-in-Fact
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Schedule Of Exhibits Pre-Effective Amendment Filing No. 1 To Form N-14
Van Kampen High Income Trust II
1 (a) Declaration of Trust and amendments thereto
2 Bylaws of the Registrant
5 (a) Form of specimen share certificate for Common Shares
(b) Form of specimen share certificate for APS
6 Investment Advisory Agreement and amendments thereto
8 (a) Trustee Deferred Compensation Plan
(b) Trustee Retirement Plan
9 Custodian Contract and amendments thereto
11 Opinion and Consent of Skadden, Arps, Slate,
Meagher & Flom LLP
13 (a) Transfer Agency Agreement
(b) Auction Agency Agreement
(c) Form of Broker-Dealer Agreement
(d) (i) Letter of Representation
(ii) Form of Letter of Representations
(e) Support Services Agreement
(f) Fund Accounting Agreement and amendments thereto
(g) Amended and Restated Legal Services Agreement
14 Consent of independent registered accounting firm
16 Power of Attorney
17 (a) Code of Ethics of Investment Adviser
(b) Code of Ethics of the Van Kampen Funds
99 (a) Form of Proxy Card for the Target Fund
(b) Form of Proxy Card for the Registrant