Edgar Filing: VAN KAMPEN HIGH INCOME TRUST II

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.

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.

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................................... 38
Management of the Funds................................... 40
Other Service Providers................................... 44
Capitalization............................................ 44
Additional Information About the Common Shares of the
Funds................................................... 46
Additional Information About the Preferred Shares of the
Funds................................................... 49
Governing Law............................................. 54
Certain Provisions of the Declarations of Trust........... 54
Conversion to Open-End Fund............................... 56
Voting Rights............................................. 56
Financial Highlights...................................... 58
INFORMATION ABOUT THE REORGANIZATION........................ 60
General................................................... 60
Terms of the Reorganization Agreement..................... 62

PAGE
----

Material U.S. Federal Income Tax Consequences of the
Reorganization.......................................... 64
Shareholder Approval...................................... 66
PROPOSAL 2: ISSUANCE OF ACQUIRING FUND COMMON SHARES........ 67
The Reorganization........................................ 67
Shareholder Approval...................................... 67
OTHER INFORMATION........................................... 68
Voting Information and Requirements....................... 68
Shareholder Information................................... 70
Section 16(a) Beneficial Ownership Reporting Compliance... 71
Solicitation of Proxies................................... 71
Legal Matters............................................. 71
Other Matters to Come Before the Special Meeting.......... 72
EXHIBIT I: DESCRIPTION OF SECURITIES RATINGS................ I-1

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

(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

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.

REORGANIZATION ESTIMATED REDUCTION TO
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

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.

------------------------------------------------------------------------------

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.

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

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,

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.

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

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

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.

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.

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 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.

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
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
30

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, 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
31

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 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 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 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
34

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 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
35

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 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
36

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 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 Funds 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 Funds, would exceed such Fund's
limitation on illiquid securities described herein. The Funds do 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 Funds 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 Funds seek to enforce their 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.

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.

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 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.
40

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 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 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 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
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 bear 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.

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.

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

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

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.

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
49

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
50

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

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 (an "Additional Dividend"). 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
52

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
53

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

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

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
56

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.

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.

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.

(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.

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
60

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.

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 after the close of business on the NYSE (generally, 4:00
p.m., Eastern time) on the Closing 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 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 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
Closing 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 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
62

Fund Common Shares held other than in a Dividend Reinvestment 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 Reinvestment
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.

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
63

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
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
64

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.

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."

------------------------------------------------------------------------------

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
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. 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 approval is based on the
affirmative vote of a majority of the 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 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
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.

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
71

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

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.

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(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

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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

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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+").

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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.

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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.

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.

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