<PAGE> 1
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Van Kampen American Capital Municipal Bond Fund, formerly known as American
Capital Municipal Bond Fund, Inc. (the "Fund"), is a mutual fund whose primary
objective is to provide, through investment in a professionally managed
portfolio of municipal bonds ("Municipal Bonds"), as high a level of current
interest income exempt from federal income tax as is consistent with the
preservation of capital. There is no assurance that the Fund will achieve its
investment objective.
THE FUND'S CURRENT SHAREHOLDERS ARE CONSIDERING A PROPOSAL TO REORGANIZE THE
FUND INTO THE VAN KAMPEN MERRITT MUNICIPAL INCOME FUND. SEE "PROPOSED
REORGANIZATION."
The Fund's investment adviser is Van Kampen American Capital Asset
Management, Inc. This Prospectus sets forth certain information that a
prospective investor should know before investing in the Fund. Please read it
carefully and retain it for future reference. The address of the Fund is 2800
Post Oak Blvd., Houston, Texas 77056, and its telephone number is
(800) 421-5666.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR STATE REGULATORS NOR HAS THE COMMISSION OR STATE
REGULATORS PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated August 1, 1995, containing
additional information about the Fund, has been filed with the Securities and
Exchange Commission ("SEC") and is hereby incorporated by reference into this
Prospectus. A copy of the Statement of Additional Information may be obtained
without charge by calling (800) 421-5666 or, for Telecommunications Device For
the Deaf, (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITAL SM
------------------
THIS PROSPECTUS IS DATED AUGUST 1, 1995.
<PAGE> 2
- ------------------------------------------------------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
---
<S> <C>
Prospectus Summary............................................... 3
Proposed Reorganization.......................................... 5
Shareholder Transaction Expenses................................. 6
Annual Fund Operating Expenses and Example....................... 7
Financial Highlights............................................. 9
The Fund......................................................... 11
Investment Objective and Policies................................ 11
Municipal Bonds.................................................. 14
Investment Practices............................................. 15
Investment Advisory Services..................................... 21
Alternative Sales Arrangements................................... 22
Purchase of Shares............................................... 26
Shareholder Services............................................. 35
Redemption of Shares............................................. 39
Distribution Plans............................................... 42
Distributions from the Fund...................................... 44
Tax Status....................................................... 45
Fund Performance................................................. 47
Description of Shares of the Fund................................ 49
Additional Information........................................... 50
</TABLE>
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* *
* NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO *
* GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE *
* CONTAINED IN THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED *
* IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR *
* REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY *
* THE FUND, THE ADVISER OR THE DISTRIBUTOR. THIS PROSPECTUS DOES NOT *
* CONSTITUTE AN OFFER BY THE FUND OR BY THE DISTRIBUTOR TO SELL OR A *
* SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY *
* IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL FOR THE FUND *
* TO MAKE SUCH AN OFFER IN SUCH JURISDICTION. *
* *
***************************************************************************
2
<PAGE> 3
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PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Municipal Bond Fund (the "Fund") is a
diversified open-end management investment company organized as a Delaware
business trust.
MINIMUM PURCHASE. $500 minimum initial investment and $25 minimum for each
subsequent investment (or less as described under "Purchase of Shares").
INVESTMENT OBJECTIVE. Interest income exempt from federal income tax. There
is, however, no assurance that the Fund will be successful in achieving its
objective.
INVESTMENT POLICY. Investing in a diversified portfolio of obligations issued
by states, territories or possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities, the
interest from which is exempt from federal income tax.
INVESTMENT RESULTS. The investment results of the Fund during the past ten
years are shown in the table of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Fund offers three classes of shares to the
general public, each with its own sales charge structure: Class A shares, Class
B shares and Class C shares. Each class has distinct advantages and
disadvantages for different investors, and investors may choose the class of
shares that best suits their circumstances and objectives. See "Alternative
Sales Arrangements -- Factors for Consideration." Each class of shares
represents an interest in the same portfolio of investments of the Fund. The per
share dividends on Class B and Class C shares will be lower than the per share
dividends on Class A shares. See "Alternative Sales Arrangements." For
information on redeeming shares see "Redemption of Shares."
Class A Shares. These shares are offered at net asset value per share plus a
maximum initial sales charge of 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of purchase. The Fund pays an annual service
fee of up to 0.25% of its average daily net assets attributable to such class of
shares. See "Purchase of Shares -- Class A Shares" and "Distribution Plans."
Class B Shares. These shares are offered at net asset value per share and are
subject to a maximum contingent deferred sales charge of four percent of
redemption proceeds during the first and second year, declining each year
thereafter to zero after the fifth year. See "Redemption of Shares." The Fund
pays a combined annual distribution fee and service fee of up to one percent of
its average daily net assets attributable to such class of shares. See "Purchase
of Shares -- Class B Shares" and "Distribution Plans." Class B shares will
convert automatically to Class A shares six years after the end of the calendar
month in which the
3
<PAGE> 4
shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
Class C Shares. These shares are offered at net asset value per share and are
subject to a contingent deferred sales charge of one percent on redemptions made
within one year of purchase. See "Redemption of Shares." The Fund pays a
combined annual distribution fee and service fee of up to one percent of its
average daily net assets attributable to such class of shares. See "Purchase of
Shares -- Class C Shares" and "Distribution Plans." Class C shares will convert
automatically to Class A shares ten years after the end of the calendar month in
which the shareholder's order to purchase was accepted. See "Alternative Sales
Arrangements -- Conversion Feature."
DISTRIBUTIONS FROM THE FUND. Income dividends are distributed monthly. Any
taxable net realized capital gains are distributed annually. Such distributions
are automatically reinvested in shares of the Fund at net asset value per share
(without sales charge) unless payment in cash is requested. See "Shareholder
Services -- Reinvestment Plan" and "Distributions from the Fund."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Fund.
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the
"Distributor").
RISK FACTORS. The Fund invests primarily in long-term Municipal Bonds which
tend to produce higher yields and are subject to greater market fluctuations as
a result of changes in interest rates ("market risk") than Municipal Bonds with
shorter maturities and lower yields. Up to 20% of the Fund's total assets may be
invested in Municipal Bonds rated Ba or B by Moody's Investors Service
("Moody's") and BB or B by Standard & Poor's Corporation ("S&P"), or which, if
non-rated, are in the opinion of the Adviser of comparable quality. Lower rated
securities are subject to market risks and are also subject to the ability of
the issuer to meet its principal and interest obligations ("credit risk").
Municipal Bonds rated B by Moody's are considered generally to lack
characteristics of the desirable investment in that assurance of interest and
principal payments or maintenance of other terms of the contract over any long
period of time may be small. The Fund may seek to hedge interest rate risk
through transactions in futures contracts and related options. Any net gains
from futures and options transactions are subject to federal income tax and such
transactions involve certain risks. See "Investment Practices -- Futures
Contracts and Related Options." The Fund invests a portion of its assets in
private-activity bonds so that a portion of its exempt-interest dividends
constitutes an item of tax preference to the extent such dividends represent
interest received from these private-activity bonds. See "Distributions from the
Fund" and "Tax Status."
4
<PAGE> 5
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
- ------------------------------------------------------------------------------
PROPOSED REORGANIZATION
- ------------------------------------------------------------------------------
On May 11, 1994, the Board of Directors of the Fund approved an Agreement and
Plan of Reorganization between the Fund and the Van Kampen Merritt Municipal
Income Fund, a sub-trust of the Van Kampen Merritt Tax Free Fund (the "Van
Kampen Fund"), a fund advised by Van Kampen American Capital Investment Advisory
Corp., providing for the transfer of assets and liabilities of the Fund to the
Van Kampen Fund in exchange for shares of beneficial interest of the Van Kampen
Fund at its net asset value per share (the "Reorganization").
Van Kampen American Capital Investment Advisory Corp. and the Adviser are
wholly owned subsidiaries of Van Kampen American Capital, Inc., which is a
wholly owned subsidiary of VK/AC Holding, Inc.
The Reorganization is subject to approval by the holders of a majority of the
outstanding shares of the Fund. Further details of the proposed Reorganization
will be contained in the proxy statement/prospectus expected to be mailed to
shareholders in August, 1995.
The Van Kampen Fund had assets of $691.9 million on March 31, 1995. Its
objective is to seek to provide high current income exempt from federal income
tax consistent with preservation of capital by investing at least 80% of its
assets in a diversified portfolio of tax-exempt municipal securities rated
investment grade at the time of investment. The Fund and the Van Kampen Fund
have similar investment objectives and follow generally similar investment
policies although the Van Kampen Fund has greater flexibility to invest in
municipal bonds rated below A by Moody's and S&P. In addition, the Van Kampen
Fund has greater flexibility to utilize options and futures, as well as interest
rate transactions such as swaps, caps, floors or collars. The Van Kampen Fund
may invest a substantial portion of its assets in municipal securities that pay
interest that is subject to the federal alternative minimum tax, while the Fund
may only invest up to 20% of its assets in such securities.
The Fund will continue its normal operations prior to the Reorganization.
5
<PAGE> 6
- ------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ----------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed on
purchases (as a percentage of
offering price)................. 4.75%(1) None None
Maximum sales charge imposed on
reinvested dividends (as a
percentage of offering price)... None None None
Deferred sales charge (as a
percentage of the lesser of
original purchase price or
redemption proceeds)............ None(2) Year 1--4.00% Year 1--1.00%
Year 2--4.00%
Year 3--3.00%
Year 4--2.50%
Year 5--1.50%
After--None
Redemption fees (as a percentage
of amount redeemed)............. None None None
Exchange fee...................... None None None
</TABLE>
- ---------------
(1) Reduced for purchases of $100,000 and over. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to any sales charge at the
time of purchase, but a contingent deferred sales charge of one percent may
be imposed on certain redemptions made within one year of the purchase.
6
<PAGE> 7
- ------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management fees (as a percentage of average
daily net assets)........................ .50% .50% .50%
12b-1 Fees (as a percentage of average
daily net assets)(3)..................... .21% 1.00%(5) 1.00%(5)
Other Expenses (as a percentage of average
daily net assets)(4)..................... .22% .22% .22%
Total Fund Operating Expenses (as a
percentage of average daily net
assets).................................. .93% 1.72% 1.72%
</TABLE>
- ---------------
(3) Up to 0.25% for Class A shares and one percent for Class B and C shares. See
"Distribution Plans."
(4) See "Investment Advisory Services."
(5) Long-term shareholders may pay more than the economic equivalent of the
maximum front-end sales charges permitted by NASD Rules.
7
<PAGE> 8
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS
------ ------ ------ ------
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of .93% for Class
A shares, 1.72% for Class B shares and
1.72% for Class C shares, (ii) a 5%
annual return and (iii) redemption at the
end of each time period:
Class A............................... $ 57 $ 76 $ 97 $156
Class B............................... $ 59 $ 87 $111 $163*
Class C............................... $ 28 $ 54 $ 93 $203
You would pay the following expenses on
the same $1,000 investment assuming no
redemption at the end of each time
period:
Class A............................... $ 57 $ 76 $ 97 $156
Class B............................... $ 17 $ 54 $ 93 $163*
Class C............................... $ 17 $ 54 $ 93 $203
</TABLE>
- ---------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years and are
included to provide a means for the investor to compare expense levels of funds
with different fee structures over varying investment periods. To facilitate
such comparison, all funds are required to utilize a five percent annual return
assumption. Class B shares acquired through the exchange privilege are subject
to the deferred sales charge schedule relating to the Class B shares of the Fund
from which the purchase of Class B shares was originally made. Accordingly,
future expenses as projected could be higher than those determined in the above
table if the investor's Class B shares were exchanged from a fund with a higher
contingent deferred sales charge. THE INFORMATION CONTAINED IN THE ABOVE TABLE
SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES AND ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. For a more complete
description of such costs and expenses, see "Purchase of Shares," "Investment
Advisory Services" and "Redemption of Shares."
8
<PAGE> 9
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(Selected data for a share of beneficial interest outstanding throughout each
of the periods indicated)
The following financial highlights for each of the five most recent fiscal
years have been audited by Price Waterhouse LLP, independent accountants, whose
report thereon was unqualified. The information presented below for the six
months ended March 31, 1995 is unaudited. This information should be read in
conjunction with the related financial statements and notes thereto included in
the Statement of Additional Information.
<TABLE>
<CAPTION>
CLASS A(1)
--------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30
SIX MONTHS ENDED -----------------------------------------------------------------
MARCH 31, 1995 1994 1993(2) 1992 1991 1990 1989
------------------ --------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................... $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33 $ 9.05
--------- -------- -------- -------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Investment income.................... .35 .68 .69 .705 .71 .72 .72
Expenses............................. (.05) (.09) (.094) (.09) (.08) (.08) (.065)
--------- -------- -------- -------- -------- -------- --------
Net investment income................. .30 .59 .596 .615 .63 .64 .655
Net realized and unrealized gains or
losses on securities................. .1555 (.7255) .558 .349 .5198 (.195) .30
--------- -------- -------- -------- -------- -------- --------
Total from investment operations...... .4555 (.1355) 1.154 .964 1.1498 .445 .955
--------- -------- -------- -------- -------- -------- --------
LESS DISTRIBUTIONS FROM:
Net investment income................ (.2955) (.5745) (.596) (.624) (.6398) (.645) (.675)
Excess of book-basis
net investment income(3)........... -- -- (.008) -- -- -- --
--------- -------- -------- -------- -------- -------- --------
Total distributions................... (.2955) (.5745) (.604) (.624) (.6398) (.645) (.675)
--------- -------- -------- -------- -------- -------- --------
Net asset value, end of period........ $ 9.98 $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
========= ======== ======== ======== ======== ======== ========
TOTAL RETURN(5)....................... 4.76% (1.33%) 11.91% 10.31% 12.98% 4.90% 10.77%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)........................... $ 306.0 $ 309.0 $ 332.3 $ 292.3 $ 266.9 $ 237.4 $ 231.8
Ratios to average net assets
(annualized):
Expenses............................. .93% .93% .91% .90% .89% .86% .71%
Net investment income................ 6.23% 5.76% 5.82% 6.29% 6.71% 6.84% 7.05%
Portfolio turnover rate............... 2% 6% 3% 6% 10% 17% 32%
<CAPTION>
CLASS A(1)
-------------------------------------
YEAR ENDED
-------------------------------------
1988 1987 1986 1986
----- ---- ---- ----
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period............................... $ 9.03 $ 10.35 $ 9.23 $ 8.46
-------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS:
Investment income.................... .72 .795 .895 .88
Expenses............................. (.06) (.065) (.07) (.065)
-------- -------- ------- -------
Net investment income................. .66 .73 .825 .815
Net realized and unrealized gains or
losses on securities................. .5913 (1.27) 1.075 .735
-------- -------- ------- -------
Total from investment operations...... 1.2513 (.54) 1.90 1.55
-------- -------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income................ (.785) (.78) (.78) (.78)
Excess of book-basis
net investment income(3)........... (.4463) -- -- --
-------- -------- ------- -------
Total distributions................... (1.2313) (.78) (.78) (.78)
-------- -------- ------- --------
Net asset value, end of period........ $ 9.05 $ 9.03 $ 10.35 $ 9.23
========= ======== ======== ========
TOTAL RETURN(5)....................... 15.57% (5.73%) 21.03% 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)........................... $ 191.7 $ 166.7 $ 159.2 $ 100.5
Ratios to average net assets
(annualized):
Expenses............................. .69% .64% .68% .72%
Net investment income................ 7.47% 7.29% 8.10% 9.20%
Portfolio turnover rate............... 33% 164% 69% 197%
</TABLE>
(Table continued on following page)
9
<PAGE> 10
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B(4)
---------------------------------------------------
YEAR ENDED SEPTEMBER 30
SIX MONTHS ENDED -------------------------
MARCH 31, 1995 1994 1993(2)
---------------- -------- ------
(UNAUDITED)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................................... $ 9.83 $ 10.53 $ 9.98
------- ------- -------
INCOME FROM INVESTMENT OPERATIONS:
Investment income...................................................... .35 .68 .685
Expenses............................................................... (.09) (.17) (.175)
------- ------- -------
Net investment income................................................... .26 .51 .51
Net realized and unrealized gains or losses on securities............... .1485 (.7195) .564
------- ------- -------
Total from investment operations........................................ .4085 (.2095) 1.074
------- ------- -------
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (.2585) (.4905) (.501)
Excess of book-basis net investment income(3).......................... -- -- (.023)
------- ------- -------
Total distributions..................................................... (.2585) (.4905) (.524)
Net asset value, end of period.......................................... $ 9.98 $ 9.83 $ 10.53
======= ======= =======
TOTAL RETURN(5)......................................................... 4.25% (2.13%) 11.15%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................................... $ 39.1 $ 37.2 $ 22.1
Ratios to average net assets (annualized)
Expenses............................................................... 1.74% 1.72% 1.71%
Net investment income.................................................. 5.42% 5.00% 4.96%
Portfolio turnover rate................................................. 2% 6% 3%
<CAPTION>
CLASS C
------------------------------------------------------
AUGUST 30,
YEAR 1993(6)
ENDED THROUGH
SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30,
MARCH 31, 1995 1994(2) 1993(2)
---------------- ------------- -----------------
(UNAUDITED)
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.................................... $ 9.83 $10.54 $ 10.53
------- ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Investment income...................................................... .35 .69 .05
Expenses............................................................... (.09) (.18) (.015)
------- ------ -------
Net investment income................................................... .26 .51 .035
Net realized and unrealized gains or losses on securities............... .1585 (.7295) .061
------- ------ -------
Total from investment operations........................................ (.4185) (.2195) .096
------- ------ -------
LESS DISTRIBUTIONS FROM:
Net investment income.................................................. (.2585) (.4905) (.007)
Excess of book-basis net investment income(3).......................... -- -- (.079)
------- ------ -------
Total distributions..................................................... (.2585) (.4905) (.086)
Net asset value, end of period.......................................... $ 9.99 $ 9.83 $ 10.54
======= ====== =======
TOTAL RETURN(5)......................................................... 4.25% (2.03%) .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).................................... $ 7.9 $ 8.0 $ 1.3
Ratios to average net assets (annualized)
Expenses............................................................... 1.74% 1.72% 1.69%
Net investment income.................................................. 5.42% 5.03% 4.25%
Portfolio turnover rate................................................. 2% 6% 3%
</TABLE>
(1) Per share amounts for 1991 through 1985 are adjusted to reflect a 2 for 1
stock split effected July 26, 1991. Additionally, in 1991, the Fund adopted
for financial reporting purposes a method of accounting for debt discounts
and premiums which is the same as is used for federal income tax reporting.
The effect of the change, on a pro forma basis, would have been to increase
net investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amounts of $.01, $.01, $.02, $.01 and
$(.01) for the years 1990 to 1986, respectively. Similarly, the ratios of
net investment income to average net assets would have been 6.94%, 7.17%,
7.71%, 7.37% and 8.02%, respectively. For the year 1985, the effect of the
change in the accounting method was immaterial.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of Income,
Capital Gain and Return of Capital Distributions by Investment Companies.
Prior year financial information was not restated.
(4) Sales of Class B commenced September 29, 1992, at a net asset value of
$10.00 per share and at year end, the net asset value was $9.98 per share.
The decrease in net asset value was due principally to a dividend of $0.52
per share. Other financial highlights for Class B shares for this short
period are not meaningful, and therefore not presented.
(5) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(6) Commencement of offering of sales.
10
<PAGE> 11
- ------------------------------------------------------------------------------
THE FUND
- ------------------------------------------------------------------------------
The Fund is an open-end, diversified management investment company. This type
of company is commonly known as a mutual fund. A mutual fund provides, for those
who have similar investment goals, a practical and convenient way to invest in a
diversified portfolio of securities by combining their resources in an effort to
achieve such goals.
Fourteen Trustees have the responsibility for overseeing the affairs of the
Fund. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines the
investment of the Fund's assets, provides administrative services and manages
the Fund's business and affairs. The Adviser together with its predecessors, has
been in the investment advisory business since 1926.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
- ------------------------------------------------------------------------------
The Fund's objective is to provide as high a level of current interest income
exempt from federal income tax as is consistent with the preservation of
capital. This limitation could result in a lesser level of interest income than
that of funds willing to incur greater risk of capital. Because the value of and
yield on Municipal Bonds fluctuate, there can be no assurance that the Fund's
objective will be achieved.
The Fund seeks to achieve its objective by investing in a diversified
portfolio of obligations issued by or on behalf of states, territories or
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, the interest from which,
in the opinion of bond counsel for the issuer, is exempt from federal income
tax. See "Municipal Bonds." Under normal circumstances, at least 80% of the
assets of the Fund are invested in Municipal Bonds which are exempt from federal
income tax. This is a fundamental policy and may not be changed without the
approval of at least a majority of the outstanding shares of the Fund. The Fund
does not independently evaluate the tax-exempt status of the Municipal Bonds in
which it invests. The Fund invests principally in Municipal Bonds rated at the
time of purchase within the four highest grades assigned by Moody's or S&P, or
which, if non-rated, is in the Adviser's opinion of comparable quality. The Fund
may not acquire any Municipal Bond which is rated below A by Moody's and S&P or
which is non-rated if immediately after and as a result of such purchase such
Bonds would constitute more than 50% of the Fund's total assets. The Fund may
not acquire any Municipal Bond which is rated below Baa by Moody's and below BBB
by S&P, or which, if non-rated, is in the opinion of the Adviser of comparable
quality, if immediately after and as a result of such purchase such Bonds would
constitute more than 20% of the Fund's total assets. The Fund may not, however,
purchase any Municipal Bond rated below B by
11
<PAGE> 12
Moody's and S&P or any non-rated Municipal Bond considered by the Adviser to be
of comparable quality. Ratings at the time of purchase determine which
securities may be acquired, and a subsequent reduction in rating does not
require the Fund to dispose of a security. Because investment in lower-rated
securities involves greater investment risks, achievement of the Fund's
investment objectives may be more dependent on the Adviser's credit analysis
than would be the case if the Fund invested only in higher-rated securities.
Non-rated Municipal Bonds are not necessarily of lower quality than rated
Municipal Bonds, but the market for rated Municipal Bonds is often broader. The
Fund may seek to hedge against changes in interest rates through transactions in
listed futures contracts related to U.S. Government securities or based upon the
Bond Buyers Municipal Bond Index and options thereon. See "Investment
Practices -- Futures Contracts and Related Options."
During the fiscal year ended September 30, 1994, the average percentage of the
Fund's assets invested in Municipal Bonds within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the non-rated debt
securities, determined on a dollar weighted average, were as follows:
<TABLE>
<S> <C>
AAA/Aaa............................................. 20.98%
AA/Aa............................................... 16.74%
A/A................................................. 28.99%
BBB/Baa............................................. 11.13%
BB/Ba............................................... 1.16%
CCC/Caa............................................. .63%
*Non-rated.......................................... 14.37%
Other net assets.................................... 6.00%
--------
Total net assets................................ 100%
</TABLE>
- ---------------
* The non-rated debt securities as a percentage of total net assets were
considered by the Adviser to be comparable to securities rated by Moody's as
follows: AAA - .17%, BBB - 10.08%, BB - 3.68% and B - .44%.
Variations in the quality and maturity of the Fund's portfolio investments can
be expected to affect the Fund's yield and the degree of market and credit risk
to which the Fund is subject. Municipal Bonds rated BBB by S&P or Baa by Moody's
may have speculative characteristics so that changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than in the case of higher grade Municipal
Bonds. The Fund maintains the flexibility to invest up to 20% of its total
assets in Municipal Bonds rated Ba or B by Moody's or BB or B by S&P. Municipal
Bonds rated Ba by Moody's are judged to have speculative elements so that their
future cannot be considered as well assured. Municipal Bonds rated B by Moody's
are considered generally to lack characteristics of a desirable investment in
that assurance of interest and principal payments or maintenance of other terms
of the contract over any long period of time may be small. Additional risks of
investing in
12
<PAGE> 13
lower-rated Municipal Bonds are described in the Statement of Additional
Information which includes an appendix describing Municipal Bond ratings.
Generally, Municipal Bonds with longer maturities tend to produce higher yields
and are subject to greater market fluctuations as a result of changes in
interest rates than Municipal Bonds with shorter maturities and lower yields.
The market value of Municipal Bonds generally rises when interest rates decline
and falls when interest rates rise. Generally, lower-rated Municipal Bonds
provide a higher yield than higher-rated Municipal Bonds of similar maturity but
are subject to greater credit risk. The Fund is not limited as to the maturities
of the Municipal Bonds in which it invests. Such securities may have remaining
maturities of up to 30 years or more. The average maturity, which may vary from
time to time, of the Municipal Bonds owned by the Fund on September 30, 1994,
was 20.32 years.
On a temporary defensive basis, due to market conditions or pending investment
in Municipal Bonds, the Fund may hold temporary investments ("Temporary
Investments") consisting of short term municipal notes rated MIG 1 through MIG 4
by Moody's or SP-1 or SP-2 by S&P; variable rate demand notes rated VMIG 1 or
VMIG 2; tax-exempt commercial paper rated P-1 or P-2 in the case of Moody's or
A-1 or A-2 by S&P; securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities; certificates of deposit of domestic banks with
assets of $500 million or more and having deposits insured by the Federal
Deposit Insurance Corporation; and shares of tax-exempt money market investment
companies. See "Investment Practices -- Money Market Investment Companies."
Temporary Investments may also include repurchase agreements collateralized by
Municipal Bonds or by any of the Temporary Investments described above,
provided, however, that no more than 15% of the Fund's net assets at the time of
purchase may be invested in repurchase agreements which do not mature within
seven days. Interest income from certain Temporary Investments may be taxable to
shareholders as ordinary income. See "Distributions from the Fund" and "Tax
Status". The Fund generally invests at least 90% of its assets in securities,
the income from which is exempt from regular federal income tax and at least 80%
of its assets in securities, the income from which is exempt from both such tax
and the federal alternative minimum tax. As a temporary defensive measure during
times of adverse market conditions, up to 50% of the Fund's assets may be
invested in such Temporary Investments.
The Fund may invest up to 15% of its net assets in illiquid securities which
include Municipal Bonds issued in limited placements under which the Fund
represents that it is purchasing for investment purposes only, repurchase
agreements maturing in more than seven days and other securities subject to
legal or contractual restrictions on resale. Municipal Bonds acquired in limited
placements generally may be resold only in a privately negotiated transaction to
one or more other institutional investors. Such limitation could result in the
Fund's inability to realize
13
<PAGE> 14
a favorable price upon disposition, and in some cases might make disposition of
such securities at the time desired by the Fund impossible. The 15% limitation
applies at the time the purchase commitment is made. See "Investment Practices
-- Repurchase Agreements." Although the Fund may invest up to 15% of its net
assets in securities subject to restrictions on resale or for which there is no
readily available market, the Fund shall not invest in such securities in excess
of ten percent of its net assets without prior approval of the Trustees.
- ------------------------------------------------------------------------------
MUNICIPAL BONDS
- ------------------------------------------------------------------------------
Municipal Bonds include debt obligations of a state, territory or a possession
of the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities, issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. Certain types of Municipal Bonds are
issued to obtain funding for privately operated facilities.
Many new issues of Municipal Bonds are sold on a "when-issued" basis. While
the Fund has ownership rights to the Bonds, the Fund does not have to pay for
them until they are delivered, normally 15 to 45 days later. To meet that
payment obligation, the Fund sets aside with the custodian sufficient cash or
securities equal to the amount that will be due. See "Investment
Practices -- Delayed Delivery and When-Issued Securities."
The yields of Municipal Bonds depend on, among other things, general money
market conditions, general conditions of the Municipal Bond market, size of a
particular offering, the maturity of the obligation and rating of the issue. The
ratings of Moody's and S&P represent their opinions of the quality of the
Municipal Bonds they undertake to rate. It should be emphasized, however, that
ratings are general and are not absolute standards of quality. Consequently,
Municipal Bonds with the same maturity, coupon and rating may have different
yields while Municipal Bonds of the same maturity and coupon with different
ratings may have the same yield. A description of the ratings is included in the
Statement of Additional Information.
Among the various types of Municipal Bonds are general obligation bonds,
revenue or special obligation bonds, industrial development bonds, pollution
control bonds, variable rate demand notes, and short-term tax-exempt municipal
obligations such as tax anticipation notes.
14
<PAGE> 15
General obligation bonds are backed by the taxing power of the issuing
municipality. Revenue bonds are backed by the revenues of a project or facility
- -- tolls from a toll-bridge, for example. Industrial development revenue bonds
are a specific type of revenue bond backed by the credit and security of a
private user. The Fund's ability to achieve its objective depends to a great
extent on the ability of these various issuers to meet their scheduled payments
of principal and interest.
The Fund considers investments in tax-exempt Municipal Bonds not to be subject
to concentration policies and may invest a relatively high percentage of its
assets in Municipal Bonds issued by entities having similar characteristics. The
issuers may be located in the same geographic area or may pay their interest
obligations from revenue of similar projects such as hospitals, utility systems
and housing finance agencies. This may make the Fund's investments more
susceptible to similar economic, political or regulatory occurrences. As the
similarity in issuers increases, the potential for fluctuation in the Fund's per
share net asset value also increases. The Fund may invest more than 25% of its
total assets in industrial development revenue bonds, but it does not intend to
invest more than 25% of its assets in industrial development revenue bonds
issued for companies in the same industry or state. Sizeable investments in such
obligations could involve an increased risk to the Fund should any of such
issuers of any such related projects or facilities experience financial
difficulties.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on Municipal Bonds. It may be expected that similar proposals may be
introduced in the future. If any such proposals were to be enacted, the ability
of the Fund to pay "exempt-interest" dividends may be adversely affected and the
Fund would re-evaluate its investment objective and policies and consider
changes in its structure.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements with
domestic banks or broker-dealers in order to earn a return on temporarily
available cash. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and that 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. In the event of the
bankruptcy of the seller of a repurchase agreement, the Fund could experience
delays in liquidating the underlying securities, and the Fund could incur a loss
if the value of the underlying securities declines. The Fund will not invest in
repurchase agreements maturing in more than seven days if any such investment,
together with any other illiquid
15
<PAGE> 16
securities held by the Fund, exceeds 15% of the value of its net assets. In the
event of the bankruptcy or other default of a seller of a repurchase agreement,
the Fund could experience both delays in liquidating the underlying securities
and loss including: (a) possible decline in the value of the underlying security
during the period while the Fund seeks to enforce its rights thereto, (b)
possible lack of access to income on the underlying security during this period,
and (c) expenses of enforcing its rights.
For the purpose of investing in repurchase agreements, the Adviser may
aggregate the cash that substantially all of the funds advised or subadvised by
the Adviser would otherwise invest separately into a joint account. The cash in
the joint account is then invested and the funds that contributed to the joint
account share pro rata in the net revenue generated. The Adviser believes that
the joint account produces greater efficiencies and economies of scale that may
contribute to reduced transaction costs, higher returns, higher quality
investments and greater diversity of investments for the Fund than would be
available to the Fund investing separately. The manner in which the joint
account is managed is subject to conditions set forth in the SEC order obtained
by the Fund authorizing this practice, which conditions are designed to ensure
the fair administration of the joint account and to protect the amounts in that
account.
VARIABLE RATE DEMAND NOTES. Variable rate demand notes ("VRDNs") are tax-
exempt obligations which contain a floating or variable interest rate adjustment
formula and which are subject to an unconditional right of demand to receive
payment of the principal balance plus accrued interest either at any time or at
specified intervals not exceeding one year and in either case upon no more than
seven days notice. The interest rates are adjustable at intervals ranging from
daily ("floating rate") to up to one year to some prevailing market rate for
similar investments, such adjustment formula being calculated to maintain the
market value of the VRDN at approximately the par value of the VRDN upon the
adjustment date. The adjustments are typically based upon the prime rate of a
bank or some other appropriate interest rate adjustment index.
The Fund may also invest in VRDNs in the form of participation interests
("Participating VRDNs") in variable rate tax-exempt obligations held by a
financial institution, typically a commercial bank ("institution").
Participating VRDNs provide the Fund with a specified undivided interest (up to
100%) in the underlying obligation and the right to demand payment of the unpaid
principal balance plus accrued interest on the Participating VRDNs from the
institution upon a specified number of days' notice, not to exceed seven days.
The Fund has an undivided interest in the underlying obligation and thus
participates on the same basis as the institution in such obligation except that
the institution typically retains fees out of the interest paid on the
obligation for servicing the obligation and issuing the repurchase commitment.
16
<PAGE> 17
STAND-BY COMMITMENTS. The Fund may acquire "stand-by commitments" with respect
to Municipal Securities held by it. Under a "stand-by commitment," a bank or
dealer from which Municipal Securities are acquired agrees to purchase from the
Fund, at the Fund's option, the Municipal Securities at a specified price. Such
commitments are sometimes called "liquidity puts."
The amount payable to the Fund upon its exercise of a "stand-by commitment" is
normally (i) the Fund's acquisition cost of the Municipal Securities (excluding
any accrued interest which the Fund paid on their acquisition), less any
amortized market premium or plus any amortized market or original issue discount
during the period the Fund owned the securities, plus (ii) all interest accrued
on the securities since the last interest payment date during that period.
"Stand-by commitments" generally can be acquired when the remaining maturity of
the underlying Municipal Securities is not greater than one year, and are
exercisable by the Fund at any time before the maturity of such obligations.
The Fund's right to exercise "stand-by commitments" is unconditional and
unqualified. A "stand-by commitment" generally is not transferable by the Fund,
although the Fund can sell the underlying Municipal Securities to a third party
at any time.
The Fund expects that "stand-by commitments" will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for a "stand-by commitment" either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to the commitment (thus reducing the yield-to-maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding "stand-by commitments" held in the Fund will not exceed
one half of one percent of the value of the Fund's total assets calculated
immediately after each "stand-by commitment" is acquired. The Fund intends to
enter into "stand-by commitments" only with banks and dealers which, in the
Adviser's opinion, present minimal credit risks.
The Fund would acquire "stand-by commitments" solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes. The acquisition of a "stand-by commitment" would not affect the
valuation of the underlying Municipal Securities which would continue to be
valued in accordance with the method of valuation employed for the Fund in which
they are held. "Stand-by commitments" acquired by the Fund would be valued at
zero in determining net asset value. Where the Fund paid any consideration
directly or indirectly for a "stand-by commitment," its costs would be reflected
as unrealized depreciation for the period during which the commitment was held
by the Fund.
DELAYED DELIVERY AND WHEN-ISSUED SECURITIES. Municipal Bonds may at times be
purchased or sold on a delayed delivery or a when-issued basis. These
transactions arise when securities are purchased or sold by the Fund with
payment and
17
<PAGE> 18
delivery taking place in the future, often a month or more after the purchase.
The payment obligation and the interest rate are each fixed at the time the Fund
enters into the commitment. The Fund will only make commitments to purchase such
securities with the intention of actually acquiring the securities, but the Fund
may sell these securities prior to settlement date if it is deemed advisable.
Purchasing Municipal Bonds on a when-issued basis involves the risk that the
yield available in the market when the delivery takes place may actually be
higher than those obtained in the transaction itself; if yields so increase, the
value of the when-issued obligation will generally decrease. The Fund will
maintain a separate account at its custodian bank consisting of cash or liquid
high-grade debt obligations (valued on a daily basis) equal at all times to the
amount of any when-issued commitment.
MONEY MARKET INVESTMENT COMPANIES. The Fund may invest in shares of open-end
investment companies which are tax-exempt money market funds. Such investment
would not exceed three percent of the total outstanding voting stock of the
acquired company; five percent of the value of the total assets of the Fund; or
ten percent of the total assets of the acquired company as held by the Fund and
all Van Kampen American Capital funds. When the Fund invests in a tax-exempt
money market fund, the Adviser will reduce its advisory fee by the amount of any
investment advisory and administrative services fees paid to the investment
adviser of the money market fund.
FUTURES CONTRACTS AND RELATED OPTIONS. The investment policies of the Fund
permit the Fund to engage in transactions in listed futures contracts and
related options. Such transactions may be in listed futures contracts based upon
The Bond Buyer Municipal Bond Index (the "Index"), a price weighted measure of
the market value of 40 large-sized, recent issues of tax-exempt bonds or in
listed contracts based on U.S. Government securities.
Futures contracts and options thereon may be used for defensive hedging or
anticipatory hedging purposes, depending upon the composition of the Fund's
portfolio and the Adviser's expectations concerning the securities markets. See
the Statement of Additional Information for discussion of futures contracts and
related options.
Potential Risks of Futures Contracts and Related Options. The purchase and
sale of futures contracts and related options involve risks different from those
involved with direct investments in securities. While utilization of futures
contracts and related options may be advantageous to the Fund, if the Adviser is
not successful in employing such instruments in managing the Fund's investments,
the Fund's performance will be worse than if the Fund did not make such
investments. In addition, the Fund would pay commissions and other costs in
connection with such investments, which may increase the Fund's expenses and
reduce its return. The Fund may not purchase or sell futures contracts or
related options for which the aggregate initial margin and premiums exceed five
percent of the fair market value
18
<PAGE> 19
of the Fund's assets. In order to prevent leverage in connection with the
purchase of futures contracts or call options thereon by the Fund, an amount of
cash, cash equivalent or liquid high-grade debt securities equal to the market
value of the obligation under the futures contracts or options (less any related
margin deposits) will be maintained in a segregated account with the custodian.
PORTFOLIO TURNOVER. The Fund may purchase or sell securities without regard to
the length of time the security has been held to take advantage of short-term
differentials in bond yields consistent with its objective of seeking tax-exempt
interest income. The Fund engages in short-term trading only if the anticipated
benefits are expected by the Adviser to exceed the transaction costs. The Fund's
annual portfolio turnover rate is shown in the "Financial Highlights" table
shown herein. Since portfolio changes are made in light of market and other
conditions, the turnover rate may vary greatly from year to year. A 100%
turnover rate would occur, for example, if all the securities in the Fund's
portfolio were replaced once a year. A 100% turnover rate is substantially
greater than that of many other investment companies. Higher portfolio turnover
involves higher transaction costs and may result in realization of short-term
capital gains if securities are held for one year or less. Such gains are
taxable to shareholders as ordinary income except to the extent such gains are
offset by capital losses.
PORTFOLIO TRANSACTIONS AND BROKERAGE PRACTICES. The Adviser is responsible for
the placement of orders for the purchase and sale of portfolio securities for
the Fund and the negotiation of the price of such transactions. The Municipal
Bonds in which the Fund invests are traded in the over-the-counter market.
Municipal Bonds are generally traded on a net basis and do not normally involve
any brokerage commissions. The cost of portfolio securities transactions of the
Fund primarily consists of dealer or underwriter spreads. The Adviser is
authorized to place portfolio transactions with brokerage firms participating in
the distribution of shares of the Fund and other Van Kampen American Capital
mutual funds if it reasonably believes that the quality of the execution and the
commission are comparable to that available from other qualified firms. The
Adviser is authorized to place portfolio transactions with brokerage firms that
provide it with investment and research information and to pay higher than the
lowest available commission if the Adviser determines that the cost is
reasonable in relation to the overall services provided. The information
received may be used by the Adviser in managing the assets of other advisory
accounts as well as in the management of the assets of the Fund.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
which, like the investment objective, may not be changed without approval by a
19
<PAGE> 20
majority (as defined in the 1940 Act) vote of the Fund's shareholders. These
restrictions provide, among other things, that the Fund may not:
1. Invest in securities other than Municipal Bonds and Temporary Investments
(as defined herein), listed futures contracts related to U.S. Government
securities, Municipal Bonds or to an index of Municipal Bonds, and options
on such contracts.
2. Invest more than five percent of its total assets at market value at the
time of purchase in the securities of any one issuer (other than
obligations of the United States Government or of any instrumentalities
thereof).
3. Borrow money, except from banks for temporary or emergency purposes, such
borrowing not to exceed five percent of its total assets at market value at
the time of borrowing. Any such borrowing may be secured provided that not
more than ten percent of the total assets at market value at the time of
pledging may be used as security for such borrowings. Notwithstanding the
foregoing, the Fund may engage in transactions in options, futures
contracts and related options, segregate or deposit assets to cover or
secure options written, and make margin deposits and payments in connection
with futures contracts and related options.
4. Purchase any Municipal Bond rated below Baa by Moody's and below BBB by
S&P, or which, if non-rated, is in the opinion of the Adviser of comparable
quality, if immediately after and as a result of such purchase such Bonds
would constitute more than 20% of the Fund's total assets.
5. Purchase any Municipal Bond rated below A by Moody's and S&P, or which is
non-rated, if immediately after and as a result of such purchase such Bonds
would constitute more than 50% of the Fund's total assets.
6. Purchase any Municipal Bond rated below B by Moody's and S&P or any
non-rated Municipal Bonds considered by the Adviser to be of comparable
quality.
Each state and each political subdivision, agency or instrumentality of such
state, and each multi-state agency of which a state is a member is a separate
"issuer" as that term is used in this Prospectus. The non-government user of
facilities financed by industrial development bonds is also considered as a
separate issuer. If, however, a security is guaranteed by another entity,
securities issued or guaranteed by such guaranteeing entity shall be limited to
ten percent of the value of the Fund's total assets.
20
<PAGE> 21
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INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Van Kampen American Capital is a
diversified asset management company with more than two million retail investor
accounts, extensive capabilities for managing institutional portfolios, and
nearly $50 billion under management or supervision. Van Kampen American
Capital's more than 40 open-end and 38 closed-end funds and more than 2,700 unit
investment trusts are professionally distributed by leading financial advisers
nationwide.
Van Kampen American Capital Distributors, Inc., the distributor of the Fund
and the sponsor of the funds mentioned above, is also a wholly owned subsidiary
of Van Kampen American Capital. Van Kampen American Capital is a wholly owned
subsidiary of VK/AC Holding, Inc. VK/AC Holding, Inc. is controlled, through the
ownership of a substantial majority of its common stock, by The Clayton &
Dubilier Private Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut
limited partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc., a
New York based private investment firm. The General Partner of C&D L.P. is
Clayton & Dubilier Associates IV Limited Partnership ("C&D Associates L.P.").
The general partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles
Ames, William A. Barbe, Alberto Cribiore, Donald J. Gogel , Leon J. Hendrix,
Jr., Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of
Clayton, Dubilier & Rice, Inc. In addition, certain officers, directors and
employees of Van Kampen American Capital own, in the aggregate, not more than
seven percent of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 11% of the
common stock of VK/AC Holding, Inc. Presently, and after giving effect to the
exercise of such options, no officer or trustee of the Fund owns or would own
five percent or more of the common stock of VK/AC Holding, Inc.
ADVISORY AGREEMENT. The Fund retains the Adviser to manage the investment of
its assets and to place orders for the purchase and sale of its portfolio
securities. Under an investment advisory agreement between the Adviser and the
Fund (the "Advisory Agreement"), the Fund pays the Adviser an annual fee of
0.50% of the Fund's average net assets. The fee is computed daily and payable
monthly. Under the Advisory Agreement, the Fund also reimburses the Adviser for
the cost of the Fund's accounting services, which include maintaining its
financial books and records and calculating its daily net asset value. Operating
expenses paid by the Fund include shareholder service agency fees, service fees,
distribution fees, custodian fees, legal and accounting fees, the costs of
reports and proxies to shareholders, trustees' fees, and all other business
expenses not specifically assumed by the Adviser. Advisory (management) fee, and
total operating expense,
21
<PAGE> 22
ratios are shown under the caption "Annual Fund Operating Expenses and Example"
herein.
From time to time as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Fund's expenses by reducing the
fees payable to them to the extent of, or bearing expenses in excess of, such
limitations as they may establish.
The Adviser may utilize, at its own expense, credit analysis, research and
trading support services provided by its affiliate, Van Kampen American Capital
Investment Advisory Corp.
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit directors/trustees, officers and
employees to buy and sell securities for their personal accounts subject to
certain restrictions. Persons with access to certain sensitive information are
subject to pre-clearance and other procedures designed to prevent conflicts of
interest.
PORTFOLIO MANAGEMENT. David C. Johnson is primarily responsible for the day-
to-day management of the Fund's investment portfolio since April 3, 1995. Mr.
Johnson is Vice President of the Fund and Vice President -- Portfolio Manager of
the Adviser. Mr. Johnson has been employed by Van Kampen American Capital
Investment Advisory Corp., an affiliate of the Adviser, for the last five years.
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are sold at net asset value plus an initial
maximum sales charge of up to 4.75% of the offering price. Investments of $1
million or more are not subject to any sales charge at the time of purchase, but
a contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Class A shares are subject to
an ongoing service fee at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Certain purchases
of Class A shares qualify for reduced initial sales charges. See "Purchase of
Shares -- Class A Shares."
CLASS B SHARES. Class B shares are sold at net asset value and are subject to
a deferred sales charge if they are redeemed within five years of purchase.
Class B shares are subject to an ongoing service fee at an annual rate of up to
0.25% of the Fund's aggregate average daily net assets attributable to the Class
B shares and an
22
<PAGE> 23
ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class B shares. Class B
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
B shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
B Shares." Class B shares will automatically convert to Class A shares six years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class B shares.
CLASS C SHARES. Class C shares are sold at net asset value and are subject to
a deferred sales charge if redeemed within one year of purchase. Class C shares
are subject to an ongoing service fee at an annual rate of up to 0.25% of the
Fund's aggregate average daily net assets attributable to the Class C shares and
an ongoing distribution fee at an annual rate of up to 0.75% of the Fund's
aggregate average daily net assets attributable to the Class C shares. Class C
shares enjoy the benefit of permitting all of the investor's dollars to work
from the time the investment is made. The ongoing distribution fee paid by Class
C shares will cause such shares to have a higher expense ratio and to pay lower
dividends than those related to Class A shares. See "Purchase of Shares -- Class
C Shares." Class C shares will convert automatically to Class A shares ten years
after the end of the calendar month in which the shareholder's order to purchase
was accepted. See "Conversion Feature" herein for discussion on applicability of
the conversion feature to Class C shares.
CONVERSION FEATURE. Class B shares and Class C shares will automatically
convert to Class A shares six years or ten years, respectively, after the end of
the calendar month in which the shares were purchased and will no longer be
subject to the distribution fee. Such conversion will be on the basis of the
relative net asset values per share, without the imposition of any sales load,
fee or other charge. The purpose of the conversion feature is to relieve the
holders of the Class B shares and Class C shares that have been outstanding for
a period of time sufficient for the Distributor to have been substantially
compensated for distribution expenses related to the Class B shares or Class C
shares as the case may be, from the burden of the ongoing distribution fee.
For purposes of conversion to Class A, shares purchased through the
reinvestment of dividends and distributions paid on Class B shares and Class C
shares in a shareholder's Fund account will be considered to be held in a
separate sub-account. Each time any Class B shares or Class C shares in the
shareholder's Fund account (other than those in the sub-account) convert to
Class A, an equal pro rata portion of the Class B shares or Class C shares in
the sub-account will also convert to Class A.
23
<PAGE> 24
The conversion of Class B shares and Class C shares to Class A shares is
subject to the continuing availability of an opinion of counsel to the effect
that (i) the assessment of the distribution fee and higher transfer agency costs
with respect to Class B shares and Class C shares does not result in the Fund's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code of 1986, as amended (the "Code"), and (ii) the conversion
of shares does not constitute a taxable event under federal income tax law. The
conversion of Class B shares and Class C shares may be suspended if such an
opinion is no longer available. In that event, no further conversions of Class B
shares or Class C shares would occur, and shares might continue to be subject to
the distribution fee for an indefinite period which may extend beyond the period
ending six years or ten years, respectively, after the end of the calendar month
in which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. In deciding which class of shares to purchase,
investors should take into consideration their investment goals, present and
anticipated purchase amounts, time horizons and temperaments. Investors should
consider whether, during the anticipated life of their investment in the Fund,
the accumulated distribution fees and contingent deferred sales charges on Class
B shares or Class C shares prior to conversion would be less than the initial
sales charge on Class A shares purchased at the same time, and to what extent
such differential would be offset by the higher dividends per share of Class A
shares. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares. In this regard, Class A shares may
be more beneficial to the investor who qualifies for reduced initial sales
charges or purchases at net asset value, as described herein under "Purchase of
Shares -- Class A Shares." For these reasons, the Distributor will reject any
order of more than $500,000 for Class B shares or any order of more than $1
million for Class C shares.
Class A shares are not subject to an ongoing distribution fee and,
accordingly, receive correspondingly higher dividends per share. However,
because initial sales charges are deducted at the time of purchase for accounts
under $1 million, investors in Class A shares do not have all their funds
invested initially and, therefore, initially own fewer shares. Other investors
might determine that it is more advantageous to purchase either Class B shares
or Class C shares and have all their funds invested initially, although
remaining subject to a contingent deferred sales charge. Ongoing distribution
fees on Class B shares and Class C shares will be offset to the extent of the
additional funds originally invested and any return realized on those funds.
However, there can be no assurance as to the return, if any, which will be
realized on such additional funds. For investments held for ten years or more,
the relative value upon liquidation of the three classes tends to favor Class A
or Class B shares, rather than Class C shares.
24
<PAGE> 25
Class A shares may be appropriate for investors who prefer to pay the sales
charge up front, want to take advantage of the reduced sales charges available
on larger investments, wish to maximize their current income from the start,
prefer not to pay redemption charges and/or have a longer-term investment
horizon. In addition, the check writing privilege is only available for Class A
shares (see "Shareholder Services -- Shareholder Services Applicable to Class A
Shareholders Only -- Check Writing Privilege"). Class B shares may be
appropriate for investors who wish to avoid a front-end sales charge, put 100%
of their investment dollars to work immediately, and/or have a longer-term
investment horizon. Class C shares may be appropriate for investors who wish to
avoid a front-end sales charge, put 100% of their investment dollars to work
immediately, have a shorter-term investment horizon and/or desire a short
contingent deferred sales charge schedule.
The distribution expenses incurred by the Distributor in connection with the
sale of the shares will be reimbursed, in the case of Class A shares, from the
proceeds of the initial sales charge and, in the case of Class B shares and
Class C shares, from the proceeds of the ongoing distribution fee and any
contingent deferred sales charge incurred upon redemption within five years or
one year, respectively, of purchase. Sales personnel of broker-dealers
distributing the Fund's shares and other persons entitled to receive
compensation for selling such shares may receive differing compensation for
selling such shares. INVESTORS SHOULD UNDERSTAND THAT THE PURPOSE AND FUNCTION
OF THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH
RESPECT TO THE CLASS B SHARES AND CLASS C SHARES ARE THE SAME AS THOSE OF THE
INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. See "Distribution Plans."
GENERAL. Dividends paid by the Fund with respect to Class A, Class B and Class
C shares will be calculated in the same manner at the same time on the same day,
except that the distribution fees and any incremental transfer agency costs
relating to Class B or Class C shares will be borne by the respective class. See
"Distributions from the Fund." Shares of the Fund may be exchanged, subject to
certain limitations, for shares of the same class of other mutual funds advised
by the Adviser. See "Shareholder Services -- Exchange Privilege."
The Trustees of the Fund have determined that currently no conflict of
interest exists between the classes of shares. On an ongoing basis, the Trustees
of the Fund, pursuant to their fiduciary duties under the Investment Company Act
of 1940 (the "1940 Act") and state laws, will seek to ensure that no such
conflict arises.
25
<PAGE> 26
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
The Fund offers three classes of shares to the general public on a continuous
basis through the Distributor as principal underwriter, which is located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181. Shares are also offered
through members of the National Association of Securities Dealers, Inc. ("NASD")
who are acting as securities dealers ("dealers") and NASD members or eligible
non-NASD members who are acting as brokers or agents for investors ("brokers").
The term "dealers" and "brokers" are sometimes referred to herein as "authorized
dealers." Class A shares are sold with an initial sales charge; Class B shares
and Class C shares are sold without an initial sales charge and are subject to a
contingent deferred sales charge upon certain redemptions. See "Alternative
Sales Arrangements" for a discussion of factors to consider in selecting which
class of shares to purchase. Contact the Investor Services Department at (800)
421-5666 for further information and appropriate forms.
Initial investments must be at least $500 and subsequent investments must be
at least $25. Both minimums may be waived by the Distributor for plans involving
periodic investments. Shares of the Fund may be sold in foreign countries where
permissible. The Fund and the Distributor reserve the right to refuse any order
for the purchase of shares. The Fund also reserves the right to suspend the sale
of the Fund's shares in response to conditions in the securities markets or for
other reasons.
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanying this Prospectus
and forwarding the application, through the designated dealer, to the
shareholder service agent, ACCESS Investor Services, Inc., a wholly owned
subsidiary of Van Kampen American Capital ("ACCESS"). When purchasing shares of
the Fund, investors must specify whether the purchase is for Class A, Class B or
Class C shares.
Shares are offered at the next determined net asset value per share, plus a
front-end or contingent deferred sales charge depending on the method of
purchasing shares chosen by the investor, as shown in the tables herein. Net
asset value per share is determined once daily as of the close of trading on the
New York Stock Exchange (the "Exchange") (currently 4:00 p.m., New York time)
each day the Exchange is open. Net asset value per share for each class is
determined by dividing the value of the Fund's securities, cash and other assets
(including accrued interest) attributable to such class, less all liabilities
(including accrued expenses) attributa-
26
<PAGE> 27
ble to such class, by the total number of shares of the class outstanding. The
Fund's investments are valued by an independent pricing service.
Generally, the net asset values per share of the Class A, Class B and Class C
shares are expected to be substantially the same. Under certain circumstances,
however, the per share net asset values of the Class A, Class B and Class C
shares may differ from one another, reflecting the daily expense accruals of the
distribution and the higher transfer agency fees applicable with respect to the
Class B and Class C shares and the differential in the dividends paid on the
classes of shares. The price paid for shares purchased is based on the net asset
value next computed plus applicable Class A sales charges after an order is
received by a dealer provided such order is transmitted to the Distributor prior
to the Distributor's close of business on such day. Orders received by dealers
after the close of the Exchange are priced based on the next close provided they
are received by the Distributor prior to the Distributor's close of business on
such day. It is the responsibility of dealers to transmit orders received by
them to the Distributor so they will be received prior to such time. Orders of
less than $500 are mailed by the dealer and processed at the offering price next
calculated after acceptance by ACCESS.
Each class of shares represents an interest in the same portfolio of
investments of the Fund, has the same rights and is identical in all respects,
except that (i) Class B and Class C shares bear the expenses of the deferred
sales arrangement and any expenses (including the distribution fee and
incremental transfer agency costs) resulting from such sales arrangement, (ii)
generally, each class has exclusive voting rights with respect to approvals of
the Rule 12b-1 distribution plan pursuant to which its distribution fee and/or
service fee is paid which relate to a specific class, and (iii) Class B and
Class C shares are subject to a conversion feature. Each class has different
exchange privileges and certain different shareholder service options available.
See "Distribution Plans" and "Shareholder Services -- Exchange Privilege." The
net income attributable to Class B and Class C shares and the dividends payable
on Class B and Class C shares will be reduced by the amount of the distribution
fee and incremental expenses associated with such distribution fees. Sales
personnel of broker-dealers distributing the Fund's shares and other persons
entitled to receive compensation for selling such shares may receive differing
compensation for selling Class A, Class B or Class C shares.
Agreements are in place which provide, among other things and subject to
certain conditions, for certain favorable distribution arrangements for shares
of the Fund, with subsidiaries of The Travelers Inc.
The Distributor may from time to time implement programs under which a broker,
dealer or financial intermediary's sales force may be eligible to win nominal
awards for certain sales efforts or under which the Distributor will reallow to
any broker, dealer or financial intermediary that sponsors sales contests or
recognition programs conforming to criteria established by the Distributor, or
participates in
27
<PAGE> 28
sales programs sponsored by the Distributor, an amount not exceeding the total
applicable sales charges on the sales generated by the broker, dealer or
financial intermediaries at the public offering price during such programs.
Other programs provide, among other things and subject to certain conditions,
for certain favorable distribution arrangements for shares of the Fund. Also,
the Distributor in its discretion may from time to time, pursuant to objective
criteria established by the Distributor, pay fees to, and sponsor business
seminars for, qualifying brokers, dealers or financial intermediaries for
certain services or activities which are primarily intended to result in sales
of shares of the Fund. Fees may include payment for travel expenses, including
lodging, incurred in connection with trips taken by invited registered
representatives and members of their families to locations within or outside of
the United States for meetings or seminars of a business nature. Such fees paid
for such services and activities with respect to the Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of the Fund on an annual
basis. The Distributor may provide additional compensation to Edward D. Jones &
Co. or an affiliate thereof based on a combination of its sales of shares and
increases in assets under management. All of the foregoing payments are made by
the Distributor out of its own assets. These programs will not change the price
an investor will pay for shares or the amount that a Fund will receive from such
sale.
CLASS A SHARES
The public offering price of Class A shares is the next determined net asset
value plus a sales charge, as set forth below.
SALES CHARGE TABLE
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REALLOWED
AS % OF TO DEALERS
SIZE OF NET AMOUNT AS % OF (AS A % OF
INVESTMENT INVESTED OFFERING PRICE OFFERING PRICE)
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Less than $100,000.......................... 4.99% 4.75% 4.25%
$100,000 but less than $250,000............. 3.90% 3.75% 3.25%
$250,000 but less than $500,000............. 2.83% 2.75% 2.25%
$500,000 but less than $1,000,000........... 2.04% 2.00% 1.75%
$1,000,000 and over......................... * * *
- ------------------------------------------------------------------------------
</TABLE>
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of one percent in the event of certain redemptions
within one year of the purchase. The contingent deferred sales charge incurred
upon redemption is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for purchases of $1 million or more as follows:
one percent on sales to $2 million, plus 0.80% on the next million, plus 0.20%
on the next $2 million and 0.08% on the excess over $5 million.
28
<PAGE> 29
In addition to the reallowances from the applicable public offering price
described above, the Distributor may, from time to time, pay or allow additional
reallowances or promotional incentives, in the form of cash or other
compensation, to dealers that sell shares of the Fund. Dealers which are
reallowed all or substantially all of the sales charges may be deemed to be
underwriters for purposes of the Securities Act of 1933.
The Distributor may also pay financial institutions (which may include banks)
and other industry professionals that provide services to facilitate
transactions in shares of the Fund for their clients a transaction fee up to the
level of the reallowance allowable to dealers described above. Such financial
institutions, other industry professionals and dealers are hereinafter referred
to as "Service Organizations." Banks are currently prohibited under the
Glass-Steagall Act from providing certain underwriting or distribution services.
If banking firms were prohibited from acting in any capacity or providing any of
the described services, the Distributor would consider what action, if any,
would be appropriate. The Distributor does not believe that termination of a
relationship with a bank would result in any material adverse consequences to
the Fund. State securities laws regarding registration of banks and other
financial institutions may differ from the interpretations of federal law
expressed herein, and banks and other financial institutions may be required to
register as dealers pursuant to certain state laws.
QUANTITY DISCOUNTS
Investors purchasing Class A shares may under certain circumstances be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
A person eligible for a reduced sales charge includes an individual, their
spouse and minor children and any corporation, partnership or sole
proprietorship which is 100% owned, either alone or in combination, by any of
the foregoing; a trustee or other fiduciary purchasing for a single fiduciary
account, or a "company" as defined in Section 2(a)(8) of the 1940 Act.
As used herein, "Participating Funds" refers to all open-end investment
companies distributed by the Distributor other than Van Kampen American Capital
Money Market Fund ("VK Money Market"), Van Kampen American Capital Tax
29
<PAGE> 30
Free Money Fund ("VK Tax Free"), Van Kampen American Capital Reserve Fund
("Reserve") and The Govett Funds, Inc.
Volume Discounts. The size of investment shown in the preceding table applies
to the total dollar amount being invested by any person in shares of the Fund
alone, or in any combination of shares of the Fund and shares of other
Participating Funds, although other Participating Funds may have different sales
charges.
Cumulative Purchase Discount. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in shares of
the Participating Funds plus the current offering price of all shares of the
Participating Funds which have been previously purchased and are still owned.
Letter of Intent. A Letter of Intent provides an opportunity for an investor
to obtain a reduced sales charge by aggregating the investments over a 13-month
period to determine the sales charge as outlined in the table herein. The size
of investment shown in the preceding table also includes purchases of shares of
the Participating Funds over a 13-month period based on the total amount of
intended purchases plus the value of all shares of the Participating Funds
previously purchased and still owned. An investor may elect to compute the
13-month period starting up to 90 days before the date of execution of a Letter
of Intent. Each investment made during the period receives the reduced sales
charge applicable to the total amount of the investment goal. If the goal is not
achieved within the period, the investor must pay the difference between the
charges applicable to the purchases made and the charges previously paid. The
initial purchase must be for an amount equal to at least five percent of the
minimum total purchased amount of the level selected. If trades not initially
made under a Letter of Intent subsequently qualify for a lower sales charge
through the 90-day back-dating provisions, an adjustment will be made at the
expiration of the Letter of Intent to give effect to the lower charge. Such
adjustment in sales charge will be used to purchase additional shares for the
shareholder at the applicable discount category. Additional information is
contained in the application form accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
Unit Fund Reinvestment Programs. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the
30
<PAGE> 31
Fund, other Participating Funds, VK Money Market, VK Tax Free or Reserve with no
minimum initial or subsequent investment requirement, and with a lower sales
charge if the administrator of an investor's unit investment trust program meets
certain uniform criteria relating to cost savings by the Fund and the
Distributor. The total sales charge for all investments made from unit trust
distributions will be one percent of the offering price (1.01% of net asset
value). Of this amount, the Distributor will pay to the broker, dealer or
financial intermediary, if any, through which such participation in the
qualifying program was initiated 0.50% of the offering price as a dealer
concession or agency commission. Persons desiring more information with respect
to this program, including the applicable terms and conditions thereof, should
contact their securities broker or dealer or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide ACCESS with appropriate backup data
for each participating investor in a computerized format fully compatible with
ACCESS's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Fund reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Investment Advisory Corp. or John Govett & Co.
Limited and such persons' families and their beneficial accounts.
(2) Current or retired directors, officers and employees of VK/AC Holding,
Inc. and any of its subsidiaries, Clayton, Dubilier & Rice, Inc.,
employees of an investment subadviser to any fund described in (1) above
or an affiliate of such subadviser, and such persons' families and their
beneficial accounts.
(3) Directors, officers, employees and registered representatives of financial
institutions that have a selling group agreement with the Distributor and
31
<PAGE> 32
their spouses and minor children when purchasing for any accounts they
beneficially own, or, in the case of any such financial institution, when
purchasing for retirement plans for such institution's employees.
(4) Registered investment advisers, trust companies and bank trust departments
investing on their own behalf or on behalf of their clients provided that
the aggregate amount invested in the Fund alone, or any combination of
shares of the Fund and shares of other Participating Funds as described
herein under "Purchase of Shares -- Class A Shares -- Volume Discounts",
during the 13 month period commencing with the first investment pursuant
hereto which equals at least $1 million. The Distributor may pay Service
Organizations through which purchases are made an amount up to 0.50% of
the amount invested, over a twelve month period following such
transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to one percent for such purchases.
(6) Accounts as to which a bank or broker or broker-dealer charges an account
management fee ("wrap accounts"), provided the bank or broker-dealer has a
separate agreement with Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
The term "families" includes a person's spouse, minor children and
grandchildren, parents, and a person's spouse's parents.
Purchase orders made pursuant to clause (4) may be placed either through
authorized dealers as described above or directly with ACCESS by the investment
adviser, trust company or bank trust department, provided that ACCESS receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized dealer or financial institution
may charge a transaction fee for placing an order to purchase shares pursuant to
this provision or for placing a redemption order with respect to such shares.
Service Organizations will be paid a service fee as described herein under
"Distribution Plans" on purchases made as described in (3) through (8) above.
The Fund may terminate, or amend the terms of, offering shares of the Fund at
net asset value to such groups at any time.
32
<PAGE> 33
CLASS B SHARES
Class B shares are offered at the next determined net asset value. Class B
shares which are redeemed within five years of purchase are subject to a
contingent deferred sales charge at the rates set forth in the following table
charged as a percentage of the dollar amount subject thereto. The charge is
assessed on an amount equal to the lesser of the then current market value or
the cost of the shares being redeemed. Accordingly, no sales charge is imposed
on increases in net asset value above the initial purchase price. In addition,
no charge is assessed on shares derived from reinvestment of dividends or
capital gains distributions.
The amount of the contingent deferred sales charge, if any, varies depending
on the number of years from the time of payment for the purchase of Class B
shares until the time of redemption of such shares. Solely for purposes of
determining the number of years from the time of any payment for the purchase of
shares, all payments during a month are aggregated and deemed to have been made
on the last day of the month.
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT
DEFERRED
SALES
CHARGE
AS A
PERCENTAGE
OF
DOLLAR
AMOUNT
SUBJECT
TO
YEAR SINCE PURCHASE CHARGE
- ------------------------------------------------------------------------------
<S> <C>
First.............................................................. 4%
Second............................................................. 4%
Third.............................................................. 3%
Fourth............................................................. 2.5%
Fifth.............................................................. 1.5%
Sixth.............................................................. None
</TABLE>
- ------------------------------------------------------------------------------
In determining whether a contingent deferred sales charge is applicable to a
redemption, it is assumed that the redemption is first, of any shares in the
shareholder's Fund account that are not subject to a contingent deferred sales
charge, second, of shares held for over five years or shares acquired pursuant
to reinvestment of dividends or distributions and third, of shares held longest
during the five year period.
To provide an example, assume an investor purchased 100 shares at $10 per
share (at a cost of $1,000) and in the second year after purchase, the net asset
value per share is $12 and, during such time, the investor has acquired ten
additional shares upon dividend reinvestment. If at such time the investor makes
his or her first redemption of 50 shares (proceeds of $600), ten shares will not
be subject to charge because of dividend reinvestment. With respect to the
remaining 40 shares, the charge is applied only to the original cost of $10 per
share and not to the increase in net asset value of $2 per share. Therefore,
$400 of the $600 redemption proceeds is subject to a deferred sales charge at a
rate of four percent (the applicable rate in the second year after purchase).
33
<PAGE> 34
A commission or transaction fee of four percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class B shares of the Fund.
CLASS C SHARES
Class C shares are offered at the next determined net asset value. Class C
shares which are redeemed within the first year of purchase are subject to a
contingent deferred sales charge of one percent. The charge is assessed on an
amount equal to the lesser of the then current market value or the cost of the
shares being redeemed. Accordingly, no sales charge is imposed on increases in
net asset value above the initial purchase price. In addition, no charge is
assessed on shares derived from reinvestment of dividends or capital gains
distributions.
In determining whether a contingent deferred sales charge is applicable to a
redemption, the calculation is determined in the manner that results in the
lowest possible rate being charged. Therefore, it is assumed that the redemption
is first of any shares in the shareholder's Fund account that are not subject to
a contingent deferred sales charge and second, of shares held for more than one
year or shares acquired pursuant to reinvestment of dividends or distributions.
A commission or transaction fee of one percent of the purchase amount will be
paid to broker-dealers and other Service Organizations at the time of purchase.
Broker-dealers and other Service Organizations will also be paid ongoing
commissions and transaction fees of up to 0.75% of the average daily net assets
of the Fund's Class C shares for the second through tenth year after purchase.
Additionally, the Distributor may, from time to time, pay additional promotional
incentives, in the form of cash or other compensation, to Service Organizations
that sell Class C shares of the Fund.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares (i) following the death or disability (as defined in the Code) of
a shareholder, (ii) in connection with certain distributions from an IRA or
other retirement plan, (iii) pursuant to the Fund's systematic withdrawal plan
but limited to 12% annually of the initial value of the account, and (iv)
effected pursuant to the right of the Fund to liquidate a shareholder's account
as described herein under "Redemption of Shares." The contingent deferred sales
charge is also waived on redemptions of Class C shares as it relates to the
reinvestment of redemption proceeds in shares of the same class of the Fund
within 120 days after redemption. See the Statement of Additional Information
for further discussion of waiver provisions.
34
<PAGE> 35
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. The
following is a description of these services.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. Each shareholder has an investment account under which
shares are held by ACCESS. Except as described herein, after each share
transaction in an account, the shareholder receives a statement showing the
activity in the account. Each shareholder who has an account in certain of the
Participating Funds or Reserve, may receive statements quarterly from ACCESS
showing any reinvestments of dividends and capital gains distributions and any
other activity in the account since the preceding statement. Such shareholders
also will receive separate confirmations for each purchase or sale transaction
other than reinvestment of dividends and capital gains distributions and
systematic purchases or redemptions. Additions to an investment account may be
made at any time by purchasing shares through authorized investment dealers or
by mailing a check directly to ACCESS.
SHARE CERTIFICATES. As a rule, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof. In addition, if such certificates are lost the shareholder
must write to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box 418256,
Kansas City, MO 64141-9256, requesting an "affidavit of loss" and obtain a
Surety Bond in a form acceptable to ACCESS. On the date the letter is received
ACCESS will calculate no more than two percent of the net asset value of the
issued shares, and bill the party to whom the certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date. Unless the shareholder instructs otherwise, the reinvestment
plan is automatic. This instruction may be made by telephone by calling (800)
421-5666 ((800) 772-8889 for the hearing impaired) or in writing to ACCESS. The
investor may, on the initial application or prior to any declaration, instruct
that dividends be paid in cash and capital gains distributions be reinvested at
net asset value, or that both dividends and capital gains distributions be paid
in cash.
AUTOMATIC INVESTMENT PLAN. An automatic investment plan is available under
which a shareholder can authorize ACCESS to charge a bank account on a regular
35
<PAGE> 36
basis to invest pre-determined amounts in the Fund. Additional information is
available from the Distributor or authorized dealers.
AUTOMATED CLEARING HOUSE ("ACH") DEPOSITS. Holders of Class A shares can use
ACH to have redemption proceeds deposited electronically into their bank
accounts. Redemptions transferred to a bank account via the ACH plan are
available to be credited to the account on the second business day following
normal payment. In order to utilize this option, the shareholder's bank must be
a member of Automated Clearing House. In addition, the shareholder must fill out
the appropriate section of the account application. The shareholder must also
include a voided check or deposit slip from the bank account into which
redemptions are to be deposited together with the completed application. Once
ACCESS has received the application and the voided check or deposit slip, such
shareholder's designated bank account, following any redemption, will be
credited with the proceeds of such redemption. Once enrolled in the ACH plan, a
shareholder may terminate participation at any time by writing ACCESS.
DIVIDEND DIVERSIFICATION. A shareholder may, upon written request or by
completing the appropriate section of the application form accompanying this
Prospectus or by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired), elect to have all dividends and other distributions paid on a Class
A, Class B or Class C account in the Fund invested into a pre-existing Class A,
Class B or Class C account in any of the Participating Funds, VK Money Market,
VK Tax Free or Reserve.
If a qualified, pre-existing account does not exist, the shareholder must
establish a new account subject to minimum investment and other requirements of
the fund into which distributions would be invested. Distributions are invested
into the selected fund at its net asset value as of the payable date of the
distribution only if shares of such selected funds have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the Fund or of any Participating Fund other than
Van Kampen American Capital Government Target Fund ("Government Target"), may be
exchanged for shares of the same class of any other fund without sales charge,
provided that shares of certain other Van Kampen American Capital fixed-income
funds may not be exchanged within 30 days of acquisition without Advisor
approval. Shares of Government Target may be exchanged for Class A shares of the
Fund without sales charge. Class A shares of VK Money Market, VK Tax Free or
Reserve that were not acquired in exchange for Class B or Class C shares of a
Participating Fund may be exchanged for Class A shares of the Fund upon payment
of the excess, if any, of the sales charge rate applicable to the shares being
acquired over the sales charge rate previously paid. Shares of VK Money Market,
VK Tax Free or Reserve acquired through an exchange of Class B or Class C shares
may be exchanged only for the same class of shares of a Participating Fund
without incurring a contingent deferred sales charge. Shares of
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<PAGE> 37
any Participating Fund, VK Money Market, VK Tax Free or Reserve may be exchanged
for shares of any other Participating Fund if shares of that Participating Fund
are available for sale; however, during periods of suspension of sales, shares
of a Participating Fund may be available for sale only to existing shareholders
of a Participating Fund.
Class B and Class C shareholders of the Fund have the ability to exchange
their shares ("original shares") for the same class of shares of any other Van
Kampen American Capital fund that offers such shares ("new shares") in an amount
equal to the aggregate net asset value of the original shares, without the
payment of any contingent deferred sales charge otherwise due upon redemption of
the original shares. For purposes of computing the contingent deferred sales
charge payable upon a disposition of the new shares, the holding period for the
original shares is added to the holding period of the new shares. Class B or
Class C shareholders would remain subject to the contingent deferred sales
charge imposed by the original fund upon their redemption from the Van Kampen
American Capital complex of funds. The contingent deferred sales charge is based
on the holding period requirement of the original fund.
Shares of the fund to be acquired must be registered for sale in the
investor's state. Exchanges of shares are sales and may result in a gain or loss
for federal income tax purposes, although if the shares exchanged have been held
for less than 91 days, the sales charge paid on such shares is not included in
the tax basis of the exchanged shares, but is carried over and included in the
tax basis of the shares acquired. See the Statement of Additional Information.
A shareholder wishing to make an exchange may do so by sending a written
request to ACCESS or by contacting the telephone transaction line at (800)
421-5684. A shareholder automatically has telephone exchange privileges unless
otherwise designated in the application form accompanying by this Prospectus.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Exchanges are effected at the net asset value per share next
calculated after the request is received in good order with adjustment for any
additional sales charge. See "Purchase of Shares" and "Redemption of Shares." If
the exchanging shareholder does not have an account in the fund whose shares are
being acquired, a new account will be established with the
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<PAGE> 38
same registration, dividend and capital gain options (except dividend
diversification) and dealer of record as the account from which shares are
exchanged, unless otherwise specified by the shareholder. In order to establish
a systematic withdrawal plan for the new account or reinvest dividends from the
new account into another fund, however, an exchanging shareholder must file a
specific written request. The Fund reserves the right to reject any order to
acquire its shares through exchange. In addition, the Fund may modify, restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
A prospectus of any of these mutual funds may be obtained from any authorized
dealer or the Distributor. An investor considering an exchange to one of such
funds should refer to the prospectus for additional information regarding such
fund prior to investing.
SYSTEMATIC WITHDRAWAL PLAN. Any investor whose shares in a single account
total $10,000 or more at the offering price next computed after receipt of
instructions may establish a monthly, quarterly, semi-annual or annual
withdrawal plan. This plan provides for the orderly use of the entire account,
not only the income but also the capital, if necessary. Each withdrawal
constitutes a redemption of shares on which any capital gain or loss will be
recognized. The planholder may arrange for monthly, quarterly, semi-annual or
annual checks in any amount, not less than $25.
Class B and Class C shareholders who establish a withdrawal plan may redeem up
to 12% annually of the shareholder's initial account balance without incurring a
contingent deferred sales charge. Initial account balance means the amount of
the shareholder's investment in the Fund at the time the election to participate
in the plan is made. See "Purchase of Shares -- Waiver of Contingent Deferred
Sales Charge" and the Statement of Additional Information.
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with the purchase of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. Any taxable gain or loss will be recognized by the shareholder upon the
redemption of shares.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. A Class A shareholder holding shares of the Fund for
which certificates have not been issued and which are in a non-escrow status may
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<PAGE> 39
appoint ACCESS as agent by completing the AUTHORIZATION FOR REDEMPTION BY CHECK
form and the appropriate section of the application and returning the form and
the application to ACCESS. Once the form is properly completed, signed and
returned to ACCESS, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to the Class A shareholder. These
checks may be made payable by the Class A shareholder to the order of any person
in any amount of $100 or more.
When a check is presented to State Street Bank for payment, full and
fractional Class A shares required to cover the amount of the check are redeemed
from the Class A shareholder's account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of shares. Any gain or
loss realized on the sale of shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A shares held less than 15
calendar days, unless such Class A shares have been paid for by bank wire. Any
Class A shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A account, the check will
be returned and the shareholder may be subject to additional charges. A Class A
shareholder may not liquidate the entire account by means of a check. The check
writing privilege may be terminated or suspended at any time by the Fund or
State Street Bank. Accounts that are subject to backup withholding are not
eligible for the privilege. A "stop payment" system is not available on these
checks. See the Statement of Additional Information for further information
regarding the establishment of the privilege.
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REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of the Fund at any time. To do so, a written request in proper form must
be sent directly to ACCESS, P.O. Box 418256, Kansas City, Missouri 64141-9256.
Shareholders may also place redemption requests through an authorized investment
dealer. Orders received from dealers must be at least $500 unless transmitted
via the FUNDSERV network. The redemption price for such shares is the net asset
value next calculated after an order is received by a dealer provided such order
is transmitted to the Distributor prior to the Distributor's close of business
on such day. It is the responsibility of dealers to transmit redemption requests
received by them to the Distributor so they will be received prior to such time.
As described herein under "Purchase of Shares," redemptions of Class B and
Class C shares are subject to a contingent deferred sales charge. In addition, a
contingent deferred sales charge of one percent may be imposed on certain
redemptions of Class A shares made within one year of purchase for investments
of
39
<PAGE> 40
$1 million or more and for certain qualified 401(k) retirement plans. The
contingent deferred sales charge incurred upon redemption is paid to the
Distributor in reimbursement for distribution-related expenses. See "Purchase of
Shares." A custodian of a retirement plan account may charge fees based on the
custodian's fee schedule.
The request for redemption must be signed by all persons in whose names the
shares are registered. Signatures must conform exactly to the account
registration. If the proceeds of the redemption exceed $50,000, or if the
proceeds are not to be paid to the record owner at the record address, or if the
record address has changed within the previous 30 days, signature(s) must be
guaranteed by one of the following: a bank or trust company; a broker-dealer; a
credit union; a national securities exchange, registered securities association
or clearing agency; a savings and loan association; or a federal savings bank.
Generally, a properly signed written request with any required signature
guarantee is all that is required for a redemption. In some cases, however,
other documents may be necessary. For example, although the Fund normally does
not issue certificates for shares, it will do so if a special request has been
made to ACCESS. In the case of shareholders holding certificates, the
certificates for the shares being redeemed must accompany the redemption
request. In the event the redemption is requested by a corporation, partnership,
trust, fiduciary, executor or administrator, and the name and title of the
individual(s) authorizing such redemption is not shown in the account
registration, a copy of the corporate resolution or other legal documentation
appointing the authorized signer and certified within the prior 60 days must
accompany the redemption request.
In the case of redemption requests sent directly to ACCESS, the redemption
price is the net asset value per share next determined after the request is
received in proper form. Payment for shares redeemed is made by check mailed
within seven days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payment may be postponed or the right
of redemption suspended as provided by the rules of the SEC. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check until the purchase check has cleared, usually a period of up to
15 days. Any taxable gain or loss will be recognized by the shareholder upon
redemption of shares.
The Fund may redeem any shareholder account with a net asset value on the date
of the notice of redemption less than the minimum investment as specified by the
Trustees. At least 60 days advance written notice of any such involuntary
redemption is required and the shareholder is given an opportunity to purchase
the required value of additional shares at the next determined net asset value
without sales charge. Any applicable contingent deferred sales charge will be
deducted from the proceeds of this redemption. Any involuntary redemption may
only occur if the
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<PAGE> 41
shareholder account is less than the minimum initial investment due to
shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures
previously set forth, the Fund permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record for the account or to
the bank account of record as described below. To establish such privilege, a
shareholder must complete the appropriate section of the application form
accompanying this Prospectus or call the Fund at (800) 421-5666 to request that
a copy of the Telephone Redemption Authorization form be sent to them for
completion. To redeem shares, contact the telephone transaction line at (800)
421-5684. VKAC and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If reasonable procedures are employed, neither VKAC nor the Fund
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. Telephone redemptions may not be available if the shareholder cannot
reach ACCESS by telephone, whether because all telephone lines are busy or for
any other reason; in such case, a shareholder would have to use the Fund's
regular redemption procedure previously described. Requests received by ACCESS
prior to 4:00 p.m., New York time, on a regular business day will be processed
at the net asset value per share determined that day. These privileges are
available for the following types of non-retirement accounts: individual
accounts, joint accounts and accounts of minors with custodians acting on their
behalf. The telephone redemption privilege is not available for shares
represented by certificates. If an account has multiple owners, ACCESS may rely
on the instructions of any one owner.
For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check and amounts of at least
$1,000 up to $1 million may be redeemed daily if the proceeds are to be paid by
wire. The proceeds must be payable to the shareholder(s) of record and sent to
the address of record for the account or wired directly to their predesignated
bank account. This privilege is not available if the address of record has been
changed within 30 days prior to a telephone redemption request. Proceeds from
redemptions are expected to be wired on the next business day following the date
of redemption. The Fund reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of a Class B and Class C share-
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<PAGE> 42
holder. An individual will be considered disabled for this purpose if he or she
meets the definition thereof in Section 72(m)(7) of the Code, which in pertinent
part defines a person as disabled if such person "is unable to engage in any
substantial gainful activity by reason of any medically determinable physical or
mental impairment which can be expected to result in death or to be of
long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B and Class C shares.
In cases of disability, the contingent deferred sales charge on Class B and
Class C shares will be waived where the disabled person is either an individual
shareholder or owns the shares as a joint tenant with right of survivorship or
is the beneficial owner of a custodial or fiduciary account, and where the
redemption is made within one year of the initial determination of disability.
This waiver of the contingent deferred sales charge on Class B and Class C
shares applies to a total or partial redemption, but only to redemptions of
shares held at the time of the initial determination of disability.
REINSTATEMENT PRIVILEGE. A Class A or Class B shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of the Fund. A Class C shareholder who has redeemed
shares of the Fund may reinstate any portion or all of the net proceeds of such
redemption in Class C shares of the Fund with credit given for any contingent
deferred sales charge paid upon such redemption. Such reinstatement is made at
the net asset value (without sales charge except as described under "Shareholder
Services -- Exchange Privilege") next determined after the order is received,
which must be within 120 days after the date of the redemption. See "Purchase of
Shares -- Waiver of Contingent Deferred Sales Charge" and the Statement of
Additional Information.
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DISTRIBUTION PLANS
- ------------------------------------------------------------------------------
Rule 12b-1 adopted by the SEC under the 1940 Act permits an investment company
to directly or indirectly pay expenses associated with the distribution of its
shares ("distribution expenses") and servicing of its shareholders in accordance
with a plan adopted by the investment company's board of directors and approved
by its shareholders. Pursuant to such Rule, the Trustees of the Fund, and the
shareholders of each class have adopted three Distribution Plans hereinafter
referred to as the "Class A Plan," the "Class B Plan" and the "Class C Plan."
Each Distribution Plan is in compliance with the Rules of Fair Practice of the
NASD ("NASD Rules") applicable to mutual fund sales charges. The NASD Rules
limit
42
<PAGE> 43
the annual distribution charges that a mutual fund may impose on a class of
shares. The NASD Rules also limit the aggregate amount which the Fund may pay
for such distribution costs. Under the Class A Plan, the Fund pays a service fee
to the Distributor at an annual rate of up to 0.25% of the Fund's aggregate
average daily net assets attributable to the Class A shares. Such payments to
the Distributor under the Class A Plan are based on an annual percentage of the
value of Class A shares held in shareholder accounts for which such Service
Organizations are responsible at the rates of 0.15% annually with respect to
Class A shares in such accounts on September 29, 1989 and 0.25% annually with
respect to Class A shares issued after that date. Under the Class B Plan and the
Class C Plan, the Fund pays a service fee to the Distributor at an annual rate
of up to 0.25% and a distribution fee at an annual rate of up to 0.75% of the
Fund's aggregate average daily net assets attributable to the Class B shares or
Class C shares to reimburse the Distributor for service fees paid by it to
Service Organizations and for its distribution costs.
The Distributor uses the Class A, Class B and Class C service fees to
compensate Service Organizations for personal services and/or the maintenance of
shareholder accounts. Under the Class B Plan, the Distributor receives
additional payments from the Fund in the form of a distribution fee at the
annual rate of up to 0.75% of the net assets of the Class B shares as
reimbursement for (i) upfront commissions and transaction fees of up to four
percent of the purchase price of Class B shares purchased by the clients of
broker-dealers and other Service Organizations, and (ii) other distribution
expenses as described in the Statement of Additional Information. Under the
Class C Plan, the Distributor receives additional payments from the Fund in the
form of a distribution fee at the annual rate of up to 0.75% of the net assets
of the Class C shares as reimbursement for (i) upfront commissions and
transaction fees of up to 0.75% of the purchase price of Class C shares
purchased by the clients of broker-dealers and other Service Organizations and
ongoing commissions and transaction fees of up to 0.75% of the average daily net
assets of the Fund's Class C shares, and (ii) other distribution expenses as
described in the Statement of Additional Information.
In adopting the Class A Plan, the Class B Plan and the Class C Plan, the
Trustees of the Fund determined that there was a reasonable likelihood that such
Plans would benefit the Fund and its shareholders. Information with respect to
distribution and service revenues and expenses is presented to the Trustees each
year for their consideration in connection with their deliberations as to the
continuance of the Distribution Plans. In their review of the Distribution
Plans, the Trustees are asked to take into consideration expenses incurred in
connection with the distribution and servicing of each class of shares
separately. The sales charge and distribution fee, if any, of a particular class
will not be used to subsidize the sale of shares of the other classes.
43
<PAGE> 44
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fees received from the Fund in subsequent fiscal years.
Thus, if the Class A Plan were terminated or not continued, no amounts (other
than current amounts accrued but not yet paid) would be owed by the Fund to the
Distributor.
The distribution fee attributable to Class B or Class C shares is designed to
permit an investor to purchase such shares without the assessment of a front-end
sales load and at the same time permit the Distributor to compensate Service
Organizations with respect to such shares. In this regard, the purpose and
function of the combined contingent deferred sales charge and distribution fee
are the same as those of the initial sales charge with respect to the Class A
shares of the Fund in that in both cases such charges provide for the financing
of the distribution of the Fund's shares.
Actual distribution expenditures paid by the Distributor with respect to Class
B or Class C shares for any given year are expected to exceed the fees received
pursuant to the Class B Plan and Class C Plan and payments received pursuant to
contingent deferred sales charges. Such excess will be carried forward and may
be reimbursed by the Fund or its shareholders from payments received through
contingent deferred sales charges in future years and from payments under the
Class B Plan and Class C Plan so long as such Plans are in effect. For example,
if in a fiscal year the Distributor incurred distribution expenses under the
Class B Plan of $1 million, of which $500,000 was recovered in the form of
contingent deferred sales charges paid by investors and $400,000 was reimbursed
in the form of payments made by the Fund to the Distributor under the Class B
Plan, the balance of $100,000 would be subject to recovery in future fiscal
years from such sources. For the plan year ended June 30, 1994, the unreimbursed
expenses incurred by the Distributor under the Class B Plan and carried forward
were approximately $1.5 million or 4.25% of the Class B shares' average daily
net assets. The unreimbursed expenses incurred by the Distributor under the
Class C Plan from August 30, 1993 (inception of Class C shares) through June 30,
1994, and carried forward were approximately $118,000 or 1.71% of the Class C
shares' average daily net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Fund
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
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DISTRIBUTIONS FROM THE FUND
- ------------------------------------------------------------------------------
DIVIDEND POLICY. The Fund distributes substantially all of its net investment
income in monthly dividends to shareholders. The Fund intends to distribute
after
44
<PAGE> 45
the end of a fiscal year the net capital gains, if any, realized during the
fiscal year, except to the extent that such gains are offset by capital loss
carryovers. Unless the shareholder instructs otherwise, dividends and
distributions are automatically applied to purchase shares of the Fund at net
asset value. See "Shareholder Services -- Reinvestment Plan."
The per share dividends on Class B and Class C shares of the Fund will be
lower than the per share dividends on Class A shares of the Fund as a result of
the distribution fees and higher incremental transfer agency fees applicable to
such classes of shares.
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TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXES. The Fund has qualified and intends to be taxed as a
regulated investment company under the Code. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its net investment income and net realized capital gains.
In addition, the Fund intends to continue to invest in sufficient Municipal
Bonds to permit payment of "exempt-interest dividends" (as defined in the Code).
Dividends paid by the Fund from the net tax-exempt interest earned from
Municipal Bonds qualify as exempt-interest dividends if, at the close of each
quarter of the Fund's fiscal year, at least 50% of the value of its total assets
consists of Municipal Bonds.
The Omnibus Budget Reconciliation Act of 1993, which was signed into law on
August 10, 1993, included certain provisions intended to prevent the conversion
of ordinary income into capital gains. One such provision affects tax-exempt
securities by requiring that gains on such securities purchased at a market
discount be treated as ordinary income to the extent of the accrued market
discount, if the securities are acquired after April 30, 1993. Such securities
were exempt from the market discount rules under prior law.
Except as provided below, exempt-interest dividends paid to shareholders are
not includable in the shareholders' gross income for federal income tax
purposes. For each of the last three fiscal years of the Fund, over 99% of the
dividends paid by the Fund were exempt-interest dividends. The percentage of
income that is tax-exempt is applied uniformly to all dividends paid during each
fiscal year. This percentage may differ from the actual tax-exempt percentage
during any particular month.
Interest on certain "private-activity bonds" issued after August 7, 1986, is
an item of tax preference subject to the alternative minimum tax on individuals
and corporations. The Fund invests a portion of its assets in such
private-activity bonds so that a portion of its exempt-interest dividends is an
item of tax preference to the extent such dividends represent interest received
from these private-activity bonds. For the fiscal year ended September 30, 1994,
approximately 12% of the Fund's
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<PAGE> 46
income consisted of interest on private-activity bonds which is an item of tax
preference. The Tax Reform Act of 1986 also imposed per capita volume
limitations on certain private-activity bonds which could limit the amount of
such bonds available for investment by the Fund.
Shareholders are notified annually of the federal tax status of dividends and
any capital gains distributions.
Individuals whose modified income exceeds a base amount are subject to federal
income tax on up to one-half of their Social Security benefits. Modified income
includes adjusted gross income, one-half of Social Security benefits and
tax-exempt interest, including tax-exempt interest dividends from the Fund.
To avoid being subject to a 31% federal back-up withholding on dividends
(except exempt-interest dividends), distributions and redemption payments,
shareholders must furnish the Fund with a certification of their correct
taxpayer identification number.
Dividends and distributions paid by the Fund have the effect of reducing net
asset value per share on the record date by the amount of the payment.
Therefore, a dividend or distribution of record shortly after the purchase of
shares by an investor represents, in substance, a return of capital to the
investor, even though subject to income taxes to the extent discussed herein.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting the Fund and its investors who are U.S.
residents or U.S. corporations. Additional tax information of relevance to
particular investors, including investors who may be "substantial users" of
facilities financed by Municipal Bonds, is contained in the Statement of
Additional Information. Investors are urged to consult their tax advisers with
specific reference to their own tax situation. Foreign investors should consult
their own counsel for further information as to the U.S. and their country of
residence or citizenship tax consequences of receipt of dividends and
distributions from the Fund.
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. The Fund's ability to
engage in transactions in listed futures contracts and related options may be
limited by provisions of the Code, including the requirement that the Fund
derive less than 30% of its gross income from the sale or other disposition of
securities held for less than three months. Gains and losses recognized by the
Fund from transactions in futures contracts and options generally constitute
capital gains and losses for federal income tax purposes. See "Federal Tax
Information" in the Statement of Additional Information. To the extent such
activities result in net realized short-term capital gains which are distributed
to shareholders, such distributions constitute taxable ordinary income. To the
extent such activities result in net realized long-term capital gains which are
distributed to shareholders, such distributions constitute taxable long-term
capital gains.
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<PAGE> 47
STATE AND LOCAL TAXES. The exemption of interest income for federal income tax
purposes may not result in similar exemptions under the laws of a particular
state or local taxing authority. Income distributions may be taxable to
shareholders under state or local law as dividend income even though a portion
of such distributions may be derived from interest on tax-exempt obligations
which, if realized directly, would be exempt from such income taxes. It is
recommended that shareholders consult their tax advisers for information in this
regard. The Fund reports annually to its shareholders the percentage and source,
on a state-by-state basis, of interest income earned on Municipal Bonds held by
the Fund during the preceding year. Distributions paid by the Fund from sources
other than tax-exempt interest are generally subject to taxation at the state
and local levels.
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FUND PERFORMANCE
- ------------------------------------------------------------------------------
From time to time, the Fund may advertise its total return for prior periods.
Any such advertisement would include at least average annual total return
quotations for one, five and ten year periods. Other total return quotations,
aggregate or average, over other time periods may also be included.
The total return of the Fund for a particular period represents the increase
(or decrease) in the value of a hypothetical investment in the Fund from the
beginning to the end of the period. Total return is calculated by subtracting
the value of the initial investment from the ending value and showing the
difference as a percentage of the initial investment; the calculation assumes
the initial investment is made at the current maximum public offering price
(which includes a maximum sales charge of 4.75% for Class A shares); that all
income dividends or capital gains distributions during the period are reinvested
in Fund shares at net asset value; and that any applicable contingent deferred
sales charge has been paid. The Fund's total return will vary depending on
market conditions, the securities comprising the Fund's portfolio, the Fund's
operating expenses and unrealized net capital gains or losses during the period.
Total return is based on historical earnings and asset value fluctuations and is
not intended to indicate future performance. No adjustments are made to reflect
any income taxes payable by shareholders on dividends and distributions paid by
the Fund or to reflect the fact no 12b-1 fees were incurred prior to October 1,
1989.
Average annual total return quotations for periods of two or more years are
computed by finding the average annual compounded rate of return over the period
that would equate the initial amount invested to the ending redeemable value.
Yield and total return are calculated separately for Class A, Class B and
Class C shares. Class A total return figures include the maximum sales charge of
4.75%; Class B and Class C total return figures include any applicable
contingent deferred
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<PAGE> 48
sales charge. Because of the differences in sales charges and distribution fees,
the total returns for each of the classes will differ.
In addition to total return information, the Fund may also advertise its
current "yield." Yield figures are based on historical earnings and are not
intended to indicate future performance. Yield is determined by analyzing the
Fund's net income per share for a 30-day (or one month) period (which period
will be stated in the advertisement), and dividing by the maximum offering price
per share on the last day of the period. A "bond equivalent" annualization
method is used to reflect a semiannual compounding. The Fund's "tax-equivalent
yield" is calculated by determining the rate of return that would have to be
achieved on a fully taxable investment to produce the after-tax equivalent of
the Fund's yield, assuming certain tax brackets for a Fund shareholder.
For purposes of calculating yield quotations, net income is determined by a
standard formula prescribed by the SEC to facilitate comparison with yields
quoted by other investment companies. Net income computed for this formula
differs from net income reported by the Fund in accordance with generally
accepted accounting principles and from net income computed for federal income
tax reporting purposes. Thus the yield computed for a period may be greater or
less than the Fund's then current dividend rate.
The Fund's yield is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of the Fund's shares, the Fund's investment policies, and the risks of
investing in shares of the Fund. The investment return and principal value of an
investment in the Fund will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. It differs from yield, which is a measure of the income
actually earned by the Fund's investments, and from total return, which is a
measure of the income actually earned by, plus the effect of any realized and
unrealized appreciation or depreciation of, such investments during a stated
period. Distribution rate is, therefore, not intended to be a complete measure
of the Fund's performance. Distribution rate may sometimes be greater than yield
since, for instance, it may not include the effect of amortization of bond
premiums, and may include non-recurring short-term capital gains and premiums
from futures transactions engaged in by the Fund. Distribution rates will be
computed separately for each class of the Fund's shares.
48
<PAGE> 49
In reports or other communications to shareholders or in advertising material,
the Fund may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc.,
Morningstar Mutual Funds or similar independent services which monitor the
performance of mutual funds; or with municipal bond indices, such as Lehman
Brothers Municipal Bond Index or Bond Buyer's Index of 25 Revenue Securities or
with the Consumer Price Index, Standard & Poor's, NASDAQ, or other appropriate
indices of investment securities, or with investment or savings vehicles. The
performance information may also include evaluations of the Fund published by
nationally recognized ranking services and by financial publications that are
nationally recognized, such as Business Week, Forbes, Fortune, Institutional
Investor, Investor's Business Daily, Kiplinger's Personal Finance Magazine,
Money, Mutual Fund Forecaster, Stanger's Investment Advisor, USA Today, U.S.
News & World Report, and The Wall Street Journal. Such comparative performance
information will be stated in the same terms in which the comparative data or
indices are stated. Such advertisements and sales material may also include a
yield quotation as of a current period. In each case, such total return and
yield information, if any, will be calculated pursuant to rules established by
the SEC and will be computed separately for each class of the Fund's shares. For
these purposes, the performance of the Fund, as well as the performance of other
mutual funds or indices, do not reflect sales charges, the inclusion of which
would reduce Fund performance. The Fund will include performance data for Class
A, Class B and Class C shares of the Fund in any advertisement or information
including performance data of the Fund.
The Fund may also utilize performance information in hypothetical
illustrations provided in narrative form. These hypotheticals will be
accompanied by the standard performance information required by the SEC as
described above.
The Fund's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Fund at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
- ------------------------------------------------------------------------------
The Fund was originally incorporated in Texas on September 8, 1976. The Fund
was incorporated in the State of Maryland on July 2, 1992 and reorganized on
July 31, 1995, under the laws of the state of Delaware as a business entity
commonly known as a "Delaware business trust." It is authorized to issue an
unlimited number of Class A, Class B and Class C shares of beneficial interest
of $0.01 par value. Other classes of shares may be established from time to time
in accordance with provisions of the Fund's Declaration of Trust. Shares issued
by the Fund are fully paid, non-assessable and have no preemptive or conversion
rights.
49
<PAGE> 50
The Fund currently offers three classes, designated Class A shares, Class B
shares and Class C shares. Each class of shares represents an interest in the
same assets of the Fund and generally are identical in all respects except that
each class bears certain distribution expenses and has exclusive voting rights
with respect to its distribution fee. See "Distribution Plans."
The Fund is permitted to issue an unlimited number of classes. Each class of
shares is equal as to earnings, assets and voting privileges, except as noted
above, and each class bears the expenses related to the distribution of its
shares. There are no conversion, preemptive or other subscription rights, except
with respect to the conversion of Class B shares and Class C shares into Class A
shares as described above. In the event of liquidation, each of the shares of
the Fund is entitled to its portion of all of the Fund's net assets after all
debt and expenses of the Fund have been paid. Since Class B shares and Class C
shares pay higher distribution expenses, the liquidation proceeds to Class B
shareholders and Class C shareholders are likely to be lower than to other
shareholders.
The Fund does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Fund is
set forth in the Statement of Additional Information.
The Fund's Declaration of Trust provides that no Trustee, officer or
shareholder of the Fund shall be held to any personal liability, nor shall
resort be had to their private property for the satisfaction of any obligation
or liability of the Fund but the assets of the Fund only shall be liable.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION
- ------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
An investment in the Fund may not be appropriate for all investors.
The Fund is not intended to be a complete investment program, and investors
should consider their long-term investment goals and financial needs when making
an investment decision with respect to the Fund.
An investment in the Fund is intended to be a long-term investment, and should
not be used as a trading vehicle.
50
<PAGE> 51
<TABLE>
<S> <C>
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL BOND
------------------
2800 Post Oak Boulevard
Houston, TX 77056
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Boulevard
Houston, TX 77056
Distributor
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
One Parkview Plaza
Oakbrook Terrace, IL 60181
Transfer Agent
ACCESS INVESTOR SERVICES, INC.
P.O. Box 418256
Kansas City, MO 64141-9256
Custodian
EXISTING SHAREHOLDERS-- STATE STREET BANK AND
FOR INFORMATION ON YOUR EXISTING TRUST COMPANY
ACCOUNT PLEASE CALL THE FUND'S 225 West Franklin Street
TOLL-FREE NUMBER--(800) 421-5666 P.O. Box 1713
Boston, MA 02105-1713
PROSPECTIVE INVESTORS--CALL YOUR Attn: Van Kampen American Capital
BROKER OR (800) 421-5666 Funds
DEALERS--FOR DEALER INFORMATION, Legal Counsel
SELLING AGREEMENTS, WIRE ORDERS, OR
REDEMPTIONS CALL THE DISTRIBUTOR'S O'MELVENY & MYERS
TOLL-FREE NUMBER--(800) 421-5666 400 South Hope Street
Los Angeles, CA 90071
FOR SHAREHOLDER AND DEALER INQUIRIES
THROUGH TELECOMMUNICATIONS DEVICE Independent Accountants
FOR THE DEAF (TDD) PRICE WATERHOUSE LLP
DIAL (800) 772-8889 1201 Louisiana
Suite 2900
FOR TELEPHONE TRANSACTIONS DIAL (800) Houston, TX 77002
421-5684
</TABLE>
<PAGE> 52
MUNICIPAL BOND
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
AUGUST 1, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
-----------------------------------------------------------------------------
<PAGE> 53
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL BOND FUND
AUGUST 1, 1995
This Statement of Additional Information is not a Prospectus but contains
information in addition to and more detailed than that set forth in the
Prospectus and should be read in conjunction with the Prospectus. The Statement
of Additional Information and the related Prospectus are both dated August 1,
1995. A Prospectus may be obtained without charge by calling or writing Van
Kampen American Capital Distributors, Inc. at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
MUNICIPAL BONDS............................................................... 2
RISK FACTORS RELATING TO HIGH YIELD BONDS..................................... 3
TEMPORARY INVESTMENTS......................................................... 4
REPURCHASE AGREEMENTS......................................................... 4
FUTURES CONTRACTS AND RELATED OPTIONS......................................... 5
INVESTMENT RESTRICTIONS....................................................... 8
TRUSTEES AND EXECUTIVE OFFICERS............................................... 9
INVESTMENT ADVISORY AGREEMENT................................................. 13
DISTRIBUTOR................................................................... 14
DISTRIBUTION PLANS............................................................ 15
TRANSFER AGENT................................................................ 16
PORTFOLIO TURNOVER............................................................ 16
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 17
DETERMINATION OF NET ASSET VALUE.............................................. 18
PURCHASE AND REDEMPTION OF SHARES............................................. 18
EXCHANGE PRIVILEGE............................................................ 22
CHECK WRITING PRIVILEGE....................................................... 22
FEDERAL TAX INFORMATION....................................................... 22
FUND PERFORMANCE.............................................................. 26
OTHER INFORMATION............................................................. 27
FINANCIAL STATEMENTS.......................................................... 27
APPENDIX...................................................................... 28
</TABLE>
<PAGE> 54
GENERAL INFORMATION
Van Kampen American Capital Municipal Bond Fund (the "Fund") was originally
incorporated in Texas on September 8, 1976. The Fund was reincorporated in
Maryland on July 2, 1992, and reorganized under the laws of Delaware on July 31,
1995.
Van Kampen American Capital Asset Management, Inc. (the "Adviser"), Van
Kampen American Capital Distributors, Inc. (the "Distributor") and ACCESS
Investor Services, Inc. ("ACCESS") are wholly owned subsidiaries of Van Kampen
American Capital, Inc. ("VKAC"), which is a wholly owned subsidiary of VK/AC
Holding, Inc. VK/AC Holding, Inc. is controlled, through the ownership of a
substantial majority of its common stock, by The Clayton & Dubilier Private
Equity Fund IV Limited Partnership ("C&D L.P."), a Connecticut limited
partnership. C&D L.P. is managed by Clayton, Dubilier & Rice, Inc. a New York
based private investment firm. The General Partner of C&D L.P. is Clayton &
Dubilier Associates IV Limited Partnership ("C&D Associates L.P."). The general
partners of C&D Associates L.P. are Joseph L. Rice, III, B. Charles Ames,
William A. Barbe, Alberto Cribiore, Donald J. Gogel, Leon J. Hendrix, Jr.,
Hubbard C. Howe and Andrall E. Pearson, each of whom is a principal of Clayton,
Dubilier & Rice, Inc. In addition, certain officers, directors and employees of
VKAC own, in the aggregate, not more than seven percent of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Advantage Capital Corporation, a retail broker-dealer affiliate of the
Distributor, is a wholly owned subsidiary of VK/AC Holding, Inc.
VKAC offers one of the industry's broadest lines of
investments -- encompassing mutual funds, closed-end funds and unit investment
trusts -- and is currently the nation's 5th largest broker-sold mutual fund
group according to Strategic Insight, July 1995. VKAC's roots in money
management extend back to 1926. Today, we manage or supervise more than $50
billion in mutual funds, closed-end funds and unit investment trusts -- assets
which have been entrusted to VKAC in more than 2 million investor accounts. VKAC
has one of the largest research teams (outside of the rating agencies) in the
country, with 86 analysts devoted to various specializations.
As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class A shares of the Fund.
As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class B shares of the Fund except as
follows: 6.99% was owned of record by National Financial Services Corp., Church
Street Station, P.O. Box 3730, New York, New York 10008-3730.
As of July 6, 1995, no person was known by the Fund to own beneficially or
of record as much as five percent of the Class C shares of the Fund except as
follows: 37.37% was owned of record by Smith Barney Inc., 388 Greenwich Street,
11th Floor, New York, New York 10013-2375.
MUNICIPAL BONDS
"Municipal Bonds" include debt obligations issued to obtain funds for
various public purposes, including construction of a wide range of public
facilities, refunding of outstanding obligations and obtaining funds for general
operating expenses and loans to other public institutions and facilities. In
addition, certain types of industrial development obligations are issued by or
on behalf of public authorities to finance various privately-operated
facilities. Such obligations are included within the term Municipal Bonds if the
interest paid thereon is exempt from Federal income tax. Municipal Bonds also
include short-term tax-exempt municipal obligations such as tax anticipation
notes, bond anticipation notes, revenue anticipation notes, and variable rate
demand notes.
The two principal classifications of Municipal Bonds are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of full faith, credit, and taxing power for the
payment of principal and interest. Revenue or special obligations are payable
only from the revenues derived from a particular facility or class of facilities
or, in some cases, from the proceeds of a special excise tax or from other
specific revenue sources such as the user of the facility being financed.
Industrial
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<PAGE> 55
development bonds, including pollution control bonds, are revenue bonds and do
not constitute the pledge of the credit or taxing power of the issuer of such
bonds. The payment of the principal and interest on such industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. The Fund's portfolio
may also include "moral obligation" bonds which are normally issued by special
purpose public authorities. If an issuer of moral obligation bonds is unable to
meet its obligations, the repayment of such bonds becomes a moral commitment but
not a legal obligation of the state or municipality which is the issuer of the
bonds.
When the Fund engages in when-issued and delayed delivery transactions, the
Fund relies on the buyer or seller, as the case may be, to consummate the trade.
Failure of the buyer or seller to do so may result in the Fund missing the
opportunity of obtaining a price considered to be advantageous.
The Fund may invest in Municipal Notes which include demand notes and
short-term municipal obligations (such as tax anticipation notes, revenue
anticipation notes, construction loan notes and short-term discount notes) and
tax-exempt commercial paper, provided that such obligations have the ratings
described in the Prospectus. Demand notes are obligations which normally have a
stated maturity in excess of one year, but permit any holder to demand payment
of principal plus accrued interest upon a specified number of days' notice.
Frequently, such obligations are secured by letters of credit or other credit
support arrangements provided by banks. The issuer of such notes normally has a
corresponding right, after a given period, to prepay at its discretion the
outstanding principal of the note plus accrued interest upon a specified number
of days' notice to the noteholders. The interest rate on a demand note may be
based on a known lending rate, such as a bank's prime rate, and may be adjusted
when such rate changes, or the interest rate on a demand note may be a market
rate that is adjusted at specified intervals. Participation interests in
variable rate demand notes will be purchased only if, in the opinion of counsel,
interest income on such interest will be tax-exempt when distributed as
dividends to shareholders.
Yields on Municipal Bonds are dependent on a variety of factors, including
the general condition of the money market and of the municipal bond market, the
size of a particular offering, the maturity of the obligation, and the rating of
the issue. The ability of the Fund to achieve its investment objective is also
dependent on the continuing ability of the issuers of the Municipal Bonds in
which the Fund invests to meet their obligations for the payment of interest and
principal when due. There are variations in the risks involved in holding
Municipal Bonds, both within a particular classification and among
classifications, depending on numerous factors. Furthermore, the rights of
holders of Municipal Bonds and the obligations of the issuers of such Municipal
Bonds may be subject to applicable bankruptcy, insolvency and similar laws and
court decisions affecting the rights of creditors generally, and such laws, if
any, which may be enacted by Congress or state legislatures imposing a
moratorium on the payment of principal and interest or imposing other
constraints or conditions on the payments of principal and interest on Municipal
Bonds.
RISK FACTORS RELATING TO HIGH YIELD BONDS
As described in the Prospectus, the Fund may purchase Municipal Bonds rated
BB or B by Standard & Poor's Corporation ("S&P") and Ba or B by Moody's
Investors Services, Inc. ("Moody's") and non-rated securities considered by the
Adviser to be of comparable quality if the purchase would not cause more than
20% of the Fund's total assets to be invested in such lower rated securities.
See the Appendix for a description of Municipal Bond ratings. The Prospectus
discussion of the risks of investing in such lower rated high yield bonds is
supplemented as follows:
1. Youth and Growth of the High Yield Bond Market. Since the high yield
bond market is relatively new, its growth has paralleled a long economic
expansion, and it has not weathered a recession in its present size and
form. An economic downturn or increase in interest rates is likely to
have a negative effect on the high yield bond market and on the value of
the high yield bonds in the Fund's portfolio, as well as on the ability
of the bonds' issuers to repay principal and interest.
2. Sensitivity to Interest Rate and Economic Changes. The economy and
interest rates affect high yield securities differently from other
securities. The prices of high yield bonds have been found to be less
3
<PAGE> 56
sensitive to interest rate changes than higher-rated investments, but
more sensitive to adverse economic changes or individual issuer
developments. During an economic downturn or substantial period of
rising interest rates, the issuers may experience financial stress which
would adversely affect their ability to service their principal and
interest obligations, to meet projected revenue goals, and to obtain
additional financing. If the issuer of a bond owned by the Fund
defaults, the Fund may incur additional expenses to seek recovery. In
addition, periods of economic uncertainty and changes can be expected to
result in increased volatility of market prices of high yield bonds and
the Fund's asset value. Furthermore, in the case of high yield bonds
structured as zero coupon or pay-in-kind securities, their market prices
are affected to a greater extent by interest rate changes and thereby
tend to be more volatile than securities which pay interest periodically
and in cash.
3. Liquidity and Valuation. To the extent that there is no established
retail secondary market, there may be thin trading of high yield bonds,
and there may be a negative impact on the Fund's board of directors'
ability to accurately value high yield bonds and the Fund's assets and
on the Fund's ability to dispose of the bonds. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield bonds, especially in a
thinly traded market. To the extent the Fund owns or may acquire
illiquid high yield bonds, these securities may involve special
liquidity and valuation difficulties.
4. Credit Ratings. Certain risks are associated with applying credit
ratings as a method of evaluating high yield bonds. Credit ratings
evaluate the safety of principal and interest payments, not market value
risk of high yield bonds. Since credit rating agencies may fail to
timely change the credit ratings to reflect subsequent events, the
Adviser monitors the issuers of high yield bonds in the Fund's portfolio
to determine if the issuers appear to have sufficient cash flow to meet
required principal and interest payments, and to attempt to assure the
bonds' liquidity so the Fund can meet redemption requests. The Fund may
retain a portfolio security whose rating has been changed.
TEMPORARY INVESTMENTS
The taxable securities in which the Fund may invest as temporary
investments include U.S. Government securities, domestic bank certificates of
deposit and repurchase agreements.
U.S. Government securities include obligations issued or guaranteed as to
principal and interest by the U.S. Government, its agencies and
instrumentalities which are supported by any of the following: (a) the full
faith and credit of the U.S. Government, (b) the right of the issuer to borrow
an amount limited to a specific line or credit from the U.S. Government, (c)
discretionary authority of the U.S. Government agency or instrumentality, or (d)
the credit of the instrumentality. Such agencies or instrumentalities include,
but are not limited to, the Federal National Mortgage Association, the
Government National Mortgage Association, Federal Land Banks, and the Farmer's
Home Administration. The Fund may not invest in a certificate of deposit issued
by a commercial bank unless the bank is organized and operating in the United
States and has total assets of at least $500 million and is a member of the
Federal Deposit Insurance Corporation.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements with domestic banks or
broker-dealers. A repurchase agreement is a short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, usually not
more than seven days from the date of purchase, thereby determining the yield
during the purchaser's holding period. Repurchase agreements are collateralized
by the underlying debt securities and may be considered to be loans under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund will make
payment 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, or
its agencies and instrumentalities), may have maturity dates exceeding one year.
The Fund does not bear the risk of a decline in value of the underlying security
unless the
4
<PAGE> 57
seller defaults under its repurchase obligation. See "Investment
Practices -- Repurchase Agreements" in Prospectus for further information.
FUTURES CONTRACTS AND RELATED OPTIONS
FUTURES CONTRACTS
A municipal bond futures contract is an agreement pursuant to which two
parties agree to take and make delivery of an amount of cash equal to a
specified dollar amount times the differences between The Bond Buyer Municipal
Bond Index (the "Index") value at the close of the last trading day of the
contract and the price at which the futures contract is originally struck. The
Index is a price weighted measure of the market value of 40 large sized, recent
issues of tax-exempt bonds.
An interest rate futures contract is an agreement pursuant to which a party
agrees to take or make delivery of a specified debt security (such as U.S.
Treasury bonds or notes) at a specified future time and at a specified price.
Initial and Variation Margin. In contrast to the purchase or sale of a
security, no price is paid or received upon the purchase or sale of a futures
contract. Initially, the Fund is required to deposit with its Custodian in an
account in the broker's name an amount of cash, cash equivalents or liquid high
grade debt securities equal to not more than five percent of the contract
amount. This amount is known as initial margin. The nature of initial margin in
futures transactions is different from that of margin in securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transaction. Rather, the initial margin is in the nature
of a performance bond or good faith deposit on the contract, which is returned
to the Fund upon termination of the futures contact and satisfaction of its
contractual obligations. Subsequent payments to and from the broker, called
variation margin, are made on a daily basis as the price of the underlying
securities or index fluctuates, making the long and short positions in the
futures contract more or less valuable, a process known as marking to market.
For example, when the Fund purchases a futures contract and the price of
the underlying security or index rises, that position increases in value, and
the Fund receives from the broker a variation margin payment equal to that
increase in value. Conversely, where the Fund purchases a futures contract and
the value of the underlying security or index declines, the position is less
valuable, and the Fund is required to make a variation margin payment to the
broker.
At any time prior to expiration of the futures contract, the Fund may elect
to terminate the position by taking an opposite position. A final determination
of variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or a gain.
Futures Strategies. When the Fund anticipates a significant market or
market sector advance, the purchase of a futures contract affords a hedge
against not participating in the advance at a time when the Fund is not fully
invested ("anticipatory hedge"). Such purchase of a futures contract serves as a
temporary substitute for the purchase of individual securities, which may be
purchased in an orderly fashion once the market has stabilized. As individual
securities are purchased, an equivalent amount of futures contracts could be
terminated by offsetting sales. The Fund may sell futures contracts in
anticipation of or in a general market or market sector decline that may
adversely affect the market value of the Fund's securities ("defensive hedge").
To the extent that the Fund's portfolio of securities changes in value in
correlation with the underlying security or index, the sale of futures contracts
substantially reduces the risk to the Fund of a market decline and, by so doing,
provides an alternative to the liquidation of securities positions in the Fund
with attendant transaction costs.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or related options, the Fund could experience delays
and/or losses in liquidating open positions purchased and/or incur a loss of all
or part of its margin deposits with the broker. Transactions are entered into by
the Fund only with brokers or financial institutions deemed creditworthy by the
Adviser.
5
<PAGE> 58
Special Risks Associated with Futures Transactions. There are several
risks connected with the use of futures contracts as a hedging device. These
include the risk of imperfect correlation between movements in the price of the
futures contracts and of the underlying securities, the risk of market
distortion, the illiquidity risk and the risk of error in anticipating price
movement.
There may be an imperfect correlation (or no correlation) between movements
in the price of the futures contracts and of the securities being hedged. The
risk of imperfect correlation increases as the composition of the securities
being hedged diverges from the securities upon which the futures contract is
based. If the price of the futures contract moves less than the price of the
securities being hedged, the hedge will not be fully effective. To compensate
for the imperfect correlation, the Fund could buy or sell futures contracts in a
greater dollar amount than the dollar amount of securities being hedged if the
historical volatility of the securities being hedged is greater than the
historical volatility of the securities underlying the futures contact.
Conversely, the Fund could buy or sell futures contracts in a lesser dollar
amount than the dollar amount of securities being hedged if the historical
volatility of the securities being hedged is less than the historical volatility
of the securities underlying the futures contract. It is also possible that the
value of futures contracts held by the Fund could decline at the same time as
portfolio securities being hedged; if this occurred, the Fund would lose money
on the futures contract in addition to suffering a decline in value in the
portfolio securities being hedged.
There is also the risk that the price of futures contracts may not
correlate perfectly with movements in the securities or index underlying the
futures contract due to certain market distortions. First, all participants in
the futures market are subject to margin depository and maintenance
requirements. Rather than meet additional margin depository requirements,
investors may close futures contracts through offsetting transactions, which
could distort the normal relationship between the futures market and the
securities or index underlying the futures contract. Second, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities markets. Therefore, increased
participation by speculators in the futures markets may cause temporary price
distortions. Due to the possibility of price distortion in the futures markets
and because of the imperfect correlation between movements in futures contracts
and movements in the securities underlying them, a correct forecast of general
market trends by the Adviser may still not result in a successful hedging
transaction judged over a very short time frame.
There is also the risk that futures markets may not be sufficiently liquid.
Futures contracts may be closed out only on an exchange or board of trade that
provides a market for such futures contracts. Although the Fund intends to
purchase or sell futures only on exchanges and boards of trade where there
appears to be an active secondary market, there can be no assurance that an
active secondary market will exist for any particular contract or at any
particular time. In the event of such illiquidity, it might not be possible to
close a futures position and, in the event of adverse price movements, the Fund
would continue to be required to make daily payments of variation margin. Since
the securities being hedged would not be sold until the related futures contract
is sold, an increase, if any, in the price of the securities may to some extent
offset losses on the related futures contract. In such event, the Fund would
lose the benefit of the appreciation in value of the securities.
Successful use of futures is also subject to the Adviser's ability to
correctly predict the direction of movements in the market. For example, if the
Fund hedges against a decline in the market, and market prices instead advance,
the Fund will lose part or all of the benefit of the increase in value of its
securities holdings because it will have offsetting losses in futures contracts.
In such cases, if the Fund has insufficient cash, it may have to sell portfolio
securities at a time when it is disadvantageous to do so in order to meet the
daily variation margin.
The Fund could engage in transactions involving futures contracts and
related options in accordance with the rules and interpretations of the
Commodity Futures Trading Commission ("CFTC") under which the Fund would be
exempt from registration as a "commodity pool". CFTC regulations require, among
other things, (i) that futures and related options be used solely for bona fide
hedging purposes (or meet certain conditions as specified in CFTC regulations)
and (ii) that the Fund not enter into futures and related options
6
<PAGE> 59
for which the aggregate initial margin and premiums exceed five percent of the
fair market value of the Fund's assets. In order to minimize leverage in
connection with the purchase of futures contracts by the Fund, an amount of
cash, cash equivalents or liquid high grade debt securities equal to the market
value of the obligation under the futures contracts (less any related margin
deposits) will be maintained in a segregated account with the Custodian.
OPTIONS ON FUTURES CONTRACTS
The Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put), at a specified
exercise price at any time during the option period. As a writer of an option on
a futures contract, the Fund would be subject to initial margin and maintenance
requirements similar to those applicable to futures contracts. In addition, net
option premiums received by the Fund are required to be included in initial
margin deposits. When an option on a futures contract is exercised, delivery of
the futures position is accompanied by cash representing the difference between
the current market price of the futures contract and the exercise price of the
option. The Fund could purchase put options on futures contracts in lieu of, and
for the same purpose as, it could sell a futures contract. The purchase of call
options on futures contracts would be intended to serve the same purpose as the
actual purchase of the futures contract.
Risks of Transactions in Options on Futures Contracts. In addition to the
risks described above which apply to all options transactions, there are several
special risks relating to options on futures. The Adviser will not purchase
options on futures on any exchange unless in the Adviser's opinion, a liquid
secondary exchange market for such options exists. Compared to the use of
futures, the purchase of options on futures involves less potential risk to the
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). However, there may be circumstances, such as when
there is no movement in the level of the index or in the price of the underlying
security, when the use of an option on a future would result in a loss to the
Fund when the use of a future would not.
ADDITIONAL RISKS TO FUTURES CONTRACTS AND RELATED OPTIONS
Each of the Exchanges has established limitations governing the maximum
number of call or put options on the same underlying security or futures
contract (whether or not covered) which may be written by a single investor,
whether acting alone or in concert with other (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the Adviser are combined for purposes of these
limits. An Exchange may order the liquidation of positions found to be in
violation of these limits and it may impose other sanctions or restrictions.
These position limits may restrict the number of listed options which the Fund
may write.
Although the Fund intends to enter into futures contracts only if there is
an active market for such contracts, there is no assurance that an active market
will exist for the contracts at any particular time. Most U.S. futures exchanges
and boards of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. Once the daily limit has been
reached in a particular contract, no trades may be made that day at a price
beyond that limit. It is possible that futures contract prices would move to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses. In such event, and in the event of
adverse price movements, the Fund would be required to make daily cash payments
of variation margin. In such circumstances, an increase in the value of the
portion of the portfolio being hedged, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities being hedged will, in fact, correlate
with the price movements in a futures contract and thus provide an offset to
losses on the futures contract.
7
<PAGE> 60
INVESTMENT RESTRICTIONS
The Fund has adopted the following restrictions which, along with its
investment objective, cannot be changed without approval by the holders of a
majority of its outstanding shares. Such majority is defined by the 1940 Act as
the lesser of (i) 67% or more of the voting securities present in person or by
proxy at the meeting, if the holders of more than 50% of the outstanding voting
securities are present or represented by proxy; or (ii) more than 50% of the
outstanding voting securities. The percentage limitations contained in the
restrictions and policies set forth herein apply at the time of purchase of
securities. These restrictions provide that the Fund shall not:
1. Purchase or hold securities of any issuer if any of the Fund's officers
or directors, or officers or directors of its investment adviser, who
beneficially own more than 1/2% of the securities of that issuer,
together own beneficially more than five percent of the securities of
such issuer.
2. Purchase securities on margin or make short sales, but it may engage in
transactions in options, futures contracts and related options and make
margin deposits and payments in connection therewith.
3. Make loans of money or securities to other persons except through the
purchase of securities in accordance with its investment objective and
policies.
4. Invest in real estate; commodities or commodities contracts; interests
in oil, gas, or other mineral exploration or development programs; or
any security not payable in United States currency (but this shall not
prevent the Fund from investing in Municipal Bonds or Temporary
Investments secured by real estate or interests therein or from
entering into transactions in futures contracts and related options).
5. Engage in the underwriting of securities or invest more than 15% of its
net assets in securities subject to restrictions on resale or for which
there is no readily available market. Such securities include
securities issued in limited placements under which the Fund represents
that it is purchasing without a view to a public distribution,
repurchase agreements maturing in more than seven days and securities
subject to legal or contractual restrictions on resale.
6. Invest in securities other than Municipal Bonds and Temporary
Investments (as defined in the Prospectus), listed futures contacts
related to U.S. Government securities, Municipal Bonds or to an index
of Municipal Bonds, and options on such contracts.
7. Invest more than five percent of its total assets at market value at
time of purchase in the securities of any one issuer (other than
obligations of the United States Government or of any instrumentalities
thereof).
8. Borrow money, except from banks for temporary or emergency purposes,
such borrowing not to exceed five percent of its total assets at market
value at the time of borrowing. Any such borrowing may be secured
provided that not more than ten percent of the total assets at market
value at the time of pledging may be used as security for such
borrowings. Notwithstanding the foregoing, the Fund may engage in
transactions in options, futures contracts and related options,
segregate or deposit assets to cover or secure options written, and
make margin deposits and payments in connection with futures contracts
and related options.
9. Purchase any Municipal Bond rated below Baa by Moody's and below BBB by
S&P, or which, if non-rated, is in the opinion of the Adviser of
comparable quality, if immediately after and as a result of such
purchase such Bonds would constitute more than 20% of the Fund's total
assets.
10. Purchase any Municipal Bond rated below A by Moody's and S&P, or which
is non-rated, if immediately after and as a result of such purchase
such Bonds would constitute more than 50% of the Fund's total assets.
11. Purchase any Municipal Bond rated below B by Moody's and S&P or any
non-rated Municipal bonds considered by the Adviser to be of comparable
quality.
8
<PAGE> 61
12. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Fund from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing futures contracts, options on futures contracts
and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Fund of a
segregated account with its custodian or some other form of "cover".
Each state and each political subdivision, agency or instrumentality of
such state, and each multi-state agency of which a state is a member is a
separate "issuer" as that term is used in the Prospectus. The non-government
user of facilities financed by industrial development bonds is also considered
as a separate issuer. If, however, a security is guaranteed by another entity,
securities issued or guaranteed by such guaranteeing entity shall be limited to
ten percent of the value of the Fund's total assets.
Because of the nature of the securities in which the Fund may invest, the
Fund may not invest in voting securities, or invest for the purpose of
exercising control or management, or invest in securities of other investment
companies.
TRUSTEES AND EXECUTIVE OFFICERS
The Fund's Trustees and Executive Officers and their principal occupations
for the past five years are listed below.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
--------------------- --------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
Strafford Hall President of MDT Corporation, a company which develops,
Suite 200 manufactures, markets and services medical and scientific
1009 Slater Road equipment. A Trustee of each of the Van Kampen American
Harrisville, NC 27560 Capital Funds.
Age: 63
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Radnor Station, Suite 314 Life Sciences Corporation, a firm specializing in life
King of Prussia Road sciences. Trustee of Susquehanna University and First
Radnor, PA 19087 Vice President, The Baum School of Arts; Founder and
Age: 52 Director of Uncommon Individual Foundation, a youth
development foundation. Director of International Board
of Business Performance Group, London School of
Economics. Formerly, Director of First Sterling Bank, and
Executive Vice President and a Director of LFC Financial
Corporation, a provider of lease and project financing. A
Trustee of each of the Van Kampen American Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A Trustee of each of the
Lyme, CT 06371 Van Kampen American Capital Funds.
Age: 75
</TABLE>
9
<PAGE> 62
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
---------------------- ---------------------------
<S> <C>
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A Trustee
of each of the Van Kampen American Capital Funds.
Donald C. Miller................... Prior to 1992, Director of Royal Group, Inc., a company
415 North Adams in insurance related businesses. Formerly Vice Chairman
Hinsdale, IL 60521 and Director of Continental Illinois National Bank and
Age: 75 Trust Company of Chicago and Continental Illinois
Corporation. A Trustee of each of the Van Kampen American
Capital Funds and Chairman of each Van Kampen American
Capital Fund advised by Van Kampen American Capital
Investment Advisory Corp.
Jack E. Nelson..................... President of Nelson Investment Planning Services, Inc., a
423 Country Club Drive financial planning company and registered investment
Winter Park, FL 32789 adviser. President of Nelson Investment Brokerage
Age: 59 Services Inc., a member of the National Association of
Securities Dealers, Inc. ("NASD") and Securities
Investors Protection Corp. A Trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, and the Adviser. Director and Executive Vice
President of ACCESS, Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director, Trustee or Managing General Partner of
each of the Van Kampen American Capital Funds and other
open-end investment companies and closed-end investment
companies advised by the Adviser and its affiliates.
David Rees......................... Contributing Columnist and, prior to 1995, Senior Editor
1601 Country Club Drive of Los Angeles Business Journal. A Director of Source
Glendale, CA 91208 Capital, Inc., an investment company unaffiliated with
Age: 71 Van Kampen American Capital. A Director and the Second
Vice President of International Institute of Los Angeles.
A Trustee of each of the Van Kampen American Capital
Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A Trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 Fund. Director, FPA Capital Fund, Inc.; FPA New Income
Los Angeles, CA 90067 Fund, Inc.; FPA Perennial Fund, Inc.; Source Capital,
Age: 63 Inc.; and TCW Convertible Security Fund, Inc., investment
companies unaffiliated with Van Kampen American Capital.
A Trustee of each of the Van Kampen American Capital
Funds.
</TABLE>
10
<PAGE> 63
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
---------------------- -----------------------------
<S> <C>
Fernando Sisto..................... George M. Bond Chaired Professor and, prior to 1995, Dean
Stevens Institute of Graduate School and Chairman, Department of Mechanical
of Technology Engineering, Stevens Institute of Technology. Director of
Castle Point Station Dynalysis of Princeton, a firm engaged in engineering
Hoboken, NJ 07030 research. A Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Van Kampen American
Capital Funds advised by the Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to certain of the Van Kampen
Chicago, IL 60606 American Capital Funds. A Trustee of each of the Van
Age: 55 Kampen American Capital Funds. He also is a Trustee of
the Van Kampen Merritt Series Trust and closed-end
investment companies advised by an affiliate of the
Adviser.
William S. Woodside................ Vice Chairman of the Board of LSG Sky Chefs, Inc., a
712 Fifth Avenue caterer of airline food. Formerly, Director of Primerica
40th Floor Corporation (currently known as The Traveler's Inc.).
New York, NY 10019 Formerly, Director of James River Corporation, a producer
Age: 73 of paper products. Trustee, and former President of
Whitney Museum of American Art. Formerly, Chairman of
Institute for Educational Leadership, Inc., Board of
Visitors, Graduate School of The City University of New
York, Academy of Political Science. Trustee of Committee
for Economic Development. Director of Public Education
Fund Network, Fund for New York City Public Education.
Trustee of Barnard College. Member of Dean's Council,
Harvard School of Public Health. Member of Mental Health
Task Force, Carter Center. A Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
- ---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the Investment Company Act of 1940). Mr. Powell is an interested person of
the Adviser and the Fund by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Fund by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
The Fund's officers other than Messrs. Johnson, McDonnell and Nyberg are
located 2800 Post Oak Blvd., Houston, TX 77056. Messrs. Johnson, McDonnell and
Nyberg are located at One Parkview Plaza, Oakbrook Terrace, IL 60181.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------- ----------------- ----------------------
<S> <C> <C>
Nori L. Gabert........... Vice President and Vice President, Associate General Counsel
Age: 41 Secretary and Corporate Secretary of the Adviser.
David C. Johnson......... Vice President Vice President -- Portfolio Manager of the
Age: 42 Adviser.
Tanya M. Loden........... Vice President and Vice President and Controller of most of
Age: 35 Controller the investment companies advised by the
Adviser, formerly Tax Manager/Assistant
Controller.
</TABLE>
11
<PAGE> 64
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND DURING PAST 5 YEARS
------------ ----------------- ---------------------
<S> <C> <C>
Dennis J. McDonnell...... Vice President President, Chief Operating Officer and a
Age: 53 Director of the Adviser. Director of VK/AC
Holding, Inc. and Van Kampen American
Capital.
Curtis W. Morell......... Vice President and Vice President and Treasurer of most of the
Age: 48 Treasurer investment companies advised by the
Adviser.
Ronald A. Nyberg......... Vice President Executive Vice President, General Counsel
Age: 42 and Secretary of Van Kampen American
Capital; Executive Vice President and a
Director of the Distributor. Executive Vice
President of the Adviser. Director of ICI
Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute.
Robert C. Peck, Jr....... Vice President Senior Vice President and Director of the
Age: 48 Adviser.
J. David Wise............ Vice President and Vice President, Associate General Counsel
Age: 51 Assistant Secretary and Assistant Corporate Secretary of the
Adviser.
Paul R. Wolkenberg....... Vice President Senior Vice President of the Adviser.
Age: 50 President, Chief Operating Officer and
Director of Van Kampen American Capital
Services, Inc. Executive Vice President,
Chief Operating Officer and Director of Van
Kampen American Capital Trust Company.
Executive Vice President and Director of
ACCESS.
</TABLE>
The Trustees and Officers of the Fund as a group own less than one percent
of the outstanding shares of the Fund. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Fund during
its last fiscal year. During the fiscal year ended September 30, 1994, the
Trustees who were not affiliated with the Adviser or its parent received as a
group $13,494 in Trustees' fees from the Fund in addition to certain
out-of-pocket expenses. Such Trustees also received compensation for serving as
trustees or directors of other investment companies advised by the Adviser. For
legal services rendered during the fiscal year, the Fund paid legal fees of
$11,680 to the law firm of O'Melveny & Myers, of which Mr. Sheehan is Of
Counsel. The firm also serves as legal counsel to other Van Kampen American
Capital Funds.
12
<PAGE> 65
Additional information regarding compensation paid by the Fund and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Fund is for the most recent
fiscal year and the total compensation shown for the Fund and other related
mutual Funds is for the calendar year ended December 31, 1994. Mr. Powell is not
compensated for his service as Trustee, because of his affiliation with the
Adviser.
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION
OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM
ACCRUED REGISTRANT
AS AND
AGGREGATE PART FUND
COMPENSATION OF COMPLEX
FROM FUND PAID TO
NAME OF PERSON REGISTRANT EXPENSES DIRECTORS(1)(5)
----------------------------------------- ------ ----- -------
<S> <C> <C> <C>
J. Miles Branagan........................ $2,050 -0- $64,000
Dr. Richard E. Caruso(3)................. $2,080(2) -0- $64,000
Dr. Roger Hilsman........................ $2,125 -0- $66,000
David Rees(3)............................ $2,050 -0- $64,000
Lawrence J. Sheehan...................... $2,155 -0- $67,000
Dr. Fernando Sisto(3).................... $2,660 -0- $82,000
William S. Woodside(4)................... $ -0- -0- $18,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,020 for Dr. Caruso.
(3) Messrs. Caruso, Rees and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Fund is as follows: Dr. Caruso,
$4,786; Mr. Rees, $7,466; and Dr. Sisto, $3,037.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second and fourth columns, $1,650
and $36,000, respectively, was paid by the Adviser directly.
(5) Includes the following amounts for which the various Funds were reimbursed
by the Adviser -- Branagan, $2,000; Caruso, $2,000; Hilsman, $1,000; Rees,
$2,000; Sheehan, $2,000; Sisto, $2,000; Woodside, $1,000 (Mr. Woodside was
paid $36,000 directly by the Adviser as discussed in Footnote 4 above).
Beginning July 21, 1995, the Fund pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,056 and a
meeting fee of $30 per Board meeting plus expenses. No additional fees are paid
for committee meetings or to the chairman of the board. In order to alleviate an
additional expense that might be caused by the new compensation arrangement, the
trustees have approved a reduction in the compensation per trustee and have
agreed to an aggregate annual compensation cap with respect to the combined fund
complex of $84,000 per trustee until December 31, 1996, based upon the net
assets and the number of Van Kampen American Capital funds as of July 21, 1995
(except that Mr. Whalen, who is a trustee of 34 closed-end funds advised by an
affiliate of the Adviser, would receive an additional $119,000 for serving as a
trustee of such funds). In addition, the Adviser has agreed to reimburse the
Fund through December 31, 1996 for any increase in the aggregate trustees'
compensation paid by the Fund over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Fund and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Fund retains the
Adviser to manage the investment of its assets and to place orders for the
purchase and sale of its portfolio securities. The Adviser is responsible for
obtaining and evaluating economic, statistical, and financial data and for
formulating and implementing investment programs in furtherance of the Fund's
investment objective. The Adviser also furnishes at no cost to the Fund (except
as noted herein) the services of sufficient executive and clerical personnel for
the Fund as are necessary to prepare registration statements, prospectuses,
shareholder reports and notices, and proxy
13
<PAGE> 66
solicitation materials. In addition, the Adviser furnishes at no cost to the
Fund the services of a President of the Fund, one or more Vice Presidents as
needed, and a Secretary.
Under the Advisory Agreement, the Fund bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating its daily net asset value. The costs of such accounting services
include the salaries and overhead expenses of a Treasurer or other principal
financial officer and the personnel operating under his direction. During the
fiscal years ended September 30, 1992, 1993 and 1994, the Adviser received
$1,393,099, $1,615,258 and $1,804,381, respectively, in advisory fees from the
Fund. For such periods the Fund paid $91,361, $120,055 and $115,272,
respectively, for accounting services. A substantial portion of these amounts
was paid to the Adviser or its parent in reimbursement of personnel, office
space, facilities and equipment costs attributable to the provision of
accounting services to the Fund. The services are provided at cost which is
allocated among the investment companies advised by the Adviser. The Fund also
pays shareholder service agency fees, distribution fees, custodian fees, legal
and auditing fees, the costs of reports to shareholders and all other ordinary
expenses not specifically assumed by the Adviser.
Under the Advisory Agreement, the Fund pays to the Adviser as compensation
for the services rendered, facilities furnished, and expenses paid by it a fee
payable monthly computed on average daily net assets of the Fund at an annual
rate of 0.50% of the Funds average net assets.
The average net asset value is determined by taking the average of all of
the determinations of net asset value for each business day during a given
calendar month. Such fee is payable for each calendar month as soon as
practicable after the end of that month. The Adviser agrees to use its best
efforts to recapture tender solicitation fees and exchange offer fees for the
Fund's benefit, and to advise the Trustees of the Fund of any other commissions,
fees, brokerage or similar payments which may be possible under applicable laws
for the Adviser or any other direct or indirect majority owned subsidiary of
VK/AC Holding, Inc. to receive in connection with the Fund's portfolio
transactions or other arrangements which may benefit the Fund.
The Advisory Agreement also provides that, in the event the expenses of the
Fund for any fiscal year exceed the most restrictive expense limitation
applicable in the states where the Fund's shares are qualified for sale, the
compensation due the Adviser for such fiscal year shall be reduced by the amount
of such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Fund monthly an amount sufficient to make
up the deficiency, subject to readjustment during the year. The Advisory
Agreement also provides that the Adviser shall not be liable to the Fund for any
actions or omissions if it acted in good faith without negligence or misconduct.
Currently, the most restrictive applicable limitations are 2 1/2% of the
first $30 million, 2% of the next $70 million, and 1 1/2% of the remaining
average net assets.
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Fund's Trustees or (ii) by vote of a
majority of the Fund's outstanding voting securities and (b) by the affirmative
vote of a majority of the Trustees who are not parties to the agreement or
interested persons of any such party by votes cast in person at a meeting called
for such purpose. The Advisory Agreement provides that it shall terminate
automatically if assigned and that it may be terminated without penalty by
either party on 60 days' written notice.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the Fund's shares
pursuant to a written agreement (the "Underwriting Agreement"). The Distributor
has the exclusive right to distribute shares of the Fund through affiliated and
unaffiliated dealers. The Distributor's obligation is an agency or "best
efforts" arrangement under which the Distributor is required to take and pay for
only such shares of the Fund as may be sold to the public. The Distributor is
not obligated to sell any stated number of shares. The Distributor bears the
cost of printing (but not typesetting) prospectuses used in connection with this
offering and the cost and expense of supplemental sales literature, promotion
and advertising. The Underwriting Agreement is renewable from year to year if
approved (a) by the Fund's Trustees or by a vote of a majority of the Fund's
14
<PAGE> 67
outstanding voting securities and (b) by the affirmative vote of a majority of
Trustees who are not parties to the Underwriting Agreement or interested persons
of any party, by votes cast in person at a meeting called for such purpose. The
Underwriting Agreement provides that it will terminate if assigned, and that it
may be terminated without penalty by either party on 60 days' written notice.
During the fiscal years ended September 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the Fund were $1,079,211,
$1,055,715 and $793,290, respectively. Of such totals, the amount retained by
the Distributor was $32,794, $97,650 and $118,647, respectively. The remainder
was reallowed to dealers. Of such dealer reallowances, $314,982, $197,590 and
$105,378, respectively, was received by Advantage Capital Corporation, an
affiliated dealer of the Distributor.
DISTRIBUTION PLANS
The Fund adopted a Class A distribution plan, a Class B distribution plan
and a Class C distribution plan (the "Class A Plan," "Class B Plan" and "Class C
Plan," respectively) to permit the Fund directly or indirectly to pay expenses
associated with servicing shareholders and in the case of the Class B Plan and
Class C Plan the distribution of its shares (the Class A Plan, the Class B Plan
and the Class C Plan are sometimes referred to herein collectively as "Plans"
and individually as a "Plan").
The Trustees have authorized payments by the Fund under the Plans to
reimburse the Distributor for its payments to certain financial institutions
(which may include banks), securities dealers and other industry professionals
(collectively, "Service Organizations") for administration, for servicing Fund
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Fund shares held in
shareholder accounts for which such Service Organizations are responsible. With
respect to the Class A Plan, the Distributor intends to make payments thereunder
only to compensate Service Organizations for personal service and/or the
maintenance of shareholder accounts. With respect to the Class B and Class C
Plans, authorized payments by the Fund include payments at an annual rate of up
to 0.25% of the net assets of the shares of the respective class to reimburse
the Distributor for payments for personal service and/or the maintenance of
shareholder accounts. With respect to the Class B Plan, authorized payments by
the Fund also include payments at an annual rate of up to 0.75% of the net
assets of the Class B shares to reimburse the Distributor for (1) commissions
and transaction fees of up to 4% of the purchase price of the Class B shares
purchased by the clients of broker-dealers and other Service Organizations, (2)
out-of-pocket expenses of printing and distributing prospectuses and annual and
semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professions, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus 1 1/2% compounded
quarterly on the unreimbursed distribution expenses. With respect to the Class C
Plan, authorized payments under the Class C Plan also include payments at an
annual rate of up to 0.75% of the net assets of the Class C shares to reimburse
the Distributor for (1) upfront commissions and transaction fees of up to 0.75%
of the purchase price of Class C shares purchased by the clients of
broker-dealers and other Service Organizations and ongoing commissions and
transaction fees paid to broker-dealers and other Service Organizations in an
amount up to 0.75% of the average daily net assets of the Fund's Class C shares,
(2) out-of-pocket expenses of printing and distributing prospectuses and annual
and semi-annual shareholder reports to other than existing shareholders, (3)
out-of-pocket and overhead expenses for preparing, printing and distributing
advertising material and sales literature, (4) expenses for promotional
incentives to broker-dealers and financial and industry professionals, (5)
advertising and promotion expenses, including conducting and organizing sales
seminars, marketing support salaries and bonuses, and travel-related expenses
and (6) interest expense at the three month LIBOR rate plus 1 1/2% compounded
quarterly on the unreimbursed distribution expenses. Such reimbursements are
subject to the maximum sales charge limits specified by the NASD for asset-based
charges.
Banks are currently prohibited under the Glass-Steagall Act from providing
certain underwriting or distribution services. If banking firms were prohibited
from acting in any capacity or providing any of the described services, the
Distributor would consider what action, if any, would be appropriate. The
Distributor
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does not believe that termination of a relationship with a bank would result in
any material adverse consequences to the Fund. In addition, state securities
laws on this issue may differ from the interpretations of federal law expressed
herein and banks and financial institutions may be required to register as
dealers pursuant to state law.
As required by Rule 12b-1 under the 1940 Act, each Plan and form of
servicing agreement and selling group agreement were approved by the Trustees,
including a majority of the Trustees who are not affiliated persons (as defined
in the 1940 Act) of the Fund and who have no direct or indirect financial
interest in the operation of any of the Plans or in any agreements related to
each Plan ("Independent Trustees"). In approving the Plans in accordance with
the requirements of Rule 12b-1, the Trustees determined that there is a
reasonable likelihood that each Plan will benefit the Fund and its shareholders.
Each Plan requires the Distributor to provide the Trustees at least
quarterly with a written report of the amounts expended pursuant to each Plan
and the purposes for which such expenditures were made. Unless sooner terminated
in accordance with its terms, each Plan will continue in effect for a period of
one year and thereafter will continue in effect so long as such continuance is
specifically approved at least annually by the Trustees, including a majority of
Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by vote of a majority of the outstanding voting shares of the
respective class of the Fund. Any change in any of the Plans that would
materially increase the distribution expenses borne by the Fund requires
shareholder approval, voting separately by class; otherwise, it may be amended
by a majority of the Trustees, including a majority of the Independent Trustees,
by vote cast in person at a meeting called for the purpose of voting upon such
amendment. So long as the Plan is in effect, the selection or nomination of the
Independent Trustees is committed to the discretion of the Independent Trustees.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class A Plan were $686,403 or .21%, of the Fund's average net assets.
Such expenses were paid to reimburse the Distributor for payments made to
Service Organizations for servicing Fund shareholders and administering the
Class A Plan. The offering of Class B shares commenced on September 29, 1992.
For the fiscal year ended September 30, 1994, the Fund's aggregate expenses
under the Class B Plan were $311,708 or 1.00% of the Class B shares' average
daily net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $233,781 for commissions and transaction fees paid to
broker-dealers and other Service Organizations in respect of sales of Class B
shares of the Fund and $77,927 for fees paid to Service Organizations for
servicing Class B shareholders and administering the Class B Plan. For the
fiscal year ended September 30, 1994, the unreimbursed expenses incurred by the
Distributor under the Class B Plan and carried forward were approximately $1.6
million. The offering of Class C shares commenced August 30, 1993. For the
fiscal year ended September 30, 1994, the Fund's aggregate expenses under the
Class C Plan were $54,489 or 1.00% of the Class C shares' average daily net
assets. Such expenses were paid to the Distributor for the following payments:
$40,867 for commissions and transaction fees paid to broker-dealers and other
Service Organizations in respect of Class C shares of the Fund and $13,622 for
fees paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan. For the fiscal year ended September 30, 1994,
the unreimbursed expenses incurred by the Distributor under the Class C Plan and
carried forward were approximately $130,000.
TRANSFER AGENT
For the fiscal years ended September 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Fund, received fees aggregating
$334,826 for these services. These services are provided at cost plus a profit.
PORTFOLIO TURNOVER
The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for a fiscal year by the average
monthly value of the Fund's portfolio securities during such fiscal year.
Securities which mature in one year or less at the time of acquisition are not
included in this computation. The
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turnover rate may vary greatly from year to year as well as within a year. The
Fund's portfolio turnover rate for prior years is shown under "Financial
Highlights" in the Prospectus. The annual turnover rate is expected to exceed
100%, which is higher than that of many other investment companies. A 100%
turnover rate would occur if all the Fund's portfolio securities were replaced
during one year. The lower turnover rate during the last fiscal year reflects
the Adviser's investment strategy and the lower volatility of the market for
municipal securities during the period.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Adviser is responsible for decisions to buy and sell securities for the
Fund and for the placement of its portfolio business and the negotiation of any
commissions, if any, paid on such transactions. As most transactions made by the
Fund are principal transactions at net prices, the Fund incurs little or no
brokerage costs. Portfolio securities are normally purchased directly from the
issuer or from an underwriter or market maker for the securities. Purchases from
underwriters of portfolio securities include a commission or concession paid by
the issuer to the underwriter and purchases from dealers serving as market
makers include the spread between the bid and asked price. Sales to dealers are
effected at bid prices.
The Adviser is responsible for placing portfolio transactions and does so
in a manner deemed fair and reasonable to the Fund and not according to any
formula. The primary consideration in all portfolio transactions is prompt
execution of orders in an effective manner at the most favorable price. In
selecting broker-dealers and in negotiating commissions, the Adviser considers
the firm's reliability, the quality of its execution services on a continuing
basis and its financial condition. When more than one firm is believed to meet
these criteria, preference may be given to firms which also provide research
services to the Fund or the Adviser. No specific value can be assigned to such
research services which are furnished without cost to the Adviser. The
investment advisory fee is not reduced as a result of the Adviser's receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of securities, the advisability of investing in, purchasing or
selling securities, and the availability of securities or purchasers or sellers
of securities, (b) furnishing analyses and reports concerning issuers,
industries, securities, economic factors and trends, portfolio strategy and the
performance of the accounts and (c) effecting securities transactions and
performing functions incidental thereto (such as clearance, settlement and
custody). Research services furnished by firms through which the Fund effects
its securities transactions may be used by the Adviser in servicing all of its
advisory accounts; not all of such services may be used by the Adviser in
connection with the Fund.
Consistent with the Rules of Fair Practice of the NASD and subject to
seeking best execution and such other policies as the Trustees may determine,
the Adviser may consider sales of shares of the Fund as a factor in the
selection of firms to execute portfolio transactions for the Fund.
The Adviser places portfolio transactions for other advisory accounts
including other investment companies. The Adviser seeks to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Fund and another advisory account. In some cases, this
procedure could have an adverse effect on the price or the amount of securities
available to the Fund. In making such allocations among the Fund and other
advisory accounts, the main factors considered by the Adviser are the respective
investment objectives, the relative size of portfolio holdings of the same or
comparable securities, the availability of cash for investment, the size of
investment commitments generally held and opinions of the persons responsible
for recommending the investment.
The Adviser's brokerage practices are monitored on a quarterly basis by the
Brokerage Review Committee comprised of Fund Trustees who are not affiliated
persons (as defined in the 1940 Act) of the Adviser. During the fiscal years
ended September 30, 1992, 1993 and 1994, the Fund paid $-0-, $-0- and $4,589,
respectively, in brokerage commissions. The negotiated commission paid to an
affiliated broker on any transaction would be comparable to that payable to a
non-affiliated broker in a similar transaction.
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DETERMINATION OF NET ASSET VALUE
The net asset value of Fund shares is computed by dividing the value of all
securities plus other assets, less liabilities, by the number of shares
outstanding. The net asset value of the shares of the Fund is determined once
daily as of the close of trading (currently 4:00 p.m., New York time) each day
the New York Stock Exchange (the "Exchange") is open. The Exchange is currently
closed on weekends and on the following holidays: New Year's Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The Fund's investments are valued by an independent pricing service
("Service"). When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at such quoted bid prices (as obtained by
the Service from dealers in such securities). Other investments are carried at
fair value as determined by the Service, based on methods which include
consideration of: yields or prices of municipal bonds of comparable quality,
coupon, maturity and type; indications as to values from dealers; and general
market conditions. The Service may employ electronic data processing techniques
and/or a matrix system to determine valuations. Any assets which are not valued
by the Service would be valued at fair value using methods determined in good
faith by the Directors. Expenses and fees, including the management fee are
accrued daily and taken into account for the purpose of determining the net
asset value of Fund shares. Short-term instruments having remaining maturities
of 60 days or less are valued at amortized cost.
The assets belonging to the Class A shares, the Class B shares and the
Class C shares will be invested together in a single portfolio. The net asset
value of each class will be determined separately by subtracting the expenses
and liabilities allocated to that class from the assets belonging to that class
pursuant to an order issued by the Securities and Exchange Commission ("SEC").
PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Fund's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Shares of the Fund are sold in a continuous offering and may be purchased
on any business day through authorized dealers, including Advantage Capital
Corporation.
ALTERNATIVE SALES ARRANGEMENTS
The Fund issues three classes of shares: Class A shares are subject to an
initial sales charge; Class B shares and Class C shares are sold at net asset
value and are subject to a contingent deferred sales charge. The three classes
of shares each represent interests in the same portfolio of investments of the
Fund, have the same rights and are identical in all respects, except that Class
B and Class C shares bear the expenses of the deferred sales arrangements, a
higher distribution services fee, and any expenses (including higher transfer
agency costs) resulting from such sales arrangements, and have exclusive voting
rights with respect to the Rule 12b-1 distribution plan pursuant to which the
distribution fee is paid.
During special promotions, the entire sales charge on Class A shares may be
reallowed to dealers, and at such times dealers may be deemed to be underwriters
for purposes of the 1933 Act.
INVESTMENTS BY MAIL
A shareholder investment account may be opened by completing the
application included in the Prospectus and forwarding the application, through
the designated dealer, to ACCESS, at P.O. Box 419319, Kansas City, Missouri
64141-6319. The account is opened only upon acceptance of the application by
ACCESS. The minimum initial investment of $500 or more, in the form of a check
payable to the Fund, must accompany the application. This minimum may be waived
by the Distributor for plans involving continuing investments. Subsequent
investments of $25 or more may be mailed directly to ACCESS. All such
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<PAGE> 71
investments are made at the public offering price of Fund shares next computed
following receipt of payment by ACCESS. Confirmations of the opening of an
account and of all subsequent transactions in the account are forwarded by
ACCESS to the investor's dealer of record, unless another dealer is designated.
In processing applications and investments, ACCESS acts as agent for the
investor and for the dealer named thereon, and also as agent for the
Distributor, in accordance with the terms of the Prospectus. If ACCESS ceases to
act as such, a successor company named by the Fund will act in the same
capacities so long as the account remains open.
CUMULATIVE PURCHASE DISCOUNT
The reduced sales charges reflected in the sales charge table as shown in
the Prospectus apply to purchases of Class A shares of the Fund where the
aggregate investment is $100,000 or more. For purposes of determining
eligibility for volume discounts, spouses and their minor children are treated
as a single fiduciary account. An aggregate investment includes all shares of
the Fund and all shares of certain other participating Van Kampen American
Capital mutual funds described in the Prospectus (the "Participating Funds"),
which have been previously purchased and are still owned, plus the shares being
purchased. The current offering price is used to determine the value of all such
shares. If, for example, an investor has previously purchased and still holds
Class A shares of the Fund and shares of other Participating Funds having a
current offering price of $40,000, and that person purchases $65,000 of
additional Class A shares of the Fund, the sales charge applicable to the
$65,000 purchase would be 3.75% of the offering price. The same reduction is
applicable to purchases under a Letter of Intent as described in the next
paragraph. THE DEALER MUST NOTIFY THE DISTRIBUTOR AT THE TIME AN ORDER IS PLACED
FOR A PURCHASE WHICH WOULD QUALIFY FOR THE REDUCED CHARGE ON THE BASIS OF
PREVIOUS PURCHASES. SIMILAR NOTIFICATION MUST BE MADE IN WRITING WHEN SUCH AN
ORDER IS PLACED BY MAIL. The reduced sales charge will not be applied if such
notification is not furnished at the time of the order. The reduced sales charge
will also not be applied should a review of the records of the Distributor or
ACCESS fail to confirm the investor's representations concerning his holdings.
LETTER OF INTENT
Purchases of Class A shares of the Participating Funds described above
under "Cumulative Purchase Discount," made pursuant to the Letter of Intent and
the value of all shares of such Participating Funds previously purchased and
still owned are also included in determining the applicable quantity discount. A
Letter of Intent permits an investor to establish a total investment goal to be
achieved by any number of investments over a 13-month period. Each investment
made during the period will receive the reduced sales charge applicable to the
amount represented by the goal as if it were a single investment. Escrowed
shares totaling five percent of the dollar amount of the Letter of Intent are
held by ACCESS in the name of the shareholder. The effective date of a Letter of
Intent may be back-dated up to 90 days in order that any investments made during
this 90-day period, valued at the investor's cost, can become subject to the
Letter of Intent. The Letter of Intent does not obligate the investor to
purchase the indicated amount. In the event the Letter of Intent goal is not
achieved within the 13-month period, the investor is required to pay the
difference between sales charges otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrow shares to obtain such difference. If the goal is exceeded in
an amount which qualifies for a lower sales charge, a price adjustment is made
by refunding to the investor in shares of the Fund, the amount of excess sales
charge, if any, paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the Exchange is closed,
including those holidays listed under "Determination of Net Asset Value." The
right of redemption may be suspended and the payment therefor may be postponed
for more than seven days during any period when (a) the Exchange is closed for
other than customary weekends or holidays; (b) trading on the Exchange is
restricted; (c) an emergency exists as a result of which disposal by the Fund of
securities owned by it is not reasonably practicable or it is
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<PAGE> 72
not reasonably practicable for the Fund to fairly determine the value of its net
assets; or (d) the SEC, by order, so permits.
CONTINGENT DEFERRED SALES CHARGE-CLASS A
For investments in the amount of $1,000,000 or more of Class A shares of
the Fund ("Qualified Purchaser"), the front-end sales charge will be waived and
a contingent deferred sales charge ("CDSC-Class A") of one percent is imposed in
the event of certain redemptions within one year of the purchase. If a
CDSC-Class A is imposed upon redemption, the amount of the CDSC-Class A will be
equal to the lesser of one percent of the net asset value of the shares at the
time of purchase, or one percent of the net asset value of the shares at the
time of redemption.
The CDSC-Class A will only be imposed if a Qualified Purchaser redeems an
amount which causes the value of the account to fall below the total dollar
amount of purchase payments made by the Qualified Purchaser without an initial
sales charge during the one-year period prior to the redemption. The CDSC-Class
A will be waived in connection with redemptions by certain Qualified Purchasers
(e.g., in retirement plans qualified under Section 401(a) of the Code and
deferred compensation plans under Section 457 of the Code) required to obtain
funds to pay distributions to beneficiaries pursuant to the terms of the plans.
Such payments include, but are not limited to, death, disability, retirement or
separation from service. No CDSC-Class A will be imposed on exchanges between
funds. For purposes of the CDSC-Class A, when shares of one fund are exchanged
for shares of another fund, the purchase date for the shares of the fund
exchanged into will be assumed to be the date on which shares were purchased in
the fund from which the exchange was made. If the exchanged shares themselves
are acquired through an exchange, the purchase date is assumed to carry over
from the date of the original election to purchase shares subject to a
CDSC-Class A rather than a front-end load sales charge. In determining whether a
CDSC-Class A is payable, it is assumed that shares held the longest are the
first to be redeemed.
Cumulative Purchase Discounts and Letters of Intent apply to the net asset
value privilege. Also, in order to establish an amount of $1,000,000 or more, a
Qualified Purchaser may aggregate shares of Van Kampen American Capital Reserve
Fund, Van Kampen American Capital Money Market Fund and Van Kampen American
Capital Tax Free Money Fund with shares of certain other participating funds
described as "Participating Funds" in the Prospectus.
As described in the Prospectus under "Redemption of Shares," redemptions of
Class B and Class C shares will be subject to a contingent deferred sales
charge.
WAIVER OF CLASS B AND CLASS C CONTINGENT DEFERRED SALES CHARGE ("CDSC-CLASS B
AND C")
The CDSC-Class B and C is waived on redemptions of Class B and Class C
shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Fund will waive the CDSC-Class B and C on redemptions following the
death or disability of a Class B and Class C shareholder. An individual will be
considered disabled for this purpose if he or she meets the definition thereof
in Section 72(m)(7) of the Internal Revenue Code (the "Code"), which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of death or disability before it determines to
waive the CDSC-Class B and C.
In cases of disability or death, the CDSC-Class B and C will be waived
where the decedent or disabled person is either an individual shareholder or
owns the shares as a joint tenant with right of survivorship or is the
beneficial owner of a custodial or fiduciary account, and where the redemption
is made within one year of the death or initial determination of disability.
This waiver of the CDSC-Class B and C applies to a total or
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<PAGE> 73
partial redemption, but only to redemptions of shares held at the time of the
death or initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Fund will waive the CDSC-Class B and C when a total or partial
redemption is made in connection with certain distributions from Retirement
Plans. The charge will be waived upon the tax-free rollover or transfer of
assets to another Retirement Plan invested in one or more of Van Kampen American
Capital Funds; in such event, as described below, the Fund will "tack" the
period for which the original shares were held on to the holding period of the
shares acquired in the transfer or rollover for purposes of determining what, if
any, CDSC-Class B and C is applicable in the event that such acquired shares are
redeemed following the transfer or rollover. The charge also will be waived on
any redemption which results from the return of an excess contribution pursuant
to Section 408(d)(4) or (5) of the Code, the return of excess deferral amounts
pursuant to Code Section 401(k)(8) or 402(g)(2), or from the death or disability
of the employee (see Code Section 72(m)(7) and 72(t)(2)(A)(ii)). In addition,
the charge will be waived on any minimum distribution required to be distributed
in accordance with Code Section 401(a)(9).
The Fund does not intend to waive the CDSC-Class B and C for any
distributions from IRAs or other Retirement Plans not specifically described
above.
(c) Redemption Pursuant to a Fund's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan
("Plan") with respect to the shareholder's investment in the Fund. Under the
Plan, a dollar amount of a participating shareholder's investment in the Fund
will be redeemed systematically by the Fund on a periodic basis, and the
proceeds mailed to the shareholder. The amount to be redeemed and frequency of
the systematic withdrawals will be specified by the shareholder upon his or her
election to participate in the Plan. The CDSC-Class B and C will be waived on
redemptions made under the Plan.
The amount of the shareholder's investment in a Fund at the time the
election to participate in the Plan is made with respect to the Fund is
hereinafter referred to as the "initial account balance." The amount to be
systematically redeemed from such Fund without the imposition of a CDSC-Class B
and C may not exceed a maximum of 12% annually of the shareholder's initial
account balance. The Fund reserves the right to change the terms and conditions
of the Plan and the ability to offer the Plan.
(d) Involuntary Redemptions of Shares in Accounts that Do Not Have the
Required Minimum Balance
The Fund reserves the right to redeem shareholder accounts with balances of
less than a specified dollar amount as set forth in the Prospectus. Prior to
such redemptions, shareholders will be notified in writing and allowed a
specified period of time to purchase additional shares to bring the account up
to the required minimum balance. The Fund will waive the CDSC upon such
involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Fund Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Fund may reinvest, with
credit for any CDSC-Class C paid on the redeemed shares, any portion or all of
his or her redemption proceeds (plus that amount necessary to acquire a
fractional share to round off his or her purchase to the nearest full share) in
shares of the Fund, provided that the reinvestment is effected within 120 days
after such redemption and the shareholder has not previously exercised this
reinvestment privilege with respect to Class C shares of the Fund. Shares
acquired in this manner will be deemed to have the original cost and purchase
date of the redeemed shares for purposes of applying the CDSC-Class C to
subsequent redemptions.
(f) Redemption by Adviser
The Fund may waive the CDSC-Class B and C when a total or partial
redemption is made by the Adviser with respect to its investments in the Fund.
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EXCHANGE PRIVILEGE
The following supplements the discussion of "Shareholder
Services -- Exchange Privilege" in the Prospectus:
By use of the exchange privilege, the investor authorizes ACCESS to act on
telephonic, telegraphic or written exchange instructions from any person
representing himself to be the investor or the agent of the investor and
believed by ACCESS to be genuine. VKAC and its subsidiaries, including ACCESS
(collectively, "Van Kampen American Capital"), and the Fund employ procedures
considered by them to be reasonable to confirm that instructions communicated by
telephone are genuine. Such procedures include requiring certain personal
identification information prior to acting upon telephone instructions, tape
recording telephone communications, and providing written confirmation of
instructions communicated by telephone. If reasonable procedures are employed,
neither Van Kampen American Capital nor the Fund will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Fund may be liable for any losses due to unauthorized
or fraudulent instructions if reasonable procedures are not followed.
For purposes of determining the sales charge rate previously paid on Class
A shares, all sales charges paid on the exchanged security and on any security
previously exchanged for such security or for any of its predecessors shall be
included. If the exchanged security was acquired through reinvestment, that
security is deemed to have been sold with a sales charge rate equal to the rate
previously paid on the security on which the dividend or distribution was paid.
If a shareholder exchanges less than all of his securities, the security upon
which the highest sales charge rate was previously paid is deemed exchanged
first.
Exchange requests received on a business day prior to the time shares of
the funds involved in the request are priced will be processed on the date of
receipt. "Processing" a request means that shares in the fund from which the
shareholder is withdrawing an investment will be redeemed at the net asset value
per share next determined on the date of receipt. Shares of the new fund into
which the shareholder is investing will also normally be purchased at the net
asset value per share, plus any applicable sales charge, next determined on the
date of receipt. Exchange requests received on a business day after the time
shares of the funds involved in the request are priced will be processed on the
next business day in the manner described herein.
A prospectus of any of these mutual funds may be obtained from any
authorized dealer or the Distributor. An investor considering an exchange to one
of such funds should refer to the prospectus for additional information
regarding such fund.
CHECK WRITING PRIVILEGE
To establish the check writing privilege for Class A shares, a shareholder
must complete the appropriate section of the application and the Authorization
for Redemption form to ACCESS before checks will be issued. All signatures on
the authorization card must be guaranteed if any of the signators are persons
not referenced in the account registration or if more than 30 days have elapsed
since ACCESS established the account on its records. Moreover, if the
shareholder is a corporation, partnership, trust, fiduciary, executor or
administrator, the appropriate documents appointing authorized signers
(corporate resolutions, partnerships or trust agreements) must accompany the
authorization card. The documents must be certified in original form, and the
certificates must be dated within 60 days of their receipt by ACCESS.
The privilege does not carry over to accounts established through exchanges
or transfers. It must be requested separately for each fund account.
FEDERAL TAX INFORMATION
The following is only a summary of certain additional federal tax
considerations generally affecting the Fund and its shareholders that are not
described in the Prospectus. No attempt is made to present a detailed
explanation of the tax treatment of the Fund or its shareholders, and the
discussion here and in the Prospectus is not intended as a substitute for
careful tax planning. Investors are urged to consult their tax advisers with
specific reference to their own tax situation.
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The Fund has elected to be taxed as a regulated investment company under
Sections 851-855 of the Code. This means the Fund must pay all or substantially
all its taxable net investment income and taxable net realized capital gains to
shareholders of Class A, Class B and Class C shares and meet certain
diversification and other requirements. The per share dividends on Class B and
Class C shares will be lower than the per share dividends on Class A shares as a
result of the higher distribution services and incremental transfer agency fees
applicable to the Class B and Class C shares. By qualifying as a regulated
investment company, the Fund is not subject to federal income taxes to the
extent it distributes its taxable net investment income and taxable net realized
capital gains. If for any taxable year the Fund does not qualify for the special
tax treatment afforded regulated investment companies, all of its taxable
income, including any net realized capital gains, would be subject to tax at
regular corporate rates (without any deduction for distributions to
shareholders).
If shares of the Fund are sold or exchanged within 90 days of acquisition,
and shares of the same or a related mutual fund are acquired, to the extent the
sales charge is reduced or waived on the subsequent acquisition, the sales
charge may not be used to determine the basis in the disposed shares for
purposes of determining gain or loss. To the extent the sales charge is not
allowed in determining gain or loss on the initial shares, it is capitalized in
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Bonds to pass through to its investors,
tax-exempt, net Municipal Bond interest income. In order for the Fund to be
eligible to pay exempt-interest dividends during any taxable year, at the close
of each fiscal quarter, at least 50% of the aggregate value of the Fund's assets
must consist of exempt-interest obligations. In addition, the Fund must
distribute at least (i) 90% of the excess of its exempt-interest income over
certain disallowed deductions, and (ii) 90% of its "investment company taxable
net income" (i.e., its ordinary taxable income and the excess, if any, of its
net short-term capital gains over any net long-term capital losses) recognized
by the Fund during the taxable year (the "Distribution Requirements").
The Fund is subject to a four percent excise tax to the extent it fails to
distribute to its shareholders at least 98% of its ordinary taxable (net
investment) income for the twelve months ended December 31, plus 98% of its
capital gain net income for the twelve months ended October 31 of such calendar
year. The Fund intends to distribute sufficient amounts to avoid liability for
the excise tax.
Not later than 60 days after the close of its taxable year, the Fund will
notify its shareholders of the portion of the dividends paid by the Fund to the
shareholders for the taxable year which constitutes exempt-interest dividends.
The aggregate amount of dividends so designated cannot exceed, however, the
amount of interest exempt from tax under Section 103 of the Code received by the
Fund during the year over any amounts disallowed as deductions under Sections
265 and 171(a)(2) of the Code. Since the percentage of dividends which are
"exempt-interest" dividends is determined on an average annual method for the
fiscal year, the percentage of income designated as tax-exempt for any
particular dividend may be substantially different from the percentage of the
Fund's income that was tax-exempt during the period covered by the dividend.
Although exempt-interest dividends generally may be treated by the Fund's
shareholders as items of interest excluded from their gross income, each
shareholder is advised to consult his tax adviser with respect to whether
exempt-interest dividends retain this exclusion if the shareholder would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Fund. "Substantial user" is defined under
U.S. Treasury Regulations to include a non-exempt person who regularly uses in
his trade or business a part of any facilities financed with the tax-exempt
obligations and whose gross revenues derived from such facilities exceed five
percent of the total revenues derived from the facilities by all users, or who
occupies more than five percent of the usable area of the facilities or for whom
the facilities or a part thereof were specifically constructed, reconstructed or
acquired. Examples of "related persons" include certain related natural persons,
affiliated corporations, a partnership and its partners and an S corporation and
its shareholders.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the
23
<PAGE> 76
shareholder's taxable year. If a shareholder receives an exempt-interest
dividend with respect to any shares and such shares are held for six months or
less, any short-term capital loss on the sale or exchange of the shares will be
disallowed to the extent of the amount of such exempt-interest dividend.
If, during any taxable year, the Fund realizes net capital gains (the
excess of net long-term capital gains over net short-term capital losses) from
the sale or other disposition of Municipal Bonds or other assets, the Fund will
have no tax liability with respect to such gains if they are distributed to
shareholders. Distributions designated as capital gains dividends are taxable to
shareholders as long-term capital gains, regardless of how long a shareholder
has held his shares. Not later than 60 days after the close of the Fund's
taxable year, the Fund will send to its shareholders a written notice
designating the amount of any distributions made during the year which
constitute capital gain.
A capital gain dividend received after the purchase of the Fund's shares
reduces the net asset value of the shares by the amount of the distribution and
will be subject to income taxes. A loss on the sale of shares held for less than
six months (to the extent not disallowed on account of the receipt of
exempt-interest dividends) attributable to a capital gain dividend is treated as
a long-term capital loss for Federal income tax purposes.
Dividends to shareholders who are non-resident aliens may be subject to a
United States withholding tax at a rate of up to 30% under existing provisions
of the Code applicable to foreign individuals and entities unless a reduced rate
of withholding or a withholding exemption is provided under applicable treaty
law. Non-resident shareholders are urged to consult their own tax adviser
concerning the applicability of the United States withholding tax.
BACK-UP WITHHOLDING
The Fund is required to withhold and remit to the United States Treasury
31% of (i) reportable taxable dividends and distributions and (ii) the proceeds
of any redemptions of Fund shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Fund with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Fund that he has provided a correct
taxpayer identification number and that he is not subject to withholding. (An
individual's taxpayer identification number is his social security number.) The
31% "back-up withholding tax" is not an additional tax and may be credited
against a taxpayer's regular federal income tax liability.
TREATMENT OF DIVIDENDS
While the Fund expects that a major portion of its investment income will
constitute tax-exempt interest, a portion may consist of "investment company
taxable income" and "net capital gains". As pointed out above, the Fund will be
subject to tax for any year on its undistributed investment company taxable
income and net capital gains.
It is anticipated that substantially all of the Fund's taxable income and
capital gain net income will be distributed by the Fund in order to meet the
Distribution Requirements and to avoid taxation at the Fund level. Dividends
from net investment income and distributions from any short-term capital gains
are taxable to shareholders as ordinary income.
Dividends and distributions declared to shareholders of record after
September 30 of any year and paid before February 1 of the following year, are
considered taxable income to shareholders on the record date even though paid in
the next year.
Since none of the Fund's net investment income will arise from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction for corporations. To qualify for the dividends
received deduction, a corporate shareholder must hold the shares on which the
dividend is paid for more than 45 days.
The Tax Reform Act of 1986 (the "Tax Reform Act") added a provision that,
for taxable years beginning after December 31, 1989, 75% of the excess of a
corporation's adjusted current earnings (generally, earning and profits, with
adjustments) over its other alternative minimum taxable income is an item of tax
24
<PAGE> 77
preference for corporations. All tax-exempt interest is included in the
definition of "adjusted current earnings" so a portion of such interest is
included in computing the alternative minimum tax on corporations. For
shareholders that are financial institutions, the Tax Reform Act eliminated
their ability to deduct interest payments to the extent allocated on a pro rata
basis to the purchase of Fund shares.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury regulations promulgated thereunder. The Code and these Treasury
regulations are subject to change by legislative or administrative action either
prospectively or retroactively.
Dividends and capital gains distributions may also be subject to state and
local taxes.
Shareholders are urged to consult their attorneys or tax advisers regarding
specific questions as to federal, state or local taxes.
TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS
In connection with its operations, the Fund may effect transactions in U.S.
Government securities and municipal bond futures contracts ("Futures Contracts")
and in options thereon ("Futures Options"). Gains or losses recognized by the
Fund from transactions in such Futures Contracts and Futures Options constitute
capital gains and losses for federal income tax purposes and do not therefore
qualify as exempt-interest income.
With respect to a Futures Contract closed out by the Fund, any realized
gain or loss will be treated as long-term capital gain or loss to the extent of
60 percent thereof and short-term capital gain or loss to the extent of 40
percent thereof (hereinafter "60/40 gain or loss"). Open Futures Contracts held
by the Fund at the end of any fiscal year will be required to be treated as sold
at market value on the last day of such fiscal year for federal income tax
purposes (i.e. "marked-to-market"). Gain or loss recognized under this mark-to-
market rule is 60/40 gain or loss. The federal income tax treatment accorded to
Futures Options will be the same as that accorded to Futures Contracts. The
Distribution Requirements may limit the Fund's ability to hold Futures Contracts
and Futures Options at the end of a year.
A portion of the Fund's transactions in Futures Contracts and Futures
Options, particularly its hedging transactions, may constitute "straddles" with
respect to the Fund's holdings of Municipal Securities. Straddles are defined in
Section 1092 of the Code as offsetting positions with respect to personal
property. A straddle in which at least one (but not all) of the positions are
Section 1256 contracts is a "mixed straddle" under the Code if certain
identification requirements are met.
The Code generally provides with respect to straddles (i) "loss deferral"
rules which may postpone a recognition for tax purposes of losses from certain
closing purchase transactions or other dispositions of a position in the
straddle to the extent of unrealized gains in the offsetting position, (ii)
"wash sale" rules which may postpone recognition for tax purposes of losses
where a position forming part of a straddle is sold and a new offsetting
position is acquired within a prescribed period, and (iii) "short sale" rules
which may terminate the holding period of securities owned by the Fund when
offsetting positions are established and which may convert certain losses from
short-term to long-term.
The Code provides that certain elections may be made for mixed straddles
that can alter the character of the capital gain or loss recognized upon
disposition of positions which form part of a straddle. Certain other elections
are also provided in the Code. The Fund has not determined whether it will make
any of these elections.
The Fund may acquire an option to "put" specified portfolio securities to
banks or municipal bond dealers from whom the securities are purchased. See
"Stand-By Commitments," in the Prospectus. The Fund has been advised by its
legal counsel that it will be treated for federal income tax purposes as the
owner of the Municipal Securities acquired subject to the put; and the interest
on the Municipal Securities will be tax-exempt to the Fund. Counsel has pointed
out that although the Internal Revenue Service has issued a favorable published
ruling on a similar but not identical situation, it could reach a different
conclusion from
25
<PAGE> 78
that of counsel. Counsel has also advised the Fund that the Internal Revenue
Service presently will not ordinarily issue private letter rulings regarding the
ownership of securities subject to stand-by commitments.
RESTRICTIONS ON FUTURES CONTRACTS AND RELATED OPTIONS
Among the requirements for qualification as a regulated investment company
under the Code, the Fund must derive less than 30% of its gross income each year
from sales of securities held for less than three months. This requirement and
the mark-to-market rule may restrict the Fund's ability to: (i) effect closing
purchase transactions in Futures Contracts and Futures Options which have been
held for less than three months, and (ii) enter into various other short-term
transactions.
In addition, the Code requires that a Fund satisfy certain portfolio
diversification requirements at the end of each fiscal quarter of its taxable
year in order to maintain its qualification as a regulated investment company.
In general, no more than 25% of the value of a Fund's assets may be invested in
the securities of any one issuer and at least 50% of the value of the Fund's
assets must be represented by securities of issuers each of which separately
represents not more than five percent of the value of the total assets of the
Fund. Consequently, a Fund's ability to invest in Futures Contracts and Futures
Options may be limited.
FUND PERFORMANCE
The Fund's average annual total return for Class A shares for the one-year,
five-year and ten-year periods ended March 31 1995, was 1.03%, 6.88% and 8.59%,
respectively. The average annual total return for Class B shares of the Fund for
the one-year period ended March 31, 1995 was 1.14%, and for the period from
September 29, 1992 (the initial offering of Class B shares) to March 31, 1995
was 4.18%. The average annual total return for Class C shares for the one-year
period ended March 31, 1995 was 4.14%, and for the period from August 30, 1993
(the initial offering of Class C shares) to March 31, 1995 was 1.92%. These
results are based on historical earnings and asset value fluctuations and are
not intended to indicate future performance. Such information should be
considered in light of the Fund's investment objective and policies as well as
the risks incurred in the Fund's investment practices.
The annualized current yield for Class A shares, Class B shares and Class C
shares of the Fund for the 30-day period ending March 31, 1995 was 4.98%, 4.39%
and 4.38%, respectively. The tax equivalent yield (based on an assumption of a
tax rate of 36%) for the same period for Class A, Class B and Class C shares of
the Fund was 7.77%, 6.85%, and 6.84%, respectively. The yield for Class A, Class
B and Class C shares is not fixed and will fluctuate in response to prevailing
interest rates and the market value of portfolio securities, and as a function
of the type of securities owned by the Fund, portfolio maturity and the Fund's
expenses.
Yield and total return are computed separately for Class A, Class B and
Class C shares.
From time to time, in reports or other communications, or in advertising or
sales materials, the Adviser may announce the results of actual tests performed
by DALBAR Financial Securities, Inc., an independent research firm, as they
relate to the level of services for mutual fund investors and may refer to the
Missouri Quality Award received by ACCESS, the Fund's transfer agent, in 1993.
In addition, the Adviser may also refer to the Houston Awards for Quality
received by Van Kampen American Capital in 1994.
From time to time, VKAC will announce the results of its monthly polls of
U.S. investor intentions -- the Van Kampen American Capital Index of Investor
IntentionsSM and the Van Kampen American Capital Mutual Fund IndexSM -- which
polls measure how Americans plan to use their money.
The Fund may, from time to time: (1) illustrate the benefits of
tax-deferral by comparing taxable investments to investments made through
tax-deferred retirement plans; (2) illustrate in graph or chart form, or
otherwise, the benefits of dollar cost averaging by comparing investments made
pursuant to a systematic investment plan to investments made in a rising market;
(3) illustrate allocations among different types of mutual funds for investors
at different stages of their lives; and (4) in reports or other communications
to shareholders or in advertising material, illustrate the benefits of
compounding at various assumed rates of return. Such illustrations may be in the
form of charts or graphs and will not be based on historical returns experienced
by the Fund.
26
<PAGE> 79
OTHER INFORMATION
Custody of Assets -- All securities owned by the Fund and all cash,
including proceeds from the sale of shares of the Fund and of securities in the
Fund's investment portfolio, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
Shareholder Reports -- Semiannual statements are furnished to shareholders,
and annually such statements are audited by the independent accountants.
Independent Accountants -- Price Waterhouse LLP, 1201 Louisiana, Houston,
Texas 77002, the independent accountants for the Fund, performs an annual audit
of the Fund's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual and Semi-annual Reports to Shareholders, including the related Report of
Independent Accountants on the September 30, 1994 financial statements, are
included in the Statement of Additional Information.
The following information is not included in the Annual or Semi-annual
Reports. This example assumes a purchase of Class A shares aggregating less than
$100,000 subject to the schedule of sales charges set forth in the Prospectus at
a price based upon the net asset value of Class A shares of the Fund.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1994 MARCH 31, 1995
------------------ --------------
<S> <C> <C>
Net Asset Value per Class A Share $ 9.82 $ 9.98
Class A Per Share Sales Charge -- 4.75% of
offering price (4.99% of net asset value per
share) $ .49 $ .50
------- -------
Class A Per Share Offering Price to the Public $10.31 $10.48
</TABLE>
27
<PAGE> 80
APPENDIX
RATINGS OF INVESTMENTS
Ratings of Municipal Bonds
Descriptions of Moody's Investors Service, Inc. ("Moody's") Municipal Bond
Ratings:
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered adequate, but elements may be present which suggest a
susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time may be
small.
Conditional Rating: Bonds for which the security depends upon the
completion of some act or the fulfillment of some condition are rated
conditionally. These are bonds secured by (a) earnings of projects under
construction, (b) earnings of projects unseasoned in operation experience, (c)
rentals which begin when facilities are completed, or (d) payments to which some
other limiting condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of condition.
Rating Refinements: Moody's may apply numerical modifiers, 1, 2 and 3 in
each generic rating classification from Aa through B in its municipal bond
rating system. The modifier 1 indicates that the security ranks in the higher
end of its generic rating category; the modifier 2 indicates a midrange ranking;
and a modifier 3 indicates that the issue ranks in the lower end of its generic
rating category.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1, MIG 2, MIG 3 and MIG 4; MIG 1 denotes "best quality, enjoying strong
protection from established cash flows"; MIG 2 denotes "high quality" with
"ample margins of protection"; MIG 3 notes are of "favorable quality . . . but
lacking the undeniable strength of the preceding grades"; MIG 4 notes are of
"adequate quality, carrying specific risk but having protection . . . and not
distinctly or predominantly speculative."
Beginning on February 5, 1985, Moody's started new rating categories for
variable rate demand obligations ("VRDO's"). VRDO's receive two ratings. The
first rating, depending on the maturity of the VRDO, is assigned either a bond
or MIG rating which represents an evaluation of the risk associated with
scheduled principal and interest payments. The second rating, designated as
"VMIG," represents an
28
<PAGE> 81
evaluation of the degree of risk associated with the demand feature. The new
VRDO's demand feature ratings and symbols are:
VMIG 1: strong protection by established cash flows, superior liquidity
support, demonstrated access to the market for refinancing.
VMIG 2: ample margins of protection, high quality.
VMIG 3: favorable quality, liquidity and cash flow protection may be
narrow, market access for refinancing may be less well established.
VMIG 4: adequate quality, not predominantly speculative but there is risk.
DESCRIPTIONS OF MOODY'S COMMERCIAL PAPER RATINGS
Moody's Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's employs three designations, all judged to be
investment grade, to indicate the relative repayment capacity of rated issuers.
The first two are described below:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S ("S&P") MUNICIPAL DEBT RATINGS
A S&P's municipal debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees.
The debt rating is not a recommendation to purchase, sell or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor.
The ratings are based on current information furnished by the issuer or
obtained by S&P from other sources S&P considers reliable. S&P does not perform
an audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended or withdrawn as a
result of changes in, or unavailability of, such information, or for other
reasons.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default -- capacity and willingness of the obligor as
to the timely payment of interest and repayment of principal in
accordance with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of the obligation in
the event of bankruptcy, reorganization or other arrangement under
the laws of bankruptcy and other laws affecting creditor's rights.
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher-rated categories.
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<PAGE> 82
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt
in higher-rated categories.
BB,B Debt rated "BB" and "B" is regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
indicates the lowest degree of speculation. While such debt will
likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
Plus (+) or Minus (-): The ratings from "AA" to "BB" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
Provisional Ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the bonds being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise his own judgment with respect to such likelihood and
risk.
NR Indicates that no rating has been requested, that there is
insufficient information on which to base a rating or that S&P does
not rate a particular type of obligation as a matter of policy.
A S&P Commercial Paper Rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days. The
highest category is "A" which is further defined with the designation of 1, 2
and 3 to indicate the relative degree of safety. The first two categories are
described below:
A Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment.
A-1 This designation indicates that the degree of safety regarding timely
payment is very strong.
A-2 Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as overwhelming
as for issues designated "A-1".
The Commercial Paper Rating is not a recommendation to purchase or sell a
security. The ratings are based on current information furnished to S&P by the
issuer and obtained by S&P from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of, such information.
Commencing on July 27, 1984, S&P instituted a new rating category with
respect to certain municipal note issues with a maturity of less than three
years. The new note ratings and symbols are:
SP-1 A very strong, or strong, capacity to pay principal and interest.
Issues that possess overwhelming safety characteristics will be given
a "+" designation.
SP-2 A satisfactory capacity to pay principal and interest.
SP-3 A speculative capacity to pay principal and interest.
S&P may continue to rate note issues with a maturity greater than three
years in accordance with the same rating scale currently employed for municipal
bond ratings.
S&P assigns dual ratings to all long-term debt issues that have a demand or
put feature. The first rating addresses the likelihood of repayment of principal
and interest as due, and the second rating addresses the demand feature alone.
Long-term debt rating symbols are used for the long-term maturity and commercial
paper rating symbols are used for the put option (for example, AAA/A-1+). For
demand notes, S&P's note rating symbols are used with the commercial paper
symbols (for example, SP-1+/a-1+).
30
<PAGE> 83
Rating criteria described in the Prospectus are applied on the basis of the
highest rating applicable to the Municipal Security. This applies to split rated
securities (i.e., different ratings by Moody's and S&P) and dual rated
securities as described above.
Subsequent to its purchase by the Fund, an issue of Municipal Bonds or a
Temporary Investment may cease to be rated or its rating may be reduced, causing
more than 20% of the Fund's assets invested in Municipal Bonds to be invested in
low or non-rated bonds. This would not require the elimination of such
obligation from the Fund's portfolio, but the Adviser will consider such an
event in its determination of whether the Fund should continue to hold such
obligation in its portfolio. To the extent that the ratings accorded by S&P or
Moody's for Municipal Bonds or Temporary Investment may change as a result of
changes in such organizations, or changes in their rating systems, the Fund will
attempt to use comparable ratings as standards for its investments in Municipal
Bonds or Temporary Investments in accordance with the investment policies
contained herein.
31
<PAGE> 84
Investment Portfolio
September 30, 1994
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL BONDS 94.9%
EDUCATION 4.5%
$ 1,000,000 Broward County, Florida, Educational Facilities Authority Rev.
(Nova University Project), G.O., 8.50%, 4/1/10 . . . . . . . . . $ 1,148,150
625,000 Clear Creek, Texas, Independent School District, G.O.,
6.25%, 2/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . 654,156
1,000,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07 . . . . . . . 1,229,150
1,150,000 Florida State Board of Education, Capital Outlay, Series A,
7.25%, 6/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 1,261,564
Illinois Educational Facilities Authority Rev., G.O.
1,000,000 Lake First College, FSA, 6.75%, 10/1/21 . . . . . . . . . . . . 1,020,930
1,000,000 Northwestern University, Series 1985, 6.90%, 12/1/21 . . . . . . 1,103,630
2,000,000 New Hampshire Higher Education & Daniel Webster College
Issue, G.O., 7.625%, 7/1/16 . . . . . . . . . . . . . . . . . . 1,900,260
1,000,000 New York City, New York, Industrial Development Agency, Civil
Facility Rev. (Marymount Manhattan College Project), G.O.,
7.00%, 7/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 953,620
New York State Dormitory Authority Rev.
1,000,000 City University, 8.125%, 7/1/17; Pre-refunded 7/1/97 . . . . . . 1,104,280
3,250,000 State University Educational Facility, Series 1990-A,
7.70%, 5/15/12 . . . . . . . . . . . . . . . . . . . . . . . . 3,703,960
Pennsylvania State Higher Educational Facilities Authority Rev.
500,000 Hahnemann University Project, MBIA, G.O., 7.20%, 7/1/19 . . . . . 538,005
250,000 Pennsylvania Medical College, Series A, G.O., 7.50%,
3/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254,850
University of the Virgin Islands, Series A
500,000 7.50%, 10/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . 497,335
500,000 7.65%, 10/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . 496,965
--------------
TOTAL EDUCATION . . . . . . . . . . . . . . . . . . . . . . . . 15,866,855
--------------
HEALTH CARE 1.7%
500,000 Colorado Health Facilities Authority Rev. (Cleo Wallace Center
Project), 7.00%, 8/1/15 . . . . . . . . . . . . . . . . . . . . 481,925
1,500,000 Colorado Health Facilities Authority Rev. (PSL Healthcare System
Project), Series 1991-A, FSA, 6.25%, 2/15/21 . . . . . . . . . . 1,460,220
1,000,000 Cuyahoga County, Ohio, Health Care Facilities Rev.
(Jennings Hall), 7.30%, 11/15/23 . . . . . . . . . . . . . . . . 941,580
1,000,000 Lebanon County, Pennsylvania, Health Facilities Authority Health
Center Rev. (UTD Church of Christ Homes Project),
6.75%, 10/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 969,620
750,000 Massachusetts State, Industrial Finance Rev., 7.10%, 11/15/18 . . . 688,673
235,000 Pinal County, Arizona, Industrial Development Authority (Casa
Grande Regional Medical Center Project), 9.00%, 12/1/13 . . . . . 239,991
1,000,000 St. Petersburg, Florida, Health Facilities Authority Rev. (Allegany
Health Systems), 7.75%, 12/1/15 . . . . . . . . . . . . . . . . 1,130,990
--------------
TOTAL HEALTH CARE . . . . . . . . . . . . . . . . . . . . . . . 5,912,999
--------------
HOSPITALS 14.6%
Bexar County, Texas, Health Facilities Development Rev. (St. Lukes
Lutheran Hospital Project)
500,000 7.00%, 5/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 495,785
1,500,000 7.90%, 5/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 1,564,290
1,000,000 Boston, Massachusetts, Rev. (Boston City Hospital), FHA,
7.625%, 2/15/21 . . . . . . . . . . . . . . . . . . . . . . . . 1,132,060
500,000 Boulder County, Colorado, Industrial Development Rev. (Boulder
Medical Center Project), 8.875%, 1/1/17 . . . . . . . . . . . . 519,905
</TABLE>
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<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS--CONTINUED
$ 1,000,000 Charlotte County, Florida, Hospital Authority Rev. (Bon Secours
Health System), 8.25%, 8/15/18 . . . . . . . . . . . . . . . . . $ 1,128,880
500,000 Clarksville, Tennessee, Hospital Rev., Refunding & Improvement
(Clarksville Memorial Project), 6.25%, 7/1/13 . . . . . . . . . . 458,670
995,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project), Series-94, 6.875%, 6/1/16 . . . . . . . . . . 903,619
800,000 Colorado Health Facilities Authority Rev. (Rocky Mountain
Adventist), 6.625%, 2/1/13 . . . . . . . . . . . . . . . . . . . 747,680
2,000,000 Delaware State Economic Development Authority Rev. (Osteopathic
Hospital Association of Delaware), Series A, 6.90%, 1/1/18 . . . 1,823,740
1,000,000 Ector County, Texas, Hospital District (Medical Center Hospital),
7.125%, 4/15/02 . . . . . . . . . . . . . . . . . . . . . . . . 1,012,720
500,000 Erie County, Pennsylvania, Hospital Authority Rev. (Metro Health
Center), Series 1992, 7.25%, 7/1/12 . . . . . . . . . . . . . . 506,535
1,000,000 Harris County, Texas, Health Facilities Development Corp.
(Memorial Hospital System Project), 7.125%, 6/1/15 . . . . . . . 1,039,500
Illinois Health Facilities Authority Rev.
1,000,000 Elmhurst Memorial Hospital, Series 87-A, 8.125%, 1/1/13 . . . . . 1,086,380
1,000,000 Improvement Swedish Covenant, Series A, 6.30%, 8/1/13 . . . . . . 915,540
2,000,000 Lutheran Health System, Series B, MBIA, 6.00%, 4/1/18 . . . . . . 1,868,980
1,000,000 Masonic Medical Center, Series 1989-B, 7.70%, 10/1/19 . . . . . . 1,125,770
1,000,000 Memorial Hospital, 7.25%, 5/1/22 . . . . . . . . . . . . . . . . 977,770
500,000 Mercy Center For Health Care Services, 6.625%, 10/1/12 . . . . . 492,770
1,000,000 Northwestern Memorial Hospital, 6.75%, 8/15/11 . . . . . . . . . 1,028,770
1,000,000 Indiana Health Facilities, Financing Hospital Authority Rev.
(Community Hospital of Indiana), Series-H, MBIA,
6.85%, 7/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . 1,020,510
1,160,000 Jefferson County, Texas, Health Facility Authority Rev. (Baptist
Health Care Project), 8.30%, 10/1/14 . . . . . . . . . . . . . . 1,249,355
845,000 Lebanon County, Pennsylvania, Good Samaritan Hospital Authority
Rev. (Good Samaritan Hospital Project), 5.85%, 11/15/07 . . . . . 762,367
1,000,000 Marion County, Indiana, Hospital Authority, Facility Rev.
(Methodist Hospital of Indiana), 6.50%, 9/1/13 . . . . . . . . . 973,060
1,000,000 McKeesport, Pennsylvania, Hospital Authority Rev. (McKeesport
Hospital Project), 6.50%, 7/1/08 . . . . . . . . . . . . . . . . 924,620
1,000,000 Michigan State Hospital Finance Authority Rev. (St. Joseph
Hospital Corp.), Series A, 8.125%, 7/1/05 . . . . . . . . . . . 1,053,220
1,000,000 Missouri State Health & Educational Facilities Authority
(Heartland Health Systems Project), 8.125%, 10/1/10 . . . . . . . 1,122,930
2,500,000 New Hampshire Health & Higher Educational Facility Authority Rev.
(Wentworth Douglass Hospital), 8.50%, 1/1/15 . . . . . . . . . . 2,735,975
New York State Medical Care Facilities Finance Agency Rev.
1,000,000 Columbia Presbyterian Hospital, Series A, FHA, 8.00%, 2/15/25 . . 1,104,630
1,965,000 Montefiore Medical Center, 7.25%, 2/15/09 . . . . . . . . . . . 2,096,262
1,000,000 North General Hospital, Series 89-A, 7.40%, 2/15/19 . . . . . . . 1,040,740
725,000 Philadelphia, Pennsylvania, Hospital & Higher Education Facilities
Authority Rev. (Roxborough Memorial Hospital),
Series 2, 7.25%, 3/1/24 . . . . . . . . . . . . . . . . . . . . 658,445
1,500,000 Richardson, Texas, Hospital Authority, Refunding & Improvement
Rev. (Richardson Medical Center), 6.75%, 12/1/23 . . . . . . . . 1,416,225
1,000,000 Royal Oak, Michigan, Hospital Finance Authority, Rev. (William
Beaumont Hospital), Series D, 6.75%, 1/1/20 . . . . . . . . . . . 1,006,770
1,750,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project), 7.75%, 4/1/13 . . . . . . 1,693,405
</TABLE>
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Investment Portfolio--continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS--CONTINUED
$ 500,000 Salem, Oregon, Hospitals Facilities Authority Rev.,
7.50%, 12/1/24 . . . . . . . . . . . . . . . . . . . . . . . . $ 493,455
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authority
Rev. (Moses Taylor Hospital Project)
1,000,000 Series A, 7.375%, 7/15/08 . . . . . . . . . . . . . . . . . . . 983,730
500,000 Series B, 8.25%, 7/1/09 . . . . . . . . . . . . . . . . . . . . 534,570
South Dakota State Health & Educational Facilities Authority Rev.
(Sioux Valley Hospital)
1,000,000 7.25%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 958,700
2,000,000 7.625%, 11/1/13 . . . . . . . . . . . . . . . . . . . . . . . . 2,216,063
1,500,000 St. Joseph County, Indiana, Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA, 6.25%, 8/15/22 . . . . . . . 1,449,990
1,000,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health), Series B, 6.75%, 11/1/25 . . . . 914,870
1,000,000 Washington County, Pennsylvania, Hospital Authority,
7.35%, 6/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . . 941,050
1,500,000 Wells County, Indiana, Hospital Authority Rev., Refunding
(Caylor-Nickel Medical Center, Inc.), 8.50%, 4/15/03 . . . . . . 1,517,085
1,000,000 Weslaco, Texas, Health Facilities Development (Knapp Medical
Center Project), Series-A, 5.25%, 6/1/16 . . . . . . . . . . . . 848,500
1,000,000 West Virginia State, Hospital Finance Authority, Refunding &
Improvement (Fairmont General Hospital), Series A,
6.75%, 3/1/14 . . . . . . . . . . . . . . . . . . . . . . . . . 946,270
2,000,000 Wisconsin State Health & Educational Facilities Rev. (Wheaton
Franciscan Services Inc.), 8.20%, 8/15/18 . . . . . . . . . . . 2,254,280
--------------
TOTAL HOSPITALS . . . . . . . . . . . . . . . . . . . . . . . . 51,746,441
--------------
HOUSING 6.2%
1,275,000 Albuquerque, New Mexico, Home Mtg. Rev., 12.00%, 9/1/98 . . . . . . 1,261,536
1,645,000 Arapahoe County, Colorado, Single Family Mtg. Rev.,
8.375%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,697,311
1,000,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project), 6.75%, 4/1/19 . . . . . . . . 965,230
Bexar County, Texas, Housing Finance Corp., Rev.
410,000 8.20%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . . . . 430,791
435,000 Series B, 9.25%, 4/1/16 . . . . . . . . . . . . . . . . . . . . 455,692
145,000 El Paso, Texas, Property Finance Authority Inc., Single Family
Mtg. Rev., Series A, 8.70%, 12/1/18 . . . . . . . . . . . . . . 154,960
680,000 Fort Worth, Texas, Housing Finance Corp., Home Mtg. Rev.,
Refunding, 8.50%, 10/1/11 . . . . . . . . . . . . . . . . . . . 724,315
800,000 Harris County, Texas, Housing Financing Corp., Single Family Mtg.
Rev., Series 1983-A, 10.125%, 7/15/03 . . . . . . . . . . . . . 802,592
Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.
705,000 10.00%, 9/15/14 . . . . . . . . . . . . . . . . . . . . . . . . 725,057
885,000 Series A, FSA, 5.95%, 12/1/10 . . . . . . . . . . . . . . . . . 866,937
1,000,000 Maricopa County, Arizona, IDR, Multi-Family Rev., Refunding
(Laguna Point Apartments Project), 6.50%, 7/1/09 . . . . . . . . 994,250
Massachusetts State Housing Finance Agency
1,000,000 Multi-family Housing Authority, Series A, 8.75%, 8/1/08 . . . . . 1,041,250
550,000 Residential Housing Authority, Series A, 8.40%, 8/1/21 . . . . . 573,375
965,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26 . . . . . . . . . . . . . . . . . . . . . . . . . 956,556
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Retirement Community Rev. (GDL Farms Corp.
Project), 6.30%, 1/1/13 . . . . . . . . . . . . . . . . . . . . 895,260
</TABLE>
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<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING--CONTINUED
$ 1,000,000 Mount Clemens, Michigan, Housing Corp., Multi-family Rev.,
Refunding, Series A, 6.60%, 6/1/13 . . . . . . . . . . . . . . . $ 1,000,640
1,000,000 North St. Paul, Minnesota, Multi-family Refunding Housing Rev.
(Cottages North St. Paul), 9.25%, 2/1/22 . . . . . . . . . . . . 1,078,020
1,000,000 Pima County, Arizona, IDR, Single Family Mtg. Rev.,
6.625%, 11/1/14 . . . . . . . . . . . . . . . . . . . . . . . . 1,000,720
1,155,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd. Project),
Series A, 7.75%, 12/1/15 . . . . . . . . . . . . . . . . . . . . 1,120,997
2,500,000 St. Paul, Minnesota Port Authority, Housing & Redevelopment
Authority, Multi-family Housing Rev., Series J, 9.50%, 12/1/11 . 2,375,525
1,000,000 South Dakota State Housing Development Authority, Homeowner
Mtg., Series D-1, 6.85%, 5/1/26 . . . . . . . . . . . . . . . . 1,013,750
1,450,000 Texas State Veterans Housing Assistance, MBIA, G.O.,
6.80%, 12/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 1,471,344
245,000 Travis County, Texas, Housing Finance Corp., Single Family Mtg.
Rev., 8.20%, 4/1/22 . . . . . . . . . . . . . . . . . . . . . . 252,073
--------------
TOTAL HOUSING . . . . . . . . . . . . . . . . . . . . . . . . . 21,858,181
--------------
LIFE CARE 1.6%
2,000,000 Butler County, Pennsylvania, Industrial Development Authority Rev.,
1st Mtg. Rev. (Sherwood Oaks Project), Series A, 8.75%, 6/1/16 . 2,119,800
975,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project), 9.25%, 12/1/07 . . . . . . . . . . . . . . . . . . . . 1,013,454
1,000,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
(Reeds Landing Project), 8.625%, 10/1/23 . . . . . . . . . . . . 1,001,470
500,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple), Series-A, 6.75%, 12/1/13 . . . . . . 445,875
1,000,000 Wisconsin State Health & Educational Facilities Authority Rev.
(United Lutheran Program for the Aging Inc. Project),
8.50%, 3/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,056,780
--------------
TOTAL LIFE CARE . . . . . . . . . . . . . . . . . . . . . . . . 5,637,379
--------------
MISCELLANEOUS 7.4%
500,000 Berry Creek Metropolitan District, Colorado, G.O.,
Refunding and Improvement, 8.25%, 12/1/11 . . . . . . . . . . . 529,345
2,000,000 Compton, California, Certificates of Participation, Refunding,
Series B, 7.50%, 8/1/15 . . . . . . . . . . . . . . . . . . . . 2,100,760
1,000,000 Detroit, Michigan, Tax Increment Bonds (Development Area No. 1
Project), Series 89-A, 7.60%, 7/1/10 . . . . . . . . . . . . . . 1,047,540
2,500,000 District of Columbia Rev. (National Public Radio), Series A,
7.70%, 1/1/23 . . . . . . . . . . . . . . . . . . . . . . . . . 2,485,300
1,000,000 Dove Valley Metropolitan District, Arapahoe County, Colorado,
G.O., 9.50%, 12/1/08 . . . . . . . . . . . . . . . . . . . . . . 1,026,910
1,000,000 Du Page County, Illinois (Stormwater Project), 6.55%, 1/1/21 . . . 1,077,360
Fort Bend County, Texas, Levee Improvement District No. 11, G.O.
500,000 8.70%, 3/1/09 . . . . . . . . . . . . . . . . . . . . . . . . . 544,620
440,000 8.70%, 3/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 479,441
1,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project), 7.75%, 8/15/22 . . 1,043,160
1,000,000 Lehigh County, Pennsylvania, IDR (Allentown Interstate Motel),
8.00%, 8/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 995,130
Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series 1992, G.O.
630,000 7.95%, 12/1/03 . . . . . . . . . . . . . . . . . . . . . . . . . 643,432
500,000 8.10%, 12/1/11 . . . . . . . . . . . . . . . . . . . . . . . . . 525,640
</TABLE>
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<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
MISCELLANEOUS--CONTINUED
$ 145,000 Pocahontas, Iowa, Industrial Development Rev. (Navistar
International Harvester Co.), 10.25%, 10/1/00 . . . . . . . . . . $ 150,690
1,000,000 Port of New Orleans, Louisiana, IDR, Refunding (Avondale
Industries, Inc.), 8.25%, 6/1/04 . . . . . . . . . . . . . . . . 1,038,230
2,330,000 Somerset County, Pennsylvania, General Authority, Commonwealth
Lease Rev., FGIC, 6.25%, 10/15/11 . . . . . . . . . . . . . . . 2,448,830
1,750,000 St. Charles, Illinois, Industrial Development Rev. (Tri-City Center
Project), 7.50%, 11/1/13 . . . . . . . . . . . . . . . . . . . . 1,693,090
Texas General Services, Community Partner Interests, (Office
Building and Land Acquisition Project)
500,000 7.00%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . 487,875
500,000 7.00%, 8/1/24 . . . . . . . . . . . . . . . . . . . . . . . . 487,130
1,000,000 Texas State, Refunding (Superconducting Project), Series C, G.O.,
5.50%, 4/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 864,050
Utah State Building Ownership Authority Lease Rev. (Dept. of
Employment Security)
1,000,000 7.80%, 8/15/10 . . . . . . . . . . . . . . . . . . . . . . . . . 1,096,710
1,300,000 7.80%, 8/15/11 . . . . . . . . . . . . . . . . . . . . . . . . . 1,425,723
1,000,000 Valdez, Alaska, Marine Term Rev., Refunding, (Sohio Pipeline),
7.125%, 12/1/25 . . . . . . . . . . . . . . . . . . . . . . . . 1,056,150
1,250,000 Virginia, Port of Authority, Commonwealth, 8.20%, 7/1/08 . . . . . 1,372,988
1,500,000 Woodward, Oklahoma, Municipal Auto Sales, Refunding,
8.00%, 11/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 1,645,860
--------------
TOTAL MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . 26,265,964
--------------
MUNICIPAL UTILITY DISTRICT (MUD) 1.4%
500,000 Eldridge Road, Texas, MUD, Refunding, 6.125%, 3/1/11 . . . . . . . 452,450
1,000,000 Harris County, Texas, MUD No. 1, 9.75%, 3/1/00; Pre-refunded 3/1/95 1,022,650
500,000 Harris County, Texas, MUD, Refunding, G.O., 7.30%, 3/1/14 . . . . . 490,815
1,000,000 Mills Road, Texas, MUD, 6.50%, 9/1/14 . . . . . . . . . . . . . . . 927,450
Mission Bend MUDNo. 2, Texas
500,000 10.00%, 9/1/98 . . . . . . . . . . . . . . . . . . . . . . . . . 567,770
375,000 10.00%, 9/1/00 . . . . . . . . . . . . . . . . . . . . . . . . . 432,881
655,000 Montgomery County, Texas, MUD No. 4 (Water Works System),
8.90%, 9/1/02 . . . . . . . . . . . . . . . . . . . . . . . . . 744,362
500,000 North Mission Glen, Texas, MUD, Refunding, 6.50%, 9/1/14 . . . . . 460,755
--------------
TOTAL MUD . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,099,133
--------------
NURSING HOMES 0.6%
500,000 Fairfield, Ohio, Economic Development Rev., Refunding
(Beverly Enterprises), 8.50%, 1/1/03 . . . . . . . . . . . . . . 523,690
475,000 Louisiana Public Facilities Authority, Industrial Development Rev.,
Refunding (Beverly Enterprises), 8.25%, 9/1/08 . . . . . . . . . 490,822
1,315,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project),
Series-A, 7.875%, 12/1/13 . . . . . . . . . . . . . . . . . . . 1,270,724
--------------
TOTAL NURSING HOMES . . . . . . . . . . . . . . . . . . . . . . 2,285,236
--------------
POLLUTION CONTROL REVENUE (PCR) 6.1%
3,675,000 Brazos River Authority, Texas, PCR (Texas Utilities Electric Co.
Project A), 9.875%, 10/1/17 . . . . . . . . . . . . . . . . . . 4,151,316
1,000,000 Burke County, Georgia, Development Authority, PCR
(Georgia Power Co.), 9.375%, 12/1/17 . . . . . . . . . . . . . . 1,133,810
1,000,000 Burlington, Kansas, PCR, MBIA (Kansas Gas & Electric Co. Project),
7.00%, 6/1/31 . . . . . . . . . . . . . . . . . . . . . . . . . 1,054,670
1,595,000 Capital Industrial Development Corp., Texas, PCR (International
Business Machines Corp.), 7.40%, 5/1/12 . . . . . . . . . . . . 1,722,472
</TABLE>
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<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE (PCR)--CONTINUED
$ 750,000 County of Coshocton, Ohio, Solid Waste Disposal Rev. (Stone
Container Corp. Project), Series 1992, 7.875%, 8/1/13 . . . . . . $ 736,185
1,000,000 Hodge, Louisiana, Utility Rev. (Stone Container Corp. Project),
Series 1990, 9.00%, 3/1/10 . . . . . . . . . . . . . . . . . . . 1,020,930
1,280,000 Illinois Development Finance Authority, PCR (Commonwealth
Edison Co.), 11.375%, 10/15/14 . . . . . . . . . . . . . . . . . 1,349,747
1,250,000 Mercer County, North Dakota, PCR, Basin Electric Power, Series E,
7.00%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,285,713
500,000 Monroe County, Michigan, PCR (Detroit Edison Co.), Series A,
10.50%, 12/1/16 . . . . . . . . . . . . . . . . . . . . . . . . 542,065
New Hampshire State Industrial Development Authority, PCR
1,000,000 New England Power Co., 7.80%, 4/1/16 . . . . . . . . . . . . . . 1,047,310
1,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12 . . . . . . . 1,161,110
1,000,000 Parish of St. Charles, Louisiana, PCR (Louisiana Power &
Light Co.), 8.25%, 6/1/14 . . . . . . . . . . . . . . . . . . . 1,104,010
1,400,000 Parish of West Feliciana, Louisiana, PCR (Gulf States Utilities),
Series A, 7.50%, 5/1/15 . . . . . . . . . . . . . . . . . . . . 1,471,904
1,000,000 Petersburg, Indiana, PCR, Refunding (Indianapolis Power &
Lighting), Series 1993-A, 6.10%, 1/1/16 . . . . . . . . . . . . 936,680
750,000 Pope County, Arkansas, PCR (Arkansas Power & Light Project),
11.00%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . 814,463
Sabine River Authority, Texas, Refunding, PCR (Texas Utilities
Co. Project)
1,350,000 7.75%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,411,938
440,000 Series 1986, 9.00%, 9/1/07 . . . . . . . . . . . . . . . . . . . 481,743
--------------
TOTAL PCR . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,426,066
--------------
POOL FINANCING PROGRAMS 2.8%
Emmaus, Pennsylvania, General Authority, Local Government Bond
Pool Program, Rev.
1,750,000 Series A, BIG, 8.15%, 5/15/18 . . . . . . . . . . . . . . . . . 1,889,650
2,500,000 Series C, BIG, 7.90%, 5/15/18 . . . . . . . . . . . . . . . . . 2,679,275
Indianapolis, Indiana, Local Public Improvement
1,000,000 Series A, 6.00%, 2/1/20 . . . . . . . . . . . . . . . . . . . . 945,280
2,000,000 Series C, 6.70%, 1/1/17 . . . . . . . . . . . . . . . . . . . . 1,986,020
450,000 Series D, 6.50%, 2/1/22 . . . . . . . . . . . . . . . . . . . . 432,747
550,000 Series D, 6.75%, 2/1/14 . . . . . . . . . . . . . . . . . . . . 558,272
1,000,000 Series D, 6.75%, 2/1/20 . . . . . . . . . . . . . . . . . . . . 992,680
670,000 Tampa, Florida, Capital Improvement Program Rev., Series A,
8.25%, 10/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 701,410
--------------
TOTAL POOL FINANCING PROGRAMS . . . . . . . . . . . . . . . . . 10,185,334
--------------
RESOURCE RECOVERY 3.2%
Broward County, Florida, Resource Recovery Rev.
1,810,000 North Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . 1,971,633
2,365,000 South Project, 7.95%, 12/1/08 . . . . . . . . . . . . . . . . . 2,576,195
1,000,000 Camden County, New Jersey, PCR, Solid Waste Resource Recovery
Rev., Series B, 7.50%, 12/1/09 . . . . . . . . . . . . . . . . . 992,700
1,500,000 Delaware County, Pennsylvania, Industrial Development Authority
Rev. (Resource Recovery Project), 8.10%, 12/1/13 . . . . . . . . 1,602,030
1,000,000 El Centro, California, Certificates of Participation, 7.00%, 6/1/19 959,170
1,000,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Resource Recovery, 7.50%, 1/1/12 . . . . . . . . 1,037,120
2,000,000 Northeast, Maryland, Solid Waste Disposal Authority Rev.
(Montgomery County Resource Recovery Project), Series A,
6.30%, 7/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 1,876,260
</TABLE>
F-6
<PAGE> 90
Investment Portfolio--continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
RESOURCE RECOVERY--CONTINUED
$ 500,000 Rockdale County, Georgia, Development Authority Rev., Solid Waste
Disposal (Visy Paper, Inc. Project), 7.50%, 1/1/26 . . . . . . . $ 484,710
--------------
TOTAL RESOURCE RECOVERY . . . . . . . . . . . . . . . . . . . . 11,499,818
--------------
SALES TAX REVENUE 1.5%
1,000,000 Crestwood, Illinois, Tax Increment Rev., Refunding, 7.25%, 12/1/08 961,440
1,000,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08 . . . . . . 931,800
1,000,000 Orange County, Florida, Tourist Development Tax Rev., AMBAC,
6.00%, 10/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 950,860
Round Lake Beach, Illinois, Tax Increment Rev.
900,000 Series 1993, 7.20%, 12/1/04 . . . . . . . . . . . . . . . . . . 855,774
500,000 Series 1993, 7.50%, 12/1/13 . . . . . . . . . . . . . . . . . . 444,000
975,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area), Series A, 10.00%, 8/1/10 . . . . . . . . . . . . . . . . 1,109,102
--------------
TOTAL SALES TAX REVENUE . . . . . . . . . . . . . . . . . . . . 5,252,976
--------------
TRANSPORTATION 10.0%
3,000,000 Atlanta, Georgia, Airport Facilities Rev. (Atlanta International
Airport), Series 1990, 6.25%, 1/1/21 . . . . . . . . . . . . . . 2,826,810
Chicago, Illinois, O'Hare International Airport Rev.
1,000,000 Series A, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 913,590
1,000,000 Series B, 6.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 913,590
500,000 Cleveland, Ohio, Parking Facilities Improvement Rev.,
8.00%, 9/15/12 . . . . . . . . . . . . . . . . . . . . . . . . . 522,285
940,000 Dallas-Fort Worth, Texas, International Airport Facility Rev,
(American Airlines, Inc.), 7.50%, 11/1/25 . . . . . . . . . . . 925,448
2,500,000 Greater Orlando Aviation Authority, Florida, Airport Facilities
Rev., 8.375%, 10/1/16 . . . . . . . . . . . . . . . . . . . . . 2,762,645
500,000 Hawaii State Harbor Capital Improvement Rev., MBIA,
7.00%, 7/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 525,205
2,000,000 Indiana Transportation Finance Authority, Airport Facilities Lease
Rev., Series A, 6.25%, 11/1/16 . . . . . . . . . . . . . . . . . 1,894,660
Kentucky State Turnpike Authority, Toll Road Rev., Refunding
1,000,000 Series A, 5.50%, 7/1/07 . . . . . . . . . . . . . . . . . . . . 948,940
8,000,000 Series 1987-A, 5.00%, 7/1/08 . . . . . . . . . . . . . . . . . . 7,078,800
2,000,000 Los Angeles, California, Regional Airport Facility Improvement
Corp., Lease Rev., 11.25%, 11/1/25 . . . . . . . . . . . . . . . 2,203,760
1,500,000 Metropolitan Transportation Authority, New York Transportation
Facilities, Rev., Series G, MBIA, 5.50%, 7/1/15 . . . . . . . . . 1,343,295
1,000,000 New Hampshire State Turnpike System, Rev., Refunding, Series A,
FGIC, 6.75%, 11/1/11 . . . . . . . . . . . . . . . . . . . . . . 1,045,350
3,200,000 New Jersey State Turnpike Authority, Series C, 6.50%, 1/1/16 . . . 3,281,568
1,000,000 Port Authority of New York and New Jersey, Consolidated Board,
95th Series, 6.125%, 7/15/22 . . . . . . . . . . . . . . . . . . 937,910
1,000,000 Philadelphia, Pennsylvania, Industrial Development Authority Rev.
(Parking Garage II Project), 6.125%, 2/15/03 . . . . . . . . . . 973,780
1,750,000 San Joaquin Hills, California, Transcorridor Agency, Toll Road
Rev., 6.75%, 1/1/32 . . . . . . . . . . . . . . . . . . . . . . 1,637,108
1,000,000 St. Louis, Missouri, Parking Facilities Rev., 6.625%, 12/15/21 . . 988,680
1,000,000 Triborough Bridge & Tunnel Authority, New York, Rev.,
7.875%, 1/1/18 . . . . . . . . . . . . . . . . . . . . . . . . . 1,101,960
Tulsa, Oklahoma, Municipal Airport Trust, Rev.
1,000,000 7.60%, 12/1/30 . . . . . . . . . . . . . . . . . . . . . . . . . 982,910
800,000 American Airlines, 9.50%, 6/1/20 . . . . . . . . . . . . . . . . 841,696
</TABLE>
F-7
<PAGE> 91
Investment Portfolio--continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION--CONTINUED
$ 825,000 Virgin Islands Port Authority, Marine Division Rev.
(Marine Terminal), Series A, 10.13%, 11/1/05 . . . . . . . . . . $ 859,196
--------------
TOTAL TRANSPORTATION . . . . . . . . . . . . . . . . . . . . . . 35,509,186
--------------
UTILITIES--COMBINATION ELECTRIC, GAS AND/OR WATER 9.5%
Austin, Texas, Utility System Rev.
1,250,000 FGIC, 7.75%, 11/15/06 . . . . . . . . . . . . . . . . . . . . . 1,334,700
2,280,000 Refunding, 6.00%, 5/15/15 . . . . . . . . . . . . . . . . . . . 2,131,686
1,000,000 Series A, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . 1,118,640
2,380,000 Series B, 7.80%, 11/15/12 . . . . . . . . . . . . . . . . . . . 2,608,147
1,000,000 Chicago, Illinois, Gas Supply Rev. (People's Gas Lighting and Coke
Co.), Series A, 8.10%, 5/1/20 . . . . . . . . . . . . . . . . . 1,111,720
1,000,000 Chicago, Illinois, Metropolitan Water District, G.O., 7.00%, 1/1/11 1,071,490
700,000 Citronelle, Alabama, Utilities Board, Water, Sewer & Gas Rev.,
9.00%, 5/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 757,526
10,950,000 Jefferson County, Kentucky, Capital Project Lease Rev., Waste
Water Treatment Plant, Zero Coupon, 8/15/14 . . . . . . . . . . . 2,710,344
750,000 Jefferson, Wisconsin, Sewer System, Waterworks, 7.40%, 7/1/16 . . . 835,193
2,000,000 Los Angeles, California, Dept. of Water & Power, Electric Plant
Rev., 5.375%, 9/1/23 . . . . . . . . . . . . . . . . . . . . . . 1,668,520
2,000,000 Massachusetts State Water Resource Authority, Series A,
7.50%, 4/1/16 . . . . . . . . . . . . . . . . . . . . . . . . . 2,240,700
1,000,000 New Hampshire State Business Finance Authority, Electric Facilities
Rev. (Plymouth Cogeneration Light Power), 7.75%, 6/1/14 . . . . . 975,260
New York City Municipal Water Finance Authority, New York,
Water & Sewer Rev.
1,000,000 Series A, 7.625%, 6/15/16 . . . . . . . . . . . . . . . . . . . 1,086,040
3,000,000 Series A, MBIA, 7.25%, 6/15/15 . . . . . . . . . . . . . . . . . 3,346,230
4,100,000 Series B, 5.00%, 6/15/17 . . . . . . . . . . . . . . . . . . . . 3,288,159
1,000,000 New York State Environment Facilities Corp., Water Facilities Rev.
(Long Island Water Corp.), 10.00%, 10/1/17 . . . . . . . . . . . 1,109,150
Norco, California, Sewer and Water Rev., Refunding,
500,000 6.70%, 10/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 488,465
500,000 7.20%, 10/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 487,570
750,000 Northwest Harris County, Texas, Municipal Utility, Waterworks and
Sewer System Combination Tax, 8.10%, 10/1/15 . . . . . . . . . . 796,117
2,000,000 Orlando, Florida, Utilities Commission, Water & Electric Rev.,
Refunding, 8.625%, 10/1/05; Pre-refunded 10/1/95 . . . . . . . . 2,123,880
Willow Fork, Texas, Drainage District, G.O.
500,000 7.00%, 3/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . 502,825
500,000 7.00%, 3/1/13 . . . . . . . . . . . . . . . . . . . . . . . . . 502,540
1,000,000 Winters, Texas, Water Works & Sewer Rev., 8.50%, 8/1/17 . . . . . . 1,202,170
--------------
TOTAL UTILITIES--COMBINATION ELECTRIC, GAS AND/OR WATER . . . . . . 33,497,072
--------------
UTILITIES--ELECTRIC 23.8%
2,500,000 Alaska Energy Authority Power Rev., First Series (Bradley Lake
Hydroelectric Project), BIG, 6.25%, 7/1/21 . . . . . . . . . . . . 2,430,150
1,500,000 Florida State Municipal Power Agency, Refunding (St. Lucie
Project), FGIC, 5.00%, 10/1/01 . . . . . . . . . . . . . . . . . 1,444,245
Georgia State Municipal Electric Authority, Power Rev.
850,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 789,582
2,000,000 Series A, 7.875%, 1/1/18; Pre-refunded 1/1/96 . . . . . . . . . . 2,117,060
1,750,000 Series Q, 8.375%, 1/1/16; Pre-refunded 1/1/98 . . . . . . . . . . 1,937,880
</TABLE>
F-8
<PAGE> 92
Investment Portfolio--continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
UTILITIES--ELECTRIC--CONTINUED
$ 9,685,000 Grand River Dam Authority, Oklahoma, Rev., Series 1987,
5.00%, 6/1/12 . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,252,395
Intermountain Power Agency, Utah, Power Supply Authority Rev.
1,850,000 1st Crossover Series, 5.00%, 7/1/16 . . . . . . . . . . . . . . 1,527,212
1,000,000 Series A, 6.00%, 7/1/23 . . . . . . . . . . . . . . . . . . . . 921,820
2,400,000 Series A, 7.75%, 7/1/17 . . . . . . . . . . . . . . . . . . . . 2,571,240
3,650,000 Series B, 7.75%, 7/1/20 . . . . . . . . . . . . . . . . . . . . 3,963,426
2,000,000 Series H, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 1,847,580
2,000,000 Series I, 6.00%, 7/1/21 . . . . . . . . . . . . . . . . . . . . 1,847,580
1,000,000 Lewis County, Washington, Public Utility District No. 1, Rev.
(Cowlitz Falls Hydroelectric Project), 6.00%, 10/1/24 . . . . . . 913,580
Massachusetts Municipal Wholesale Electric Co., Rev.
2,060,000 Series B, 13.00%, 7/1/18 . . . . . . . . . . . . . . . . . . . . 2,145,305
310,000 Series B, 13.625%, 7/1/17; Pre-refunded 1/1/93 . . . . . . . . . 326,380
750,000 Michigan Public Power Agency, Rev., Refunding (Belle River
Project), 7.00%, 1/1/18 . . . . . . . . . . . . . . . . . . . . 778,958
1,250,000 Municipal Electric Authority, Georgia, Special Obligation, 2nd
Crossover Series Rev., 8.125%, 1/1/17 . . . . . . . . . . . . . 1,374,988
3,000,000 Muscatine, Iowa, Electric Authority Rev., 5.00%, 1/1/08 . . . . . . 2,628,210
2,500,000 New York State Power Authority, Rev., Series T, 7.375%, 1/1/18 . . 2,636,000
300,000 Northern California, Public Power Agency, Rev., 5.00%, 7/1/09 . . . 254,643
North Carolina Eastern Municipal Power Agency, Power System Rev.
335,000 8.00%, 1/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 370,279
2,665,000 8.00%, 1/1/21; Pre-refunded 1/1/98 . . . . . . . . . . . . . . . 2,945,651
7,695,000 Series A, 4.50%, 1/1/24 . . . . . . . . . . . . . . . . . . . . 6,076,972
North Carolina Municipal Power Agency No. 1, Catawba Electric Rev.
1,000,000 6.00%, 1/1/20 . . . . . . . . . . . . . . . . . . . . . . . . . 909,550
2,850,000 7.875%, 1/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 3,139,161
1,070,000 Piedmont Municipal Power Agency, South Carolina, Rev.,
5.00%, 1/1/25 . . . . . . . . . . . . . . . . . . . . . . . . . 828,587
5,290,000 Salt River Project, Arizona Agricultural Improvement & Power
District Electric System Rev., 7.875%, 1/1/28 . . . . . . . . . . 5,826,723
Sam Rayburn, Texas, Municipal Power Agency, Refunding
1,000,000 Series A, 6.25%, 10/1/17 . . . . . . . . . . . . . . . . . . . . 870,840
1,000,000 Series A, 6.75%, 10/1/14 . . . . . . . . . . . . . . . . . . . . 949,640
1,000,000 South Carolina, Public Service Authority, 7.875%, 7/1/21;
Pre-refunded 1/1/96 . . . . . . . . . . . . . . . . . . . . . . 1,053,297
Southern Minnesota Municipal Power Agency, Power Supply
System Rev.
2,000,000 Series A, 5.00%, 1/1/16 . . . . . . . . . . . . . . . . . . . . 1,654,780
1,250,000 Series C, 5.00%, 1/1/17 . . . . . . . . . . . . . . . . . . . . 1,029,625
8,565,000 Texas Municipal Power Agency Rev., 5.50%, 9/1/13 . . . . . . . . . 7,621,908
Washington State Public Power Supply System Rev.
1,250,000 Nuclear Project No. 1, Series B, 7.125%, 7/1/16 . . . . . . . . . 1,312,438
445,000 Nuclear Project No. 1, Series D, 15.00%, 7/1/17 . . . . . . . . . 534,574
2,500,000 Nuclear Project No. 2, Series B, 7.00%, 7/1/12 . . . . . . . . . 2,596,400
1,000,000 Nuclear Project No. 2, Series B, 7.375%, 7/1/12 . . . . . . . . . 1,117,760
2,000,000 Nuclear Project No. 2, Series 1990-C, 7.625%, 7/1/10 . . . . . . 2,264,820
3,000,000 Nuclear Project No. 3, MBIA 5.60%, 7/1/17 . . . . . . . . . . . 2,626,560
--------------
TOTAL UTILITIES--ELECTRIC . . . . . . . . . . . . . . . . . . 84,437,799
--------------
TOTAL MUNICIPAL BONDS (COST $321,111,687) . . . . . . . . . . . 336,480,439
--------------
</TABLE>
F-9
<PAGE> 93
Investment Portfolio--continued
<TABLE>
<CAPTION>
Principal Market
Amount Value
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 3.7%
$ 100,000 Arkansas State Development Finance Authority, 3.65%, 12/1/15 . . . $ 100,000
California Statewide Communities Development Corp. Rev., Series A
600,000 3.50%, 6/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 600,000
1,000,000 3.50%, 8/1/19 . . . . . . . . . . . . . . . . . . . . . . . . . 1,000,000
400,000 Cuyahoga County, Ohio, IDR (Allen Group, Inc. Project),
3.50%, 12/1/15 . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
500,000 Dade County, Florida, Industrial Development Authority Rev.,
(Dynacolor Graphic Project), 4.00%, 6/1/99 . . . . . . . . . . . 500,000
500,000 Delaware County, Pennsylvania, Industrial Development
Authority Rev. (Ram Motors, Inc.), 4.20%, 9/1/10 . . . . . . . . 500,000
300,000 Fort Wayne, Indiana, Hospital Authority, Series C, 3.90%, 1/1/16 . 300,000
900,000 Illinois Development Finance Authority Rev., 3.70%, 4/1/07 . . . . 900,000
100,000 Illinois Health Facilities Authority Rev., 3.70%, 1/1/18 . . . . . 100,000
800,000 Indiana Health Facilities Financing Authority Rev., Capital Access
Designated Pool Program, 3.70%, 12/1/02 . . . . . . . . . . . . 800,000
100,000 Maricopa County, Arizona, Industrial Development Authority,
Hospital Facility Rev. (Samaritan Health Services Hospital),
Series B-2, 3.60%, 12/1/08 . . . . . . . . . . . . . . . . . . . 100,000
New York City, New York, G.O.
500,000 3.70%, 8/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
700,000 3.70%, 8/1/17 . . . . . . . . . . . . . . . . . . . . . . . . . 700,000
400,000 3.70%, 8/1/21 . . . . . . . . . . . . . . . . . . . . . . . . . 400,000
1,550,000 New York, New York, Subseries A-7, G.O., 3.95%, 8/1/20 . . . . . . 1,550,000
100,000 New York State Job Development Authority, 3.60%, 3/1/07 . . . . . . 100,000
500,000 Ossian, Indiana, Economic Development Rev. (Walbro Auto
Corporation Project), 3.80%, 12/1/23 . . . . . . . . . . . . . . 500,000
3,100,000 Panola County, Mississippi (Moog Automotive, Inc. Project),
3.85%, 9/1/10 . . . . . . . . . . . . . . . . . . . . . . . . . 3,100,000
400,000 Pennsylvania State Higher Educational Facility Authority Rev.,
Series B, 3.75%, 7/1/18 . . . . . . . . . . . . . . . . . . . . 400,000
300,000 Sacramento County, California, Multi-family Housing Rev., Series E,
3.75%, 9/15/07 . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
100,000 Uinta County, Wyoming, PCR, Refunding (Chevron U.S.A., Inc.
Project), 3.50%, 12/1/22 . . . . . . . . . . . . . . . . . . . . 100,000
--------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $12,950,000) . . . . . . . . . . . . . . . . . . . . . . 12,950,000
--------------
TOTAL INVESTMENTS (Cost $334,061,687) 98.6% . . . . . . . . . . . . 349,430,439
Other assets and liabilities, net 1.4% . . . . . . . . . . . . . . 4,826,629
--------------
NET ASSETS 100% . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,257,068
==============
</TABLE>
<TABLE>
<S> <C>
Insurers:
+Interest rates are as of September 30, 1994. AMBAC -- AMBAC Indemnity Corp.
FHA -- Federal Housing Administration BIG -- Bond Investors Guaranty Insurance Co.
G.O. -- General obligation bond FGIC -- Financial Guaranty Insurance Corp.
Rev. -- Revenue bond FSA -- Financial Security Assurance Inc.
IDR -- Industrial Revenue Bond MBIA -- Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
F-10
<PAGE> 94
Statement of Assets and Liabilities
September 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $334,061,687) . . . . . . . . . . . $ 349,430,439
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,191
Interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . 6,945,043
Receivable for investments sold . . . . . . . . . . . . . . . . . . . . 677,921
Receivable for Fund shares sold . . . . . . . . . . . . . . . . . . . . 255,397
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,370
---------------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . . . . 357,316,361
---------------
LIABILITIES
Payable for Fund shares redeemed . . . . . . . . . . . . . . . . . . . 1,836,732
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 752,716
Due to Distributor . . . . . . . . . . . . . . . . . . . . . . . . . . 220,415
Due to Adviser . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149,623
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 99,807
---------------
TOTAL LIABILITIES . . . . . . . . . . . . . . . . . . . . . . . . 3,059,293
---------------
NET ASSETS, equivalent to $9.82 per share for Class A shares and
$9.83 per share for Class B and Class C shares . . . . . . . . . . $ 354,257,068
===============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 31,463,264 Class A, 3,791,614 Class B and
814,200 Class C shares outstanding . . . . . . . . . . . . . . . . . $ 360,691
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 349,124,331
Accumulated net realized loss on securities . . . . . . . . . . . . . . (9,469,519)
Net unrealized appreciation of investments . . . . . . . . . . . . . . 15,368,752
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . (1,127,187)
---------------
NET ASSETS at September 30, 1994 . . . . . . . . . . . . . . . . . . . $ 354,257,068
===============
</TABLE>
See Notes to Financial Statements.
F-11
<PAGE> 95
Statement of Operations
Year Ended September 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,134,366
---------------
EXPENSES
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,804,381
Service fees--Class A . . . . . . . . . . . . . . . . . . . . . . . . . . 686,403
Distribution and service fees--Class B . . . . . . . . . . . . . . . . . 311,708
Distribution and service fees--Class C . . . . . . . . . . . . . . . . . 54,489
Shareholder service agent's fees and expenses . . . . . . . . . . . . . . 407,704
Accounting services . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,272
Registration and filing fees . . . . . . . . . . . . . . . . . . . . . . 109,827
Reports to shareholders . . . . . . . . . . . . . . . . . . . . . . . . . 64,148
Legal fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,177
Audit fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,983
Directors' fees and expenses . . . . . . . . . . . . . . . . . . . . . . 15,386
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,381
---------------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,628,859
---------------
Net investment income . . . . . . . . . . . . . . . . . . . . . . . . . 20,505,507
---------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities . . . . . . . . . . . . . . . . . . . . . (2,005,680)
Net unrealized depreciation of securities during the year . . . . . . . . (23,803,245)
---------------
Net realized and unrealized loss on securities . . . . . . . . . . . . (25,808,925)
---------------
Decrease in net assets resulting from operations . . . . . . . . . . . $ (5,303,418)
===============
</TABLE>
See Notes to Financial Statements.
F-12
<PAGE> 96
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------------------------------
1994 1993
---------------------- -----------------------
<S> <C> <C>
NET ASSETS, beginning of year . . . . . . . . . . . . . $ 355,682,180 $ 292,305,914
--------------------- -----------------------
Operations
Net investment income . . . . . . . . . . . . . . . . 20,505,507 18,722,991
Net realized loss on securities . . . . . . . . . . . (2,005,680) (61,760)
Net unrealized appreciation (depreciation) of
securities during the year . . . . . . . . . . . . . (23,803,245) 18,032,935
--------------------- -----------------------
Increase (decrease) in net assets resulting
from operations . . . . . . . . . . . . . . . . . . (5,303,418) 36,694,166
--------------------- -----------------------
Dividends and distributions to shareholders
From net investment income
Class A . . . . . . . . . . . . . . . . . . . . . . . (18,227,557) (18,216,098)
Class B . . . . . . . . . . . . . . . . . . . . . . . (1,534,981) (490,357)
Class C . . . . . . . . . . . . . . . . . . . . . . . (276,302) (275)
--------------------- -----------------------
(20,038,840) (18,706,730)
--------------------- -----------------------
In excess of book-basis net investment
income (Note 1D)
Class A . . . . . . . . . . . . . . . . . . . . . . . -- (252,018)
Class B . . . . . . . . . . . . . . . . . . . . . . . -- (55,026)
Class C . . . . . . . . . . . . . . . . . . . . . . . -- (4,939)
--------------------- -----------------------
-- (311,983)
--------------------- -----------------------
Total dividends and distributions to shareholders . . (20,038,840) (19,018,713)
--------------------- -----------------------
Net equalization credits (debits) (Note 1F) . . . . . . (20,289) 81,721
--------------------- -----------------------
Capital transactions
Proceeds from shares sold
Class A . . . . . . . . . . . . . . . . . . . . . . . 49,766,921 54,755,685
Class B . . . . . . . . . . . . . . . . . . . . . . . 25,694,674 22,802,935
Class C . . . . . . . . . . . . . . . . . . . . . . . 9,071,276 1,280,053
--------------------- -----------------------
84,532,871 78,838,673
--------------------- -----------------------
Proceeds from shares issued for dividends reinvested
Class A . . . . . . . . . . . . . . . . . . . . . . . 10,485,166 10,718,588
Class B . . . . . . . . . . . . . . . . . . . . . . . 958,506 333,342
Class C . . . . . . . . . . . . . . . . . . . . . . . 183,364 3,626
--------------------- -----------------------
11,627,036 11,055,556
--------------------- -----------------------
Cost of shares redeemed
Class A . . . . . . . . . . . . . . . . . . . . . . . (60,814,520) (42,583,199)
Class B . . . . . . . . . . . . . . . . . . . . . . . (9,282,719) (1,691,938)
Class C . . . . . . . . . . . . . . . . . . . . . . . (2,125,233) --
--------------------- -----------------------
(72,222,472) (44,275,137)
--------------------- -----------------------
Increase in net assets resulting from capital
transactions . . . . . . . . . . . . . . . . . . . . 23,937,435 45,619,092
--------------------- -----------------------
Increase (decrease) in Net Assets . . . . . . . . . . . (1,425,112) 63,376,266
--------------------- -----------------------
NET ASSETS, end of year . . . . . . . . . . . . . . . $ 354,257,068 $ 355,682,180
===================== =======================
</TABLE>
See Notes to Financial Statements.
F-13
<PAGE> 97
Notes to Financial Statements
Note 1-Significant Accounting Policies
American Capital Municipal Bond Fund (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified open-end
management investment company. The following is a summary of significant
accounting policies consistently followed by the Fund in the preparation of its
financial statements.
A. Investment Valuations
Investments in municipal bonds are valued at the most recently quoted bid
prices or at bid prices based on a matrix system (which considers such
factors as security prices, yields, maturities and ratings) furnished by
dealers and an independent pricing service. Municipal variable rate
demand notes are valued at par; periodic rate changes reflect current
market conditions.
Short-term investments with a maturity of 60 days or less when purchased
are valued at amortized cost, which approximates market value. Short-term
investments with a maturity of more than 60 days when purchased are
valued based on market quotations until the remaining days to maturity
becomes less than 61 days. From such time, until maturity, the
investments are valued at amortized cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity.
The insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated debt securities which may be more
susceptible to adverse economic conditions than other investment grade
holdings. These securities are often subordinated to the prior claims of
other senior lenders and uncertainties exist as to an issuer's ability to
meet principal and interest payments. At September 30, 1994, debt
securities rated below investment grade and comparable unrated securities
represented approximately 19% of the investment portfolio.
B. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as a "regulated investment company" under the
Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and
taxable net realized capital gains to its shareholders. It is
anticipated that no distributions of net realized capital gains will be
made until tax basis capital loss carryforwards expire or are offset by
net realized capital gains.
C. Investment Transactions and Related Investment Income
Investment transactions are accounted for on the trade date. Realized
gains and losses on investments are determined on the basis of identified
cost. Interest income is accrued daily.
D. Dividends and Distributions
Dividends and distributions to shareholders are recorded on the record
date. The Fund distributes tax basis earnings in accordance with the
minimum distribution requirements of the Internal Revenue Code, which may
differ from generally accepted accounting principles. Such dividends or
distributions may exceed financial statement earnings.
E. Debt Discount and Premium
The Fund accounts for debt discounts and premiums on the same basis as is
followed for federal income tax reporting. Accordingly, original issue
discounts and all premiums are amortized over the life of the security.
Market discounts are recognized at the time of sale as realized gains for
book purposes, and ordinary income for tax purposes.
F. Equalization
At September 30, 1994, the Fund discontinued the accounting practice of
equalization, which it had used since its inception. Equalization is a
practice whereby a portion of the proceeds from sales and costs of
redemptions of Fund shares, equivalent on a per-share basis to the
F-14
<PAGE> 98
amount of the undistributed net investment income, is charged or credited
to undistributed net investment income.
The balance of equalization included in undistributed net investment
income at the date of change, which was approximately $2.8 million, was
reclassified to capital surplus. Such reclassification had no effect on
net assets, results of operations, or net asset value per share of the
Fund.
G. When-Issued Securities
Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the date of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid
securities equal to the amount that will be due are set aside with the
custodian.
Note 2-Management Fees and Other Transactions with Affiliates
American Capital Asset Management, Inc. (the "Adviser") serves as investment
manager of the Fund. Management fees are paid monthly, based on the rate of
.50% per annum of the average daily net assets of the Fund.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are
allocated among all investment companies advised or sub-advised by the Adviser.
For the year ended September 30, 1994, these charges included $10,303 as the
Fund's share of the employee costs attributable to the Fund's accounting
officers. A portion of the accounting services expense was paid to the Adviser
in reimbursement of personnel, facilities and equipment costs attributable to
the provision of accounting services to the Fund. The services provided by the
Adviser are at cost.
American Capital Companies Shareholder Services, Inc., an affiliate of the
Adviser, serves as shareholder service agent. These services are provided at
cost plus a profit. For the year ended September 30, 1994, the fees for such
services were $334,826.
The Fund has been advised that American Capital Marketing, Inc. (the
"Distributor") and Advantage Capital Corp. (the "Retailer Dealer"), both
affiliates of the Adviser, received $118,647 and $105,378, respectively, as
their portion of the commissions charged on sales of Fund shares during the
year.
Under the Distribution Plans, the Fund pays up to .25% per annum of its average
net assets to reimburse the Distributor for expenses and service fees incurred.
Class B shares and Class C shares pay an additional fee of up to .75% per annum
of their average daily net assets to reimburse the Distributor for its
distribution expenses. Actual distribution expenses incurred by the Distributor
for Class B shares and Class C shares may exceed the amounts reimbursed to the
Distributor by the Fund. At September 30, 1994, the unreimbursed expenses
incurred by the Distributor under the Class B and Class C plans aggregated
approximately $1.6 million and $130,000, respectively, and may be carried
forward and reimbursed through either the collection of the contingent deferred
sales charges from share redemptions or, subject to the annual renewal of the
plans, future Fund reimbursements of distribution fees.
Legal fees of $11,680 were for services rendered by O'Melveny & Myers, counsel
for the Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of
the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder service agent.
Note 3-Investment Activity
During the year, the cost of purchases and proceeds from sales of investments,
excluding short-term investments, were $45,734,980 and $21,355,006,
respectively.
For federal income tax purposes, the identified cost of investments owned at
September 30, 1994 was
F-15
<PAGE> 99
$334,094,902. Net unrealized appreciation of investments aggregated
$15,335,537, gross unrealized appreciation of investments aggregated
$19,847,942, and gross unrealized depreciation of investments aggregated
$4,512,405.
The net realized capital loss carryforward for federal income tax purposes of
approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.
Note 4-Director Compensation
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,320 plus a fee of $30 per day for Board and
Committee meetings attended. The Chairman receives additional fees from the
Fund at the annual rate of $490. During the year, such fees aggregated $13,494.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. At September 30, 1994, the liability for the Plan aggregated
$25,830. The deferred fees have been credited with interest at a rate equal to
that earned by the Fund on its short-term investments.
Note 5-Capital
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred
basis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
The Fund has 200 million of each class of shares of $.01 par value of capital
stock authorized. Transactions in shares of capital stock were as follows:
<TABLE>
<CAPTION>
Year Ended September 30
---------------------------
1994 1993
------------ -----------
<S> <C> <C>
Shares sold
Class A . . . . . . . . . . . . . . . . . . . 4,883,618 5,402,298
Class B . . . . . . . . . . . . . . . . . . . 2,518,998 2,225,454
Class C . . . . . . . . . . . . . . . . . . . 884,668 121,207
----------- -----------
8,287,284 7,748,959
----------- -----------
Shares issued for dividends and distributions
reinvested
Class A . . . . . . . . . . . . . . . . . . . 1,032,887 1,047,735
Class B . . . . . . . . . . . . . . . . . . . 94,773 32,208
Class C . . . . . . . . . . . . . . . . . . . 18,175 344
----------- -----------
1,145,835 1,080,287
----------- -----------
Shares redeemed
Class A . . . . . . . . . . . . . . . . . . . (6,004,203) (4,190,132)
Class B . . . . . . . . . . . . . . . . . . . (915,403) (164,467)
Class C . . . . . . . . . . . . . . . . . . . (210,194) -
----------- -----------
(7,129,800) (4,354,599)
----------- -----------
Increase in shares outstanding . . . . . . 2,303,319 4,474,647
=========== ===========
</TABLE>
Note 6-Subsequent Dividends
The Board of Directors of the Fund declared a dividend of $.0485 per share for
Class A shares, $.0415 per share for Class B shares and $.0415 for Class C
shares from net investment income, payable November 15, 1994 to shareholders of
record on October 31, 1994.
F-16
<PAGE> 100
Financial Highlights
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class A(1)
---------------------------------------------
Year Ended September 30
---------------------------------------------
1994 1993(2) 1992 1991 1990
--------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE(4)
Net asset value, beginning of period . . $ 10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . . .68 .69 .705 .71 .72
Expenses . . . . . . . . . . . . . . . . (.09) (.094) (.09) (.08) (.08)
------- ------- ------ ------ ------
Net investment income . . . . . . . . . . .59 .596 .615 .63 .64
Net realized and unrealized gains or
losses on securities . . . . . . . . . . (.7255) .558 .349 .5198 (.195)
------- ------- ------ ------ ------
Total from investment operations . . . . (.1355) 1.154 .964 1.1498 .445
------- ------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . . (.5745) (.596) (.624) (.6398) (.645)
Distributions in excess of book-basis
net investment income(3) . . . . . . . . -- (.008) -- -- --
------- ------- ------ ------ ------
Total distributions . . . . . . . . . . . (.5745) (.604) (.624) (.6398) (.645)
------- ------- ------ ------ ------
Net asset value, end of period . . . . . $ 9.82 $ 10.53 $ 9.98 $ 9.64 $ 9.13
======= ======= ====== ====== ======
TOTAL RETURN(4) . . . . . . . . . . . . (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . . $ 309.0 $ 332.3 $292.3 $266.9 $237.4
Average net assets (millions) . . . . . . $ 324.2 $ 313.0 $278.6 $253.2 $241.2
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . .93% .91% 90% .89% .86%
Net investment income . . . . . . . . . 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate . . . . . . . . . 6% 3% 6% 10% 17%
</TABLE>
(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1
stock split effected July 26, 1991. Additionally, in 1991, the Fund
adopted for financial reporting purposes a method of accounting for
debt discounts and premiums which is the same as is used for federal
income tax reporting. The effect of the change, on a pro forma basis,
would have been to increase net investment income with a corresponding
decrease in net realized and unrealized gains or losses in the amount
of $.01 for 1990. Similarly, the ratio of net investment income to
average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies. Prior year financial information was not restated.
(4) Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-17
<PAGE> 101
Financial Highlights, continued
Selected data for a share of capital stock outstanding throughout each of the
periods indicated.
<TABLE>
<CAPTION>
Class B(1) Class C(2)
------------------------ ----------------------------
Year August 30,
Year Ended September 30, Ended 1993(5) through
------------------------ September 30, September 30,
1994 1993(2) 1994 1993
------ -------- -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period . $ 10.53 $ 9.98 $10.54 $10.53
------- ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS
Investment income . . . . . . . . . . . .68 .685 .69 .05
Expenses . . . . . . . . . . . . . . . (.17) (.175) (.18) (.015)
------- ------ ------ ------
Net investment income . . . . . . . . . .51 .51 .51 .035
Net realized and unrealized gains or
losses on securities . . . . . . . . . (.7195) .564 (.7295) .061
------- ------ ------ ------
Total from investment operations . . . (.2095) 1.074 (.2195) .096
------- ------ ------ ------
LESS DISTRIBUTIONS
Dividends from net investment income . (.4905) (.501) (.4905) (.007)
------- ------ ------ ------
Distributions in excess of book-basis net
investment income(3) . . . . . . . . -- (.023) -- (.079)
Total distributions . . . . . . . . . . (.4905) (.524) (.4905) (.086)
------- ------ ------ ------
Net asset value, end of period . . . . $ 9.83 $10.53 $ 9.83 $10.54
======= ====== ====== ======
TOTAL RETURN(4) . . . . . . . . . . . (2.13%) 11.15% (2.03%) .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions) . $ 37.2 $ 22.1 $ 8.0 $ 1.3
Average net assets (millions) . . . . . $ 31.2 $ 10.0 $ 5.4 $ 0.4
Ratios to average net assets
Expenses . . . . . . . . . . . . . . . 1.72% 1.71% 1.72% 1.69%(6)
Net investment income . . . . . . . . . 5.00% 4.96% 5.03% 4.25%(6)
Portfolio turnover rate . . . . . . . . 6% 3% 6% 3%
</TABLE>
(1) Sales of Class B commenced September 29, 1992 at a net asset value of
$10.00 per share. At September 30, 1992, there were 50 Class B shares
outstanding with a per share net asset value of $9.98. The decrease in
net asset value was due principally to a dividend of $.052 per share.
Other financial highlights for Class B shares for this short period
(September 29, 1992 to September 30, 1992) are not presented as they
are not meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Effective October 1, 1992, the Fund adopted Statement of Position 93-2,
Determination, Disclosure and Financial Statement Presentation of
Income, Capital Gain and Return of Capital Distributions by Investment
Companies.
(4) Total return for periods of less than one full year are not
annualized. Total return does not consider the effect of sales charges.
(5) Commencement of offering of sales.
(6) Annualized
See Notes to Financial Statements.
F-18
<PAGE> 102
Report of Independent Accountants
To the Shareholders and Board of Directors of
American Capital Municipal Bond Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the investment portfolio, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of American Capital Municipal Bond
Fund, Inc. at September 30, 1994, and the results of its operations, the
changes in its net assets and the selected per share data and ratios for each
of the fiscal periods presented, in conformity with generally accepted
accounting principles. These financial statements and selected per share data
and ratios (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at September 30, 1994 by
correspondence with the custodian and brokers, provide a reasonable basis for
the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
November 11, 1994
F-19
<PAGE> 103
PORTFOLIO OF INVESTMENTS
March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
MUNICIPAL BONDS 95.6%
EDUCATION 4.6%
$1,000 Broward County, Florida,
Educational Facilities Authority
Rev. (Nova University Project),
G.O............................... 8.500% 04/01/10 $ 1,143,070
625 Clear Creek, Texas, Independent
School District, G.O.............. 6.250 02/01/11 660,175
1,000 Cook County, Illinois, Community
College, District #508,
Certificates of Participation,
FGIC.............................. 8.750 01/01/07 1,252,580
1,150 Florida State Board of Education,
Capital Outlay, Series A.......... 7.250 06/01/23 1,266,722
1,000 Illinois Educational Facilities
Authority Rev., G.O.
Lake First College, FSA........... 6.750 10/01/21 1,041,270
1,000 Illinois Educational Facilities
Authority Rev., G.O., Northwestern
University, Series 1985........... 6.900 12/01/21 1,113,650
2,000 New Hampshire Higher Education &
Daniel Webster College Issue,
G.O............................... 7.625 07/01/16 1,960,540
1,000 New York City, New York,
Industrial Development Agency,
Civil Facility Rev. (Marymount
Manhattan College Project), G.O... 7.000 07/01/23 1,009,310
1,000 New York State Dormitory Authority
Rev. City University (Prerefunded
@ 7/1/97)......................... 8.125 07/01/17 1,091,920
3,250 New York State Dormitory Authority
Rev., State University Education
Facility, Series 1990-A........... 7.700 05/15/12 3,705,130
500 Pennsylvania State Higher
Educational Facilities Authority
Rev. Hahnemann University Project,
MBIA, G.O......................... 7.200 07/01/19 533,815
250 Pennsylvania State Higher
Educational Facilities Authority
Rev., Pennsylvania Medical
College, Series A, G.O............ 7.500 03/01/14 257,635
500 University of the Virgin Islands,
Series A.......................... 7.500 10/01/09 521,130
500 University of the Virgin Islands,
Series A.......................... 7.650 10/01/14 518,185
-----------
TOTAL EDUCATION............... 16,075,132
-----------
HEALTH CARE 1.7%
500 Colorado Health Facilities
Authority Rev. (Cleo Wallace
Center Project)................... 7.000 08/01/15 502,435
1,500 Colorado Health Facilities
Authority Rev. (PSL Healthcare
System Project), Series 1991-A,
FSA............................... 6.250 02/15/21 1,518,435
1,000 Cuyahoga County, Ohio, Health Care
Facilities Rev. (Jenning Hall).... 7.300 11/15/23 947,300
1,000 Lebanon County, Pennsylvania,
Health Facilities Authority Health
Center Rev. (UTD Church of Christ
Homes Project).................... 6.750 10/01/10 1,004,600
700 Massachusetts State, Industrial
Finance Rev....................... 7.100 11/15/18 672,875
230 Pina County, Arizona, Industrial
Development Authority (Casa Grande
Regional Medical Center Project).. 9.000 12/01/13 238,425
1,000 St. Petersburg, Florida, Health
Facilities Authority Rev.
(Allegany Health Systems)......... 7.750 12/01/15 1,130,330
-----------
TOTAL HEALTH CARE............. 6,014,400
-----------
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE> 104
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOSPITAL 15.5%
$ 500 Bexar County, Texas, Health
Facilities Development Rev.
(St. Lukes Lutheran Hospital
Project).......................... 7.000% 05/01/21 $ 509,830
1,500 Bexar County, Texas, Health
Facilities Development Rev.
(St. Lukes Lutheran Hospital
Project).......................... 7.900 05/01/18 1,762,245
1,000 Boston Massachusetts, Rev. (Boston
City Hospital), FHA............... 7.625 02/15/21 1,133,810
500 Boulder County, Colorado,
Industrial Development Rev.
(Boulder Medical Center Project).. 8.875 01/01/17 518,565
1,000 Charlotte County, Florida,
Hospital Authority Rev. (Bon
Secours Health System)............ 8.250 08/15/18 1,120,860
500 Clarksville, Tennessee, Hospital
Rev., Refunding & Improvement
(Clarskville Memorial Project).... 6.250 07/01/13 477,960
995 Clearfield, Pennsylvania, Hospital
Authority Rev. (Clearfield
Hospital Project), Series-94...... 6.875 06/01/16 995,587
800 Colorado Health Facilities
Authority Rev. (Rocky Mountain
Adventist)........................ 6.625 02/01/13 779,520
2,000 Delaware State Economic
Development Authority Rev.
(Osteopathic Hospital Association
of Delaware), Series A............ 6.900 01/01/18 1,835,120
500 Erie County, Pennsylvania,
Hospital Authority Rev. (Metro
Health Center), Series 1992....... 7.250 07/01/12 514,150
1,000 Harris County, Texas, Health
Facilities Development Corp.
(Memorial Hospital System
Project).......................... 7.125 06/01/15 1,057,750
1,000 Illinois Health Facilities
Authority Rev. Elmhurst Memorial
Hospital, Series 87-A............. 8.125 01/01/13 1,073,910
1,000 Illinois Health Facilities
Authority Rev. Improvement Swedish
Covenant, Series A................ 6.300 08/01/13 933,080
2,000 Illinois Health Facilities
Authority Rev. Lutheran Health
System, Series B, MBIA............ 6.000 04/01/18 1,922,940
1,000 Illinois Health Facilities
Authority Rev. Masonic Medical
Center, Series 1989-B............. 7.700 10/01/19 1,124,910
1,000 Illinois Health Facilities
Authority Rev., Memorial Hospital. 7.250 05/01/22 1,005,850
500 Illinois Health Facilities
Authority Rev. Mercy Center For
Health Care Services.............. 6.625 10/01/12 500,350
1,000 Illinois Health Facilities
Authority Rev., Northwestern
Memorial Hospital................. 6.750 08/15/11 1,031,460
1,000 Indiana Health Facilities,
Financing Hospital Authority Rev.
(Community Hospital of Indiana),
Series-H, MBIA.................... 6.850 07/01/22 1,044,390
1,160 Jefferson County, Texas, Health
Facility Authority Rev. (Baptist
Health Care Project).............. 8.300 10/01/14 1,263,426
845 Lebanon County, Pennsylvania, Good
Samaritan Hospital Authority Rev.
(Good Samaritan Hospital Project). 5.850 11/15/07 772,279
1,000 Marion County, Indiana, Hospital
Authority, Facility Rev.,
(Methodist Hospital of Indiana)... 6.500 09/01/13 1,006,840
1,000 McKeesport, Pennsylvania, Hospital
Authority Rev. (McKeesport
Hospital Project)................. 6.500 07/01/08 979,910
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE> 105
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,000 Michigan State Hospital Finance
Authority Rev. St. Joseph Hospital
Corp., Series A.................... 8.125% 07/01/05 $1,045,100
1,000 Michigan State Hospital Finance
Authority Rev., Refunding, Genesys
Health System, Series A............ 7.500 10/01/07 1,010,500
1,000 Missouri State Health & Educational
Facilities Authority (Heartland
Health Systems Project)............ 8.125 10/01/10 1,112,180
1,000 New Hampshire Health & Higher
Educational Facility Authority
Rev................................ 7.500 06/01/05 1,042,440
2,500 New Hampshire Health & Higher
Educational Facility Authority Rev.
(Wentworth Douglass Hospital)...... 8.500 01/01/15 2,700,525
1,000 New York State Medical Care
Facilities Finance Agency Rev.
Columbia Presbyterian Hospital,
Series A, FHA...................... 8.000 02/15/25 1,092,980
1,960 New York State Medical Care
Facilities Finance Agency Rev.,
Montefiore Medical Center.......... 7.250 02/15/09 2,104,080
1,000 New York State Medical Care
Facilities Finance Agency Rev.,
North General Hospital, Series 89-
A.................................. 7.400 02/15/19 1,034,670
1,000 Newton, Kansas, Hospital Rev.,
Newton Health Care Corp., Series-A. 7.750 11/15/24 1,018,260
695 Philadelphia, Pennsylvania,
Hospital & Higher Education
Facilities Authority Rev.
(Roxborough Memorial Hospital),
Series 2........................... 7.250 03/01/24 649,040
1,500 Richardson, Texas, Hospital
Authority, Refunding & Improvement
Rev. (Richardson Medical Center)... 6.750 12/01/23 1,507,740
1,000 Royal Oak, Michigan, Hospital
Finance Authority, Rev. (William
Beaumont Hospital), Series D....... 6.750 01/01/20 1,027,130
1,750 Rusk County, Texas, Health
Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital
Project)........................... 7.750 04/01/13 1,801,450
500 Salem, Oregon, Hospitals Facilities
Authority Rev...................... 7.500 12/01/24 507,295
1,000 Scranton-Lackawanna, Pennsylvania,
Health & Welfare Authority Rev.
(Moses Taylor Hospital Project),
Series A........................... 7.375 07/15/08 1,012,830
500 Scranton-Lackawanna, Pennsylvania,
Health & Welfare Authority Rev.
(Moses Taylor Hospital Project),
Series B........................... 8.250 07/01/09 536,310
1,000 South Dakota State Health &
Educational Facilities Authority
Rev. (Sioux Valley Hospital)....... 7.250 04/01/20 1,003,450
2,000 South Dakota State Health &
Educational Facilities Authority
Rev. (Sioux Valley Hospital)....... 7.625 11/01/13 2,221,598
1,500 St. Joseph County, Indiana,
Hospital Authority Rev. (Memorial
Hospital South Bend Project), MBIA. 6.250 08/15/22 1,504,245
1,000 Tyler, Texas, Health Facilities
Development Corp. (East Texas
Medical Center Regional Health),
Series B........................... 6.750 11/01/25 964,310
1,000 Washington County, Pennsylvania,
Hospital Authority................. 7.350 06/01/13 952,800
1,500 Wells County, Indiana, Hospital
Authority Rev., Refunding (Caylor-
Nickel Medical Center, Inc.)....... 8.500 04/15/03 1,529,550
1,000 Weslaco, Texas, Health Facilities
Development (Knapp Medical Center
Project), Series-A, CONN........... 5.250 06/01/16 885,540
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE> 106
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,000 West Virginia State, Hospital
Finance Authority, Refunding &
Improvement (Fairmont General
Hospital), Series A................. 6.750% 03/01/14 $ 969,850
2,000 Wisconsin State Health & Educational
Facilities Rev. (Wheaton Franciscan
Services Inc.)...................... 8.200 08/15/18 2,238,660
-----------
TOTAL HOSPITAL.................. 54,837,275
-----------
HOUSING 5.8%
1,545 Arapahoe County, Colorado, Single
Family Mtg. Rev..................... 8.375 08/01/19 1,618,094
1,000 Austin, Texas, Housing Finance
Corp., Multi-family Rev. (Stassey
Woods Apartment Project)............ 6.750 04/01/19 979,090
410 Bexar County, Texas, Housing Finance
Corp., Rev.......................... 8.200 04/01/22 431,550
420 Bexar County, Texas, Housing Finance
Corp., Rev., Series B............... 9.250 04/01/16 440,534
135 El Paso, Texas, Property Finance
Authority Inc., Single Family Mtg.
Rev., Series A...................... 8.700 12/01/18 145,064
645 Fort Worth, Texas, Housing Finance
Corp., Home Mtg. Rev. Refunding..... 8.500 10/01/11 702,605
735 Harris County, Texas, Housing
Financing Corp., Single Family Mtg.
Rev., Series 1983-A................. 10.125 07/15/03 737,742
670 Houston, Texas, Housing Finance
Corp., Single Family Mgt. Rev....... 10.000 09/15/14 689,309
855 Houston, Texas, Housing Finance
Corp., Single Family Mgt. Rev.,
Series A, FSA....................... 5.950 12/01/10 842,089
1,000 Maricopa County, Arizona, IDR,
Multi-Family Rev., Refunding (Laguna
Point Apartments Project)........... 6.500 07/01/09 1,016,630
1,000 Massachusetts State Housing Finance
Agency, Multi-family Housing
Authority, Series A................. 8.750 08/01/08 1,051,250
550 Massachusetts State Housing Finance
Agency, Residential Housing
Authority, Series A................. 8.400 08/01/21 578,875
910 Minnesota State Housing Finance
Agency, Single Family Mtg. Rev...... 6.750 01/01/26 907,725
1,000 Montgomery County, Pennsylvania,
Industrial Development Authority,
Retirement Community Rev. (GDL Farms
Corp. Project)...................... 6.300 01/01/13 907,690
1,000 Mount Clemens, Michigan, Housing
Corp., Multi-family Rev., Refunding,
Series A............................ 6.600 06/01/13 1,030,480
1,000 North St. Paul, Minnesota, Multi-
family Refunding Housing Rev.
(Cottages North St. Paul)........... 9.250 02/01/22 1,086,250
1,000 Pima County, Arizona, IDR, Single
Family Mtg. Rev..................... 6.625 11/01/14 1,018,000
1,155 Ridgeland, Mississippi, Urban
Renewal (The Orchard, Ltd. Project),
Series A............................ 7.750 12/01/15 1,130,410
2,500 St. Paul, Minnesota Port Authority,
Housing & Redevelopment Authority,
Multi-family Housing Rev., Series J. 9.500 12/01/11 2,396,875
1,000 South Dakota State Housing
Development Authority, Homeowner
Mtg., Series D-1.................... 6.850 05/01/26 1,017,500
1,450 Texas State Veterans Housing
Assistance, MBIA, G.O.,............. 6.800 12/01/23 1,521,616
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE> 107
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 245 Travis County, Texas, Housing Finance
Corp., Single Family Mtg. Rev........ 8.200% 04/01/22 $ 253,134
-----------
TOTAL HOUSING.................... 20,502,512
-----------
LIFE CARE 2.7%
500 Atlantic Beach, Florida, Rev.,
Refunding & Improvement Fleet Landing
Project, Series A.................... 7.500 10/01/02 506,270
500 Atlantic Beach, Florida, Rev.,
Refunding & Improvement Fleet Landing
Project, Series A.................... 7.875 10/01/08 514,430
2,000 Butler County, Pennsylvania,
Industrial Development Authority
Rev., 1st Mgt. Rev. (Sherwood Oaks
Project), Series A................... 8.750 06/01/16 2,099,300
500 Chartiers Valley, Pennsylvania,
Industrial & Commercial Development
Authority (Asbury Health Center
Project)............................. 7.250 12/01/11 503,840
500 Chartiers Valley, Pennsylvania,
Industrial & Commercial Development
Authority (Asbury Health Center
Project)............................. 7.400 12/01/15 494,195
950 Hanover Park, Illinois, 1st Mgt. Rev.
Windsor Park Manor Project........... 9.250 12/01/07 1,029,733
1,000 Massachusetts State Industrial
Finance Agency Rev. 1st Mtg. Reeds
Landing Project...................... 8.625 10/01/23 1,012,350
1,000 Massachusetts State Industrial
Finance Agency, Greater Lynn Mental
Health Association Project........... 8.800 06/01/14 1,105,680
500 Scottsdale, Arizona, Industrial
Development Authority, Refunding, 1st
Mtg. Westminter Village, Series A.... 8.250 06/01/15 528,275
500 Tempe, Arizona, Industrial
Development Authority Rev. Friendship
Village Temple, Series-A............. 6.750 12/01/13 487,020
1,000 Wisconsin State Health & Educational
Facilities Authority Rev., (United
Lutheran Program for the Aging Inc.
Project)............................. 8.500 03/01/19 1,058,750
-----------
TOTAL LIFE CARE.................. 9,339,843
-----------
MISCELLANEOUS 7.6%
500 Berry Creek Metropolitan District,
Colorado, G.O., Refunding and
Improvement.......................... 8.250 12/01/11 534,280
2,000 Compton, California, Certificates of
Participation, Refunding, Series B... 7.500 08/01/15 2,119,320
1,000 Detroit, Michigan, Tax Increment
Bonds (Development Area No. 1
Project) Series 89-A................. 7.600 07/01/10 1,047,270
2,500 District of Columbia Rev. (National
Public Radio), Series A.............. 7.700 01/01/23 2,621,775
1,000 Dove Valley Metropolitan District,
Arapahoe County, Colorado, G.O....... 9.500 12/01/08 1,048,290
1,000 Du Page County, Illinois (Stormwater
Project)............................. 6.550 01/01/21 1,091,860
500 Fort Bend County, Texas, Levee
Improvement District No. 11, G.O..... 8.700 03/01/09 547,735
440 Fort Bend County, Texas, Levee
Improvement District No. 11, G.O..... 8.700 03/01/10 482,007
1,000 Lake Charles, Louisiana, Harbor &
Terminal Facilities Rev. (Trunkline
Liquified Natural Gas Co. Project)... 7.750 08/15/22 1,074,380
1,000 Lehigh County, Pennsylvania, IDR
(Allentown Interstate Motel.......... 8.000 08/01/12 1,022,720
</TABLE>
See Notes to Financial Statements.
F-24
<PAGE> 108
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 630 Mountain Village Metropolitan
District, San Miguel County,
Colorado, Refunding, Series 1992,
G.O................................. 7.950% 12/01/03 $ 652,182
500 Mountain Village Metropolitan
District, San Miguel County,
Colorado, Refunding, Series 1992,
G.O................................. 8.100 12/01/11 525,605
145 Pocahontas, Iowa, Industrial
Development Rev. (Navistar
International Harvester Co.)........ 10.250 10/01/00 150,986
1,000 Port of New Orleans, Louisiana, IDR,
Refunding (Avondale Industries,
Inc.)............................... 8.250 06/01/04 1,063,900
2,330 Somerset County, Pennsylvania,
General Authority, Commonwealth
Lease Rev., FGIC.................... 6.250 10/15/11 2,474,693
1,705 St. Charles, Illinois, Industrial
Development Rev. (Tri-City Center
Project)............................ 7.500 11/01/13 1,707,302
500 Texas General Services, Community
Partner Interests, (Office Building
and Land Acquisition Project)....... 7.000 08/01/19 513,320
500 Texas General Services, Community
Partner Interests, (Office Building
and Land Acquisition Project)....... 7.000 08/01/24 513,320
1,000 Texas State, Refunding
(Superconducting Project), Series C,
G.O. ............................... 5.500 04/01/20 922,340
1,000 Utah State Building Ownership
Authority Lease Rev. (Dept. of
Employment Security)................ 7.800 08/15/10 1,090,020
1,300 Utah State Building Ownership
Authority Lease Rev. (Dept. of
Employment Security)................ 7.800 08/15/11 1,417,026
1,000 Valdez, Alaska, Marine Term Rev.,
Refunding (Sohio Pipeline).......... 7.125 12/01/25 1,073,550
1,250 Virginia, Port of Authority,
Commonwealth........................ 8.200 07/01/08 1,369,200
1,500 Woodward, Oklahoma, Municipal Auto
Sales, Refunding.................... 8.000 11/01/12 1,629,645
-----------
TOTAL MISCELLANEOUS............ 26,692,726
-----------
MUNICIPAL UTILITY DISTRICT
(MUD) 1.2%
500 Eldridge Road, Texas, MUD,
Refunding........................... 6.125 03/01/11 479,860
500 Harris County, Texas, MUD,
Refunding, G.O. .................... 7.300 03/01/14 508,790
1,000 Mills Road, Texas, MUD.............. 6.500 09/01/14 973,090
500 Mission Bend MUD No. 2, Texas....... 10.000 09/01/98 567,845
375 Mission Bend MUD No. 2, Texas....... 10.000 09/01/00 435,878
655 Montgomery County, Texas, MUD No. 4
(Water Works System)................ 8.900 09/01/02 737,117
500 North Mission Glen, Texas, MUD,
Refunding........................... 6.500 09/01/14 482,360
-----------
TOTAL MUD...................... 4,184,940
-----------
NURSING HOMES 1.2%
500 Fairfield, Ohio, Economic
Development Rev., Refunding (Beverly
Enterprises)........................ 8.500 01/01/03 525,595
475 Louisiana Public Facilities
Authority, Industrial Development
Rev., Refunding (Beverly
Enterprises)........................ 8.250 09/01/08 500,740
1,315 Luzerne County, Pennsylvania,
Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood
Nursing Center Project), Series-A... 7.875 12/01/13 1,377,620
</TABLE>
See Notes to Financial Statements.
F-25
<PAGE> 109
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$1,555 New Hampshire Health & Higher
Educational Facility Authority Rev.,
Refunding 1st Mtg. Odd Fellows Home. 8.800% 06/01/09 $ 1,698,635
-----------
TOTAL NURSING HOMES............. 4,102,590
-----------
POLLUTION CONTROL REVENUE (PCR) 5.6%
3,675 Brazos River Authority, Texas, PCR
(Texas Utilities Electric Co.
Project A).......................... 9.875 10/01/17 4,074,031
1,000 Burke County, Georgia, Development
Authority, PCR (Georgia Power Co.).. 9.375 12/01/17 1,115,390
1,000 Burlington, Kansas, PCR, MBIA
(Kansas Gas & Electric Co. Project). 7.000 06/01/31 1,050,940
1,595 Capital Industrial Development
Corp., Texas, PCR (International
Business Machines Corp.)............ 7.400 05/01/12 1,749,683
750 County of Coshocton, Ohio, Solid
Waste Disposal Rev. (Stone Container
Corp. Project), Series 1992......... 7.875 08/01/13 753,022
1,000 Hodge, Louisiana, Utility Rev.
(Stone Container Corp. Project),
Series 1990......................... 9.000 03/01/10 1,063,530
1,240 Mercer County, North Dakota, PCR,
Basin Electric Power, Series E...... 7.000 01/01/19 1,274,174
500 Monroe County, Michigan, PCR
(Detroit Edison Co.), Series A...... 10.500 12/01/16 531,290
1,000 New Hampshire State Industrial
Development Authority, PCR, New
England Power Co. .................. 7.800 04/01/16 1,042,090
1,000 New Hampshire State Industrial
Development Authority, PCR, United
Illuminating Co., Series B.......... 10.750 10/01/12 1,140,690
1,000 Parish of St. Charles, Louisiana,
PCR (Louisiana Power & Light Co.)... 8.250 06/01/14 1,068,750
1,400 Parish of West Feliciana, Louisiana,
PCR (Gulf States Utilities), Series
A................................... 7.500 05/01/15 1,432,634
1,000 Petersburg, Indiana, PCR, Refunding
(Indianapolis Power & Lighting),
Series 1993-A....................... 6.100 01/01/16 981,440
750 Pope County, Arkansas, PCR (Arkansas
Power & Light Project).............. 11.000 12/01/15 792,983
1,350 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities Co.
Project)............................ 7.750 04/01/16 1,404,338
440 Sabine River Authority, Texas,
Refunding, PCR (Texas Utilities Co.
Project), Series 1986............... 9.000 09/01/07 482,090
-----------
TOTAL PCR....................... 19,957,075
-----------
POOL FINANCING PROGRAMS 2.9%
1,750 Emmaus, Pennsylvania, General
Authority, Local Government Bond
Pool Program, Rev., Series A, BIG... 8.150 05/15/18 1,881,215
2,500 Emmaus, Pennsylvania, General
Authority, Local Government Bond
Pool Program, Rev., Series C, BIG... 7.900 05/15/18 2,669,750
1,000 Indianapolis, Indiana, Local Public
Improvement, Series A............... 6.000 02/01/20 967,350
2,000 Indianapolis, Indiana, Local Public
Improvement, Series C............... 6.700 01/01/17 2,010,220
450 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.500 02/01/22 450,410
550 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.750 02/01/14 579,502
1,000 Indianapolis, Indiana, Local Public
Improvement, Series D............... 6.750 02/01/20 1,024,400
</TABLE>
See Notes to Financial Statements.
F-26
<PAGE> 110
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 670 Tampa, Florida, Capital Improvement
Program Rev., Series A.............. 8.250% 10/01/18 $ 700,237
-----------
TOTAL POOL FINANCING PROGRAMS... 10,283,084
-----------
RESOURCE RECOVERY 2.7%
1,760 Broward County, Florida, Resource
Recovery Rev., North Project........ 7.950 12/01/08 1,920,389
2,295 Broward County, Florida, Resource
Recovery Rev., South Project........ 7.950 12/01/08 2,501,206
1,000 Camden County, New Jersey, PCR,
Solid Waste Resource Recovery Rev.,
Series B............................ 7.500 12/01/09 960,440
1,500 Delaware County, Pennsylvania,
Industrial Development Authority
Rev. (Resource Recovery Project).... 8.100 12/01/13 1,588,005
1,000 El Centro, California, Certificates
of Participation.................... 7.000 06/01/19 975,990
1,000 Montgomery County, Pennsylvania,
Industrial Development Authority
Rev., Resource Recovery............. 7.500 01/01/12 1,054,390
500 Rockdale County, Georgia,
Development Authority Rev. Solid
Waste Disposal (Visy Paper, Inc.
Project)............................ 7.500 01/01/26 504,685
-----------
TOTAL RESOURCE RECOVERY......... 9,505,105
-----------
SALES TAX REVENUE 1.5%
1,000 Crestwood, Illinois, Tax Increment
Rev., Refunding..................... 7.250 12/01/08 986,250
1,000 Edgewater, Colorado, Redevelopment
Rev................................. 6.750 12/01/08 1,009,710
1,000 Orange County, Florida, Tourist
Development Tax Rev., AMBAC......... 6.000 10/01/16 1,000,930
865 Round Lake Beach, Illinois, Tax
Increment Rev., Series 1993......... 7.200 12/01/04 858,954
500 Round Lake Beach, Illinois, Tax
Increment Rev., Series 1993......... 7.500 12/01/13 448,390
975 St. Louis, Missouri, Tax Increment
Rev. (Scullin Redevelopment Area),
Series A............................ 10.000 08/01/10 1,144,367
-----------
TOTAL SALES TAX REVENUE......... 5,448,601
-----------
TRANSPORTATION 9.7%
3,000 Atlanta, Georgia, Airport Facilities
Rev. (Atlanta International
Airport), Series 1990............... 6.250 01/01/21 2,946,900
1,000 Chicago, Illinois, O'Hare
International Airport Rev.,
Series A............................ 6.000 01/01/18 940,910
1,000 Chicago, Illinois, O'Hare
International Airport Rev.,
Series B............................ 6.000 01/01/18 940,910
500 Cleveland, Ohio, Parking Facilities
Improvement Rev..................... 8.000 09/15/12 523,230
940 Dallas-Fort Worth, Texas,
International Airport Facility Rev.,
(American Airlines, Inc.)........... 7.500 11/01/25 955,623
2,500 Greater Orlando Aviation Authority,
Florida, Airport Facilities Rev..... 8.375 10/01/16 2,746,558
500 Hawaii State Harbor Capital
Improvement Rev., MBIA.............. 7.000 07/01/17 525,685
2,000 Indiana Transportation Finance
Authority, Airport Facilities Lease
Rev., Series A...................... 6.250 11/01/16 1,962,720
1,000 Kentucky State Turnpike Authority,
Toll Road Rev., Refunding Series A.. 5.500 07/01/07 967,900
</TABLE>
See Notes to Financial Statements.
F-27
<PAGE> 111
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 8,000 Kentucky State Turnpike Authority,
Toll Road Rev., Refunding Series
1987-A.............................. 5.000% 07/01/08 $ 7,261,520
2,000 Los Angeles, California, Regional
Airport Facility Improvement Corp.,
Lease Rev........................... 11.250 11/01/25 2,138,200
1,500 Metropolitan Transportation
Authority, New York Transportation
Facilities, Rev., Series G, MBIA.... 5.500 07/01/15 1,419,315
1,000 New Hampshire State Turnpike System,
Rev., Refunding Series A, FGIC...... 6.750 11/01/11 1,087,400
3,200 New Jersey State Turnpike Authority,
Series C............................ 6.500 01/01/16 3,372,416
1,000 Port Authority of New York and New
Jersey, Consolidated Board, 95th
Series.............................. 6.125 07/15/22 997,250
915 Philadelphia, Pennsylvania,
Industrial Development Authority
Rev. (Parking Garage II Project).... 6.125 02/15/03 907,049
1,000 St. Louis, Missouri, Parking
Facilities Rev...................... 6.625 12/15/21 1,007,690
1,000 Triborough Bridge & Tunnel
Authority, New York, Rev............ 7.875 01/01/18 1,093,430
1,000 Tulsa, Oklahoma, Municipal Airport
Trust, Rev.......................... 7.600 12/01/30 986,530
800 Tulsa, Oklahoma, Municipal Airport
Trust, Rev. (American Airlines)..... 9.500 06/01/20 832,968
785 Virgin Islands Port Authority,
Marine Division Rev. (Marine
Terminal), Series A................. 10.125 11/01/05 811,737
-----------
TOTAL TRANSPORTATION............ 34,425,941
-----------
UTILITIES--COMBINATION ELECTRIC, GAS
AND/OR WATER 9.7%
1,250 Austin, Texas, Utility System Rev.,
FGIC................................ 7.750 11/15/06 1,316,662
2,280 Austin, Texas, Utility System Rev.,
Refunding........................... 6.000 05/15/15 2,258,796
1,000 Austin, Texas, Utility System Rev.,
Series A............................ 7.800 11/15/12 1,112,940
2,380 Austin, Texas, Utility System Rev.,
Series B............................ 7.800 11/15/12 2,631,209
1,000 Chicago, Illinois, Gas Supply Rev.
(People's Gas Lighting and
Coke Co.), Series A................. 8.100 05/01/20 1,103,260
1,000 Chicago, Illinois, Metropolitan
Water District, G.O................. 7.000 01/01/11 1,122,700
700 Citronelle, Alabama, Utilities
Board, Water, Sewer & Gas Rev....... 9.000 05/01/13 752,171
10,950 Jefferson County, Kentucky, Capital
Project Lease Rev. Waste Water
Treatment Plant..................... * 08/15/14 2,931,315
750 Jefferson, Wisconsin, Sewer System,
Waterworks.......................... 7.400 07/01/16 840,397
2,000 Los Angeles, California, Dept. of
Water & Power, Electric Plant Rev... 5.375 09/01/23 1,776,940
2,000 Massachusetts State Water Resource
Authority, Series A................. 7.500 04/01/16 2,243,440
1,000 New Hampshire State Business Finance
Authority, Electric Facilities Rev.
(Plymouth Cogeneration Light Power). 7.750 06/01/14 1,006,120
1,000 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series A................ 7.625 06/15/16 1,075,680
3,000 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series A, MBIA.......... 7.250 06/15/15 3,352,200
</TABLE>
See Notes to Financial Statements.
F-28
<PAGE> 112
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$4,100 New York City Municipal Water
Finance Authority, New York, Water &
Sewer Rev., Series B................ 5.000% 06/15/17 $ 3,510,584
1,000 New York State Environment
Facilities Corp., Water Facilities
Rev. (Long Island Water Corp.)...... 10.000 10/01/17 1,108,110
500 NORCO, California, Sewer and Water
Rev., Refunding..................... 6.700 10/01/13 489,130
500 NORCO, California, Sewer and Water
Rev., Refunding..................... 7.200 10/01/19 493,770
750 Northwest Harris County, Texas,
Municipal Utility, Waterworks and
Sewer System Combination Tax........ 8.100 10/01/15 809,610
2,000 Orlando, Florida, Utilities
Commission, Water & Electric Rev.
Refunding (Prerefunded @ 10/1/95)... 8.625 10/01/05 2,081,240
500 Willow Fork, Texas, Drainage
District, G.O....................... 7.000 03/01/12 517,080
500 Willow Fork, Texas, Drainage
District, G.O....................... 7.000 03/01/13 514,270
1,000 Winters, Texas, Water Works & Sewer
Rev................................. 8.500 08/01/17 1,219,240
-----------
TOTAL UTILITIES--COMBINATION
ELECTRIC, GAS AND/OR WATER.... 34,266,864
-----------
UTILITIES--ELECTRIC 23.2%
2,500 Alaska Energy Authority Power Rev.,
First Series (Bradley Lake
Hydroelectric Project), BIG......... 6.250 07/01/21 2,502,475
850 Georgia State Municipal Electric
Authority, Power Rev................ 6.000 01/01/20 817,114
2,000 Georgia State Municipal Electric
Authority, Power Rev., Series A
(Prerefunded 1/1/96)................ 7.875 01/01/18 2,086,560
1,750 Georgia State Municipal Electric
Authority, Power Rev., Series Q
(Prerefunded 1/1/98)................ 8.375 01/01/16 1,927,730
1,250 Georgia State Municipal Electric
Authority, Power Rev., Series O..... 8.125 01/01/17 1,358,250
9,685 Grand River Dam Authority, Oklahoma,
Rev. Series 1987.................... 5.000 06/01/12 8,598,052
1,850 Intermountain Power Agency, Utah,
Power Supply Authority Rev., 1st
Crossover Series.................... 5.000 07/01/16 1,597,419
1,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
A................................... 6.000 07/01/23 965,630
2,400 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
A................................... 7.750 07/01/17 2,536,824
3,650 Intermountain Power Agency, Utah,
Power Supply Authority Rev., Series
B................................... 7.750 07/01/20 3,917,070
2,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev.,
Series H............................ 6.000 07/01/21 1,920,740
2,000 Intermountain Power Agency, Utah,
Power Supply Authority Rev.,
Series I............................ 6.000 07/01/21 1,920,740
1,000 Lewis County, Washington, Public
Utility District No. 1 Rev. (Cowlitz
Falls Hydroelectric Project)........ 6.000 10/01/24 966,510
750 Michigan Public Power Agency, Rev.,
Refunding (Belle River Project)..... 7.000 01/01/18 770,467
3,000 Muscatine, Iowa, Electric Authority
Rev................................. 5.000 01/01/08 2,700,330
2,500 New York State Power Authority,
Rev., Series T...................... 7.375 01/01/18 2,601,950
300 Northern California, Public Power
Agency, Rev......................... 5.000 07/01/09 260,835
</TABLE>
See Notes to Financial Statements.
F-29
<PAGE> 113
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ 335 North Carolina Eastern Municipal
Power Agency, Power System Rev...... 8.000% 01/01/21 $ 367,971
2,665 North Carolina Eastern Municipal
Power Agency, Power System Rev.
(Prerefunded @ 1/1/98).............. 8.000 01/01/21 2,927,289
7,695 North Carolina Eastern Municipal
Power Agency, Power System Rev.,
Series A............................ 4.500 01/01/24 6,140,379
1,000 North Carolina Municipal Power
Agency No. 1, Catawba Electric Rev.. 6.000 01/01/20 948,150
2,850 North Carolina Municipal Power
Agency No. 1, Catawba Electric Rev.. 7.875 01/01/19 3,121,064
1,070 Piedmont Municipal Power Agency,
South Carolina, Rev................. 5.000 01/01/25 870,552
5,290 Salt River Project, Arizona
Agricultural Improvement & Power
District Electric System Rev........ 7.875 01/01/28 5,785,938
1,000 Sam Rayburn, Texas, Municipal Power
Agency, Refunding, Series A......... 6.250 10/01/17 864,160
1,000 Sam Rayburn, Texas, Municipal Power
Agency, Refunding, Series A......... 6.750 10/01/14 942,280
1,000 South Carolina, Public Service
Authority (Prerefunded @ 1/1/96).... 7.875 07/01/21 1,036,228
2,000 Southern Minnesota Municipal Power
Agency, Power Supply System Rev.,
Series A............................ 5.000 01/01/16 1,730,140
1,250 Southern Minnesota Municipal Power
Agency, Power Supply System Rev.,
Series C............................ 5.000 01/01/17 1,077,400
8,565 Texas Municipal Power Agency Rev.... 5.500 09/01/13 7,990,289
1,250 Washington State Public Power Supply
System Rev., Nuclear Project No. 1,
Series B............................ 7.125 07/01/16 1,350,525
445 Washington State Public Power Supply
System Rev., Nuclear Project No. 1,
Series D............................ 15.000 07/01/17 513,294
2,500 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series B............................ 7.000 07/01/12 2,589,975
1,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series B............................ 7.375 07/01/12 1,120,120
2,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 2,
Series 1990-C....................... 7.625 07/01/10 2,276,020
3,000 Washington State Public Power Supply
System Rev., Nuclear Project No. 3,
MBIA................................ 5.600 07/01/17 2,773,770
------------
TOTAL UTILITIES--ELECTRIC....... 81,874,240
------------
TOTAL MUNICIPAL BONDS (Cost
$316,710,927).................. 337,510,328
------------
MUNICIPAL VARIABLE RATE DEMAND
NOTES+ 2.9%
540 Anchorage, Alaska, Higher Education
Rev................................. 4.200 07/01/17 540,000
2,100 District Columbia, Series A-4....... 4.750 10/01/07 2,100,000
2,000 District Columbia, Series A-6....... 4.750 10/01/07 2,000,000
300 Illinois Health Facilities Authority
Rev., La Grand Memorial Health
System.............................. 4.600 12/01/16 300,000
900 Illinois Development Finance
Authority Rev....................... 4.200 04/01/07 900,000
</TABLE>
See Notes to Financial Statements.
F-30
<PAGE> 114
PORTFOLIO OF INVESTMENTS (CONTINUED)
March 31, 1995 (Unaudited)
- ----------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount
(000) Description Coupon Maturity Market Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$750 Illinois Health Facilities
Authority Rev.................... 4.600% 01/01/18 $ 750,000
355 Jacksonville, Florida,
Industrial Development Rev....... 4.750 09/01/07 355,000
500 Maricopa County, Arizona,
Industrial Development Authority,
Hospital Facility Rev.,
Series B-2....................... 4.500 12/01/08 500,000
300 New York, New York, Subseries
A-7, G.O......................... 4.600 08/01/20 300,000
200 New York, New York, Subseries
E-2, G.O......................... 4.500 08/01/20 200,000
500 New York, New York, Subseries
E-5, G.O......................... 4.500 08/01/16 500,000
575 New York State Job Development
Authority........................ 4.500 03/01/07 575,000
200 Peninsula Ports, Virginia,
Authority Rev., Port Facilities.. 4.450 12/01/05 200,000
500 West Feliciana Parish,
Louisiana........................ 4.750 04/01/16 500,000
500 Wisconsin State Health
Facilities Authority Rev., Series
A-2.............................. 4.100 01/01/16 500,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND
NOTES (Cost $10,220,000).................... 10,220,000
------------
TOTAL INVESTMENTS (Cost $326,930,927) 98.5%.............. 347,730,328
OTHER ASSETS AND LIABILITIES, NET 1.5%................... 5,299,458
------------
NET ASSETS 100%.......................................... $353,029,786
============
</TABLE>
<TABLE>
<S> <C>
*Zero Coupon bond Insurers:
+Interest rates are as of March 31, 1995 AMBAC--AMBAC Indemnity Corp.
FHA--Federal Housing Administration BIG--Bond Investors Guranty Insurance Co.
G.O.--General obligation bond CONN--Connie Lee
Rev.--Revenue bond FGIC--Financial Guaranty Insurance Corp.
IDR--Industrial Revenue Bond FSA--Financial Security Assurance Inc.
MBIA--Municipal Bond Investor's Assurance Corp.
</TABLE>
See Notes to Financial Statements.
F-31
<PAGE> 115
STATEMENT OF ASSETS AND LIABILITIES
March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $326,930,927)............... $347,730,328
Cash........................................................... 63,719
Interest receivable............................................ 6,874,209
Receivable for Fund shares sold................................ 409,773
Receivable for investments sold................................ 160,463
Other assets................................................... 2,683
------------
Total Assets................................................ 355,241,175
------------
LIABILITIES
Payable for Fund shares redeemed............................... 923,890
Dividends payable.............................................. 763,698
Due to Distributor............................................. 217,909
Due to Adviser................................................. 147,435
Deferred Director compensation................................. 25,079
Accrued expenses............................................... 133,378
------------
Total Liabilities........................................... 2,211,389
------------
NET ASSETS, equivalent to $9.98 per share for Class A shares,
$9.98 per share for Class B shares and $9.99 per share for
Class C shares................................................ $353,029,786
============
NET ASSETS WERE COMPRISED OF:
Capital stock, at par; 30,671,176 Class A, 3,922,453 Class B
and 794,623 Class C shares outstanding........................ $ 353,883
Capital surplus................................................ 342,630,860
Accumulated net realized loss on securities.................... (9,875,520)
Net unrealized appreciation of investments..................... 20,799,401
Accumulated deficit............................................ (878,838)
------------
NET ASSETS at March 31, 1995................................... $353,029,786
============
</TABLE>
See Notes to Financial Statements.
F-32
<PAGE> 116
STATEMENT OF OPERATIONS
Six Months Ended March 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest....................................................... $12,361,124
-----------
EXPENSES
Management fees................................................ 865,032
Service fees--Class A.......................................... 299,675
Distribution and service fees--Class B......................... 186,720
Distribution and service fees--Class C......................... 38,876
Shareholder service agent's fees and expenses.................. 212,684
Accounting services............................................ 66,960
Registration and filing fees................................... 51,672
Reports to shareholders........................................ 32,076
Custodian fees................................................. 10,669
Audit fees..................................................... 10,350
Directors' fees and expenses................................... 9,682
Legal fees..................................................... 1,807
Miscellaneous.................................................. 6,781
-----------
Total expenses.............................................. 1,792,984
-----------
NET INVESTMENT INCOME.......................................... 10,568,140
===========
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized loss on securities................................ (406,001)
Net unrealized appreciation of securities during the period.... 5,430,649
-----------
NET REALIZED AND UNREALIZED GAIN ON SECURITIES................. 5,024,648
===========
INCREASE IN NET ASSETS RESULTING FROM OPERATIONS............... $15,592,788
===========
</TABLE>
See Notes to Financial Statements.
F-33
<PAGE> 117
STATEMENT OF CHANGES IN NET ASSETS
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended Year Ended
March 31, 1995 September 30, 1994
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSETS, beginning of period........... $354,257,068 $355,682,180
------------ ------------
Operations
Net investment income.................... 10,568,140 20,505,507
Net realized loss on securities.......... (406,001) (2,005,680)
Net unrealized appreciation (depreciation)
of securities during the period......... 5,430,649 (23,803,245)
------------ ------------
Increase (decrease) in net assets
resulting from operations.............. 15,592,788 (5,303,418)
------------ ------------
Distributions to shareholders from net
investment income
Class A................................ (9,121,444) (18,227,557)
Class B................................ (992,532) (1,534,981)
Class C................................ (205,815) (276,302)
------------ ------------
(10,319,791) (20,038,840)
------------ ------------
Net equalization debits (Note 1F)......... -- (20,289)
------------ ------------
Capital transactions
Proceeds from shares sold
Class A................................ 14,727,341 49,766,921
Class B................................ 5,982,935 25,694,674
Class C................................ 1,089,358 9,071,276
------------ ------------
21,799,634 84,532,871
------------ ------------
Proceeds from shares issued for
distributions reinvested
Class A................................ 5,388,284 10,485,166
Class B................................ 608,782 958,506
Class C................................ 134,811 183,364
------------ ------------
6,131,877 11,627,036
------------ ------------
Cost of shares redeemed
Class A................................ (27,714,382) (60,814,520)
Class B................................ (5,310,821) (9,282,719)
Class C................................ (1,406,587) (2,125,233)
------------ ------------
(34,431,790) (72,222,472)
------------ ------------
Increase (decrease) in net assets
resulting from capital transactions...... (6,500,279) 23,937,435
------------ ------------
DECREASE IN NET ASSETS.................... (1,227,282) (1,425,112)
------------ ------------
NET ASSETS, end of period................. $353,029,786 $354,257,068
============ ============
</TABLE>
See Notes to Financial Statements.
F-34
<PAGE> 118
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A(1)
-----------------------------------------------------
Six Months
Ended Year Ended September 30
March 31, -----------------------------------------
1995 1994 1993(2) 1992 1991 1990
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net asset value, beginning
of period................. $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13 $ 9.33
------ ------ ------ ------ ------ ------
Income from investment
operations:
Investment income........ .35 .68 .69 .705 .71 .72
Expenses................. (.05) (.09) (.094) (.09) (.08) (.08)
------ ------ ------ ------ ------ ------
Net investment income..... .30 .59 .596 .615 .63 .64
Net realized and
unrealized gains or losses
on securities............ .1555 (.7255) .558 .349 .5198 (.195)
------ ------ ------ ------ ------ ------
Total from investment
operations............... .4555 (.1355) 1.154 .964 1.1498 .445
------ ------ ------ ------ ------ ------
Less distributions from:
Net investment income.... (.2955) (.5745) (.596) (.624) (.6398) (.645)
Excess of book-basis net
investment income....... -- -- (.008) -- -- --
------ ------ ------ ------ ------ ------
Total distributions....... (.2955) (.5745) (.604) (.624) (.6398) (.645)
------ ------ ------ ------ ------ ------
Net asset value, end of
period................... $ 9.98 $ 9.82 $10.53 $ 9.98 $ 9.64 $ 9.13
====== ====== ====== ====== ====== ======
TOTAL RETURN(3)........... 4.76% (1.33%) 11.91% 10.31% 12.98% 4.90%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period
(millions)............... $306.0 $309.0 $332.3 $292.3 $266.9 $237.4
Average net assets
(millions)............... $300.9 $324.2 $313.0 $278.6 $253.2 $241.2
Ratios to average net
assets (annualized):
Expenses............... .93% .93% .91% .90% .89% .86%
Net investment income.. 6.23% 5.76% 5.82% 6.29% 6.71% 6.84%
Portfolio turnover rate... 2% 6% 3% 6% 10% 17%
</TABLE>
(1) Per share amounts for 1990 and 1991 are adjusted to reflect a 2 for 1 stock
split effected July 26, 1991. Additionally, in 1991, the Fund adopted for
financial reporting purposes a method of accounting for debt discounts and
premiums which is the same as is used for federal income tax reporting. The
effect of the change, on a pro forma basis, would have been to increase net
investment income with a corresponding decrease in net realized and
unrealized gains or losses in the amount of $.01 for 1990. Similarly, the
ratio of net investment income to average net assets would have been 6.94%.
(2) Per share amounts based on average month-end shares outstanding.
(3) Total return for a period of less than one full year is not annualized.
Total return does not consider the effect of sales charges.
See Notes to Financial Statements.
F-35
<PAGE> 119
FINANCIAL HIGHLIGHTS
Selected data for a share of capital stock outstanding throughout each of the
periods indicated (Unaudited).
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B(1) Class C
----------------------------------- --------------------------------------------
August 30,
Six Months Year Ended Six Months 1993(4)
Ended September 30 Ended Year Ended through
March 31, ------------------ March 31, September 30, September 30,
1995 1994 1993(2) 1995 1994(2) 1993(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of
period........................ $ 9.83 $10.53 $ 9.98 $ 9.83 $10.54 $10.53
------ ------ ------ ------ ------ ------
Income from investment
operations:
Investment income............ .35 .68 .685 .35 .69 .05
Expenses..................... (.09) (.17) (.175) (.09) (.18) (.015)
------ ------ ------ ------ ------ ------
Net investment Income.......... .26 .51 .51 .26 .51 .035
Net realized and unrealized
gains or losses on securities.. .1485 (.7195) .564 .1585 (.7295) .061
------ ------ ------ ------ ------ ------
Total from investment
operations.................... .4085 (.2095) 1.074 .4185 (.2195) .096
------ ------ ------ ------ ------ ------
Less Distributions from:
Net investment income......... (.2585) (.4905) (.501) (.2585) (.4905) (.007)
Excess of book-basis net
investment income ........... -- -- (.023) -- -- (.079)
------ ------ ------ ------ ------ ------
Total distributions............ (.2585) (.4905) (.524) (.2585) (.4905) (.086)
------ ------ ------ ------ ------ ------
Net asset value, end of
period........................ $ 9.98 $ 9.83 $10.53 $ 9.99 $ 9.83 $10.54
====== ====== ====== ====== ====== ======
TOTAL RETURN(3)................ 4.25% (2.13%) 11.15% 4.25% (2.03%) .91%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of the
period (millions)............. $ 39.1 $ 37.2 $ 22.1 $ 7.9 $ 8.0 $ 1.3
Average net assets (millions).. $ 37.3 $ 31.2 $ 10.0 $ 7.8 $ 5.4 $ 0.4
Ratios to average net assets
Expenses...................... 1.74%(5) 1.72% 1.71% 1.74%(5) 1.72% 1.69%(5)
Net investment income......... 5.42%(5) 5.00% 4.96% 5.42%(5) 5.03% 4.25%(5)
Portfolio turnover rate........ 2% 6% 3% 2% 6% 3%
</TABLE>
(1) Sales of Class B commenced September 29, 1992 at a net asset value of
$10.00 per share. At September 30, 1992, there were 50 Class B shares
outstanding with a per share net asset value of $9.98. The decrease in net
asset value was due principally to a dividend of $.052 per share. Other
financial highlights for Class B shares for this short period (September
29, 1992 to September 30, 1992) are not presented as they are not
meaningful.
(2) Per share amounts based on average month-end shares outstanding.
(3) Total return for periods of less than one full year are not annualized.
Total return does not consider the effect of sales charges.
(4) Commencement of offering of sales.
(5) Annualized
See Notes to Financial Statements.
F-36
<PAGE> 120
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 1--SIGNIFICANT ACCOUNTING POLICIES
American Capital Municipal Bond Fund (the "Fund") is registered under the In-
vestment Company Act of 1940, as amended, as a diversified open-end management
investment company. The following is a summary of significant accounting poli-
cies consistently followed by the Fund in the preparation of its financial
statements.
A. INVESTMENT VALUATIONS-Investments in municipal bonds are valued at the most
recently quoted bid prices or at bid prices based on a matrix system (which
considers such factors as security prices, yields, maturities and ratings)
furnished by dealers and an independent pricing service. Municipal variable
rate demand notes are valued at par; periodic rate changes reflect current
market conditions.
Short-term investments with a maturity of 60 days or less when purchased are
valued at amortized cost, which approximates market value. Short-term invest-
ments with a maturity of more than 60 days when purchased are valued based on
market quotations until the remaining days to maturity becomes less than 61
days. From such time, until maturity, the investments are valued at amortized
cost.
Issuers of certain securities owned by the Fund have obtained insurance
guaranteeing their timely payment of principal and interest at maturity. The
insurance reduces financial risk but not market risk of the security.
Fund investments include lower rated debt securities which may be more sus-
ceptible to adverse economic conditions than other investment grade holdings.
These securities are often subordinated to the prior claims of other senior
lenders and uncertainties exist as to an issuer's ability to meet principal
and interest payments. At March 31, 1995, debt securities rated below invest-
ment grade and comparable unrated securities represented approximately 20% of
the investment portfolio.
B. FEDERAL INCOME TAXES-No provision for federal income taxes is required be-
cause the Fund has elected to be taxed as a "regulated investment company" un-
der the Internal Revenue Code and intends to maintain this qualification by
annually distributing all of its taxable net investment income and taxable net
realized capital gains to its shareholders. It is anticipated that no distri-
butions of net realized capital gains will be made until tax basis capital
loss carryforwards expire or are offset by net realized capital gains.
The net realized capital loss carryforward for federal income tax purposes
of approximately $9.4 million at September 30, 1994 may be utilized to offset
current or future gains until expiration in 1996 through 2002.
F-37
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
C. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME-Investment transac-
tions are accounted for on the trade date. Realized gains and losses on in-
vestments are determined on the basis of identified cost. Interest income is
accrued daily.
D. DIVIDENDS AND DISTRIBUTIONS-Dividends and distributions to shareholders are
recorded on the record date. The Fund distributes tax basis earnings in accor-
dance with the minimum distribution requirements of the Internal Revenue Code,
which may differ from generally accepted accounting principles. Such dividends
or distributions may exceed financial statement earnings.
E. DEBT DISCOUNT AND PREMIUM-The Fund accounts for debt discounts and premiums
on the same basis as is followed for federal income tax reporting. According-
ly, original issue discounts and all premiums are amortized over the life of
the security. Market discounts are recognized at the time of sale as realized
gains for book purposes and ordinary income for tax purposes.
F. EQUALIZATION-At September 30, 1994, the Fund discontinued the accounting
practice of equalization, which it had used since its inception. Equalization
is a practice whereby a portion of the proceeds from sales and costs of re-
demptions of Fund shares, equivalent on a per-share basis to the amount of the
undistributed net investment income, is charged or credited to undistributed
net investment income.
G. WHEN-ISSUED SECURITIES-Delivery and payment for securities purchased on a
when-issued basis may take place up to 45 days after the date of the transac-
tion. The securities purchased are subject to market fluctuation during this
period. To meet the payment obligation, sufficient cash or liquid securities
equal to the amount that will be due are set aside with the custodian.
NOTE 2--MANAGEMENT FEES AND OTHER TRANSACTIONS WITH AFFILIATES
Van Kampen American Capital Asset Management, Inc. (the "Adviser") serves as
investment manager of the Fund. Management fees are paid monthly, based on the
rate of .50% per annum of the average daily net assets of the Fund.
Accounting services include the salaries and overhead expenses of the Fund's
Treasurer and the personnel operating under his direction. Charges are allo-
cated among investment companies advised or sub-advised by the Adviser. For
the period March 31, 1995, these
F-38
<PAGE> 122
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
charges included $5,384 as the Fund's share of the employee costs attributable
to the Fund's accounting officers. A portion of the accounting services ex-
pense was paid to the Adviser in reimbursement of personnel, facilities and
equipment costs attributable to the provision of accounting services to the
Fund. The services provided by the Adviser are at cost.
ACCESS Investor Services, Inc., an affiliate of the Adviser, serves as
shareholder service agent. These services are provided at cost plus a profit.
For the period ended March 31, 1995, the fees for such services were $147,187.
The Fund has been advised that Van Kampen American Capital Distributors,
Inc. (the "Distributor") and Advantage Capital Corp. (the "Retailer Dealer")
both affiliates of the Adviser, received $27,527 and $30,555, respectively, as
their portion of the commissions charged on sales of Fund shares during the
period.
Under the Distribution Plans, the Fund pays up to .25% per annum of its av-
erage net assets to reimburse the Distributor for expenses and service fees
incurred. Class B shares and Class C shares pay an additional fee of up to
.75% per annum of their average daily net assets to reimburse the Distributor
for its distribution expenses. Actual distribution expenses incurred by the
Distributor for Class B shares and Class C shares may exceed the amounts reim-
bursed to the Distributor by the Fund. At March 31, 1995, the unreimbursed ex-
penses incurred by the Distributor under the Class B and Class C plans
aggregated approximately $1.5 million and $110,000, respectively, and may be
carried forward and reimbursed through either the collection of the contingent
deferred sales charges from share redemptions or, subject to the annual re-
newal of the plans, future Fund reimbursements of distribution fees.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a director of the Fund.
Certain officers and directors of the Fund are officers and directors of the
Adviser, the Distributor, the Retail Dealer and the shareholder services
agent.
NOTE 3--INVESTMENT ACTIVITY
During the period, the cost of purchases and proceeds from sales of invest-
ments, excluding short-term investments, were $8,215,930 and $12,451,313, re-
spectively.
For federal income tax purposes, the identified cost of investments owned at
March 31, 1995 was $326,964,141. Net unrealized appreciation of investments
aggregated $20,766,187, gross unrealized appreciation of investments aggre-
gated $23,399,469, and gross unrealized depreciation of investments aggregated
$2,633,282.
F-39
<PAGE> 123
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
NOTE 4--DIRECTOR COMPENSATION
Fund directors who are not affiliated with the Adviser are compensated by the
Fund at the annual rate of $1,250 plus a fee of $30 per day for Board and Com-
mittee meetings attended. The Chairman receives additional fees from the Fund
at the annual rate of $470. During the period, such fees aggregated $7,453.
The directors may participate in a voluntary Deferred Compensation Plan (the
"Plan"). The Plan is not funded, and obligations under the Plan will be paid
solely out of the Fund's general accounts. The Fund will not reserve or set
aside funds for the payment of its obligations under the Plan by any form of
trust or escrow. Each director covered by the Plan elects to be credited with
an earnings component on amounts deferred equal to the income earned by the
Fund on its short-term investments or equal to the total return of the Fund.
NOTE 5--CAPITAL
The Fund offers three classes of shares at their respective net asset values
per share, plus a sales charge which is imposed either at the time of purchase
(the Class A shares) or at the time of redemption on a contingent deferred ba-
sis (the Class B shares and Class C shares). All classes of shares have the
same rights, except that Class B shares and Class C shares bear the cost of
distribution fees and certain other class specific expenses. Realized and
unrealized gains or losses, investment income and expenses (other than class
specific expenses) are allocated daily to each class of shares based upon the
relative proportion of net assets of each class. Class B shares and Class C
shares automatically convert to Class A shares six years and ten years after
purchase, respectively, subject to certain conditions.
F-40
<PAGE> 124
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
- -------------------------------------------------------------------------------
The Fund has 200 million shares of each class of shares of $.01 par value of
capital stock authorized. Transactions in shares of capital stock were as fol-
lows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30,
1995 1994
- ----------------------------------------------------------------------------------
<S> <C> <C>
Shares sold
Class A............................................. 1,519,426 4,883,618
Class B............................................. 617,796 2,518,998
Class C............................................. 110,152 884,668
---------- ----------
2,247,374 8,287,284
========== ==========
Shares issued for distributions reinvested
Class A............................................. 554,575 1,032,887
Class B............................................. 62,597 94,773
Class C............................................. 13,854 18,175
---------- ----------
631,026 1,145,835
========== ==========
Shares redeemed
Class A............................................. (2,866,089) (6,004,203)
Class B............................................. (549,554) (915,403)
Class C............................................. (143,583) (210,194)
---------- ----------
(3,559,226) (7,129,800)
---------- ----------
Increase (decrease) in shares outstanding............ (680,826) 2,303,319
========== ==========
</TABLE>
NOTE 6--SUBSEQUENT DIVIDENDS
The Board of Directors of the Fund declared a dividend of $.05 per share for
Class A shares, $.044 per share for Class B and Class C shares from net in-
vestment income, payable May 15, 1995 to shareholders of record on April 28,
1995.
F-41
