<PAGE> 1
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
TAX-EXEMPT TRUST
- --------------------------------------------------------------------------------
Van Kampen American Capital Tax-Exempt Trust, formerly known as American
Capital Tax-Exempt Trust, (the "Trust"), is a mutual fund whose objective is to
provide as high a level of current income exempt from federal income tax as is
consistent with the investment policies of each Fund.
The Van Kampen American Capital High Yield Municipal Fund ("High Yield
Municipal Fund") invests principally in medium to lower rated tax-exempt debt
securities. LOWER RATED SECURITIES ARE REGARDED BY THE RATING AGENCIES AS
PREDOMINANTLY SPECULATIVE WITH RESPECT TO THE ISSUER'S CONTINUING ABILITY TO
MEET PRINCIPAL AND INTEREST PAYMENTS. The Fund is designed for investors willing
to assume additional risk in return for above average income. Investors should
assess carefully the risks associated with an investment in the Fund.
The Van Kampen American Capital Insured Municipal Fund ("Insured Municipal
Fund") invests principally in tax-exempt debt securities covered by insurance
guaranteeing the timely payment of principal at maturity and interest. See
"Insured Municipal Fund" herein regarding the nature and limitations of such
insurance.
The Trust's current shareholders are considering a proposal to reorganize
the Insured Municipal Fund into the Van Kampen Merritt Insured Tax Free Fund.
SEE "PROPOSED REORGANIZATION."
There is no assurance that the Trust will achieve its investment objective.
The Trust'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 Trust. Please read it
carefully and retain it for future reference. The address of the Trust 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 TRUST 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 TRUST INVOLVE
INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated August 1, 1995, containing
additional information about the Trust, has been filed with the Securities and
Exchange Commission (the "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.......................................... 6
Shareholder Transaction Expenses................................. 7
Annual Fund Operating Expenses and Example....................... 8
Financial Highlights............................................. 10
The Trust........................................................ 14
Investment Objectives and Policies............................... 14
High Yield Municipal Fund...................................... 16
Insured Municipal Fund......................................... 19
Municipal Securities............................................. 20
Investment Practices............................................. 21
Investment Advisory Services..................................... 27
Alternative Sales Arrangements................................... 29
Purchase of Shares............................................... 32
Shareholder Services............................................. 41
Redemption of Shares............................................. 46
Distribution Plans............................................... 49
Distributions from the Trust..................................... 51
Tax Status....................................................... 52
Trust Performance................................................ 54
Description of Shares of the Trust............................... 57
Additional Information........................................... 58
</TABLE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS AND, IF
GIVEN OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE TRUST, THE ADVISER OR THE DISTRIBUTOR. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE TRUST 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 TRUST TO MAKE
SUCH AN OFFER IN SUCH JURISDICTION.
2
<PAGE> 3
- ------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- ------------------------------------------------------------------------------
THE TRUST. Van Kampen American Capital Tax-Exempt Trust (the "Trust") is a
diversified open-end management investment company organized as a Delaware
business trust.
MINIMUM PURCHASE. $500 minimum initial investment in each Fund and $25 minimum
for each subsequent investment (or less as described under "Purchase of
Shares").
INVESTMENT OBJECTIVE. As high a level of interest income exempt from federal
income tax as is consistent with the investment policies of each Fund. There is,
however, no assurance that a Fund will be successful in achieving its objective.
INVESTMENT POLICY. Each Fund invests under normal market conditions at least 80%
of its net assets in obligations issued by states, territories or possessions of
the United States and the District of Columbia and their political subdivisions,
the interest from which is exempt from federal income tax ("Municipal
Securities"). Each Fund may acquire stand-by commitments. See "Investment
Practices and Restrictions -- Stand-By Commitments." Each Fund may seek to hedge
investments through transactions in futures contracts and related options. Any
net gains from futures and options transactions are subject to federal income
tax. See "Investment Practices -- Futures Contracts and Related Options."
HIGH YIELD MUNICIPAL FUND. Invests principally in medium to lower rated
Municipal Securities. This Fund normally can be expected to provide a higher
yield than the Insured Municipal Fund, but will also be subject to a higher
market and financial risk. See "Risk Factors" below.
INSURED MUNICIPAL FUND. Invests principally in Municipal Securities covered by
insurance guaranteeing the timely payment of principal at maturity and interest.
Such insurance reduces financial risk but not market risk and does not insure
the shares of the Fund owned by the investor.
ALTERNATIVE SALES ARRANGEMENTS. Each 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. 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."
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
3
<PAGE> 4
contingent deferred sales charge of one percent may be imposed on certain
redemptions made within one year of the purchase. Each 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." Each 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 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." Each 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 TRUST. Dividends from net investment income are declared
on each business day and distributed monthly. Such distributions are
automatically reinvested, without sales charge, in additional shares at the next
determined net asset value per share. Payment in cash may be requested. Shares
begin accruing dividends on the day on which payment for the shares is received
by the shareholder service agent, ACCESS Investor Services, Inc. ("ACCESS"), a
wholly-owned subsidiary of Van Kampen American Capital, Inc. See "Distributions
from the Trust."
INVESTMENT ADVISER. Van Kampen American Capital Asset Management, Inc. (the
"Adviser") is the investment adviser to the Trust. Van Kampen American Capital
Advisors, Inc. (the "Subadviser") provides advisory services to the Adviser with
respect to High Yield Municipal Fund. The Adviser and the Subadviser are
sometimes referred to as the "Advisers."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc. (the "Distributor").
RISK FACTORS. Differences in the investment policies of the two Funds with
respect to the maturity and quality of investments can be expected to affect the
yield on each Fund and the degree of market and financial risk to which such
Fund is
4
<PAGE> 5
subject. Generally, Municipal Securities with longer maturities tend to produce
higher yields and are subject to greater market fluctuations as a result of
changes in interest rates ("market risk") than are Municipal Securities with
shorter maturities and lower yields. Lower rated Municipal Securities generally
provide a higher yield than higher rated Municipal Securities of similar
maturity but are subject to greater market risk and are also subject to a
greater degree of risk with respect to the ability of the issuer to meet its
principal and interest obligations ("financial risk"). Use of futures, options
on futures, and other instruments involves certain risks. See "Investment
Practices -- Repurchase Agreements, Stand-By Commitments, and Futures Contracts
and Related Options." The Funds may experience high portfolio turnover which
involves higher transaction costs and may result in short-term gains taxable as
ordinary income. See "Investment Practices -- Portfolio Turnover."
ADDITIONAL RISK FACTORS OF THE HIGH YIELD MUNICIPAL FUND. The lower rated
Municipal Securities in which the High Yield Municipal Fund invests are regarded
as predominantly speculative with respect to the issuer's continuing ability to
meet principal and interest payments. Because investment in lower rated
Municipal Securities (commonly referred to as junk bonds) involves greater
investment risk, achievement of the Fund's investment objectives may be more
dependent on the Advisers' credit analysis than would be the case if the Fund
were investing in higher rated Municipal Securities. Lower rated Municipal
Securities may be more susceptible to real or perceived adverse economic and
competitive industry conditions than investment grade Municipal Securities and
thus be subject to higher risk. A projection of an economic downturn, for
example, could cause a decline in lower rated Municipal Securities prices
because the advent of a recession could lessen the ability of the issuer to make
principal and interest payments on its debt securities. In addition, the
secondary trading market for lower rated Municipal Securities may be less liquid
than the market for higher grade Municipal Securities. The market prices of all
Municipal Securities generally fluctuate with changes in interest rates so that
the Fund's net asset value can be expected to decrease as long-term rates rise
and to increase as long-term interest rates fall.
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
5
<PAGE> 6
- ------------------------------------------------------------------------------
PROPOSED REORGANIZATION
- ------------------------------------------------------------------------------
On May 11, 1995, the Trustees of the Trust approved an Agreement and Plan of
Reorganization between the Insured Municipal Fund of the Trust and the Van
Kampen Merritt Insured Tax Free 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 Van Kampen American Capital 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 Trust. 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 $1,222.3 million on March 31, 1995. Its
objective is to seek to provide high current income exempt from federal income
taxes consistent with liquidity and safety of principal primarily through
investment in a diversified portfolio of insured municipal securities. The Fund
and the Van Kampen Fund have similar investment objectives and follow generally
similar investment policies.
The Fund will continue its normal operations prior to the Reorganization.
6
<PAGE> 7
- ------------------------------------------------------------------------------
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
the 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%
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.
7
<PAGE> 8
- --------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
--------------------------------- ---------------------------------
CLASS A CLASS B CLASS C CLASS A CLASS B CLASS C
SHARES SHARES SHARES SHARES SHARES SHARES
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Management fees (as a percentage of average daily net
assets)................................................. .57% .57% .57% .57% .57% .57%
12b-1 Fees (as a percentage of average daily net
assets)(3).............................................. .25% 1.00% (5) 1.00%(5) .24% 1.00% (5) 1.00%(5)
Other Expenses (as a percentage of average daily net
assets)(4).............................................. .20% .20% .18% .34% .34% .32%
Total fund operating expenses (as a percentage of average
daily net assets)....................................... 1.02% 1.77% 1.75% 1.15% 1.91% 1.89%
</TABLE>
- ---------------
(3) Up to 0.25% for Class A shares and 1.00% 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.
8
<PAGE> 9
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
------------------------------ ------------------------------
ONE THREE FIVE TEN ONE THREE FIVE TEN
EXAMPLE: YEAR YEARS YEARS YEARS YEAR YEARS YEARS YEARS
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
You would pay the following expenses on a $1,000 investment
assuming (i) an operating expense ratio of 1.02% and 1.15% for
High Yield and Insured, respectively, for Class A shares,
1.77% and 1.91% for High Yield and Insured, respectively, for
Class B shares and 1.75% and 1.89% for High Yield and Insured,
respectively, for Class C shares, (ii) a 5% annual return and
(iii) redemption at the end of each time period:
Class A..................................................... $ 57 $ 78 $101 $166 $ 59 $ 82 $108 $181
Class B..................................................... $ 59 $ 89 $114 $170* $ 61 $ 93 $121 $185*
Class C..................................................... $ 28 $ 55 $ 95 $206 $ 30 $ 59 $102 $221
An investor would pay the following expenses on the same $1,000
investment assuming no redemption at the end of each time
period:
Class A..................................................... $ 57 $ 78 $101 $166 $ 59 $ 82 $108 $181
Class B..................................................... $ 18 $ 56 $ 96 $170* $ 19 $ 60 $103 $185*
Class C..................................................... $ 18 $ 55 $ 95 $206 $ 19 $ 59 $102 $221
</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 Trust 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 is
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."
9
<PAGE> 10
- --------------------------------------------------------------------------------
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 years in the period
ended November 30, 1994 has been audited by Price Waterhouse LLP, independent
accountants, whose report thereon was unqualified. 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
------------------------------------------------------------------------------ JANUARY 2,
YEAR ENDED NOVEMBER 30 1986(2) THROUGH
HIGH YIELD ------------------------------------------------------------------------------------------------ NOVEMBER 30,
MUNICIPAL FUND 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
Net asset
value,
beginning of
period........ $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85 $12.08 $11.91
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
Investment
income....... .87 .931 .93 .885 1.005 1.03 1.05 1.0754 1.0014
Expenses....... (.11) (.1178) (.115) (.115) (.105) (.09) (.09) (.0903) (.0615)
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Net investment
income....... .76 .8132 .815 .77 .90 .94 .96 .9851 .9399
Net realized
and unrealized
gain or loss
on
securities.... (.744) .2303 .195 .13 (.23) .1418 (.105) (1.2751) .1735
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Total from
investment
operations.... .016 1.0435 1.01 .90 .67 1.0818 .855 (.29) 1.1134
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
DIVIDENDS FROM
NET INVESTMENT
INCOME........ (.766) (.8035) (.84) (.84) (.86) (.8918) (.985) (.94) (.9434)
--------- ---------- --------- --------- --------- ---------- --------- ---------- ---------------
Net asset
value, end of
period........ $10.44 $11.19 $10.95 $10.78 $10.72 $10.91 $10.72 $10.85 $12.08
======== ========= ======== ======== ======== ========= ======== ========== ===============
TOTAL
RETURN(3).... .10% 9.65% 9.77% 8.73% 6.43% 10.39% 8.12% (2.51%) 9.64%
RATIOS/
SUPPLEMENTAL
DATA
Net assets, end
of period
(millions).... $411.1 $408.0 $309.5 $225.3 $222.3 $233.3 $206.3 $157.0 $ 152.2
Ratios to
average net
assets
Expenses..... 1.02% 1.03% 1.07% 1.06% .97% .85% .85% .78% .55%(4)
Expenses
without
expense
reimbursement.. -- -- -- -- 1.06% 1.04% 1.07% 1.05% 1.02%(4)
Net investment
income...... 6.98% 7.13% 7.45% 7.20% 8.34% 8.86% 8.84% 8.55% 8.39%(4)
Net investment
income,
without
expense
reimbursement... -- -- -- -- 8.27% 8.65% 8.62% 8.28% 7.92%(4)
Portfolio
turnover
rate......... 33% 27% 24% 20% 29% 19% 36% 137% 32%
</TABLE>
(Table continued on following page)
10
<PAGE> 11
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------ ---------------
JULY 20, DECEMBER 10,
YEAR ENDED NOVEMBER 30, 1992(2) THROUGH 1993(2) THROUGH
------------------------------- NOVEMBER 30, NOVEMBER 30,
HIGH YIELD MUNICIPAL FUND 1994 1993(1) 1992(1) 1994(1)
----------- --------------- --------------- ---------------
1994
-----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......................... $11.18 $10.96 $ 11.08 $ 11.29
----------- --------------- --------------- ---------------
INCOME FROM INVESTMENT OPERATIONS
Investment income............................................. .87 .8905 .35 .81
Expenses...................................................... (.19) (.1986) (.08) (.18)
----------- --------------- --------------- ---------------
Net investment income......................................... .68 .6919 .27 .63
Net realized and unrealized gain or loss on securities........ (.748) .2476 (.1122) (.8363)
----------- --------------- --------------- ---------------
Total from investment operations.............................. (.068) .9395 .1578 (.2063)
----------- --------------- --------------- ---------------
DIVIDENDS FROM NET INVESTMENT INCOME.......................... (.682) (.7195) (.2778) (.6637)
----------- --------------- --------------- ---------------
Net asset value, end of period................................ $10.43 $11.18 $ 10.96 $ 10.42
========== =============== =============== ===============
TOTAL RETURN(3)............................................... (.76%) 8.84% 1.45% (1.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).......................... $159.3 $ 104.8 $ 21.0 $ 15.3
Ratios to average net assets
Expenses.................................................. 1.77% 1.77% 1.71%(4) 1.75%(4)
Net investment income........................................ 6.19% 6.15% 5.88%(4) 6.07%(4)
Portfolio turnover rate....................................... 33% 27% 24% 33%
</TABLE>
- ------------------------------
(1) Based on average month-end shares outstanding.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
11
<PAGE> 12
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------------------------------ JANUARY 2,
YEAR ENDED NOVEMBER 30 1986(2) THROUGH
INSURED MUNICIPAL --------------------------------------------------------------------------------------------- NOVEMBER 30,
FUND 1994 1993 1992 1991 1990 1989 1988 1987 1986
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE
OPERATING
PERFORMANCE
Net asset value,
beginning of
period......... $11.59 $11.30 $11.07 $10.86 $10.95 $10.68 $10.56 $12.33 $ 11.91
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
INCOME FROM
INVESTMENT
OPERATIONS
Investment
income......... .74 .79 .81 .86 .84 .85 .81 .8443 .831
Expenses......... (.13) (.127) (.135) (.13) (.12) (.09) (.09) (.0827) (.0693)
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
Net investment
income......... .61 .663 .675 .73 .72 .76 .72 .7616 .7617
Net realized and
unrealized gain
or loss on
securities..... (1.0425) .274 .240 .19 (.07) .275 .1225 (1.7853) .4219
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
Total from
investment
operations..... (.4325) .937 .915 .92 .65 1.035 .8425 (1.0237) 1.1836
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
DIVIDENDS FROM
NET INVESTMENT
INCOME......... (.6075) (.647) (.685) (.71) (.74) (.765) (.7225) (.7463) (.7636)
--------- --------- --------- -------- -------- --------- ---------- ---------- ---------------
Net asset value,
end of
period......... $10.55 $11.59 $11.30 $11.07 $10.86 $10.95 $10.68 $10.56 $ 12.33
======== ======== ======== ======= ======= ======== ========= ========= ===============
TOTAL
RETURN(3)...... (3.88%) 8.47% 8.48% 8.73% 6.21% 9.97% 8.22% (8.53%) 10.29%
RATIOS/SUPPLEMENTAL
DATA
Net assets, end
of period
(millions)..... $67.3 $75.3 $64.3 $52.2 $42.3 $38.5 $33.7 $31.2 $ 25.7
Ratios to average
net assets
Expenses....... 1.15% 1.07% 1.20% 1.20% 1.08% .85% .85% .72% .63%(4)
Expenses,
without
expense
reimbursement... -- 1.17% -- -- 1.20% 1.20% 1.19% 1.18% 1.10%(4)
Net investment
income....... 5.45% 5.57% 5.98% 6.59% 6.63% 6.96% 6.75% 6.67% 6.93%(4)
Net investment
income,
without
expense
reimbursement... -- 5.47% -- -- 6.51% 6.61% 6.41% 6.21% 6.46%(4)
Portfolio
turnover
rate........... 5% 5% 3% 5% 1% 38% 131% 166% 33%
</TABLE>
(Table continued on following page)
12
<PAGE> 13
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C(1)
--------------------------------------------- --------------
DECEMBER 10,
JULY 20, 1993(2)
YEAR ENDED NOVEMBER 30, 1992(2) THROUGH THROUGH
--------------------------- NOVEMBER 30, NOVEMBER 30,
INSURED MUNICIPAL FUND 1994 1993(1) 1992(1) 1994
--------- ------------ --------------- --------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.............................. $11.58 $ 11.30 $ 11.39 $ 11.66
--------- ------------ --------------- --------------
INCOME FROM INVESTMENT OPERATIONS
Investment income................................................. .74 .754 .28 .77
Expenses.......................................................... (.21) (.205) (.08) (.22)
--------- ------------ --------------- --------------
Net investment income............................................. .53 .549 .20 .55
Net realized and unrealized gain or loss on securities............ (1.0365) .294 (.07) (1.161)
--------- ------------ --------------- --------------
Total from investment operations.................................. (.5065) .843 .13 (.611)
--------- ------------ --------------- --------------
DIVIDENDS FROM NET INVESTMENT INCOME.............................. (.5235) (.563) (.22) (.509)
--------- ------------ --------------- --------------
Net asset value, end of period.................................... $10.55 $ 11.58 $ 11.30 $ 10.54
======== ============= =============== ==============
TOTAL RETURN(3)................................................... (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (millions).............................. $35.6 $ 34.4 $ 10.1 $ 1.9
Ratios to average net assets
Expenses........................................................ 1.91% 1.77% 1.82%(4) 1.89%(4)
Expenses, without expense reimbursement......................... -- 1.87% -- --
Net investment income........................................... 4.71% 4.74% 4.33%(4) 4.64%(4)
Net investment income, without expense reimbursement............ -- 4.64% -- --
Portfolio turnover rate........................................... 5% 5% 3% 5%
</TABLE>
- ------------------------------
(1) Based on average month-end shares outstanding.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
13
<PAGE> 14
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THE TRUST
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The Trust 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
Trust. The Adviser, 2800 Post Oak Boulevard, Houston, Texas 77056, determines
the investment of the Trust's assets, provides administrative services and
manages the Trust's business and affairs. The Adviser together with its
predecessor, has been in the investment advisory business since 1926.
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INVESTMENT OBJECTIVES AND POLICIES
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The Trust is a diversified, open-end management investment company, generally
known as a mutual fund, originally organized as a Massachusetts business trust
on December 5, 1984 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," with an investment objective of providing as high a level of interest
income exempt from federal income tax as is consistent with the investment
policies of each Fund. However, there can be no assurance that the objective of
the Trust will be achieved. The Trust is comprised of two separate Funds: the
High Yield Municipal Fund and the Insured Municipal Fund. Each Fund invests
primarily in Municipal Securities.
Among the various types of Municipal Securities 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. General obligations are backed by
the taxing power of the issuing municipality. Revenue obligations are backed by
the revenues of a project or facility -- tolls from a toll-bridge, for example.
Industrial development revenue obligations are a specific type of revenue
obligation backed by the credit and security of a private user. Variable rate
demand notes are described under "Investment Practices -- Variable Rate Demand
Notes."
Each Fund maintains at least 80% of its net assets invested in Municipal
Securities except as a temporary defensive measure during periods of adverse
market conditions. 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
Trust does not invest in any securities except Municipal Securities and
Temporary Investments as defined below, except that each Fund may seek to hedge
against changes in interest rates through transactions in listed futures
contracts related to
14
<PAGE> 15
U.S. Government securities or based upon the Bond Buyers Municipal Bond Index
and options thereon. See "Investment Practices -- Futures Contracts and Related
Options."
On a temporary basis, to provide cash reserves or pending investment in
Municipal Securities, each Fund may invest up to 20% of its net assets in
taxable securities of at least comparable quality to the Municipal Securities in
which the Fund invests ("Temporary Investments"). Each Fund also may invest
temporarily a greater proportion of its assets in Temporary Investments for
defensive purposes, when, in the judgment of the Adviser(s), market conditions
warrant. Temporary Investments include but are not limited to securities issued
or guaranteed by the United States Government, its agencies or
instrumentalities; corporate bonds and debentures; certificates of deposit and
bankers' acceptances of domestic banks with assets of $500 million or more and
having deposits insured by the Federal Deposit Insurance Corporation; commercial
paper and repurchase agreements.
The Trust may invest up to 10% of the net assets of any Fund in illiquid
securities which include Municipal Securities issued in limited placements under
which the Trust 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 Securities
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 Trust's inability to realize a favorable price
upon disposition, and in some cases might make disposition of such securities at
the time desired by the Trust impossible. The 10% limitation applies at the time
the purchase commitments are made. See "Investment Practices -- Repurchase
Agreements."
Differences in the investment policies of the two Funds with respect to the
quality and maturity of portfolio investments can be expected to affect the
yield on each Fund and the degree of market and financial risk to which such
Fund is subject. Generally Municipal Securities 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 Securities with shorter maturities
and lower yields. In general, market prices of Municipal Securities vary
inversely with interest rates. Lower rated Municipal Securities generally
provide a higher yield than higher rated Municipal Securities of similar
maturity but are subject to greater market and financial risk. The Funds may
purchase short-term or long-term Municipal Securities (with remaining maturities
of up to 30 years or more). There is no limitation on the average maturity of
the Municipal Securities in any Fund, and such average maturity is likely to
change from time to time based on the Adviser's view of market conditions held
by the Adviser(s). At November 30, 1994, such average maturity was 20 years for
the High Yield Municipal Fund and 20.48 years for the Insured Municipal Fund.
Municipal Securities ratings of Moody's Investors Service
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<PAGE> 16
("Moody's") and of Standard & Poor's Corporation ("S&P") are described in the
Statement of Additional Information. See also "Municipal Securities" herein.
HIGH YIELD MUNICIPAL FUND. The High Yield Municipal Fund invests, under normal
market conditions, at least 75% of its net assets in medium to lower rated high
yielding Municipal Securities which are subject to high risk as described below.
This Fund normally can be expected to offer the higher yield of the two Funds,
but it will also be subject to higher market and financial risks. Because an
investment in the High Yield Municipal Fund entails relatively greater risks, it
may not be an appropriate investment for all investors.
The investment policies of the High Yield Municipal Fund are not governed by
specific rating categories. The Advisers generally seek medium and lower rated
Municipal Securities (commonly referred to as junk bonds) for the Fund.
Generally, the Fund invests at least 75% of its assets in Municipal Securities
rated, at the time of purchase, in the following quality grades as determined by
either Moody's (Baa or lower for bonds, and MIG 3 or VMIG 3 or lower for notes)
or by S&P (BBB or lower for bonds and SP-2 or lower for notes), or non-rated
Municipal Securities considered by the Advisers to be of comparable quality.
Lower rated obligations generally are more speculative with respect to the
capacity of the issuer to make interest and principal payments. For example,
Municipal Securities rated BB or Ba or lower are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. Municipal Securities
rated CC by S&P or Ca by Moody's are considered speculative in a high degree.
The Fund does not purchase obligations which are in default or rated C (lowest
grade by Moody's) or rated C or D by S&P or non-rated bonds, notes and other
obligations considered by the Advisers to be of comparable quality, although the
Fund may retain obligations assigned such ratings after a purchase is made. The
Fund may also invest under normal market conditions up to 20% of its assets in
Municipal Securities rated A, SP-1 or higher by S&P or A, MIG 2, VMIG 2 or
higher by Moody's, and in tax-exempt commercial paper rated Prime-3 or higher by
Moody's or A-3 or higher by S&P.
While the Fund normally will invest at least 75% of its assets in medium and
lower rated Municipal Securities, it may invest in higher rated issues,
particularly when the difference in returns between quality classifications is
very narrow or when the Advisers expect interest rates to increase. These
investments may lessen the decline in net asset value but may also affect the
amount of current income, since high rated yields are usually lower than medium
rated yields.
While the High Yield Municipal Fund may invest in both general obligations and
revenue obligations, a substantial portion of the Fund generally is invested in
revenue obligations, which may include public utility, housing, industrial
development, pollution control, hospital and health care issues. The Fund's
ability to
16
<PAGE> 17
achieve its objective depends to a great extent on the ability of these various
issuers to meet their scheduled payments of principal and interest.
During the fiscal year ended November 30, 1994, the percentage of the Fund's
assets invested in Municipal Securities within the various rating categories
(based on the higher of the S&P or Moody's ratings), and the nonrated debt
securities, determined on a dollar weighted average, were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
AAA/Aaa.............................................. 3.71%
AA/Aa................................................ 2.43%
A/A.................................................. 4.37%
BBB/Baa.............................................. 18.05%
BB/Ba................................................ 5.30%
B.................................................... .56%
CCC/Caa.............................................. .21%
CC/Ca................................................ .06%
*Nonrated............................................. 63.17%
Other Net Assets..................................... 2.14%
-------
Total Net Assets............................. 100%
</TABLE>
- ------------------------------------------------------------------------------
* The nonrated debt securities as a percentage of total net assets were
considered by the Advisers to be comparable to securities rated by Moody's as
follows: Aaa--1.08%, A--.31%, Baa--31.95%, Ba--25.15%, B--4.02%, Caa--.13%,
Ca--.08%, C--.34% and D--.11%.
RISK FACTORS OF INVESTING IN LOWER RATED MUNICIPAL SECURITIES. The market for
lower rated Municipal Securities is relatively new and its growth has paralleled
a long economic expansion. Past experience may not, therefore, provide an
accurate indication of future performance of this market, particularly during
periods of economic recession. An economic downturn or increase in interest
rates is likely to have a greater negative effect on this market, the value of
lower rated Municipal Securities in the Fund, the Fund's net asset value and the
ability of the bonds' issuers to repay principal and interest, meet projected
business goals and obtain additional financing than on higher rated securities.
These circumstances also may result in a higher incidence of defaults than with
respect to higher rated securities. An investment in this Fund may be considered
more speculative than investment in shares of a fund which invests primarily in
higher rated Municipal Securities.
Prices of lower rated Municipal Securities may be more sensitive to adverse
economic changes or individual issuer developments than higher rated
investments. Municipal Securities with longer maturities, which may have higher
yields, may increase or decrease in value more than Municipal Securities with
shorter maturities. Market prices of lower rated Municipal Securities structured
as zero coupon or pay-in-kind securities are affected to a greater extent by
interest rate changes and may be more volatile than securities which pay
interest periodically and in cash. When deemed appropriate and in the best
interests of shareholders, the Fund may
17
<PAGE> 18
incur additional expenses to seek recovery on a Municipal Security on which the
issuer has defaulted and to pursue litigation to protect its interests as a
debtholder.
Because the market for lower rated securities may be thinner and less active
than for higher rated securities, there may be market price volatility for these
securities and limited liquidity in the resale market. Nonrated securities are
usually not as attractive to as many buyers as are rated securities, a factor
which may make nonrated securities less marketable. These factors may have the
effect of limiting the availability of the securities for purchase by the Fund
and may also limit the ability of the Fund to sell such securities at their fair
value either to meet redemption requests or in response to changes in the
economy or the financial markets. Adverse publicity and investor perceptions,
whether or not based on fundamental analysis, may decrease the values and
liquidity of lower rated Municipal Securities, especially in a thinly traded
market. To the extent the Fund owns or may acquire illiquid or restricted lower
rated Municipal Securities, these securities may involve special registration
responsibilities, liabilities and costs, and liquidity and valuation
difficulties. Changes in values of Municipal Securities which the Fund owns will
affect its net asset value per share. If market quotations are not readily
available for the Fund's lower rated or nonrated securities, these securities
will be valued by a method that the Trust's Trustees believe accurately reflects
fair value. See "Purchase of Shares -- General" and "Determination of Net Asset
Value" in the Statement of Additional Information. Judgment plays a greater role
in valuing lower rated Municipal Securities than with respect to securities for
which more external sources of quotations and last sale information are
available.
Special tax considerations are associated with investing in lower rated
Municipal Securities structured as zero coupon or pay-in-kind securities. The
Fund accrues income on these securities prior to the receipt of cash payments.
The Fund must distribute substantially all of its income to its shareholders to
qualify for pass-through treatment under the tax laws and may, therefore, have
to dispose of portfolio securities to satisfy cash distribution requirements for
shareholders who do not reinvest dividends.
While credit ratings are only one factor the Advisers rely on in evaluating
lower rated Municipal Securities, certain risks are associated with using credit
ratings. Credit ratings evaluate the safety of principal and interest payments,
not market value risk. Credit rating agencies may fail to timely change the
credit ratings to reflect subsequent events; however, the Advisers continuously
monitor the issuers of lower rated Municipal Securities in its portfolio in an
attempt to determine if the issuers will have a sufficient cash flow and profits
to meet required principal and interest payments. Achievement of the Fund's
investment objective may be more dependent upon the Advisers' credit analysis
than is the case for higher quality Municipal Securities. Credit ratings for
individual securities may change from time to time and the Fund may retain a
portfolio security whose rating has been changed.
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<PAGE> 19
Investors should consider carefully the additional risks associated with
investment in Municipal Securities which carry lower ratings.
INSURED MUNICIPAL FUND. The Insured Municipal Fund invests, under normal
market conditions, at least 80% of its net assets in Municipal Securities
covered by insurance guaranteeing the timely payment of principal at maturity
and interest. The Fund may also invest in Municipal Notes (i.e. Municipal
Securities with maturities of less than five years) rated MIG 1, VMIG 1, MIG 2,
or VMIG 2 by Moody's or rated AAA, AA or SP-1 by S&P and tax-exempt commercial
paper rated Prime-1 or Prime-2 by Moody's or A-1 or A-2 by S&P. Such short-term
securities are generally not insured. However, it is anticipated that, under
normal market conditions, uninsured obligations (including any taxable
obligations subject to regular federal income tax) will constitute no more than
20% of the Fund's net assets.
At November 30, 1994, the percentage of the Fund's assets invested in
Municipal Securities within the various rating categories (based on the higher
of the S&P or Moody's ratings) were as follows:
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
AAA/Aaa............................................... 89.48%
AA/Aa................................................. 2.94%
A/A................................................... .56%
Nonrated.............................................. 1.15%
Other Net Assets...................................... 5.87%
-------
Total Net Assets............................. 100%
</TABLE>
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Generally the insured Municipal Securities purchased by the Fund consist of
issues which are already insured under an insurance policy obtained by the
issuer or underwriter thereof. All premiums for "new issue" insurance are paid
in advance. Municipal Securities of this type are acquired only if they are
rated AAA by S&P or Aaa by Moody's. The Fund may, but is not required to, sell
any of such Municipal Securities in the event that the rating is lowered. While
insurance coverage for the Municipal Securities held by the Fund reduces credit
risk by insuring that the Fund will receive timely payment of principal and
interest, it does not protect against other market factors and does not insure
the shares of the Fund owned by the investor.
It is anticipated that under current market conditions, the insured Municipal
Securities purchased by the Fund will be insured by one of the following
companies: AMBAC Indemnity Corporation ("AMBAC"), Bond Investors Guaranty
Insurance Co. ("BIG"), Capital Guaranty Insurance Company ("CGIC"), Connie Lee
("CL"), Financial Guaranty Insurance Company ("FGIC"), Financial Security
Assurance, Inc. ("FSA"), and Municipal Bond Investor's Assurance Corp. ("MBIA").
Assuming the insurance policies have been validly issued and are in
19
<PAGE> 20
standard form, such policies are non-cancellable and continue in force so long
as the insured Municipal Securities are outstanding and the insurers remain in
business. No representation is made as to the ability of the insurance companies
to meet their respective obligations under their policies of insurance. However,
the claims-paying abilities of each of these companies receives a "AAA" rating
from S&P.
In order to be eligible for such insurance, Municipal Securities generally
must have credit characteristics which, in the opinion of the insurer, would
qualify them as "investment grade" obligations. However, at some time in the
future, the Fund may purchase Municipal Securities insured by companies other
than AMBAC, BIG, CGIC, CL, FGIC, FSA, and MBIA, if such company has received a
claims-paying ability rating of AAA from S&P or Aaa from Moody's. The Fund may
also acquire insurance coverage for individual uninsured Municipal Securities
directly from an insurance company, provided any such company has a
claims-paying ability rated AAA by S&P or Aaa by Moody's. Since the cost of such
special insurance coverage would be borne by the Fund, such insurance would be
obtained if the total return net of insurance premiums is expected by the
Adviser to be greater than that anticipated on comparable insured Municipal
Securities. Insured Municipal Securities will usually have a lower yield than
comparable noninsured Municipal Securities.
- ------------------------------------------------------------------------------
MUNICIPAL SECURITIES
- ------------------------------------------------------------------------------
Municipal Securities include debt obligations of a state, territory or
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 Securities 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
Securities are issued to obtain funding for privately operated facilities.
Many new issues of Municipal Securities are sold on a "when-issued" basis.
While the Trust has ownership rights to such Municipal Securities, the Trust
does not have to pay for them until they are delivered, normally 15 to 45 days
later. To meet that payment obligation, the Trust sets aside with the Custodian
sufficient cash or liquid securities equal to the amount that will be due. See
"Investment Practices -- Delayed Delivery and When-Issued Securities."
The yields of Municipal Securities depend on, among other things, general
money market conditions, general conditions of the Municipal Securities market,
size of a particular offering, the maturity of the obligation and rating of the
issue.
20
<PAGE> 21
The ratings of S&P and Moody's represent their opinions of the quality of the
Municipal Securities they undertake to rate. It should be emphasized, however,
that ratings are general and are not absolute standards of quality.
Consequently, Municipal Securities with the same maturity, coupon and rating may
have different yields while Municipal Securities 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.
The Trust considers investments in tax-exempt Municipal Securities not to be
subject to concentration policies and may invest a relatively high percentage of
the assets of any Fund in Municipal Securities 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 a Fund's per share net asset value also increases. The Trust may
invest more than 25% of the total assets of any Fund in Municipal Securities
with similar characteristics, such as industrial development revenue bonds,
including pollution control revenue bonds, housing finance agency bonds, or
hospital bonds. The Trust may not, however, invest more than 25% of the total
assets of any Fund in industrial development revenue bonds, including pollution
control bonds, issued for companies in the same industry. See restriction 5
under "Investment Practices -- Investment Restrictions." Sizeable investments in
such obligations could involve an increased risk to the Trust should any of such
issuers or any such related projects or facilities experience financial
difficulties.
The Trust has no fundamental policy limiting its investments in securities
whose issuers are located in the same state. However, it is not the present
intention of the Trust to invest more than 25% of the value of the total assets
of any Fund in securities whose issuers are located in the same state.
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 Securities. It may be expected that similar proposals may
be introduced in the future. If any such proposal were to be enacted, the
ability of the Funds to pay "exempt-interest" dividends may be adversely
affected and the Trust would re-evaluate its investment objective and policies
and consider changes in its structure.
- ------------------------------------------------------------------------------
INVESTMENT PRACTICES
- ------------------------------------------------------------------------------
With respect to High Yield Municipal Fund, the term "Adviser" refers to both
the Adviser, Van Kampen American Capital Asset Management, Inc., and the
21
<PAGE> 22
Subadviser, Van Kampen American Capital Advisors, Inc. With respect to Insured
Municipal Fund, the term "Adviser" refers only to Van Kampen American Capital
Asset Management, Inc.
REPURCHASE AGREEMENTS. Each 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 Trust) acquires ownership of a debt security and the seller
agrees to repurchase the obligation at a future time and set price, thereby
determining the yield during the holding period. Repurchase agreements involve
certain risks in the event of default by the other party. Each Fund will not
invest in repurchase agreements maturing in more than seven days if any such
investment, together with any other illiquid securities held by the Fund,
exceeds 10% of the value of its net assets. In the event of the bankruptcy or
other default of a seller of a repurchase agreement, the Trust 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 Trust 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 each Fund than would be
available to each 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 Trust 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.
22
<PAGE> 23
Investments by a Fund in VRDNs may also be made 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 Trust 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 Trust 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.
STAND-BY COMMITMENTS. Each 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 a 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 Trust expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a 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 any Fund will not exceed one
half of one percent of the value of such Fund's total assets calculated
immediately after each stand-by commitment is acquired. The Trust intends to
enter into stand-by commitments only with banks and dealers which, in the
Adviser's opinion, present minimal credit risks.
A Fund would acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its rights thereunder for trading
purposes.
23
<PAGE> 24
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 a Fund would be valued at zero in determining
net asset value. Where a 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 Securities 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 a Fund with payment
and 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 Trust enters into the commitment. The Trust will only make commitments
to purchase such securities with the intention of actually acquiring the
securities, but the Trust may sell these securities prior to settlement date if
it is deemed advisable. Purchasing Municipal Securities on a when-issued basis
involves the risk that the yields 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. Each Fund maintains 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.
FUTURES CONTRACTS AND RELATED OPTIONS. Each Fund may 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 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 a Fund, if the Adviser is
not successful in employing such instruments in managing a Fund's investments, a
Fund's performance will be worse than if a Fund did not make such investments.
In addition, a Fund would pay commissions and other costs in connection with
such investments, which may increase a Fund's expenses and reduce its return.
The Trust 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 of the
24
<PAGE> 25
Trust's assets. In order to prevent leverage in connection with the purchase of
futures contracts thereon by the Trust, an amount of cash, cash equivalents or
liquid high grade debt securities equal to the market value of the obligation
under the futures contract or option (less any related margin deposits) will be
maintained in a segregated account with the Custodian.
PORTFOLIO TURNOVER. Each 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. A Fund may engage in short-term trading if the anticipated
benefits are expected by the Adviser to exceed the transaction costs. The annual
turnover rate for each Fund is expected to vary from year to year depending on
market conditions. A 100% turnover rate would occur, for example, if all the
securities in a Fund were replaced in a period of one year. Municipal Securities
with remaining maturities of less than one year are excluded in the computation
of the portfolio turnover rate. 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 any capital
losses. Portfolio turnover is not a limiting factor in making portfolio
decisions, except as limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company. See "Federal Tax Information"
in the Statement of Additional Information.
PORTFOLIO TRANSACTIONS AND BROKERAGE. The Adviser is responsible for the
placement of orders for the purchase and sale of portfolio securities for each
Fund. The Municipal Securities and other obligations in which each Fund invests
are traded primarily in the over-the-counter market. Such securities are
generally traded on a net basis with dealers acting as principal for their own
accounts without a stated commission, although the prices of the securities
usually include a profit to the dealers. In underwritten offerings, securities
are purchased at a fixed price which includes an amount of compensation to the
underwriter, generally referred to as the underwriter's concession or discount.
It is the policy of the Trust to obtain the best net results taking into account
such factors as price (including the applicable dealer spread), the size, type
and difficulty of the transaction involved, the firm's general execution and
operational facilities, and the firm's risk in positioning the securities
involved and the provision of supplemental investment research by the firm.
While the Trust generally seeks reasonably competitive spreads or commissions,
the Trust will not necessarily be paying the lowest spread or commission
available. Brokerage commissions are paid on transactions in futures contracts
and options thereon. The Adviser is authorized to place portfolio transactions
with broker-dealers participating in the distribution of shares of the Trust and
other Van Kampen American Capital funds if they reasonably believe that the
quality of the execution and any commission are comparable to that available
from other qualified firms. The Adviser is authorized to pay higher commissions
to brokerage firms that provide
25
<PAGE> 26
them with investment and research information than to firms which do not provide
such services if the Adviser determines that such commissions are reasonable in
relation to the overall services provided.
INVESTMENT RESTRICTIONS. The Trust has adopted certain investment restrictions
which, like the investment objective, may not be changed with respect to any
Fund without approval by a majority (as defined in the 1940 Act) vote of the
shareholders of such Fund. These restrictions provide, among other things, that
a Fund may not:
1. Invest in securities other than Municipal Securities, Temporary Investments
(as defined herein), stand-by commitments, futures contracts described in
the next paragraph, and options on such contracts;
2. Purchase or sell commodities or commodity contracts except that a Fund may
purchase, hold and sell listed futures contracts related to U.S. Government
securities, Municipal Securities or to an index of Municipal Securities;
3. 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 any agency or
instrumentality thereof);
4. Borrow money, except that a Fund may borrow from banks to meet redemptions
or for other temporary or emergency purposes, with such borrowing not to
exceed five percent of the total assets of the Fund at market value at the
time of borrowing. Any such borrowing may be secured provided that not more
than 10% of the total assets of the Fund at market value at the time of
pledging may be used as security for such borrowings; or
5. Purchase any securities which would cause more than 25% of the value of the
Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall not
apply to Municipal Securities or governmental guarantees of Municipal
Securities; and provided, further, that for the purpose of this limitation
only, industrial development bonds that are considered to be issued by
non-governmental users shall not be deemed to be Municipal Securities.
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 or pollution control bonds is also
considered as a separate issuer. In certain circumstances, the guarantor of a
guaranteed security may also be considered to be an issuer in connection with
such guarantee.
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<PAGE> 27
- ------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
- ------------------------------------------------------------------------------
THE ADVISER. The Adviser is a wholly-owned subsidiary of Van Kampen American
Capital, Inc. ("Van Kampen American Capital"). Vam 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 Trust
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 Trust owns or would own five percent or
more of the Common Stock of VK/AC Holding, Inc.
ADVISORY AGREEMENTS. The Trust 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
Trust (the "Advisory Agreement"), the Trust pays the Adviser an annual fee of
0.60% of the first $300 million of the aggregate average net assets of the High
Yield Municipal Fund and the Insured Municipal Fund, 0.55% of the next $300
million of the two Funds' and 0.50% of the two Funds' aggregate average net
assets in excess of $600 million. Each of the Funds will pay the same percentage
of its average net assets. The fees are payable monthly. Under the Advisory
Agreement, the Trust also reimburses the Adviser for the costs of the Trust's
accounting services, which include maintaining its financial books and records
and calculating the daily net asset value of each Fund. Operating expenses paid
by the Trust include shareholder
27
<PAGE> 28
service agency fees, distribution fees, service 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) fees, and total operating expense ratio are shown under
the caption "Annual Fund Operating Expenses and Example" herein. The Adviser has
entered into a subadvisory agreement (the "Subadvisory Agreement") with the
Subadviser to assist it in performing its investment advisory function with
respect to High Yield Municipal Fund. Pursuant to the Subadvisory Agreement, the
Subadviser receives an annual fee, payable monthly, of 0.40% of the first $20
million of High Yield Municipal Fund's average daily net assets, 0.25% of the
next $30 million of such Fund's average daily net assets and 0.15% of the excess
over $50 million.
From time to time, as the Adviser and/or the Distributor may deem appropriate,
they may voluntarily undertake to reduce the Trust'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 INVESTMENT POLICIES. The Trust and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Trust 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. Mr. Wayne D. Godlin is primarily responsible for the
day-to-day management of the High Yield Municipal Fund's investment portfolio.
Mr. Godlin is Vice President of the Trust and has been Vice President of the
Subadviser since September 1993. He was previously a securities analyst and
portfolio manager with the Adviser. Mr. Godlin has been primarily responsible
for managing the High Yield Municipal Fund's investments since March 1990.
Joseph A. Piraro is primarily responsible for the day-to-day management of the
Insured Municipal Fund's investment portfolio. Mr. Piraro is Vice President of
the Trust and an agent of the Adviser. Mr. Piraro has been employed by Van
Kampen American Capital Investment Advisory Corp., an affiliate of the Adviser,
since 1992. Prior to that time, Mr. Piraro was employed by First Chicago Capital
Markets. Mr. Piraro has been primarily responsible for managing the Insured
Municipal Fund's investments since April 1995.
28
<PAGE> 29
- ------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
- ------------------------------------------------------------------------------
The Alternative Sales Arrangements permits an investor to choose the method of
purchasing shares of each Fund 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 of each Fund 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 of each Fund are subject to an ongoing service fee at an annual rate of
up to 0.25% of each 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 of each Fund 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 of each Fund are subject to an ongoing service fee at
an annual rate of up to 0.25% of each Fund's aggregate average daily net assets
attributable to the Class B shares and an ongoing distribution fee at an annual
rate of up to 0.75% of each 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 of
each Fund 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 of each Fund are sold at net asset value and
are subject to a deferred sales charge if redeemed within one year of purchase.
Class C shares of each Fund are subject to an ongoing service fee at an annual
rate of up to 0.25% of each 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 each 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 of
each Fund will automatically convert to Class A shares ten years after the end
of the calendar month in which the shareholder's order to purchase
29
<PAGE> 30
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 of each Fund 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 of each Fund 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 of each Fund 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.
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 Trust's
dividends or distributions constituting "preferential dividends" under the
Internal Revenue Code, 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 each 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 on Class A
shares. To assist investors in making this determination, the table under the
caption "Annual
30
<PAGE> 31
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, as described
herein under "Purchase of Shares -- Class A Shares." For these reasons, the
Distributor will reject any order of $500,000 or more for Class B shares or any
order of $1 million or more for Class C shares.
Class A shares of each Fund 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 ongoing distribution fees and, for a five-year or one-year
period, respectively, being 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.
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 of each Fund 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, or purchase. Sales personnel of broker-dealers
distributing each 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 of such Fund. INVESTORS SHOULD
UNDERSTAND THAT THE PURPOSE AND FUNCTION OF
31
<PAGE> 32
THE CONTINGENT DEFERRED SALES CHARGE AND ONGOING DISTRIBUTION FEE WITH RESPECT
TO THE CLASS B SHARES AND CLASS C SHARES OF EACH FUND ARE THE SAME AS THOSE OF
THE INITIAL SALES CHARGE WITH RESPECT TO CLASS A SHARES. SEE "DISTRIBUTION
PLANS."
GENERAL. Dividends paid by each 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 Trust." Shares of each 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 Trust have determined that currently no conflict of
interest exists between the classes of shares of each Fund. On an ongoing basis,
the Trustees of the Trust, 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.
- ------------------------------------------------------------------------------
PURCHASE OF SHARES
- ------------------------------------------------------------------------------
GENERAL
Each 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 in a Fund must be at least $500 and subsequent investments
must be at least $25. Both minimums may be waived by the Distributor for shares
involving periodic investments. Shares of the Trust may be sold in foreign
countries where permissible. The Trust and the Distributor reserve the right to
refuse any order for the purchase of shares of either Fund. The Trust also
reserves the right to suspend the sale of each Fund's shares in response to
conditions in the securities markets or for other reasons.
32
<PAGE> 33
Shares may be purchased on any business day through authorized dealers. Shares
may also be purchased by completing the application accompanied by this
Prospectus and forwarding the application, through the designated dealer, to the
shareholder service agent, ACCESS. When purchasing shares of any Fund, investors
must specify whether the purchase is for Class A, Class B or Class C shares.
Shares of each Fund 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 of each Fund is computed 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 of each
Fund for each class is determined by dividing the value of all portfolio
securities held by such Fund, cash and other assets (including accrued interest)
attributable to such class, less all liabilities (including accrued expenses)
attributable to such class, by the total number of shares of the class
outstanding. Each 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 of each Fund 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 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. With respect to the Funds, the price paid for
shares purchased is based on the next calculation of net asset value (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 of each Fund represents an interest in the same portfolio
of investments of such 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 of each Fund 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 of each Fund are subject to a conversion feature. Each
class has different exchange
33
<PAGE> 34
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 fee. Sales personnel
of broker-dealers distributing each 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 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
Trust. 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 Trust. 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 Trust will not exceed in
the aggregate 1.25% of the average total daily net assets of the Trust 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 Trust will
receive from such sale.
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<PAGE> 35
CLASS A SHARES
With respect to each Fund, 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 TO
DEALERS (AS
AS % OF AS % OF A %
SIZE OF NET AMOUNT OFFERING OF OFFERING
INVESTMENT INVESTED PRICE 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 Trust 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.
In addition to the reallowances from the applicable public offering price
described herein, 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 Trust. 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 Trust for their clients a transaction fee up to
the level of the reallowance allowable to dealers described herein. 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 Trust. 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.
35
<PAGE> 36
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 Trust 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 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
indicated Fund, or in any combination of shares of such Funds 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 High Yield Municipal Fund and the Insured Municipal Fund and the
Participating Funds plus the current offering price of all shares of such Funds
and 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 preceding table. The
size of investment shown in the preceding table also includes purchases of
shares of the High Yield Municipal Fund and the Insured Municipal Fund and of
the Participating Funds over a 13-month period based on the total amount of
intended purchases plus the value of all shares of such Funds and 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
36
<PAGE> 37
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 accompanied by this Prospectus.
OTHER PURCHASE PROGRAMS
Purchases 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
Trust or the Distributor. The Trust reserves the right to modify or terminate
these arrangements at any time.
Unit Trust Reinvestment Programs. The Trust permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A shares
of the Trust, 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 Trust 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
Trust during each distribution period by all investors who choose to invest in
the Trust 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 Trust also
requires that all dividends and other distributions by the Trust be reinvested
in
37
<PAGE> 38
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Trust will send
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently. The Trust reserves the right to
modify or terminate this program at any time.
NAV Purchase Options. Class A shares of a 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 such 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
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 Trust alone, or in any combination of
shares of the Trust 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 of 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-dealer charges an account management
fee ("wrap accounts"), provided the bank or broker-dealer has a separate
agreement with the Distributor.
(7) Investors purchasing shares of the Trust 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.
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<PAGE> 39
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 Trust may terminate, or amend the terms of, offering shares of the Funds at
net asset value to such groups at any time.
CLASS B SHARES
Class B shares of any Fund are offered at the next determined net asset value.
Class B shares of any Fund 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
YEAR SINCE PURCHASE DOLLAR AMOUNT SUBJECT TO CHARGE
- ------------------------------------------------------------------------------
<S> <C>
First........................................ 4%
Second....................................... 4%
Third........................................ 3%
Fourth....................................... 2.5%
Fifth........................................ 1.5%
Sixth........................................ None
</TABLE>
- ------------------------------------------------------------------------------
39
<PAGE> 40
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).
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 Trust.
CLASS C SHARES
Class C shares of each Fund are offered at the next determined net asset
value. Class C shares of each Fund 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, it is assumed that the redemption is first of any shares in the
shareholder's Trust 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
40
<PAGE> 41
Trust'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 Trust.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE
The contingent deferred sales charge is waived on redemptions of Class B and
Class C shares of each Fund (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 Trust'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 Trust 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 each Fund within 120 days after redemption. See the Statement of
Additional Information for further discussion of waiver provisions.
- ------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- ------------------------------------------------------------------------------
The Trust 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 such 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 Trust will not issue share certificates.
However, upon written or telephone request to the Trust, a share certificate
will be issued, representing shares (with the exception of fractional shares) of
the Trust. A
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<PAGE> 42
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 a
Fund. Such shares are acquired at net asset value, without sales charge, on the
record date. Unless the shareholder instructs otherwise, the reinvestment
privilege is automatic. This instruction may be made by telephone by calling
(800) 421-5666 ((800) 772-8889 for the hearing impaired). 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
basis to invest pre-determined amounts in shares of a Fund. Additional
information is available from the Distributor or authorized investment 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 accompanied by 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 Trust 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.
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<PAGE> 43
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 fund have been registered for sale
in the investor's state.
EXCHANGE PRIVILEGE. Shares of the High Yield Municipal Fund, Insured Municipal
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 High
Yield Municipal Fund and Insured Municipal Fund and shares of certain other Van
Kampen American Capital fixed-income funds may not be exchanged within 30 days
of acquisition without Adviser approval. Shares of Government Target may be
exchanged for shares of High Yield Municipal Fund or Insured Municipal 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 High Yield Municipal
Fund or Insured Municipal 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 any Participating Fund, VK Money Market, VK Tax
Free or Reserve that 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 each 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 requirements of the original fund.
Shares of the Trust 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
43
<PAGE> 44
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 accompanied by this Prospectus. Van
Kampen American Capital and its subsidiaries, including ACCESS (collectively,
"VKAC"), and the Trust 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 Trust will be liable
for following telephone instructions which it reasonably believes to be genuine.
VKAC and the Trust 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 both
"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 same registration, dividend and capital
gains 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 Trust
reserves the right to reject any order to acquire either Fund's shares through
exchange. In addition, the Trust 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
44
<PAGE> 45
arrange for monthly, quarterly, semi-annual, or annual checks in any amount not
less than $25.
Class B and Class C shareholders of any Fund 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 each 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 a 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 any Fund for
which certificates have not been issued and which are in a non-escrow status may
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 shareholder's Class A account by ACCESS at the next determined net
asset value. Check writing redemptions represent the sale of Class A 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 value 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
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<PAGE> 46
be terminated or suspended at any time by the Trust 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.
- ------------------------------------------------------------------------------
REDEMPTION OF SHARES
- ------------------------------------------------------------------------------
REGULAR REDEMPTIONS. Shareholders may redeem for cash some or all of their
shares of any 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 $1 million or more. 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 Trust 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
46
<PAGE> 47
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 of the Fund next determined after the
request is received in proper form. Payment for shares redeemed will be 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 Trust 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 shareholder account is less than the minimum initial
investment due to shareholder redemptions.
TELEPHONE REDEMPTIONS. In addition to the regular redemption procedures set
forth above, the Trust permits redemption of shares by telephone and for
redemption proceeds to be sent to the address of record of the account or to the
bank account of record as described herein. To establish such privilege, a
shareholder must complete the appropriate section of the application form
accompanied by this Prospectus or call the Trust 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 Trust 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 Trust
will be liable for following telephone instructions which it reasonably believes
to be genuine. VKAC and the Trust 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
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<PAGE> 48
the Trust's regular redemption procedure described herein. 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 all accounts other than retirement accounts. 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 Trust reserves the right at any time to terminate, limit or
otherwise modify this redemption privilege.
REDEMPTION UPON DISABILITY. The Trust will waive the contingent deferred sales
charge on redemptions following the 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 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 Trust 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 Trust may reinstate any portion or all of the net proceeds of such
redemption in Class A shares of any Fund of the Trust. A Class C shareholder who
has redeemed shares of the Trust may reinstate any portion or all of the net
proceeds of such redemption in Class C shares of each Fund of the Trust with
credit
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<PAGE> 49
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.
- ------------------------------------------------------------------------------
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 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 Trust, and the
shareholders of each class of each Fund 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") as amended July 7, 1993. The NASD Rules
limit the annual distribution costs and service fees that a mutual fund may
impose on a class of shares. The NASD Rules also limit the aggregate amount
which the Trust may pay for such distribution costs. Under the Class A Plan, the
Trust pays a service fee to the Distributor at an annual rate of up to 0.25% of
each Fund's aggregate average daily net assets attributable to the Class A
shares. Under the Class B Plan and the Class C Plan, the Trust 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 each Fund's aggregate average daily net
assets attributable to the Class B or Class C shares of such Fund 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 Trust 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 of each Fund
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 Trust 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 of each Fund 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
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<PAGE> 50
average daily net assets of the Trust'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 Trust determined that there was a reasonable likelihood that
such Plans would benefit the Trust 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.
Service expenses accrued by the Distributor in one fiscal year may not be paid
from the Class A service fee received from the Trust 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 Trust to the
Distributor.
The distribution fee attributable to the 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 Trust in that in both cases such charges provide for the
financing of the distribution of the Trust'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 Trust 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 Trust 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 previous plan year ended June 30, 1994, the
unreimbursed expenses incurred by the Distributor under the Class B Plan and
carried forward were approximately $5.9 million or 3.98% of the Class' average
daily net assets. The unreimbursed expenses incurred by the Distributor under
the Class C Plan from
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<PAGE> 51
December 10, 1993 (inception of Class C shares) through June 30, 1994, and
carried forward were approximately $100,000 or 1.02% of the Class' average daily
net assets.
If the Class B Plan or Class C Plan was terminated or not continued, the Trust
would not be contractually obligated to pay and has no liability to the
Distributor for any expenses not previously reimbursed by the Trust or recovered
through contingent deferred sales charges.
- ------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE TRUST
- ------------------------------------------------------------------------------
DIVIDEND POLICY. Each Fund declares dividends from net investment income on
each business day. Such dividends are distributed monthly. The Trust intends to
distribute after the end of a fiscal year the net capital gains, if any,
realized during the fiscal year by each Fund except to the extent that such
gains are offset by capital loss carryovers of such Fund. The daily dividend is
a fixed amount determined at least monthly which is not expected to exceed the
net income of the Fund for the month divided by the number of business days
during the month. Realized capital gains and losses of the two Funds will not be
combined for the purpose of determining capital distributions. Unless the
shareholder instructs otherwise, dividends and distributions are automatically
reinvested in additional shares of each Fund unless the shareholder instructs
otherwise. See "Shareholder Services -- Reinvestment Plan."
Shares (other than shares acquired through an exchange) become entitled to
dividends on the day ACCESS receives payment for the shares, and remain entitled
to dividends through the day such shares are priced for redemption. With respect
to shares acquired through an exchange, such shares become entitled to dividends
on the day after ACCESS receives payment for the shares, and remains entitled to
dividends through the day such shares are purchased for payment on redemption.
Therefore, if a dealer delays forwarding to ACCESS payment for shares which an
investor has made to the dealer, this will in effect cost the investor money
because it will delay the date upon which he or she becomes entitled to
dividends.
The per share dividends on Class B and Class C shares of each Fund will be
lower than the per share dividends on Class A shares of such Fund as a result of
the distribution fees and higher incremental transfer agency fees applicable to
such classes of shares.
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<PAGE> 52
- ------------------------------------------------------------------------------
TAX STATUS
- ------------------------------------------------------------------------------
FEDERAL INCOME TAXES. Each Fund has qualified and intends to be taxed as a
regulated investment company under the Code by meeting certain requirements of
the Code. In addition, each Fund intends to invest in sufficient Municipal
Securities to permit payment of "exempt-interest dividends" (as defined in the
Code). Dividends paid by each Fund from the net tax-exempt interest earned from
Municipal Securities qualify as exempt-interest dividends if, at the close of
each quarter of the fiscal year, at least 50% of the value of the total assets
of the Fund consists of Municipal Securities. See "Federal Tax Information" in
the Statement of Additional Information.
The Tax Reform Act of 1986 (the "Tax Reform Act") may have an adverse impact
upon the Trust and its shareholders. The Tax Reform Act imposed new limitations
on the use and investment of the proceeds of state and local governmental bonds
and other funds, which limitations must be satisfied in order to maintain the
exclusion from gross income for interest on such bonds. The provisions of the
Tax Reform Act generally apply to bonds issued after August 15, 1986. In light
of these requirements, bond counsel qualify their opinions as to the federal tax
status of bonds issued after August 15, 1986 by making them contingent on the
issuer's future compliance with these limitations. Any failure on the part of an
issuer to comply could cause the interest on its bonds to become taxable to
investors retroactive to the date the bonds were issued.
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 Trust, over 99% of the
dividends paid by each Fund were exempt-interest dividends. The percentage of
the total dividends paid by each Fund during any taxable year that qualify as
exempt-interest dividends will be the same for all shareholders of such Fund
receiving dividends during such year.
The Tax Reform Act also makes interest on certain "private-activity bonds"
issued after August 7, 1986, an item of tax preference subject to the
alternative minimum tax on individuals and corporations. The Trust invests a
portion of its assets in Municipal Securities subject to this provision 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. The Tax Reform Act also imposed per capita volume limitations on certain
private-activity bonds which could limit the amount of such bonds available for
investment by the Trust.
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
52
<PAGE> 53
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.
Each Fund is subject to the requirement that at least 80% of its assets be
invested in securities, the income from which is exempt from both regular
federal income tax and the federal alternative minimum tax. For the fiscal year
ended November 30, 1994, approximately 6.99% and 16.28% of the interest income
earned by the High Yield Municipal Fund and the Insured Municipal Fund,
respectively, consisted of interest on private-activity bonds which is an item
of tax preference.
Distributions of net investment income received by each Fund from investments
in debt securities other than Municipal Securities, and any net realized
short-term capital gains distributed by the Fund, are taxable to shareholders as
ordinary income. Any distribution of net long-term capital gains by a Fund is
subject to capital gains tax rates. Interest on indebtedness which is incurred
to purchase or carry shares of a mutual fund which distributes exempt-interest
dividends during the year is not deductible for federal income tax purposes.
Shareholders are notified annually of the federal tax status of dividends and
any distributions paid by a Fund during the fiscal year.
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 Trust.
To avoid being subject to a 31% federal back-up withholding tax on dividends
(except exempt-interest dividends), capital gains distributions and redemption
payments, shareholders must furnish the Trust with a certification of their
correct taxpayer identification number.
The foregoing is only a brief summary of some of the important tax
considerations generally affecting each Fund and its shareholders. Additional
tax information of relevance to particular investors, including corporations and
investors who may be "substantial users" of facilities financed by Municipal
Securities, is contained in the Statement of Additional Information. Investors
are urged to consult their tax advisers with specific reference to their own tax
situation.
FEDERAL INCOME TAX ASPECTS OF FUTURES AND OPTIONS. A 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 each 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 a Fund from
transactions in futures contracts and options thereon constitute capital gains
and losses for federal
53
<PAGE> 54
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.
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 investors consult their tax advisers for information in this
regard. Each Fund will report annually to its shareholders the percentage and
source, on a state-by-state basis, of interest income earned on Municipal
Securities received by such Fund during the preceding calendar year. Dividends
and distributions paid by each Fund from sources other than tax-exempt interest
are generally subject to taxation at the state and local levels.
- ------------------------------------------------------------------------------
TRUST PERFORMANCE
- ------------------------------------------------------------------------------
From time to time a 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 or for the life of the Fund. Other total
return quotations, aggregate or average, over other time periods may also be
included.
The total return of a 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. Each Fund's total return will vary depending on
market conditions, the securities comprising each Fund's portfolio, each 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.
54
<PAGE> 55
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 of each Fund. 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 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 Funds may also advertise their
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. A 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 Trust 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 a 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 a Fund's then current dividend rate.
A 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 a Fund, portfolio maturity and a Fund's
expenses.
Yield quotations should be considered relative to changes in the net asset
value of a Fund's shares, a Fund's investment policies, and the risks of
investing in shares of a Fund. The investment return and principal value of an
investment in a Fund will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
A yield quotation which reflects an expense reimbursement or subsidization by
the Adviser will be accompanied by a hypothetical yield quotation excluding such
reimbursement.
To increase a Fund's yield, the Adviser may, from time to time, absorb a
certain amount of the future ordinary business expenses. The Adviser may stop
absorbing these expenses at any time without prior notice.
55
<PAGE> 56
Since yield fluctuates, yield data cannot necessarily be used to compare an
investment in a Fund's shares with bank deposits, savings accounts and similar
investment alternatives which often provide an agreed or guaranteed fixed yield
for a stated period of time. Shareholders should remember that yield is
generally a function of the kind and quality of the instruments held in a
portfolio, portfolio maturity, operating expenses and market conditions.
From time to time, the Trust may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Trust. 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 Trust'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 Trust'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 Trust. Distribution rates will be
computed separately for each class of the Trust's shares.
In reports or other communications to shareholders or in advertising material,
the Trust may compare its performance with that of other mutual funds as listed
in the ratings or rankings prepared by Lipper Analytical Services, Inc., CDA,
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 Bonds, or with
investment or savings vehicles. The performance information may also include
evaluations of the Trust 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, U.S. News & World Report, USA Today 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 Trust's shares. For these purposes, the performance of the
Trust, as well as the performance of other mutual funds or indices, do not
reflect sales charges, the inclusion of which would reduce Trust performance.
The Trust will include performance data for Class A, Class B and Class C shares
of any Fund in any advertisement or information including performance data of
the Trust.
56
<PAGE> 57
The Trust 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 Trust's Annual Report contains additional performance information. A copy
of the Annual Report may be obtained without charge by calling or writing the
Trust at the telephone number and address printed on the cover page of this
Prospectus.
- ------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE TRUST
- ------------------------------------------------------------------------------
The Trust was originally organized on December 5, 1984 under the laws of the
Commonwealth of Massachusetts as a business entity commonly known as a
"Massachusetts business trust" 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 a diversified, open-end investment company. Each Fund is
a diversified fund. 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,
respectively, in one or more Funds. Other classes of shares may be established
from time to time in accordance with provisions of the Trust's Declaration of
Trust. Shares issued by the Fund are fully paid, non-assessable and have no
preemptive or conversion rights. In the event of liquidation of any Fund,
shareholders of such Fund are entitled to share pro rata in the net assets of
the Fund available for distribution to shareholders.
The Trust 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 Trust 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 Trust 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 Trust is entitled to its portion of all of the Trust's net assets after all
debt and expenses of the Trust 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 Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. More detailed information concerning the Trust is
set forth in the Statement of Additional Information.
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<PAGE> 58
The Trust's Declaration of Trust provides that no Trustee, officer or
shareholder of the Trust 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 Trust but the assets of the Trust 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 Trust 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 Trust may not be appropriate for all investors.
The Trust 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 Trust.
An investment in the Trust is intended to be a long-term investment, and
should not be used as a trading vehicle.
58
<PAGE> 59
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE TRUST'S TOLL-FREE
NUMBER--(800) 421-5666
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR (800) 421-5666
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--(800) 421-5666
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL (800) 772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL (800) 847-2424
VAN KAMPEN AMERICAN CAPITAL
TAX-EXEMPT TRUST
- ------------------
2800 Post Oak Blvd.
Houston, TX 77056
- ------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
ASSET MANAGEMENT, INC.
2800 Post Oak Blvd.
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
STATE STREET BANK AND
TRUST COMPANY
225 Franklin Street, P.O. Box 1713
Boston, MA 02105-1713
Attn: Van Kampen American Capital Funds
Legal Counsel
O'MELVENY & MYERS
400 South Hope Street
Los Angeles, CA 90071
Independent Accountants
PRICE WATERHOUSE LLP
1201 Louisiana, Suite 2900
Houston, TX 77002
<PAGE> 60
TAX-EXEMPT TRUST
------------------------------------------------------------------------------
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> 61
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL TAX-EXEMPT TRUST
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, IL 60181 at (800) 421-5666.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENERAL INFORMATION........................................................... 2
MUNICIPAL SECURITIES.......................................................... 3
TEMPORARY INVESTMENTS......................................................... 5
REPURCHASE AGREEMENTS......................................................... 5
FUTURES CONTRACTS AND RELATED OPTIONS......................................... 6
INVESTMENT RESTRICTIONS....................................................... 9
TRUSTEES AND EXECUTIVE OFFICERS............................................... 10
INVESTMENT ADVISORY AGREEMENT................................................. 14
DISTRIBUTOR................................................................... 16
DISTRIBUTION PLANS............................................................ 16
TRANSFER AGENT................................................................ 18
PORTFOLIO TRANSACTIONS AND BROKERAGE.......................................... 18
DETERMINATION OF NET ASSET VALUE.............................................. 19
PURCHASE AND REDEMPTION OF SHARES............................................. 20
EXCHANGE PRIVILEGE............................................................ 23
CHECK WRITING PRIVILEGE....................................................... 24
FEDERAL TAX INFORMATION....................................................... 24
TRUST PERFORMANCE............................................................. 27
OTHER INFORMATION............................................................. 28
FINANCIAL STATEMENTS.......................................................... 28
APPENDIX...................................................................... 29
</TABLE>
<PAGE> 62
GENERAL INFORMATION
Van Kampen American Capital Tax-Exempt Trust (the "Trust") was originally
organized as a business trust under the laws of Massachusetts on December 5,
1984 and reorganized under the laws of Delaware on July 31, 1995. The Trust is
comprised of two Funds: the Van Kampen American Capital High Yield Municipal
Fund ("High Yield Municipal Fund") and the Van Kampen American Capital Insured
Municipal Fund ("Insured Municipal Fund").
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. Each of our high yield analysts, based
either in San Francisco, Chicago, Houston or Boston, has the responsibility to
cover a specific region of the country. This regional focus enables each high
yield analyst to provide more specialized coverage of the market and alert the
portfolio manager to issues of local importance.
As of July 6, 1995, no person was known by management to own beneficially
or of record as much as five percent of the outstanding shares of any portfolio
except the following:
HIGH YIELD MUNICIPAL FUND
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER JULY 6, 1995 SHARES OWNERSHIP
--------------------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
PaineWebber Inc. 1,115,985 shares Class B 5.48%
Genises Jungco -- Lincoln Harbor owned of record
1000 Harbor Blvd., 6th Floor 146,205 shares Class C 5.47%
Weehawken, NJ 07087-6727 owned of record
Smith Barney, Inc. 9,356,192 shares Class A 20.16%
388 Greenwich Street, 22nd Floor owned of record
New York, NY 10013-2375 Class B 41.85%
8,528,851 shares
owned of record Class C 69.27%
1,852,843 shares
owned of record
</TABLE>
2
<PAGE> 63
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF OWNERSHIP AT CLASS OF PERCENTAGE
NAME AND ADDRESS OF HOLDER JULY 6, 1995 SHARES OWNERSHIP
--------------------------------------------------- ------------------ -------- ---------
<S> <C> <C> <C>
Merrill Lynch Pierce Fenner & Smith 2,437,543 shares Class A 5.37%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
1,766,097 shares Class B 8.67%
owned of record
INSURED MUNICIPAL FUND
Vernon & Ruth Maddox 6,509 shares of Class C 5.50%
JT TEN beneficial
18402 Tomlinson Dr. interest
Lutz, FL 33549-5485
Harold J. & Julienne M. Ladouceur 6,281 shares of Class C 5.30%
JT TEN beneficial
5604 Wopod Forest Dr. interest
Tampa, FL 33615-3909
R. T. Kelley 22,274 shares Class C 18.83%
P.O. Box 237 of beneficial
Canadian, TX 79014-0237 interest
B&C Construction 19,142 shares Class C 16.18%
A Corporation of beneficial
4950 Valenty interest
Chubbuck, ID 83202-1850
Donaldson Lufkin Jenrette Secs. 217,452 shares Class B 6.66%
P.O. Box 2052 owned of record
Jersey City, NJ 07303-2052
National Financial Services 296,221 shares Class B 9.07%
P.O. Box 3730 owned of record
New York, NY 10008-3730
Smith Barney, Inc. 557,149 shares Class A 9.22%
388 Greenwich Street, 22nd Floor owned of record Class B 8.49%
New York, NY 10013-2375 277,303 shares Class C 24.58%
owned of record
29,074 shares
owned of record
Merrill Lynch Pierce Fenner & Smith 330,792 shares Class A 5.47%
4800 Deer Lake Drive East, 3rd Floor owned of record
Jacksonville, FL 32246-6484
</TABLE>
With respect to the High Yield Municipal Fund, the term "Adviser" refers to
both the Adviser, Van Kampen American Capital Asset Management, Inc., and the
Subadviser, Van Kampen American Capital Advisors, Inc. With respect to the
Insured Municipal Fund, the term "Adviser" refers only to Van Kampen American
Capital Asset Management, Inc.
MUNICIPAL SECURITIES
Municipal Securities 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-
3
<PAGE> 64
operated facilities. Such obligations are included within the term Municipal
Securities if the interest paid thereon is exempt from federal income tax.
Municipal Securities 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 Securities are "general
obligations" and "revenue" or "special obligations." General obligations are
secured by the issuer's pledge of 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 other specific
revenue source such as from the user of the facility being financed. Industrial
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 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 in question.
When a 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.
Each 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 for such Fund or if unrated are of comparable
quality as determined by the Adviser. 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. Demand notes may also
include Municipal Securities subject to a Stand-By Commitment as described in
the Prospectus. 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 interests will be tax-exempt when distributed as dividends to shareholders.
Yields on Municipal Securities 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 a Fund to achieve its investment
objective is also dependent on the continuing ability of the issuers of the
Municipal Securities 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 Securities, both within a particular
classification and between classifications, depending on numerous factors.
Furthermore, the rights of holders of Municipal Securities and the obligations
of the issuers of such Municipal Securities 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 of and interest on Municipal Securities.
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 Securities. It may be expected that similar proposals may
be introduced in the future. If such a proposal were enacted, the ability of the
Trust to pay "exempt interest" dividends may be adversely affected and the Trust
would re-evaluate its investment objective and policies and consider changes in
its structure.
4
<PAGE> 65
ADDITIONAL RISKS OF LOWER RATED MUNICIPAL SECURITIES
Additional risks of lower rated Municipal Securities include limited
liquidity and secondary market support. As a result, the prices of lower rated
Municipal Securities may decline rapidly in the event a significant number of
holders decide to sell. Changes in expectations regarding an individual issuer,
an industry or lower rated Municipal Securities generally could reduce market
liquidity for such securities and make their sale by the Fund more difficult, at
least in the absence of price concessions. Reduced liquidity could also create
difficulties in accurately valuing such securities at certain times. The high
yield bond market has grown primarily during a period of long economic expansion
and it is uncertain how it would perform during an economic downturn. An
economic downturn or an increase in interest rates could severely disrupt the
market for high yield bonds and adversely affect the value of outstanding bonds
and the ability of the issuers to repay principal and interest. The Fund will
take such actions as it considers appropriate in the event of anticipated
financial difficulties, default or bankruptcy of either the issuer or any
Municipal Security owned by the Fund or the underlying source of funds for debt
service. Such action may include retaining the services of various persons and
firms to evaluate or protect any real estate, facilities or other assets
securing any such obligation or acquired by the Fund as a result of any such
event. The Fund incurs additional expenditures in taking protective action with
respect to Fund obligations in default and assets securing such obligations.
Investment in lower rated Municipal Securities are not generally meant for
short-term investment.
TEMPORARY INVESTMENTS
The taxable securities in which the Funds may invest as temporary
investments include United States Government securities, corporate bonds and
debentures, domestic bank certificates of deposit and bankers' acceptances of
domestic banks with assets of $500 million or more and having deposits insured
by the Federal Deposit Insurance Corporation, commercial paper and repurchase
agreements. In the case of each Fund, the taxable securities are subject to the
same rating requirements applicable to the Municipal Securities in which the
Fund invests, including, in the case of unrated securities, that such
obligations be in the opinion of the Adviser of comparable quality.
United States Government securities include obligations issued or
guaranteed as to principal and interest by the United States Government, its
agencies and instrumentalities which are supported by any of the following: (a)
the full faith and credit of the United States Government, (b) the right of the
issuer to borrow an amount limited to a specific line of credit from the United
States Government, (c) discretionary authority of the United States 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. A Fund may not invest
in any security 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
Each Fund of the Trust 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 Trust) 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
Trust 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 is required to maintain the value
of the underlying securities marked to market daily at not less than the
repurchase price. The underlying securities (securities of the U.S. Government,
or its agencies and instrumentalities), may have maturity dates exceeding one
year. The Trust does not bear the risk of a decline in value of the underlying
security unless the seller defaults under its repurchase obligation. In the
event of a bankruptcy or other default of a seller of a repurchase agreement,
the Trust could experience both delays in liquidating the underlying securities
and loss
5
<PAGE> 66
including: (a) possible decline in the value of the underlying security during
the period while the Trust 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. A Fund will not invest in repurchase
agreements maturing in more than seven days if any such investment, together
with any other illiquid security owned by such Fund, exceeds ten percent of the
value of its net assets. See "Investment Practices -- Repurchase Agreements" in
the 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, a 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 contract 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 a 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. A 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
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<PAGE> 67
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.
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.
A 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
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<PAGE> 68
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 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
A Fund could also purchase and write options on futures contracts. An
option on a futures contract gives the purchase 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. A 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 others (regardless of whether such
options are written on the same or different Exchanges or are held or written on
one or more accounts or through one or more brokers). Option positions of all
investment companies advised by the 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 Trust 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 Trust 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.
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<PAGE> 69
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions which, along with its
investment objective, cannot be changed with respect to any Fund without
approval by the holders of a majority of the outstanding shares of such Fund.
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. In
addition to the fundamental investment limitations set forth in the Prospectus,
a Fund shall not:
1. Purchase or hold securities of any issuer if any of the Trust's
officers or trustees, or officers or directors of its investment
adviser, who beneficially owns 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, except that a Fund may obtain such
short-term credits as may be necessary for the clearance of purchases
and sales of securities. The deposit or payment by the Trust of an
initial or maintenance margin in connection with futures contracts or
related option transactions is not considered the purchase of a
security on margin;
3. Sell securities short, except to the extent that the Fund
contemporaneously owns or has the right to acquire at no additional
cost securities identical to those sold short;
4. Make loans of money or securities to other persons except that a Fund
may purchase or hold debt instruments and enter into repurchase
agreements in accordance with its investment objective and policies;
5. Invest in real estate or mortgage loans (but this shall not prevent a
Fund from investing in Municipal Securities or Temporary Investments
secured by real estate or interests therein); or in interests in oil,
gas, or other mineral exploration or development programs; or in any
security not payable in United States currency;
6. Invest more than ten percent of the value of its net assets in
securities which are illiquid, including securities restricted as to
disposition under the Securities Act of 1933, and including repurchase
agreements maturing in more than seven days;
7. Invest in securities of any one issuer with a record of less than three
years of continuous operation, including predecessors, except
obligations issued or guaranteed by the United States Government or its
agencies or Municipal Securities (except that in the case of industrial
revenue bonds, this restriction shall apply to the entity supplying the
revenues from which the issue is to be paid), if such investments by
any Fund would exceed five percent of the value of its total assets
(taken at market value);
8. Underwrite the securities of other issuers, except insofar as a Fund
may be deemed an underwriter under the Securities Act of 1933 by virtue
of disposing of portfolio securities;
9. Invest in securities other than Municipal Securities, Temporary
Investments (as defined herein), stand-by commitments, futures
contracts described in the next paragraph, and options on such
contracts;
10. Purchase or sell commodities or commodity contracts except that a Fund
may purchase, hold and sell listed futures contracts related to U.S.
Government securities, Municipal Securities or to an index of Municipal
Securities;
11. 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 any agency or
instrumentality thereof);
12. Borrow money, except that a Fund may borrow from banks to meet
redemptions or for other temporary or emergency purposes, with such
borrowing not to exceed five percent of the total assets of the Fund at
market value at the time of borrowing. Any such borrowing may be
secured provided
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<PAGE> 70
that not more than ten percent of the total assets of the Fund at
market value at the time of pledging may be used as security for such
borrowings;
13. Purchase any securities which would cause more than 25% of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry; provided that this limitation shall
not apply to Municipal Securities or governmental guarantees of
Municipal Securities; and provided, further, that for the purpose of
this limitation only, industrial development bonds that are considered
to be issued by non-governmental users shall not be deemed to be
Municipal Securities; or
14. Issue senior securities, as defined in the 1940 Act, except that this
restriction shall not be deemed to prohibit the Trust from (i) making
and collateralizing any permitted borrowings, (ii) making any permitted
loans of its portfolio securities, or (iii) entering into repurchase
agreements, utilizing options, futures contracts, options on futures
contracts and other investment strategies and instruments that would be
considered "senior securities" but for the maintenance by the Trust of
a segregated account with its custodian or some other form of "cover".
Because of the nature of the securities in which the Trust may invest, no
Fund may invest in voting securities, or invest for the purpose of exercising
control or management, or invest in securities of other investment companies. If
a percentage restriction is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in value will
not constitute a violation of such restriction.
TRUSTEES AND EXECUTIVE OFFICERS
The Trust'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 Art. 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
</TABLE>
10
<PAGE> 71
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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
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>
11
<PAGE> 72
<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 Trust by reason of his position with the Adviser. Mr.
Sheehan and Mr. Whalen are interested persons of the Adviser and the Trust by
reason of their firms having acted as legal counsel to the Adviser or an
affiliate thereof.
The Trust's officers other than Messrs. Godlin, McDonnell, Nyberg and
Piraro are located at 2800 Post Oak Blvd., Houston, Texas 77056. Messrs.
McDonnell, Nyberg and Piraro are located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. Mr. Godlin is located at 40 Broad St., Boston,
Massachusetts 02110.
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH TRUST 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.
Wayne D. Godlin.......... Vice President Vice President of Van Kampen American
Age: 34 Capital Advisors, Inc.; formerly Securities
Analyst and Associate Portfolio Manager of
the 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.
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.
</TABLE>
12
<PAGE> 73
<TABLE>
<CAPTION>
POSITIONS AND PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH TRUST DURING PAST 5 YEARS
- ------------------------- -------------------------- -------------------------------------------
<S> <C> <C>
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.
Joseph A. Piraro......... Vice President Agent of the Adviser. Employed since 1992
Age: 47 with Van Kampen American Capital Investment
Advisory Corp., an affiliate of the
Adviser. Prior to that time he was employed
by First Chicago Capital Markets.
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 Trust as a group own less than one percent
of the outstanding shares of the Trust. Only Messrs. Branagan, Caruso, Hilsman,
Powell, Rees, Sheehan, Sisto and Woodside served as Trustees of the Trust during
its last fiscal year. During the fiscal year ending November 30, 1994, Trustees
who were not affiliated with the Adviser or its parent received as a group
$15,738 and $10,514 in trustees' fees from the High Yield Municipal Fund and
Insured Municipal Fund, respectively, in addition to certain out-of-pocket
expenses. Such Trustees also received compensation for serving as directors or
trustees of other investment companies advised by the Adviser as identified in
the notes to the foregoing table. For legal services rendered during the fiscal
year ended November 30, 1994, the Trust paid legal fees of $24,750 and $11,762
for High Yield Municipal Fund and Insured Municipal Fund, respectively, 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.
Additional information regarding compensation paid by the Trust and the
related mutual funds for which the Trustees serve as directors or trustees is
set forth below. The compensation shown for the Trust is for the most recent
fiscal year and the total compensation shown for the Trust and other related
mutual funds is for the calendar year ended December 31, 1994, is set forth
below. Mr. Powell is not compensated for his service as Trustee because of his
affiliation with the Adviser.
13
<PAGE> 74
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL
FROM REGISTRANT PENSION OR COMPENSATION
------------------------ RETIREMENT FROM REGISTRANT
HIGH YIELD INSURED BENEFITS ACCRUED AND TRUST
MUNICIPAL MUNICIPAL AS PART OF TRUST COMPLEX PAID TO
NAME OF PERSONS FUND FUND EXPENSES DIRECTORS(1)(5)
- ----------------------------------------- ---------- --------- ---------------- ---------------
<S> <C> <C> <C> <C>
J. Miles Branagan........................ $2,550 $ 1,515 -0- $64,000
Dr. Richard E. Caruso(3)................. 2,550(2) 1,515(2) -0- 64,000
Dr. Roger Hilsman........................ 2,630 1,565 -0- 66,000
David Rees............................... 2,550 1,515 -0- 64,000
Lawrence J. Sheehan...................... 2,670 1,590 -0- 67,000
Dr. Fernando Sisto(3).................... 3,280 1,940 -0- 82,000
William S. Woodside(4)................... 690 395 -0- 18,000
</TABLE>
- ---------------
(1) Represents 29 investment company portfolios in the fund complex.
(2) Amount reflects deferred compensation of $2,470 and $1,465 for High Yield
Municipal Fund and Insured Municipal Fund, respectively.
(3) Messrs. Caruso and Sisto have deferred compensation in the past. The
cumulative deferred compensation paid by the Funds is as follows for Dr.
Caruso: High Yield Muni, $6,448; Insured Muni, $4,078; and as follows for
Dr. Sisto; High Yield Muni, $1,525; Insured Muni, $1,086.
(4) Prior to October 6, 1994, Mr. Woodside's compensation was paid by the
Adviser. As a result, with respect to the second, third and fifth columns,
$1,500, $895 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 Trust pays each trustee who is not affiliated
with the Adviser, the Distributor or VKAC an annual retainer of $1,562, and $738
and a meeting fee of $45 and $21 per Board meeting plus expenses for High Yield
Municipal Fund and Insured Municipal Fund, respectively. 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 Trust through December 31, 1996 for any increase in the aggregate
trustees' compensation paid by the Trust over their 1994 fiscal year aggregate
compensation.
INVESTMENT ADVISORY AGREEMENT
The Trust and the Adviser are parties to an investment advisory agreement
(the "Advisory Agreement"). Under the Advisory Agreement, the Trust 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 each Fund's
investment objectives. The Adviser also furnishes at no cost to the Trust
(except as noted herein) the services of sufficient executive and clerical
personnel for the Trust as are necessary to prepare registration statements,
prospectuses, shareholder reports, and notices and proxy solicitation materials.
In addition, the Adviser furnishes at no cost to the Trust the services of a
President of the Trust, one or more Vice Presidents as needed, and a Secretary.
Under the Advisory Agreement, the Trust bears the cost of its accounting
services, which includes maintaining its financial books and records and
calculating the daily net asset value of each Fund. The costs of such accounting
services include the salaries and overhead expenses of a Treasurer or other
principal financial
14
<PAGE> 75
officer and the personnel operating under his direction. The services are
provided at cost which is allocated among the investment companies advised by
the Adviser. The Trust also pays transfer agency fees, distribution fees,
service fees, custodian fees, legal fees, the costs of reports to shareholders
and all other ordinary expenses not specifically assumed by the Adviser.
Under the Advisory Agreement, the Trust 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 High Yield Municipal
Fund and the Insured Municipal Fund, at an annual rate of 0.60% of the first
$300 million of such Funds' aggregate average net assets, 0.55% of the next $300
million of such Funds' aggregate average net assets and 0.50% of such Funds'
aggregate average net assets in excess of $600 million. Each of the Funds will
pay the same percentage of its average net assets.
The Adviser has entered into a subadvisory agreement (the "Subadvisory
Agreement") with the Subadviser to assist it in performing its investment
advisory function with respect to High Yield Municipal Fund. Pursuant to the
Subadvisory Agreement, the Subadviser receives an annual fee, payable monthly,
of 0.40% of the first $20 million of High Yield Municipal Fund's average daily
net assets, 0.25% of the next $30 million of such Fund's average daily net
assets and 0.15% of the excess over $50 million. The Adviser and Subadviser are
hereinafter referred to as the "Advisers."
The average daily net assets is determined by taking the average of all of
the determinations of the net assets for each business day during a given
calendar month. Such fees are payable for each calendar month as soon as
practicable after the end of that month. The fee payable to the Adviser is
reduced by any commissions, tender solicitation and other fees, brokerage or
similar payments received by the Adviser or any other direct or indirect
majority owned subsidiary of VK/AC Holding, Inc., in connection with the
purchase and sale of portfolio investments of the Trust, less any direct
expenses incurred by such subsidiary of VK/AC Holding, Inc. in connection with
obtaining such payments. The Adviser shall use its best efforts to recapture all
available tender solicitation fees and exchange offer fees in connection with
each of the Trust's transactions and shall advise the Trustees of the Trust 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
Trust's portfolio transactions or other arrangements which may benefit the
Trust.
The Advisory Agreement also provides that, in the event the ordinary
business expenses of the Trust for any fiscal year exceed 0.95% of the average
daily net assets, the compensation due the Adviser will be reduced by the amount
of such excess and that, if a reduction in and refund of the advisory fee is
insufficient, the Adviser will pay the Trust monthly an amount sufficient to
make up the deficiency, subject to readjustment during the year. Ordinary
business expenses do not include (1) interest and taxes, (2) brokerage
commissions, (3) payments made pursuant to distribution plans (described below),
(4) certain litigation and indemnification expenses as described in the Advisory
Agreement, and (5) insurance premiums paid by the Trust to insure the timely
payment of principal and interest on its portfolio obligations. The Advisory
Agreement also provides that the Adviser shall not be liable to the Trust for
any actions or omissions if it acted in good faith without negligence or
misconduct.
For the period ended December 1, 1987 to March 31, 1990, in addition to the
contractual expense limitation, the Adviser elected to reimburse each Fund for
all ordinary business expenses, exclusive of taxes and interest, in excess of
0.85% of the average daily net assets.
The following table shows expenses payable under the Advisory Agreement
during the fiscal years ending November 30, 1992, 1993 and 1994.
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/92: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $1,562,047 $ 355,391
Accounting Services $ 102,088 $ 58,211
Contractual Expense Reimbursement $ -0- $ 41,687
</TABLE>
15
<PAGE> 76
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/93: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $2,390,833 $ 555,067
Accounting Services $ 132,407 $ 82,231
Contractual Expense Reimbursement $ -0- $ -0-
Voluntary Expense Reimbursement $ -0- $ 96,000
</TABLE>
<TABLE>
<CAPTION>
HIGH YIELD INSURED
FISCAL YEAR ENDING MUNICIPAL MUNICIPAL
11/30/94: FUND FUND
------------------------------------------------------------ ---------- ---------
<S> <C> <C>
Gross Advisory Fees $3,172,407 $ 641,145
Accounting Services $ 163,929 $ 86,031
Contractual Expense Reimbursement $ 0 $ 0
</TABLE>
The Advisory Agreement may be continued from year to year if specifically
approved at least annually (a)(i) by the Trust's Trustees or (ii) by vote of a
majority of the Trust'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 30 days' written notice.
DISTRIBUTOR
The Distributor acts as the principal underwriter of the shares of the
Trust pursuant to a written agreement (the "Underwriting Agreement"). The
Distributor has the exclusive right to distribute shares of each 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 Trust as may be sold to the public. The
Distributor is not obligated to sell any stated number of shares. The
Underwriting Agreement is renewable from year to year if approved (a) by the
Trust's Trustees or by a vote of a majority of the Trust's 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.
For the fiscal years ending November 30, 1992, 1993 and 1994, total
underwriting commissions on the sale of shares of the High Yield Municipal Fund
and Insured Municipal Fund were $3,499,659, $4,146,051, and $2,667,572, and
$531,280, $427,753 and $176,026, respectively. Of such totals, the amount
retained by the Distributor was $226,654, $635,449, and $27,152, and $41,203,
$61,827 and $406,466, respectively. The remainder was reallowed to dealers. Of
such dealer reallowances, $164,406, $168,470, and $81,508, and $62,735, $35,042,
and $8,526, respectively, was received by Advantage Capital Corporation.
DISTRIBUTION PLANS
The Trust 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 each 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 Trust 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 Trust
shareholders who are also their clients and/or for distribution. Such payments
are based on an annual percentage of the value of Trust 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
16
<PAGE> 77
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 Trust 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 Trust also include payments at an
annual rate of up to 0.75% of the net assets of the Class B shares of each Fund
to reimburse the Distributor for (1) commissions and transaction fees of up to
four percent 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 one and one half percent compounded quarterly on the
unreimbursed distribution expenses. With respect to the Class C Plan, authorized
payments by the Trust also include payments at an annual rate of up to 0.75% of
the net assets of the Class C shares of each Portfolio 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 Trust'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 one and one half percent 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 does not believe that termination of a relationship with a bank
would result in any material adverse consequences to the Trust. 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 the forms 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 Trust 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 each Plan 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 Trust's 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, the Plans 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
the Independent Trustees.
Each Plan may be terminated by vote of a majority of the Independent
Trustees, or by a vote of a majority of the outstanding voting shares of the
respective class of any Fund. Any change in any of the Plans that would
materially increase the distribution or service expenses borne by the Trust
requires shareholder approval, voting separately by class of any Fund;
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
17
<PAGE> 78
voting upon such amendment. So long as the Plans are in effect, the selection or
nomination of the Independent Trustees is committed to the discretion of the
Independent Trustees.
For the fiscal year ending November 30, 1994, the High Yield Municipal
Fund's and Insured Municipal Fund's gross aggregate expenses under the Class A
Plan were $1,029,318 and $180,174, or 0.25% and 0.24%, respectively, of the
Funds' average daily net assets. Such expenses were paid to reimburse the
Distributor for payments made to Service Organizations for servicing Trust
shareholders and administering the Class A Plan.
For the fiscal year ended November 30, 1994, the aggregate expenses under
the Class B Plan for the High Yield Fund and the Insured Municipal Fund were
$1,335,592 and $378,659, or 1.00% and 1.00%, respectively, of the Funds' average
daily net assets. Such expenses were paid to reimburse the Distributor for the
following payments: $1,001,694 and $283,994, respectively, for commissions and
transaction fees paid to broker-dealers and other Service Organizations in
respect of sales of Class B shares of the Trust and $333,898 and $94,665,
respectively, for fees paid to Service Organizations for servicing Class B
shareholders and administering the Class B Plan.
The offering of Class C shares commenced on December 10, 1993. For the
fiscal year ended November 30, 1994, the aggregate expenses under the Class C
Plan for the High Yield Fund and the Insured Municipal Fund were $65,351 and
$15,952, or 0.97% and 0.97%, respectively, of the Funds' average daily net
assets. Such expenses were paid to reimburse the Distributor for the following
payments: $49,013 and $11,964, respectively, for the commissions and transaction
fees paid to broker-dealers and other Service Organizations in respect of sales
of Class C shares of the Trust and $16,338 and $3,988 respectively, for fees
paid to Service Organizations for servicing Class C shareholders and
administering the Class C Plan.
TRANSFER AGENT
During the fiscal year ended November 30, 1994, ACCESS, shareholder service
agent and dividend disbursing agent for the Trust, received fees aggregating
$561,481 and $92,670 from the High Yield Municipal Fund and Insured Municipal
Fund, respectively. These services are provided at cost plus a profit.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Advisers are responsible for decisions to buy and sell securities for
the Trust 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 Trust are principal transactions at net prices, the Trust incurs little or
no brokerage costs except for commissions paid with respect to transactions in
future contracts and options. Fund 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 Advisers are responsible for placing portfolio transactions and do so
in a manner deemed fair and reasonable to the Trust 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 Advisers consider
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, consideration may be given to firms which also provide research
services to the Trust or the Advisers. No specific value can be assigned to such
research services which are furnished without cost to the Advisers. The
investment advisory fee is not reduced as a result of the Advisers' receipt of
such research services. Services provided may include (a) furnishing advice as
to the value of the 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 Trust effects
its securities transactions may be used by the Advisers in
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servicing all of their advisory accounts; not all of such services may be used
by the Advisers in connection with the Trust.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc. and subject to seeking best execution of such other
policies as the Trustees may determine, the Advisers may consider sales of
shares of the Trust as a factor in the selection of firms to execute portfolio
transactions for the Trust.
The Advisers place portfolio transactions for other advisory accounts
including other investment companies. The Advisers seek to allocate portfolio
transactions equitably whenever concurrent decisions are made to purchase or
sell securities by the Trust 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 Trust. In making such allocations among the Trust and other
advisory accounts, the main factors considered by the Advisers 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 the Trustees of the Trust who are not
interested persons (as defined in the 1940 Act) of the Adviser.
During the fiscal years ended November 30, 1992, 1993 and 1994, the High
Yield Municipal Fund paid $17,325, $5,481 and $79,957, respectively, in
brokerage commissions on portfolio transactions and Insured Municipal Fund paid
no 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.
The Trust conducted no affiliated brokerage transactions through affiliated
brokers during the last three fiscal years.
DETERMINATION OF NET ASSET VALUE
The net asset value of the shares of each Fund is computed by dividing the
value of all securities held by the Fund plus other assets, less liabilities
(including accrued expenses), by the number of shares outstanding. Such
computation is made as of the close of the New York Stock Exchange (currently
4:00 p.m., New York time) on each business day on which the New York Stock
Exchange is open. The New York Stock 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.
Each Fund's investments in bonds are valued by an independent pricing
service ("Service"). When, in the judgment of the Service, quoted bid prices for
bonds are readily available and are representative of the bid side of the
market, these bonds are valued at such quoted bid prices (as obtained by the
Service from dealers in such securities). Other bonds 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. Options are valued at the last sale price or, if no
sales are reported, at the mean between the bid and asked prices. Any bonds
which are not valued by the independent pricing service would be valued at fair
value using methods determined in good faith by the Trustees. Expenses and fees,
including the investment advisory fee are accrued daily and taken into account
for the purpose of determining the net asset value of shares of each Fund.
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 of any Fund 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").
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PURCHASE AND REDEMPTION OF SHARES
The following information supplements that set forth in the Trust's
Prospectus under the heading "Purchase of Shares."
PURCHASE OF SHARES
Each Fund's shares 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 Trust issues three classes of shares for each Fund: 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 Trust, 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, distribution fees, 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 Securities Act of 1933.
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 any Fund, in the form
of a check payable to the Trust, 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
investments are made at the public offering price of the Fund's 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 Trust will act in the same
capacity 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 under "Sales Charge Table" apply to purchases of Class A shares
of each 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 purchaser, as is a trustee or other fiduciary purchasing
for a single fiduciary account. An aggregate investment includes all shares of
the Trust 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 Trust 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 Trust, the charge applicable to the $65,000
purchase would be four percent 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
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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 represented 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
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. If 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 Trust, the amount of excess sales charges, if any,
paid during the 13-month period.
REDEMPTION OF SHARES
Redemptions are not made on days during which the New York Stock 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 New York Stock
Exchange is closed for other than customary weekends or holidays; (b) trading on
the New York Stock Exchange is restricted; (c) an emergency exists as a result
of which disposal by the Trust of securities owned by it is not reasonably
practicable or it is not reasonably practical for the Trust 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 Trust ("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 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.
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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 herein under "Purchase and 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 may be waived on redemptions of Class B and Class
C shares in the circumstances described below:
(a) Redemption Upon Disability or Death
The Trust 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 Trust 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 or C will be waived
where the descendent 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 or C applies to a total or partial
redemption, but only to redemptions of shares held at the time of the death or
initial determination of disability.
(b) Redemption in Connection with Certain Distributions from Retirement
Plans
The Trust 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 may 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 Trust 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 Trust 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 Trust's Systematic Withdrawal Plan
A shareholder may elect to participate in a systematic withdrawal plan (the
"Plan") with respect to the shareholder's investment in the Trust. Under the
Plan, a dollar amount of a participating shareholder's investment in the Trust
will be redeemed systematically by the Trust 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.
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The amount of the shareholder's investment in a Trust at the time the
election to participate in the Plan is made with respect to the Trust 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 Trust 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 Trust 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 Trust will waive the CDSC -- Class B and C
upon such involuntary redemption.
(e) Reinvestment of Redemption Proceeds in Shares of the Same Trust Within
120 Days After Redemption
A shareholder who has redeemed Class C shares of a Trust may reinvest at
net asset value, with credit for any CDSC -- Class C paid on the redeemed
shares, any portion or all of his or her redemption proceeds (plus that amount
necessary to acquire a fractional share to round off his or her purchase to the
nearest full share) in Class C shares of the Trust, 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 Trust. 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 Trust 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 Trust.
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 Trust 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 Trust will be liable for following
telephone instructions which it reasonably believes to be genuine. Van Kampen
American Capital and the Trust 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
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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 and return both documents 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, partnership 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, state and
local tax considerations generally affecting the Funds and their shareholders
that are not described in the Prospectus. No attempt is made to present a
detailed explanation of the tax treatment of a 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.
GENERAL
By maintaining its qualification as a "regulated investment company" under
the Internal Revenue Code, a Fund will not incur any liability for federal
income taxes to the extent its taxable ordinary income and any capital gain net
income are distributed in accordance with Subchapter M of the Code.
A 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. Each Fund intends to distribute sufficient amounts to avoid liability for
the excise tax. By qualifying as a regulated investment company, a 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 a 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 Trust 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 on
the basis of the subsequent shares.
The Code permits a regulated investment company whose assets consist
primarily of tax-exempt Municipal Securities to pass through to its investors,
tax-exempt, net Municipal Securities interest income. In order for a 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
income" (i.e., its
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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").
Not later than 60 days after the close of its taxable year, each 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 Fund
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 purchaser would be
treated as a "substantial user" or a "related person" with respect to any of the
tax-exempt obligations held by the Fund, or by the Trust if it is required to
qualify as a regulated investment company as described below. "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 useable 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 a Fund is not deductible for federal income tax purposes if the Fund
distributes exempt-interest dividends during the 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, a 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 Securities 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 shares of any
one of the Funds 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.
TAX TREATMENT OF FUTURES CONTRACTS AND RELATED OPTIONS
In connection with its operations, a 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 a 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 a Fund, any realized gain
or loss will be treated as long-term capital gain or loss to the extent of 60%
thereof and short-term capital gain or loss to the extent of 40%
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thereof (hereinafter "60/40 gain or loss"). Open Futures Contracts held by a
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 Futures Contracts. The Distribution
Requirements may limit a Fund's ability to hold Futures Contracts and Futures
Options at the end of a year.
A portion of a 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 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 a 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. No determination has been made whether any Fund
will make any of these elections.
A 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 Trust 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 Trust. 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 that of counsel. Counsel has also advised the Trust 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, a 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 a 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 the Trust 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 the Trust's assets may be invested
in the securities of any one issuer and at least 50% of the value of the Trust'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
Trust. Consequently, the Trust's ability to invest in Futures Contracts and
Futures Options may be limited.
TREATMENT OF DIVIDENDS
While each Fund expects that a major portion of its investment income will
constitute tax-exempt interest, a significant portion may consist of "investment
company taxable income" and "net capital gains." As pointed out above, a Fund
will be subject to tax for any year on its undistributed investment company
taxable income and net capital gains.
26
<PAGE> 87
It is anticipated that substantially all of a 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. Distributions
that are not designated as capital gain dividends will be taxable to
shareholders as ordinary income. Dividends and distributions declared payable 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 a Fund's net investment income arises from dividends on
common or preferred stock, none of its distributions are eligible for the 70%
dividends received deduction available to corporations.
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 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 Trust
shares.
BACK-UP WITHHOLDING
The Trust 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 Trust shares with respect to any shareholder who is not
exempt from withholding and who fails to furnish the Trust with a correct
taxpayer identification number, who fails to report fully dividend or interest
income or who fails to certify to the Trust 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.
TRUST PERFORMANCE
The average annual total return for Class A shares of each Fund for the
one-year, five-year and eight-year periods ending November 30, 1994 was -4.68%,
5.83% and 6.11% for the High Yield Municipal Fund, and - 8.47%, 4.44% and 4.61%
for the Insured Municipal Fund, respectively. Results from inception through
April 1, 1990, reflect expense reimbursement described under "Investment
Advisory Agreement." The average annual total return for Class B shares of each
Fund one-year period and the 28 month period ending November 30, 1994, was
- -4.49% and 2.80% for the High Yield Municipal Fund and -8.24% and 0.48% for the
Insured Municipal Fund, respectively. The aggregate total return for Class C
shares of each Fund for the period December 10, 1993 through November 30, 1994
was -2.73% and -6.29% for the High Yield Municipal Fund and Insured Municipal
Fund, respectively. These results are based on historical earnings and asset
value fluctuations and are not intended to indicate future performance. Such
information should be considered in light of the Fund's investment objectives
and policies as well as the risks incurred in the Fund's investment practices.
The following chart lists the High Yield Municipal Fund's and Insured
Municipal Fund's annualized current yield and tax equivalent yield for the
30-day period ending November 30, 1994.
<TABLE>
<CAPTION>
HIGH YIELD MUNICIPAL INSURED MUNICIPAL
---------------------------- ---------------------------
CLASS CLASS CLASS CLASS CLASS CLASS
A B C A B C
------ ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Current yield 6.60% 6.19% 6.17% 4.68% 4.16% 4.15%
Tax-equivalent
yield 10.31% 9.66% 9.64% 7.31% 6.49% 6.48%
</TABLE>
Neither the High Yield Municipal Fund's nor the Insured Municipal Fund's
yield is 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, Fund maturity and the Fund's expenses.
27
<PAGE> 88
Yield and total return are computed separately for Class A, Class B and
Class C shares.
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
Intentions and the Van Kampen American Capital Mutual Fund Index -- which polls
measure how Americans plan to use their money.
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.
The Funds 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 Funds.
OTHER INFORMATION
Dividends and Distributions -- Shareholders are informed as to the sources
of distributions at the time of payment. Any capital gain distribution paid
shortly after a purchase of shares by an investor will have the effect of
reducing the per share net asset value of the shares owned by the amount of the
distribution. See "Distributions from the Fund" in the Prospectus for further
information.
Custody of Assets -- All securities owned by the Trust and all cash,
including proceeds from the sale of shares of the Trust and of securities in the
Trust's investment portfolios, are held by State Street Bank and Trust Company,
225 Franklin Street, Boston, Massachusetts 02110, as Custodian.
Shareholder Reports -- Semi-annual 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 Trust, performs an annual audit
of the Trust's financial statements.
FINANCIAL STATEMENTS
The attached financial statements in the form in which they appear in the
Annual Report to Shareholders, including the related Report of Independent
Accountants on the November 30, 1994 Financial Statements are included in the
Statement of Additional Information.
Set forth below is an example of the method of computing the offering price
of the Trust's Class A shares. The example assumes a purchase of Class A shares
of a Fund 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 such Fund on November 30, 1994.
<TABLE>
<CAPTION>
HIGH YIELD INSURED
MUNICIPAL MUNICIPAL
FUND FUND
------------ ------------
NOVEMBER 30, NOVEMBER 30,
1994 1994
------------ ------------
<S> <C> <C>
Net Asset Value Per Class A Share $10.44 $10.55
Class A Per Share Sales Charge -- 4.75% of offering price
(4.99% of net asset value per share) $ 0.52 $ 0.53
------------ ------------
Class A Per Share Offering Price to the Public $10.96 $11.08
</TABLE>
28
<PAGE> 89
APPENDIX
RATINGS OF INVESTMENTS
RATINGS OF MUNICIPAL BONDS
DESCRIPTIONS OF MOODY'S INVESTORS SERVICE ("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.
Caa -- Bonds which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca -- Bonds which are rated Ca represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated C are the lowest rated class of bonds and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
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
29
<PAGE> 90
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 in 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
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 the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity of
rated issuers:
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.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
DESCRIPTION OF STANDARD & POOR'S CORPORATION'S MUNICIPAL ("S&P") 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.
30
<PAGE> 91
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 it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher-rated categories.
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-CCC-CC-C
Debt rated "BB", "B", "CCC", "CC" or "C" 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 and "C" the highest 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.
CI This rating is reserved for income bonds on which no interest is
being paid.
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 Standard & Poor's 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.
Ratings are graded into four categories, ranging from "A" for the highest
quality obligations to "D" for the lowest. Ratings are applicable to both
taxable and tax-exempt commercial paper. The four categories are as follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are further refined
with the designation 1, 2 and 3 to indicate the relative degree of
safety.
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".
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
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
31
<PAGE> 92
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in or unavailability of, such information.
S&P ratings of certain municipal note issues with a maturity of less than
three years 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+).
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.
32
<PAGE> 93
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
- ---------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
Municipal Bonds 96.7%
AIR FREIGHT 1.5%
(3)$ 7,625,000 Dayton, Ohio, Special Facilities Rev. (Emery Air Freight Corp.)
Series A, 12.50%, 10/1/09 .............................................. $ 8,797,115
------------
EDUCATION 2.1%
2,610,000 California Educational Facilities Authority Rev. (College of
Osteopathic Medicine) 7.50%, 6/1/18 .................................... 2,493,881
5,000,000 New Hampshire Higher Education & Health (Daniel Webster
College Issue) 7.625%, 7/1/16 .......................................... 4,613,750
1,500,000 New Jersey State Educational Facilities Authority Rev. (Fairleigh
Dickinson University) Series C, 6.625%, 7/1/23 ......................... 1,256,250
1,500,000 New York, New York, City Industrial Development Agency,
Marymount-Manhattan College, 7.00%, 7/1/23 ............................. 1,355,415
Pennsylvania State Higher Educational Facilities Authority,
College and University Rev., (College of Science & Agriculture)
645,000 6.90%, 4/1/14 .......................................................... 595,870
1,000,000 7.00%, 4/1/22 .......................................................... 902,710
1,000,000 Vermont Educational & Health Buildings Finance Authority,
7.15%, 4/15/14 ......................................................... 939,190
------------
TOTAL EDUCATION......................................................... 12,157,066
------------
GENERAL OBLIGATIONS 8.3%
1,000,000 Arrowhead Metropolitan District, Colorado, 8.125%, 12/1/11 ............... 978,420
2,000,000 Beaver Creek Metropolitan District, Colorado, 9.25%, 12/1/05 ............. 2,178,200
1,060,000 Berry Creek Metropolitan District, Colorado, Refunding,
7.30%, 12/1/12 ......................................................... 1,000,406
1,000,000 Brush Creek Village, Colorado, Water District, 8.875%, 11/15/09 .......... 1,161,490
(3)6,720,000 California State, Veterans Bonds, 7.375%, 4/1/19 ......................... 6,900,028
1,250,000 Cordillera Metropolitan District, Colorado, Eagle County,
8.25%, 12/1/13 ......................................................... 1,210,525
470,000 Detroit, Michigan, Local Development Finance Authority, Series A
9.50%, 5/1/21 .......................................................... 493,726
1,650,000 Dove Valley Metropolitan District, Arapahoe County, Colorado,
9.50%, 12/1/08 ......................................................... 1,717,287
4,000,000 Fairlake Metropolitan District, City & County of Denver, Colorado,
Series 1991, 9.625%, 12/1/10 ........................................... 4,450,000
2,000,000 Greenwood Metropolitan District, Colorado, 7.30%, 12/1/06 ................ 1,988,960
2,000,000 Highlands Ranch, Colorado, Metropolitan District 1,
7.30%, 9/1/12 ........................................................ 2,021,920
2,000,000 Illinois Development Finance Authority,
(Debt Restructure - East St. Louis), 7.375%, 11/15/11 .................. 1,917,940
2,175,000 Jefferson County, Colorado, Section 14 Metropolitan District,
Refunding, 9.00%, 12/1/09 .............................................. 2,522,522
1,000,000 Landmark Metropolitan District, Colorado, 8.75%, 12/1/05 ................ 1,005,280
Mountain Village Metropolitan District, San Miguel County,
Colorado
225,000 10.50%, 12/1/05 ........................................................ 237,866
355,000 11.00%, 12/1/04 ........................................................ 377,017
(3)3,000,000 11.00%, 12/1/07, Pre-refunded, 12/1/98 ................................. 3,621,870
3,000,000 New York, New York, Series B, 7.30%, 8/15/10 ............................. 2,988,450
Panorama Metropolitan District, Colorado
500,000 Series B, 9.00%, 12/1/09 ............................................... 514,540
265,000 9.50%, 12/1/05 ......................................................... 273,255
</TABLE>
F-1
<PAGE> 94
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- ------------------------------------------------------------------------------------------------------
<CAPTION>
Prinicpal Market
Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
GENERAL OBLIGATIONS--continued
$ 200,000 Skyland Metropolitan District, Colorado Facilities,
Zero Coupon, 12/1/08 ....................................... $ 59,612
Southtech Metropolitan District, Colorado, Refunding
1,500,000 6.875%, 12/1/11 ............................................ 1,360,695
2,175,000 9.50%, 12/1/11 ............................................. 2,437,697
Superior, Colorado, Metropolitan District No. 2,
Refunding, Series A
660,000 7.25%, 12/1/02 ............................................. 636,035
840,000 7.75%, 12/1/13 ............................................. 779,629
University of the Virgin Islands, Public Finance Authority,
Series A
1,210,000 7.50%, 10/1/09 ............................................. 1,171,014
1,965,000 7.65%, 10/1/14 ............................................. 1,874,394
3,000,000 Virgin Islands, Public Finance Authority, 7.25%, 10/1/18 ..... 2,853,180
-------------
TOTAL GENERAL OBLIGATIONS................................. 48,731,958
-------------
HEALTH CARE 3.5%
Brevard County, Florida, Health Facilities Authority Rev.,
1,730,000 7.375%, 11/15/04 ........................................... 1,634,573
2,200,000 7.75%, 11/15/17 (Courtenay Springs Village) ................ 2,102,584
Colorado Health Facilities Authority Rev.
1,000,000 Cleo Wallace Center Project, 7.00%, 8/1/15 ................. 919,330
400,000 Mile High Transplant Bank, 8.50%, 6/1/07 ................... 394,272
2,460,000 Presbyterian/St. Luke Healthcare System Project, Series A,
6.75%, 2/15/13 ........................................... 2,195,377
1,000,000 Connecticut State Development Authority, Health Care Rev.
(Independent Living Project) Series B, 8.00%, 7/1/17 ....... 941,470
1,000,000 Lowndes County, Mississippi, Hospital Rev., Refunding
(Golden Triangle Medical Center) 8.50%, 2/1/10 ............. 1,054,510
Massachusetts State, Industrial Finance Rev.,
1,250,000 7.10%, 11/15/18 ........................................... 1,112,650
3,785,000 8.80%, 6/1/14 ............................................. 4,092,796
New Jersey Economic Development Authority, 1st Mtg. Gross Rev.
(1)1,240,000 Dover Residential Healthcare Facilities, 13.375%, 11/1/14 .. 1,199,638
1,000,000 Franciscan Oaks Project, Series A, 8.50%, 10/1/23 .......... 981,890
1,000,000 The Evergreens, 9.25%, 10/1/22 ............................. 966,920
1,000,000 North Canton, Ohio, Health Care Facilities Rev. (Waterford at
St. Luke Project) 8.625%, 11/15/21 ......................... 964,770
Pinal County, Arizona, Industrial Development Authority
(Casa Grande Regional Medical Center Project)
1,025,000 Series A, 8.125%, 12/1/22 ................................... 973,197
475,000 Series B, 8.125%, 12/1/22 .................................. 426,764
715,000 9.00%, 12/1/13 ............................................. 728,120
-------------
TOTAL HEALTH CARE........................................... 20,688,861
-------------
</TABLE>
F-2
<PAGE> 95
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
- -----------------------------------------------------------------------------------------------------------------
<CAPTION>
Principal Market
Amount Value
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS 14.3%
(3)$ 2,000,000 Alabama Special Care Facilities Financing Authority Rev.
(Montgomery Hospital) 10.25%, 11/1/15 ................................ $ 2,105,060
1,470,000 Arizona Health Facilities Authority, Hospital System Rev.,
Refunding (St. Lukes Health System) 7.25%, 11/1/14 ................... 1,336,568
1,500,000 Athens County, Ohio, Hospital Facilities Rev. (O'Bleness
Memorial Hospital Project) 7.10%, 11/15/23 ............................ 1,289,205
Bay County, Florida, Hospital Systems Rev.,
1,500,000 8.00%, 10/1/12 ........................................................ 1,484,325
500,000 8.00%, 10/1/19 ........................................................ 488,855
1,130,000 Bell County, Texas, Health Facilities Development Corp.
(King's Daughters Hospital) 9.25%, 7/1/08 ............................. 1,218,625
1,500,000 Bexar County, Texas, Health Facilities Development Rev.
(St. Lukes Hospital Project) 7.90%, 5/1/18 ............................ 1,513,575
3,150,000 Clark County, Ohio, Hospital Improvement Rev., Refunding
(Community Hospital) Series A, 9.375%, 4/1/08 ......................... 3,332,164
1,990,000 Clearfield, Pennsylvania, Hospital Authority Rev. (Clearfield
Hospital Project) Series 1994, 6.875%, 6/1/16 ......................... 1,787,099
Delaware State Economic Development Authority Rev.,
(Osteopathic Hospital Association of Delaware) Series A
3,000,000 6.90%, 1/1/18 ......................................................... 2,565,660
980,000 9.50%, 1/1/22 ......................................................... 1,006,117
(2)1,000,000 Dickinson County, Michigan, Memorial Hospital,
8.00%, 11/1/14 ........................................................ 987,170
1,350,000 Doylestown, Pennsylvania, Hospital Authority Rev. (Pine Run)
Series A, 7.20%, 7/1/23 ............................................... 1,234,805
385,000 Edinburg, Texas, Hospital Authority Rev., Project 86 (Edinburg
General Hospital) 10.00%, 7/1/11 ...................................... 398,910
1,500,000 Glendale, California, Hospital Rev., Refunding (Glendale
Memorial Hospital & Health) Series A, 9.00%, 11/1/17 .................. 1,567,500
Illinois Health Facilities Authority Rev. (Holy Cross Hospital
Project)
500,000 6.25%, 3/1/04 ......................................................... 472,105
1,250,000 6.70%, 3/1/14 ......................................................... 1,120,763
Illinois Health Facilities Authority Rev. (St. Elizabeths Hospital)
1,250,000 7.625%, 7/1/10 ........................................................ 1,181,488
1,500,000 7.75%, 7/1/16 ......................................................... 1,416,180
1,000,000 Jackson County, Oklahoma, Memorial Hospital Authority Rev.
(Jackson Memorial Hospital) 9.00%, 8/1/15 ............................. 1,105,600
(1)1,500,000 Jackson Park Hospital Foundation, Chicago, Illinois (Jackson
Park Hospital) 9.00%, 3/1/05 .......................................... 1,245,000
500,000 Leflore County, Oklahoma, Hospital Authority Improvement Rev.,
9.40%, 5/1/06 ......................................................... 525,620
2,000,000 Lorain, Ohio, Hospital Improvement Rev., Refunding (Lakeland
Community Hospital, Inc. Project) 9.50%, 11/1/12 ...................... 2,125,460
765,000 Loves Park, Illinois, 1st Mtg. Rev. (Hossier Care Project)
Series A, 9.75%, 8/1/19 ............................................... 799,547
470,000 Maine Health & Higher Educational Facilities Authority Rev.
(Franklin Memorial Hospital) 9.875%, 7/1/13 ........................... 532,322
Massachusetts State Health & Educational Facilities Authority Rev.,
Series B
1,080,000 Holyoke Hospital, 6.50%, 7/1/15 ......................................... 942,116
1,000,000 Milford-Whitinsville Regional Project, 7.75%, 7/15/17 ................... 906,550
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOSPITALS-CONTINUED
$ 500,000 Massachusetts State Industrial Finance Agency, Rev. (Atlanticare
Medical Center) Series B, 10.125%, 11/1/14.............................. $ 540,680
400,000 McCormick County, South Carolina, Hospital Facilities Rev.,
Series 88 (McCormick Hospital) 10.50%, 3/1/18........................... 421,356
2,585,000 Mercer County, West Virginia, Commercial Development Rev.
(Rehabilitation Hospital) 12.00%, 12/1/15............................... 2,744,133
2,900,000 Michigan State Hospital Finance Authority Rev., Refunding
(Saratoga Community Hospital) 8.75%, 6/1/10............................. 3,003,878
Missouri State Health & Educational Facilities, Series A
1,075,000 Bethesda Health Group, Inc. Project, 7.50%, 8/15/12..................... 981,841
1,500,000 6.625%, 8/15/05......................................................... 1,362,270
820,000 Montgomery County, Texas, Health Facilities Development Corp.,
Hospital Mortgage Rev. (Woodlands Medical Center Project)
8.85%, 8/15/14........................................................... 861,353
1,495,000 Newark-Wayne Community Hospital, Inc., New Jersey, Hospital Rev.,
Refunding & Improvement, Series A, 7.60%, 9/1/15......................... 1,440,492
1,455,000 New Hampshire Higher Educational & Health Facility Authority
Hospital Rev. (Monadnock Community Hospital),
Series 1990, 9.125%, 10/1/20............................................. 1,597,925
2,500,000 New Jersey Health Care Facilities Authority Rev., (Raritan Bay
Medical Center), 7.25%, 7/1/14 ......................................... 2,288,225
Newton, Kansas, Hospital Rev., Series A,
2,000,000 7.375%, 11/15/14........................................................ 1,865,920
1,500,000 7.75%, 11/15/24......................................................... 1,409,205
170,000 Ohio County, Kentucky, Hospital Facilities Rev. (Ohio County
Hospital) 12.00%, 10/1/15 .............................................. 178,709
Philadelphia, Pennsylvania, Hospitals & Higher Education
750,000 Children's Seashore House, Series B, 7.00%, 8/15/12..................... 713,460
2,000,000 Facilities Authority, Hospital Rev. (Roxborough Memorial
Hospital) Series 2, 7.25%, 3/1/24....................................... 1,712,400
500,000 Facilities Authority, Hospital Rev. (Temple University Hospital)
Series A, 6.625%, 11/15/23.............................................. 440,835
500,000 Randolph County, West Virginia, Building Commission, Refunding
& Improvement (Davis Memorial Hospital Project)
7.65%, 11/1/21.......................................................... 500,590
3,255,000 Rusk County, Texas, Health Facilities Corp., Hospital Rev.
(Henderson Memorial Hospital Project) 7.75%, 4/1/13..................... 3,096,091
Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Allied Services Rehabilition Hospital), Series A
1,500,000 7.125%, 7/15/05......................................................... 1,422,900
3,000,000 7.375%, 7/15/08......................................................... 2,823,210
300,000 Scranton-Lackawanna, Pennsylvania, Health & Welfare Authorities
Rev. (Moses Taylor Hospital Project) Series B, 8.25%, 7/1/09............ 308,868
400,000 Selma, Alabama, Special Care Facilities Financing Authority
Hospital Rev. (Vaughan Regional Medical Center Project)
9.50%, 6/1/14........................................................... 448,416
South Dakota State Health and Educational Authority Rev.
(Huron Regional Medical Center)
1,000,000 7.00%, 4/1/10........................................................... 920,650
1,000,000 7.25%, 4/1/20........................................................... 910,170
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOSPITALS-CONTINUED
$ 1,000,000 Southwestern Illinois Development Authority, Medical Facilities
Rev. (Andersen Hospital Project) Series A, 7.00%, 8/15/12 .............. $ 936,440
2,000,000 Tulsa, Oklahoma, Industrial Authority, Hospital Rev. (Tulsa
Regional Medical Center) 7.20%, 6/1/17 ................................. 1,834,220
1,880,000 Tyler, Texas, Health Facilities Development Corp. (East Texas
Medical Center Regional Health) Series A, 6.625%, 11/1/11 ............. 1,676,584
2,000,000 Valley Health System, California, Refunding, 6.875%, 5/15/23 ............. 1,702,680
800,000 Vermont Educational & Health Buildings Financing Agency Rev.
(Northwestern Medical Center) 9.75%, 9/1/18 ............................ 871,264
1,000,000 Warren County, Pennsylvania, Hospital Authority Rev. (Warren
General Hospital Project) Series A, 6.90%, 4/1/11 ...................... 921,850
2,000,000 Washington County, Pennsylvania, Hospital Authority Rev.
(Canonsburg General Hospital Project) 7.35%, 6/1/13 ................... 1,777,240
Wells County, Indiana, Hospital Authority Rev. (Caylor-Nickel
Medical Center, Inc.)
400,000 8.50%, 4/15/03 ......................................................... 392,924
3,600,000 8.75%, 4/15/12 ......................................................... 3,771,216
790,000 Weslaco, Texas, Health Facilities Development Corp., Hospital
Rev. (Weslaco Health Facility) 10.375%, 6/1/16 ......................... 914,867
1,000,000 West Virginia State, Hospital Finance Authority, Refunding
& Improvement (Fairmont General Hospital) Series A,
6.75%, 3/1/14........................................................... 885,220
Wilmington, Delaware, Hospital Rev. (Osteopathic Hospital,
Association of Delaware/Riverside Hospital)
300,000 Series A, 10.00%, 10/1/03............................................... 317,454
500,000 Series A, 10.20%, 10/1/18............................................... 586,430
500,000 Woodward, Oklahoma, Municipal Authority Hospital, Rev.,
9.25%, 11/1/14.......................................................... 528,595
------------
TOTAL HOSPITALS......................................................... 83,798,950
------------
HOTELS 0.5%
1,575,000 Gulf Shores, Alabama, Rev. (Quality Inn, Beachsiding Project)
Series 1986, 11.00%, 6/1/16............................................. 1,597,097
800,000 Minneapolis, Minnesota, Commercial Development Rev.
(Holiday Inn Metrodome Project) 10.50%, 6/1/03.......................... 805,000
(1)650,000 Minneapolis, Minnesota, Community Development Agency,
Commercial Development Rev. (Standard Mill Whitney Hotel
Project) 12.00%, 4/1/10................................................. 515,125
------------
TOTAL HOTELS............................................................ 2,917,222
------------
HOUSING 10.4%
(1)1,000,000 Atlanta, Georgia, Urban Residential Finance Authority, Multi-family
Mtg. Rev. (Peachtree Apartments) 10.50%, 12/1/10........................ 840,830
Austin, Minnesota, Multi-family Rev., Refunding
(Cedars of Austin Project)
1,020,000 7.50%, 4/1/17........................................................... 974,100
2,000,000 7.50%, 4/1/18........................................................... 1,915,000
1,710,000 Austin, Texas, Housing Finance Corp., Multi-family Rev.
(Stassey Woods Apartments Project) 6.75%, 4/1/19........................ 1,563,709
2,500,000 Berks County, Pennsylvania, Municipal Authority Rev. (Phoebe
Berks Village, Inc. Project) 8.25%, 5/15/22............................. 2,420,925
</TABLE>
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<TABLE>
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Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
Harris County, Texas, Housing Finance Corp., Single Family Mtg. Rev.
$ 355,000 Series 1983-A, 10.125%, 7/15/03......................................... $ 349,934
1,800,000 Series 1983-A, 10.375%, 7/15/14......................................... 1,755,522
300,000 9.875%, 3/15/14......................................................... 300,378
80,000 11.25%, 4/15/06......................................................... 79,222
2,770,000 Iowa Finance Authority, Multi-family Rev., Refunding (Park West
Project) 8.00%, 10/1/23................................................. 2,785,152
Lebanon County, Pennsylvania, Health Facilities Authority Rev.,
(Church of Christ Homes Project)
1,250,000 7.00%, 10/1/14.......................................................... 1,128,813
1,250,000 7.25%, 10/1/19.......................................................... 1,119,825
1,500,000 Massachusetts State Health & Educational Facilities Authority Rev.
(Independent Living) 8.10%, 7/1/18...................................... 1,461,435
Massachusetts State Housing Finance Agency,
1,000,000 Series 38, 7.20%, 12/1/26............................................... 983,750
2,750,000 Single family, 6.75%, 6/1/26............................................ 2,554,063
3,780,000 Montgomery County, Pennsylvania, Industrial Development
Authority, Rev., (Assisted Living Facilities), 8.25%, 5/1/23............ 3,578,715
New Hampshire State Housing Finance Authority (Single Family
Residential Mortgage)
500,000 6.85%, 7/1/16........................................................... 480,000
190,000 6.95%, 1/1/26........................................................... 180,975
New Hope, Minnesota, Multi-family Rev., Refunding (Broadway
Lanel Project)
950,000 7.75%, 9/1/07........................................................... 912,741
2,320,000 8.00%, 9/1/18........................................................... 2,215,600
2,615,000 North Miami, Florida, Health Care Facilities Rev. (Imperial Club
Project) Series A, 9.25%, 1/1/13........................................ 2,679,957
North St. Paul, Minnesota, Multi-family, Refunding
(Cottages North St. Paul)
980,000 9.00%, 2/1/09........................................................... 997,150
2,220,000 9.25%, 2/1/22........................................................... 2,328,225
2,000,000 North Syracuse, New York, Housing Authority Rev., (Janus Park
Project), 8.00%, 6/1/14................................................. 1,876,740
1,430,000 Oklahoma Housing Finance Agency, Single Family, Class A,
7.997%, 8/1/18.......................................................... 1,508,650
675,000 Rhode Island Housing & Mortgage Finance, 7.60%, 10/1/21................... 675,959
3,105,000 Richmond, California, Redevelopment Agency, 7.50%, 9/1/23................. 2,930,344
300,000 Richmond County, Georgia, Development Authority, Nursing
Home Rev., Refunding (Beverly Enterprises, Inc.-
Georgia Project) 8.75%, 6/1/11.......................................... 309,978
(1)7,000,000 Richmond, Virginia, Redevelopment & Housing Authority,
Multi-family Mtg. Rev. (Triton/Richmond) Series A, 10.50%, 12/1/05...... 6,020,000
3,000,000 Ridgeland, Mississippi, Urban Renewal (The Orchard, Ltd.
Project) Series A, 7.75%, 12/1/15....................................... 2,767,650
Santa Rosa, California, (Fountaingrove Parkway Extension)
500,000 7.40%, 9/2/13........................................................... 465,535
1,000,000 7.625%, 9/2/19.......................................................... 931,780
750,000 Snowmass Village, Colorado, Multi-family, Refunding, Series A,
8.00%, 9/1/14........................................................... 699,383
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
HOUSING-CONTINUED
$ 2,000,000 Spring Lake Park, Minnesota, Multi-family Rev., Refunding,
8.375%, 1/1/22.......................................................... $ 1,965,000
4,000,000 St. Charles, Illinois, Multi-family Rev. (Wessel Court Project)
7.60%, 4/1/24........................................................... 3,738,520
Telluride, Colorado, Housing Authority, Housing Rev.
2,000,000 Refunding (Shandoka Apartments Project) 7.875%, 6/1/17.................. 1,915,000
1,500,000 Series 1991, 9.10%, 6/1/01.............................................. 1,677,255
------------
TOTAL HOUSING........................................................... 61,087,815
------------
INDUSTRIAL DEVELOPMENT REVENUE 14.4%
500,000 Casa Grande, Arizona, Industrial Development Authority,
Refunding, 8.25%, 12/1/15............................................... 477,995
Chandler, Arizona, Industrial Development Authority Rev.
(Chandler Financial Center Project) Series 1986,
2,955,000 7.125%, 12/1/16......................................................... 3,008,071
(1)875,000 10.75%, 12/1/15......................................................... 798,691
200,000 Charlotte County, Florida, Industrial Development Authority,
Refunding (Beverly Enterprises) 10.00%, 6/1/11.......................... 216,364
1,000,000 Chartiers Valley, Pennsylvania, Inc., 1st Mtg. Rev.
(United Methodist Health Center) Series A, 9.50%, 12/1/15............... 1,154,160
1,500,000 Chesterfield, Missouri, Industrial Development Authority Rev.
(St. Andrews Episcopal-Presbyterian) Series A, 8.50%, 12/1/19........... 1,510,005
1,820,000 Collier County, Florida, Industrial Development Authority Rev.,
Retirement Rent Housing, Refunding (Beverly Enterprises,
Inc.) 10.75%, 3/1/03.................................................... 2,009,061
400,000 Connecticut State Development Authority, Industrial Development
(Stone Container Corp.) 11.625%, 6/1/11................................. 411,140
1,095,000 Covington-Alleghany County, Virginia, Industrial Development
Authority Rev., Refunding (Beverly Enterprises, Inc. Project)
9.375%, 9/1/01.......................................................... 1,156,123
(4)915,000 Decatur, Georgia, Downtown Development Authority,
(Decatur Hotel Association Project) 7.125%, 11/1/16..................... 621,834
2,925,000 Delaware State, Economic Development Authority, Refunding,
1st Mtg. (Dover Health Care) 7.875%, 4/1/08............................. 2,893,673
Denver, Colorado, City and County, Industrial Development Rev.,
(Jewish Community Centers Project)
1,055,000 7.375%, 3/1/09.......................................................... 1,003,178
1,130,000 7.50%, 3/1/14........................................................... 1,069,477
815,000 7.875%, 3/1/19.......................................................... 768,798
875,000 Fort Walton Beach, Florida, 1st Mtg. (Shoney's Inn & Restaurant)
10.50%, 12/1/16......................................................... 893,139
2,030,000 Harrison, Ohio, Refunding (Harrison Avenue K Mart Corp.
Project) Series A, 8.125%, 12/1/02...................................... 2,003,123
285,000 Hernando County, Florida, Refunding (Beverly Enterprises, Inc.)
10.00%, 9/1/11.......................................................... 308,664
2,500,000 Hialeah Gardens, Florida, (Waterford Convalescent) Series A,
8.25%, 12/1/14.......................................................... 2,367,175
1,500,000 Homestead, Florida, (Brookwood Gardens Center Project)
Series A, 8.25%, 12/1/14................................................ 1,420,305
860,000 Lee County, Virginia, Industrial Development Authority Hospital
Facility Rev. (Lee County Community Hospital) 10.50%, 8/1/11............ 917,990
4,000,000 Lehigh County, Pennsylvania, (Allentown Interstate Motel)
8.00%, 8/1/12........................................................... 3,849,720
</TABLE>
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<TABLE>
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<CAPTION>
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 1,300,000 Marion County, Florida, Industrial Development Authority Rev.
(Marion Ross Corp.) 11.875%, 8/1/11..................................... $ 1,315,015
1,000,000 Martin County, Florida, Industrial Development Rev. (Indiantown
Cogeneration Project), Series A, 7.875%, 12/15/25....................... 1,001,480
910,000 Montgomery County, Pennsylvania (Pennsburg Nursing &
Rehabilitation Center) 7.625%, 7/1/18................................... 784,711
Montgomery County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Meadowood Corp. Project)
1,550,000 Series A, 9.25%, 12/1/00................................................ 1,583,434
2,025,000 Series A, 10.00%, 12/1/19............................................... 2,154,762
2,199,150 Series B, Zero Coupon, 12/1/20.......................................... 162,649
2,660,000 7.75%, 9/1/14........................................................... 2,477,285
2,500,000 10.25%, 12/1/20......................................................... 2,688,825
3,595,000 Montgomery County, Pennsylvania, Industrial Development
Authority Rev., Health Care (Advanced Geriatric) Series A,
8.375%, 7/1/23.......................................................... 3,370,133
New Jersey Economic Development Authority
1,000,000 Electric Energy Facilities Rev. (Vineland Cogeneration L.P.
Project) 7.875%, 6/1/19............................................... 1,016,680
1,000,000 Series E (Borg Warner Corp.) 11.20%, 8/1/04............................. 1,080,560
North Hampton County, Pennsylvania, Industrial Development
Authority Rev., 1st Mtg. (Kirkland Village Project)
750,000 7.375%, 12/15/18........................................................ 658,223
750,000 7.50%, 12/15/23......................................................... 653,820
2,000,000 Ohio State, Refunding, 1st Mtg. (Swifton Commons)
8.125%, 12/1/15......................................................... 1,852,860
480,000 Orange County, Florida, Industrial Development Authority Rev.,
Refunding (Beverly Enterprises, Inc.) 9.25%, 8/1/10..................... 504,605
Philadelphia, Pennsylvania (FFE/Maplewood)
2,000,000 8.00%, 1/1/14........................................................... 1,839,300
1,000,000 8.00%, 1/1/24........................................................... 900,160
Philadelphia, Pennsylvania, Industrial Development Authority Rev.
1,500,000 Cathedral Village, 7.25%, 4/1/15........................................ 1,362,630
1,000,000 Lutheran Retirement Home, Series B, 5.00%, 1/1/17....................... 639,470
1,185,000 1st Mtg., RHA/Care Pavilion Project, 10.25%, 2/1/18..................... 1,203,782
1,000,000 Pittsylvania County, Virginia, Series A, 7.45%, 1/1/09.................. 934,760
510,000 Pocahontas, Iowa (International Harvester Co.) 10.25%, 10/1/00.......... 531,711
Port of Corpus Christi, Texas (Valero Refining & Marketing Co.)
500,000 Series B, 10.625%, 6/1/08............................................... 556,950
4,505,000 10.25%, 6/1/17.......................................................... 4,977,034
2,000,000 Port of New Orleans, Louisiana (Avondale Industries Inc., Project)
8.25%, 6/1/04........................................................... 2,003,900
Port of New Orleans, Louisiana (Continental Grain Co.)
3,000,000 Refunding, 7.50%, 7/1/13................................................ 2,716,680
1,000,000 Series A, 14.50%, 2/1/02................................................ 1,115,870
1,000,000 14.50%, 1/1/02.......................................................... 1,111,910
735,000 Santa Fe, New Mexico, Refunding (Casa Real Nursing Home)
9.75%, 1/1/13........................................................... 754,632
250,000 Santa Rosa County, Florida, Industrial Development Authority
Rev., 1st Mtg. (Sandy Ridge Care Center) 10.50%, 4/1/16................. 252,208
1,380,000 Scott County, Tennessee (Fruehauf Corp.) 10.75%, 1/1/09................... 1,429,997
2,540,000 Scottsdale, Arizona, Industrial Development Authority Rev.,
1st Mtg. (Westminister Village) 10.00%, 6/1/17.......................... 2,710,434
</TABLE>
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<TABLE>
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Principal Market
Amount Value
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<S> <C>
INDUSTRIAL DEVELOPMENT REVENUE-CONTINUED
$ 3,190,000 St. Charles, Illinois (Tri-City Center Project) 7.50%, 11/1/13............ $ 2,911,545
St. John's County, Florida, Industrial Development Authority,
Refunding (Vicars Landing Project) Series A
500,000 6.25%, 2/15/04.......................................................... 458,280
2,080,000 6.75%, 2/15/12 ......................................................... 1,842,464
St. Louis, Missouri, Industrial Development Authority Rev.,
1st Mtg. (Deaconess Manor Association)
500,000 7.50%, 6/1/16........................................................... 435,575
500,000 7.50%, 6/1/23........................................................... 430,190
470,000 Sunrise, Florida, Series 86 (Sunshine Palms Adult Congregate
Living Facility) 10.75%, 12/1/16........................................ 471,058
1,400,000 Tempe, Arizona, Industrial Development Authority Rev.
(Friendship Village Temple) Series A, 6.75%, 12/1/13.................... 1,244,194
750,000 Vincent, Alabama, Industrial Development Board (Shelby Motel
Group, Inc. Project) 10.50%, 9/1/16..................................... 744,375
(4)1,500,000 Walton County, Florida, Industrial Development Authority
(International Medical Institute) 10.50%, 1/1/17........................ 589,380
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.................................... 84,332,217
------------
LIFE CARE 5.7%
Atlantic Beach, Florida, Rev., Series A,
1,590,000 7.50%, 10/1/02.......................................................... 1,539,644
2,085,000 7.875%, 10/1/08......................................................... 1,991,946
Chartiers Valley, Pennsylvania, Industrial & Commercial
Development Authority (Ashbury Health Center Project)
500,000 6.70%, 12/1/05.......................................................... 474,685
500,000 6.75%, 12/1/06.......................................................... 471,410
1,000,000 7.25%, 12/1/11.......................................................... 954,090
2,000,000 7.40%, 12/1/15.......................................................... 1,882,720
1,150,000 Cumberland County, Pennsylvania, Municipal Authority Rev.,
1st Mtg. (Carlisle Hospital & Health) 6.80%, 11/15/14................... 1,011,425
500,000 Fayetteville, Arkansas, Public Facilities Board Rev. (Butterfield
Trail Village Project) Series B, 9.50%, 9/1/14.......................... 517,340
1,350,000 Hanover Park, Illinois, 1st Mtg. Rev. (Windsor Park Manor
Project) 9.50%, 12/1/14................................................. 1,433,268
Illinois Health Facilities Authority Rev.
1,000,000 Covenant Retirement Communities, Series A, 7.60%, 12/1/12............... 912,650
1,000,000 Fairview Obligated Group Project, Series A, 9.50%, 10/1/22.............. 1,003,550
Illinois Health Facilities Authority Rev. (Friendship Village)
1,000,000 6.65%, 12/1/06.......................................................... 936,490
1,645,000 6.75%, 12/1/08.......................................................... 1,529,751
Massachusetts State Industrial Finance Agency Rev., 1st Mtg.
1,000,000 Brookhaven Community, Series A, 7.00%, 1/1/15........................... 933,750
500,000 Brookhaven Community, 10.25%, 1/1/18.................................... 577,660
500,000 Orchard Cove, Inc., 8.00%, 5/1/99....................................... 499,085
2,000,000 Orchard Cove, Inc., 9.00%, 5/1/22....................................... 2,082,000
130,000 Pioneer Valley, 7.00%, 10/1/01.......................................... 131,399
500,000 Pioneer Valley, 7.00%, 10/1/20.......................................... 496,250
3,000,000 Reeds Landing Project, 8.625%, 10/1/23.................................. 2,882,700
500,000 Montgomery County, Pennsylvania, Higher Education & Health
Authority Rev., Retirement Community (GDL Farms) Series A,
9.50%, 1/1/20........................................................... 585,500
</TABLE>
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<TABLE>
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Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
LIFE CARE-CONTINUED
$ 3,000,000 Palm Beach County, Florida, Health Facilities Authority Rev.,
Refunding (Waterford Project) 7.75%, 10/1/15............................ $ 2,868,570
(1)1,083,000 Peoria, Arizona, Industrial Development Authority (Sierra Winds
Life Care Community Project) 10.75%, 11/1/17............................ 893,962
Plantation, Florida, Health Facilities Authority Rev. (Covenant
Retirement Communities, Inc.)
1,000,000 7.625%, 12/1/12......................................................... 945,010
750,000 7.75%, 12/1/22.......................................................... 717,908
2,500,000 Riverside County, California, Refunding (Air Force Village West,
Inc.) Series A, 8.125%, 6/15/20......................................... 2,445,025
Salem, Oregon, Hospital Facility Authority Rev.,
700,000 7.25%, 12/1/15.......................................................... 643,692
2,000,000 7.50%, 12/1/24.......................................................... 1,886,880
------------
TOTAL LIFE CARE......................................................... 33,248,360
------------
MISCELLANEOUS 4.2%
1,800,000 Brea & Olinda, California, University School District, Certificate
of Participation (High School Refunding Program) Series B,
7.00%, 8/1/18........................................................... 1,645,290
500,000 Brevard County, Florida, Tourist Development Tax Rev.,
6.875%, 3/1/13.......................................................... 434,975
3,500,000 District of Columbia Rev. (National Public Radio) Series A,
7.70%, 1/1/23........................................................... 3,401,895
1,250,000 Erlanger, Kentucky, Assessment Rev. (Public Improvement
Project) 7.50%, 8/1/18.................................................. 1,104,850
2,960,000 Fresno, California, Certificates of Participation, 8.50%, 5/1/16.......... 3,001,440
500,000 Hopewell, Virginia, Industrial Development Authority, Resource
Recovery Rev., Refunding (Stone Container Corp. Project)
8.25%, 6/1/16........................................................... 500,700
2,500,000 Hyland Hills Metropolitan Park & Recreation District, Colorado,
Special Rev., Series A, 8.625%, 12/15/12................................ 2,529,900
(3)4,000,000 Lake Charles, Louisiana, Harbor & Terminal Facilities Rev.
(Trunkline Liquified Natural Gas Co. Project) 7.75%, 8/15/22............ 4,051,480
Pennsylvania Convention Center Authorities Rev., Refunding, Series A
1,000,000 6.60%, 9/1/09........................................................... 912,050
1,555,000 6.70%, 9/1/14........................................................... 1,393,871
700,000 6.75%, 9/1/19........................................................... 624,022
1,000,000 South Orange County, California, Public Funding Authority Rev.,
Series B, 7.00%, 9/1/07.................................................. 955,300
Texas General Services, Community Partner Interests (Office
Building and Land Acquisition Project)
1,000,500 7.00%, 8/1/09............................................................ 945,282
1,090,500 7.00%, 8/1/19............................................................ 1,014,492
1,400,500 7.00%, 8/1/24............................................................ 1,297,199
790,000 Virgin Islands Port Authority, Marine Division Rev. (Marine
Terminal) Series A, 10.125%, 11/1/05..................................... 816,465
------------
TOTAL MISCELLANEOUS...................................................... 24,629,211
------------
</TABLE>
F-10
<PAGE> 103
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
MUNICIPAL UTILITY DISTRICT 0.4%
$ 750,000 Clarksburg, West Virginia, Water Rev., 10.875%, 2/1/20,
Pre-refunded, 2/1/95.................................................... $ 772,582
275,000 Fort Bend County, Texas, Refunding, #25, 8.00%, 10/1/15................... 280,063
955,000 Hawaii County, Hawaii, Improvement District No. 17, Special
Assessment--Kaloko Subdivision, 9.50%, 8/1/11........................... 967,663
200,000 Northwest Harris County, Texas, Municipal Utility #22, Refunding,
Combined Tax and Rev., Water Works and Sewer System,
8.00%, 10/1/15.......................................................... 203,932
------------
TOTAL MUNICIPAL UTILITY DISTRICT........................................ 2,224,240
------------
NURSING HOMES 8.1%
720,000 Albuquerque, New Mexico, Nursing Home Rev., Refunding
(Albuquerque Health Care) 9.75%, 12/1/14................................ 765,050
500,000 Carmel, Indiana, Retirement Rental Housing Rev., Refunding
(Beverly Enterprises, Inc.) 8.75%, 12/1/08.............................. 523,750
Charleston County, South Carolina, Health Facilities Rev.,
Refunding, 1st Mtg.
750,000 Episcopal Project, 9.75%, 4/1/16........................................ 805,800
1,500,000 Roper Geriatric Center, Inc. Project, 7.75%, 5/1/17..................... 1,476,375
Colorado Health Facilities Authority Rev. (Beth Israel at Shalom,
Park Project)
585,000 7.40%, 12/15/07......................................................... 575,868
250,000 8.00%, 12/15/22......................................................... 254,215
1,025,000 Columbia County, Pennsylvania, Industrial Development Authority,
Refunding (1st Street Association Project) 9.00%, 5/1/14................ 1,071,812
Cuyahoga County, Ohio, Health Care Facilities Rev. (Jennings Hall)
1,000,000 7.20%, 11/15/14......................................................... 889,130
1,500,000 7.30%, 11/15/23......................................................... 1,328,940
2,500,000 DeSoto, Texas, Health Facilities Development Corp. Rev. (Park
Manor Senior Care, Inc. Project) 11.00%, 12/1/16........................ 2,588,150
500,000 Fairfield, Ohio, Economic Development Rev., Refunding (Beverly
Enterprises, Inc.) 8.50%, 1/1/03........................................ 508,680
1,000,000 Gardendale, Alabama, Hospital & Nursing Home Medical Clinic
Board Rev., Series A, 9.50%, 4/1/20..................................... 1,034,090
Indiana Health Facilities Authority (St. Anthony Home)
1,500,000 7.00%, 5/15/17.......................................................... 1,337,520
1,000,000 7.25%, 5/15/24.......................................................... 920,750
250,000 Lee County, Florida, Industrial Development Authority, Economic
Development Rev., Refunding (Encore Nursing Center Partner)
8.125%, 12/1/07......................................................... 240,715
Lehigh County, Pennsylvania, 1st Mtg, (Bible Fellowship Project)
250,000 7.15%, 12/15/08......................................................... 230,478
1,700,000 8.00%, 12/15/23......................................................... 1,584,757
710,000 Louisiana Public Facilities Authority Rev., Refunding
Industrial Development (Beverly Enterprises, Inc.)
8.25%, 9/1/08........................................................... 703,539
2,000,000 Luzerne County, Pennsylvania, Industrial Development Authority,
1st Mtg. Rev., Refunding (Birchwood Nursing Center Project)
Series A, 7.875%, 12/1/13............................................... 1,896,600
1,200,000 Maplewood, Minnesota, Health Care Facilities Rev.,
(VOA Care Centers Project) 7.45%, 10/1/16............................... 1,114,752
</TABLE>
F-11
<PAGE> 104
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C>
NURSING HOMES-CONTINUED
$ 500,000 Massachusetts Industrial Finance Agency, Industrial Development
Authority, Refunding (Beverly Enterprises, Inc.)
8.375%, 5/1/09........................................................ $ 502,350
1,500,000 Massachusetts State Industrial Finance Agency Rev., 1st Mtg.,
7.70%, 1/1/14 ........................................................ 1,449,075
Massachusetts State Industrial Finance, Refunding, 1st Mtg.,
Series A
2,000,000 Evanswood Bethzatha, 7.625%, 1/15/14.................................. 1,870,440
1,000,000 Healthcare Corp Project, 7.625%, 4/1/13............................... 945,300
1,005,000 7.40%, 1/15/09........................................................ 942,298
Minneapolis, Minnesota, Health Care Facilities Authority Rev.
1,950,000 Ebenezer Society Project, Series A, 7.20%, 7/1/23 .................... 1,716,644
1,000,000 St. Olaf Residence, Inc. Project, 7.10%, 10/1/23...................... 886,230
2,410,000 Nevada State Department Community Health Facilities, Rev.,
Refunding (Washoe Convalescent Center Project)
8.125%, 6/1/03........................................................ 2,386,792
New Jersey Economic Development Authority Rev., Refunding
500,000 Burnt Tavern Convalescent, Series A, 9.00%, 11/15/13.................. 516,370
840,000 Stone Arch Nursing Home Project, 8.75%, 12/1/10....................... 855,649
1,500,000 United Methodist Homes of New Jersey, 6.50%, 7/1/23................... 1,196,880
500,000 Zirbser-Greenbriar, Inc., Series A, 7.375%, 7/15/03................... 472,565
915,000 Zirbser-Greenbriar, Inc., Series A, 7.75%, 7/15/08.................... 855,214
750,000 1st Mtg., Delaire Nursing, Series A, 8.75%, 11/1/10................... 755,888
New Jersey, Economic Development Rev., Series A
500,000 8.00%, 1/1/09......................................................... 470,290
1,000,000 8.25%, 1/1/17......................................................... 929,360
500,000 Oakland County, Michigan, Economic Development (Pontiac
Osteopathic Hospital Project) 9.625%, 1/1/20 ......................... 588,100
500,000 San Antonio, Texas, Health Facilities Development Corp. Rev.
(Encore Nursing Center Partner) 8.25%, 12/1/19........................ 492,210
Sherman, Illinois (Villa Health Care) 1st Mtg., Series A
500,000 8.25%, 10/1/14........................................................ 474,760
500,000 8.50%, 10/1/24........................................................ 471,675
Smith County, Tennessee, Health and Educational Facilities,
(Healthcare Corporation Project) Refunding
250,000 7.00%, 4/1/08......................................................... 232,393
500,000 7.40%, 4/1/13......................................................... 459,660
South Carolina Jobs Economic Dev. Authority, Health Facilities
Rev., 1st Mtg. (Lutheran Homes South Carolina Project)
250,000 7.75%, 10/1/12........................................................ 240,523
750,000 8.00%, 10/1/22........................................................ 719,175
1,000,000 St. Paul, Minnesota, Housing & Redevelopment Authority,
Commercial Development Rev., Refunding (Beverly
Enterprises, Inc.) 7.75%, 11/1/02..................................... 978,750
470,000 Truth or Consequences, New Mexico, Nursing Home Rev.,
Refunding & Improvement (Sierra Health Care)
9.75%, 12/1/14........................................................ 502,515
4,030,000 Valparaiso, Indiana, Economic Development Rev., Refunding,
1st Mtg. (Whispering Pines) 9.50%, 1/1/07............................. 4,240,688
250,000 Warren County, Pennsylvania, Industrial Development Authority
Rev., Refunding (Beverly Enterprises, Inc.) 9.00%, 11/1/12............ 258,913
</TABLE>
F-12
<PAGE> 105
High Yield Municipal Portfolio Investment Portfolio, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NURSING HOMES-CONTINUED
Westmoreland County, Virginia, Industrial Development Authority,
Health Facilities Rev., 1st Mtg. (Mary Washington Health Center)
$ 250,000 7.00%, 2/1/13.................................................... $ 221,228
1,500,000 7.00%, 2/1/23 ................................................... 1,281,450
------------
TOTAL NURSING HOMES.............................................. 47,764,356
------------
POLLUTION CONTROL REVENUE 10.3%
Baltimore County, Maryland (Bethlehem Steel Corp.
Project), Series A
500,000 7.50%, 6/1/15.................................................... 474,525
560,000 7.55%, 6/1/17.................................................... 532,212
Beaver County, Pennsylvania, Industrial Development Authority
2,500,000 Cleveland Electric Illuminating Co., 10.50%, 9/1/15.............. 2,629,525
2,000,000 Cleveland Electric Illuminating Co., 11.125%, 11/15/14........... 2,110,540
(3)4,075,000 Ohio Edison, 10.50%, 10/1/15..................................... 4,339,100
650,000 Toledo Edison, Series A, 10.75%, 11/15/15........................ 688,766
(3)6,235,000 Toledo Edison, 13.25%, 11/15/14 ................................. 6,588,960
565,000 Brazos River Authority, Texas (Texas Utilities Electric Co.
Project A) 9.875%, 10/1/17....................................... 626,652
Clairborne County, Mississippi (Middle South Energy)
1,355,000 Series D, 12.50%, 6/15/15........................................ 1,442,424
1,500,000 9.50%, 4/1/16.................................................... 1,597,770
(3)5,575,000 9.875%, 12/1/14.................................................. 6,283,526
1,300,000 Hodge, Louisiana, Utility Rev. (Stone Container) Series 1990,
9.00%, 3/1/10.................................................... 1,320,345
Illinois Development Finance Authority (Illinois Power Co. Project)
1,500,000 Refunding, Series A, 8.30%, 4/1/17 .............................. 1,598,265
1,245,000 10.75%, 3/1/15................................................... 1,283,956
3,000,000 Monroe County, Georgia Development Authority (Georgia
Power Co. Project) 10.50%, 9/1/15................................ 3,172,890
New Hampshire State Industrial Development Authority Rev.
3,420,000 Public Service Co. of New Hampshire Project, Series A,
7.65%, 5/1/21 ................................................... 3,288,877
4,000,000 United Illuminating Co., Series B, 10.75%, 10/1/12............... 4,566,960
2,500,000 New York State Energy Research & Development Authority
(Long Island Lighting) Series B, 7.15%, 2/1/22................... 2,296,375
Ohio State Air Quality Development Authority Rev.
3,000,000 Cincinnati Gas & Electric, 10.125%, 12/1/15...................... 3,205,830
4,930,000 Toledo Edison, Series B, 9.875%, 11/1/22......................... 5,344,465
2,000,000 Ohio State Water Development Authority Pollution Control
Facilities Rev., Series A, 8.00%, 10/1/23........................ 1,872,400
Parish of West Feliciana, Louisiana (Gulf States Utilities Project)
500,000 Series A, 7.50%, 5/1/15.......................................... 488,735
440,000 Series A, 10.625%, 5/1/14........................................ 454,947
500,000 Series D, 12.00%, 5/1/14......................................... 517,995
600,000 12.00%, 5/1/14................................................... 621,594
1,515,000 Pope County, Arkansas (Arkansas Power & Light Project)
11.00%, 12/1/15.................................................. 1,620,823
1,500,000 Sabine River Authority, Texas, Refunding (Texas Utilities Co.
Project) 7.75%, 4/1/16........................................... 1,552,530
------------
TOTAL POLLUTION CONTROL REVENUE.................................. 60,520,987
------------
</TABLE>
F-13
<PAGE> 106
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
PUBLIC IMPROVEMENT 1.9%
$ 1,300,000 Emeryville, California, Improvement Bonds, 7.30%, 9/2/21.................. $ 1,212,094
Fresno, California, JT Powers Financing Authority, Local
Agency Rev.
2,000,000 Series A, 6.55%, 9/2/12................................................. 1,814,900
2,600,000 Series B, 6.75%, 9/2/01................................................. 2,513,680
1,000,000 Series B, 7.35%, 9/2/12................................................. 931,610
Las Vegas, Nevada, Local Improvement Bonds
990,000 Special Improvement District No. 404, 7.30%, 11/1/09.................... 909,236
1,000,000 Special Improvement District No. 505 (Elkhorn Springs) 8.00%, 9/15/13... 925,180
Rancho Cucamonga, California, Community Facilities District
100,000 8.00%, 9/1/20........................................................... 97,640
1,500,000 8.25%, 9/1/19........................................................... 1,458,165
Riverside County, California, Improvement Bonds
500,000 7.40%, 9/2/09........................................................... 477,515
1,000,000 7.625%, 9/2/14.......................................................... 949,140
------------
TOTAL PUBLIC IMPROVEMENT................................................ 11,289,160
------------
RETIREMENT CENTERS 0.4%
1,055,000 Albuquerque, New Mexico, Retirement Facilities Rev., Refunding
(La Vida Liena Project) Series A, 8.85%, 2/1/23......................... 1,056,171
1,130,000 Jefferson County, Missouri, Industrial Development Authority,
1st Mtg., Rev. (Cedar Hills Retirement Village Project)
12.00%, 12/1/15......................................................... 1,184,104
------------
TOTAL RETIREMENT CENTERS................................................ 2,240,275
------------
SALES TAX REVENUE 4.5%
Bedford Park, Illinois, Tax Increment Rev.
1,000,000 Bedford City Project, 9.25%, 2/1/12..................................... 1,061,260
1,500,000 Mark IV Project, 9.75%, 3/1/12.......................................... 1,639,035
3,000,000 Broadview, Illinois, Tax Increment Rev., 8.25%, 7/1/13.................... 2,988,360
3,000,000 Crestwood, Cook County, Illinois, Tax Increment Rev., 7.25%, 12/1/08...... 2,767,560
2,000,000 Denver, Colorado, Urban Renewal Authority, Tax Increment Rev.,
8.50%, 5/1/16........................................................... 2,002,500
1,315,000 Edgewater, Colorado, Redevelopment Rev., 6.75%, 12/1/08................... 1,212,246
2,000,000 Hodgkins, Illinois, Tax Increment Rev., 9.50%, 12/1/09.................... 2,150,020
1,500,000 Huntington Park, California, Series C, 7.60%, 9/1/18...................... 1,424,190
1,000,000 Moreno Valley, California, Special Tax Rev., Towngate Community
Facilities District 87-1, 7.125%, 10/1/23............................... 882,100
4,250,000 New York City, New York, Industrial Development Agency,
8.50%, 12/30/22......................................................... 4,282,938
1,500,000 Richmond, California, JT Powers Financing Authority,
Improvement District No. 851 & No. 853, Series A, 7.40%, 9/2/19......... 1,414,095
Round Lake Beach, Illinois, Tax Increment Rev., Series 1993
1,900,000 7.20%, 12/1/04.......................................................... 1,797,932
500,000 7.50%, 12/1/13.......................................................... 420,035
2,000,000 St. Louis, Missouri, Tax Increment Rev. (Scullin Redevelopment
Area) Series A, 10.00%, 8/1/10.......................................... 2,182,128
------------
TOTAL SALES TAX REVENUE................................................. 26,224,399
------------
</TABLE>
F-14
<PAGE> 107
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION 3.1%
$ 1,000,000 Chicago, Illinois, O'Hare International Airport,
Special Facilities Rev. (American Airlines,
Inc. Project) 8.25%, 12/1/24.................. $ 1,003,780
Chicago, Illinois, Skyway Tollbridge Rev.,
Refunding
2,000,000 6.50%, 1/1/10.................................. 1,846,380
2,000,000 6.75%, 1/1/17.................................. 1,823,160
(3)3,000,000 Cleveland, Ohio, Parking Facilities Rev., 8.00%,
9/15/12........................................ 3,019,620
Dallas-Fort Worth, Texas, International Airport
Facilities Improvement Corp. Rev.
500,000 American Airlines, Inc., 7.50%, 11/1/25........ 453,105
1,500,000 American Airlines, Inc., 7.25%, 11/1/30........ 1,327,995
1,000,000 Delta Airlines, Inc., 7.625%, 11/1/21.......... 917,170
1,195,000 Kenton County, Kentucky, Airport Board, Special
Facilities, Rev. (Delta Airlines, Inc.
Project) 8.10%, 12/1/15........................ 1,166,786
2,000,000 New Jersey, Economic Development Authority Rev.
(Holt Hauling) Series D, 10.25%, 9/15/14....... 2,136,840
1,000,000 New York City, New York, Industrial Development
Agency, 6.90%, 8/1/24.......................... 923,310
Philadelphia, Pennsylvania, Parking Authority,
Parking Rev.
500,000 8.75%, 3/1/05.................................. 502,405
1,785,000 8.875%, 3/1/10................................. 1,794,104
1,000,000 Port Authority of New York & New Jersey,
Consolidated Board, 53rd Series, 8.70%,
7/15/20........................................ 1,051,540
------------
TOTAL TRANSPORTATION........................... 17,966,195
------------
UTILITIES 2.0%
3,000,000 Luzerne County, Pennsylvania, Industrial
Development Authority, Exempt Facilities Rev.,
Refunding (Pennsylvania Gas & Water Co.
Project) Series A, 7.20%, 10/1/17............... 2,861,070
Massachusetts Municipal Wholesale Electric Co.,
Power Supply Systems Rev.
1,515,000 Seabrook Plant, Series B, 13.625%, 7/1/17,
Pre-refunded 1/1/95............................. 1,571,661
5,000 13.625%, 7/1/17, Pre-refunded, 7/1/94........... 5,038
5,000 13.625%, 7/1/17, Pre-refunded, 1/1/95........... 5,257
4,110,000 New Hampshire State Business Finance Authority,
Electric Facilities Rev. (Plymouth Cogeneration
Light Power) 7.75%, 6/1/14...................... 3,931,462
Norco, California, Sewer and Water Rev., Refunding
1,530,000 7.20%, 10/1/19.................................. 1,415,541
935,000 6.70%, 10/1/13.................................. 869,831
1,000,000 Swanton Village, Vermont, Electric Systems
Rev., 6.70%, 12/1/23............................ 842,160
-----------
TOTAL UTILITIES................................. 11,502,020
-----------
WASTE DISPOSAL 1.1%
1,750,000 Greater Detroit, Michigan, Resource Recovery
Agency Rev. Series C, 9.25%, 12/13/08........... 1,836,590
1,500,000 Parish of St. James, Louisiana, Solid Waste
Disposal Rev. (Kaiser Aluminum Project)
7.75%, 8/1/22................................... 1,454,970
1,500,000 Rockdale County, Georgia, Development Authority
Rev., Solid Waste Disposal (Visy Paper, Inc.
Project) 7.50%, 1/1/26.......................... 1,393,365
</TABLE>
F-15
<PAGE> 108
HIGH YIELD MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<Caption)
- --------------------------------------------------------------------------------
Principal Market
Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C>
WASTE DISPOSAL-CONTINUED
$ 1,825,000 Sweetwater County, Wyoming, Solid Waste
Disposal Rev. (FMC Corporate Project)
Series A, 7.00%, 6/1/24....................... $ 1,684,858
------------
TOTAL WASTE DISPOSAL.......................... 6,369,783
------------
TOTAL MUNICIPAL BONDS (Cost $585,729,914)..... 566,490,190
------------
Private Placement 0.4%
2,425,000 New Hampshire, Higher Educational & Health Care,
7.25%, 9/1/23, purchased 9/23/93
(Cost $2,381,908)............................. 2,183,713
------------
Repurchase Agreement 0.9%
5,100,000 Salomon Brothers, Inc., dated 11/30/94, 5.70%
due 12/1/94 (collateralized by U.S. Government
obligations in a pooled cash account)
repurchase proceeds $5,100,808
(Cost $5,100,000)............................. 5,100,000
------------
TOTAL INVESTMENTS (Cost $593,211,822) 98.0%..... 573,773,903
Other assets and liabilities, net 2.0%......... 11,944,408
------------
NET ASSETS 100%................................. $585,718,311
</TABLE> ============
(1) SECURITY IS NOT ACCRUING AT THE STATED RATE, BUT A LESSER INTEREST RATE.
(2) WHEN ISSUED SECURITY (NOTE 1H)
(3) SECURITIES WITH A MARKET VALUE OF APPROXIMATELY $39.8 MILLION WERE PLACED
AS COLLATERAL FOR FUTURES CONTRACTS (NOTE 1C).
(4) NON-INCOME PRODUCING SECURITY
REV.--REVENUE BOND.
See Notes to Financial Statements.
F-16
<PAGE> 109
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $593,211,822)................. $573,773,903
Interest receivable.............................................. 14,996,820
Receivable for investments sold.................................. 9,979,675
Receivable for Fund shares sold.................................. 2,828,465
Other assets..................................................... 2,678
------------
601,581,541
------------
LIABILITIES
Payable for investments purchased................................ 10,967,185
Dividends payable................................................ 1,959,605
Payable for Fund shares redeemed................................. 1,680,399
Accrued expenses and other payables.............................. 351,585
Due to Distributor............................................... 344,067
Due to Adviser................................................... 270,239
Due to broker-variation margin................................... 239,150
Due to shareholder service agent................................. 51,000
------------
15,863,230
------------
NET ASSETS, equivalent to $10.44 per share for Class A shares,
$10.43 per share for Class B shares and $10.42 per share for
Class C shares................................................. $585,718,311
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 39,398,176 Class A and
15,273,330 Class B and 1,465,808 Class C shares outstanding.... $ 561,373
Capital surplus.................................................. 632,480,720
Accumulated net realized loss on securities...................... (27,601,474)
Net unrealized depreciation of securities
Investments.................................................... (19,437,919)
Futures contracts.............................................. (506,300)
Undistributed net investment income.............................. 221,911
------------
NET ASSETS at November 30, 1994.................................. $585,718,311
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-17
<PAGE> 110
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest.................................................................. $ 44,680,531
------------
EXPENSES
Management fees........................................................... 3,172,407
Service fees-Class A...................................................... 1,029,318
Distribution and service fees-Class B..................................... 1,335,592
Distribution and service fees-Class C..................................... 65,351
Shareholder service agent's fees and expenses............................. 676,716
Accounting services....................................................... 163,929
Registration and filing fees.............................................. 93,269
Reports to shareholders................................................... 91,596
Audit fees................................................................ 30,582
Legal fees................................................................ 24,750
Trustees' fees and expenses............................................... 18,546
Custodian fees............................................................ 16,424
Miscellaneous............................................................. 30,424
------------
Total expenses........................................................... 6,748,904
------------
Net investment income.................................................... 37,931,627
------------
REALIZED AND UNREALIZED GAIN (LOSS) ON SECURITIES
Net realized gain (loss) on securities
Investments.............................................................. (11,274,136)
Futures contracts........................................................ 4,523,306
Net unrealized depreciation of securities during the year
Investments.............................................................. (30,992,247)
Futures transactions..................................................... (279,550)
------------
Net realized and unrealized loss on securities.......................... (38,022,627)
------------
Decrease in net assets resulting from operations........................ $ (91,000)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-18
<PAGE> 111
HIGH YIELD MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1994 1993
------------ ------------
<S> <C> <C>
NET ASSETS, beginning of year........................... $512,768,709 $330,485,088
------------ ------------
OPERATIONS
Net investment income................................. 37,931,627 28,908,357
Net realized gain (loss) on securities................ (6,750,830) 104,748
Net unrealized appreciation (depreciation) of
securities during the year....... ................. (31,271,797) 5,397,218
------------ ------------
Increase (decrease) in net assets resulting
from operations .................................... (91,000) 34,410,323
------------ ------------
DIVIDENDS TO SHAREHOLDERS FROM NET INVESTMENT INCOME
Class A............................................... (29,486,022) (25,476,080)
Class B............................................... (8,334,914) (3,395,580)
Class C............................................... (399,671) --
------------ ------------
(38,220,607) (28,871,660)
------------ ------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A............................................. 98,704,070 136,200,777
Class B............................................. 70,654,239 86,185,026
Class C............................................. 15,954,972 --
------------ ------------
185,313,281 222,385,803
------------ ------------
Proceeds from shares issued for dividends reinvested
Class A............................................. 11,857,412 10,482,082
Class B............................................. 3,702,608 1,527,476
Class C............................................. 230,780 --
------------ ------------
15,790,800 12,009,558
------------ ------------
Cost of shares redeemed
Class A............................................. (78,622,401) (54,058,845)
Class B............................................. (10,751,774) (3,591,558)
Class C............................................. (468,697) --
------------ ------------
(89,842,872) (57,650,403)
------------ ------------
Increase in net assets resulting from
share transactions.................................. 111,261,209 176,744,958
------------ ------------
INCREASE IN NET ASSETS.................................. 72,949,602 182,283,621
------------ ------------
NET ASSETS, end of year................................. $585,718,311 $512,768,709
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-19
<PAGE> 112
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Bonds 96.6%
EDUCATION 4.7%
$ 500,000 Cook County, Illinois, Community College, District #508,
Certificates of Participation, FGIC, 8.75%, 1/1/07.................... $ 587,605
1,000,000 Corona-Norco, California, University School District Lease Rev., FSA,
6.00%, 4/15/19........................................................ 868,080
425,000 Earlimart, California, Elementary School District, Series 1, AMBAC,
6.70%, 8/1/21......................................................... 397,056
500,000 Indiana State University Rev., Building 3 (Student Fee) Series E,
MBIA, 7.375%, 10/1/10................................................. 540,505
1,000,000 Pennsylvania State Higher Education, Assistance Agency, Student
Loan Rev., Series D, AMBAC, 6.05%, 1/1/19............................. 875,440
1,000,000 University of Washington, Housing & Dining Rev., MBIA, 7.00%, 12/1/21.... 1,006,620
750,000 Wisconsin State Health & Educational Facilities Rev.,
FGIC 6.25%, 12/1/10................................................... 695,685
------------
TOTAL EDUCATION....................................................... 4,970,991
------------
GENERAL OBLIGATIONS 6.9%
1,000,000 Berwyn Illinois Corp., MBIA, 7.00%, 11/15/10............................. 1,002,370
1,075,000 Cicero, Illinois, Refunding, Tax Increment, Series A, MBIA,
5.70%, 12/1/13........................................................ 921,318
245,000 Henderson, Texas, Limited Tax, AMBAC, 9.125%, 5/15/04.................... 295,499
1,000,000 Mountain Village Metropolitan District, San Miguel County,
Colorado, Refunding, Series-92, 8.10%, 12/1/11........................ 1,026,280
800,000 Regional Transportation Authority, Illinois, Series A, AMBAC,
6.125%, 6/1/22........................................................ 696,296
1,000,000 St. Clair County, Illinois, FGIC, 5.75%, 10/1/15......................... 843,680
965,000 Texas State Veterans Housing Assistance, MBIA, 6.80%, 12/1/23............ 925,049
500,000 Travis County, Texas, Series A, MBIA, 5.50%, 3/1/03...................... 480,095
1,000,000 Webb County, Texas, Limited Tax, CGIC, Series-89,
7.25%, 2/15/09........................................................ 1,053,340
------------
TOTAL GENERAL OBLIGATIONS............................................. 7,243,927
------------
HOSPITALS 28.5%
500,000 Ames, Iowa, Hospital Rev. (Mary Greeley Medical Center Project)
AMBAC, 5.75%, 8/15/22................................................. 412,400
1,000,000 Charleston County, South Carolina, Hospital Facilities Rev.
(Bon Secours Health System Project) FSA, 5.625%, 8/15/25.............. 801,320
190,000 Clermont County, Ohio, Hospital Facilities Rev. (Mercy Health Care
System) Series A, AMBAC, 9.75%, 9/1/13................................ 200,805
750,000 Decatur, Illinois, Health Care Facilities Rev. (DMH Community
Services Corp. Project) BIG, 8.10%, 11/15/18.......................... 793,597
750,000 District of Columbia Hospital Rev. (National Rehabilitation Hospital
MedLantic) Series A, MBIA, 7.10%, 11/1/11............................. 756,037
500,000 Florence County, South Carolina, Hospital Rev. (McLeod Regional
Medical Center Project) Series B, FGIC, 8.75%, 11/1/09,
Pre-refunded, 11/1/95................................................. 528,030
1,650,000 Fort Wayne, Indiana, Hospital Authority Rev. (Ancilla Health
Systems, Inc.) Series C, BIG, 8.125%, 7/1/18, Pre-refunded, 1/1/99 ... 1,826,550
1,250,000 Harris County, Texas Health Facilities, (Development Corp. Thermal
Utility Rev.), Series A, AMBAC, 7.25%, 2/15/15........................ 1,275,050
1,500,000 Harris County, Texas, Hospital District Mtg. Rev., BIG,
8.50%, 4/1/15, Pre-refunded, 4/1/96.................................... 1,594,950
</TABLE>
F-20
<PAGE> 113
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOSPITALS-continued
Illinois Health Facilities Authority Rev.
$ 1,685,000 Brokaw Mennonite Association, FGIC, 8.00%, 8/15/17.................. $ 1,843,441
775,000 Franciscan Sisters Health Project, MBIA, 7.875%, 9/1/18............. 836,644
1,695,000 Sisters of St. Mary's Health Care, Series B, MBIA, 8.00%, 6/1/14.... 1,850,703
Indiana Health Facility Financing Authority (Lutheran Hospital
Indiana, Inc.)
1,000,000 MBIA, 6.85%, 7/1/22................................................. 964,000
1,000,000 AMBAC, 7.00%, 2/15/19............................................... 995,230
500,000 Kent Hospital Finance Authority, Michigan Hospital Facility Rev.
(Pine Rest Christian Hospital Association) FGIC, 9.00%, 11/1/10..... 529,140
1,000,000 Laramie County, Wyoming, Hospital Rev. (Memorial Hospital
Project) AMBAC, 6.70%, 5/1/12....................................... 970,970
1,000,000 Louisiana Public Facilities Authority, Health & Educational Capital
Facilities Rev. (Our Lady of the Lake Medical Center) Series A,
BIG, 8.20%, 12/1/15................................................. 1,075,660
Louisiana Public Facilities Authority, Hospital Rev.
500,000 Southern Baptist Hospital Project, FSA, 6.80%, 5/15/12.............. 493,940
500,000 Touro Infirmary Project, Series A, BIG, 8.00%, 6/1/02............... 545,930
500,000 Maine Health & Higher Educational Facilities Authority Rev.,
Series-91, FSA, 6.375%, 7/1/21...................................... 455,490
250,000 Marion County, Florida, Hospital District Rev., Refunding, Ocala,
Florida (Munroe Regional Medical Center) FGIC,
6.25%, 10/1/12...................................................... 230,798
Massachusetts State Health & Educational Facilities Authority Rev.
1,000,000 Children's Hospital Corp., Series B, 11.00%, 1/1/05................. 1,024,270
1,000,000 University Hospital, Series C, MBIA, 7.25%, 7/1/19.................. 1,017,370
500,000 Mississippi, Hospital Equipment & Facilities (Wesley Health
System, Inc.) CONN, Series A, 6.05%, 4/1/12......................... 436,805
475,000 Missouri State Health & Educational Facilities Authority Rev.,
Heartland Health Systems Project, AMBAC, 6.35%, 11/15/17............ 437,428
500,000 North Central Texas, Health Facility Development Corp. Rev.
(Presbyterian Healthcare Project) Series B, BIG,
8.875%, 12/1/15, Pre-refunded, 12/1/97.............................. 556,025
1,000,000 Parish of Jefferson, Louisiana, Hospital Services (West Jefferson
General Hospital Project) FGIC, 9.875%, 1/1/10...................... 1,024,280
1,000,000 Sayre, Pennsylvania, Health Care Facility Authority Rev., Series H-2,
AMBAC, 7.625%, 12/1/15.............................................. 1,068,360
1,000,000 St. Joseph County, Indiana, Hospital Authority, Hospital Facilities
Rev. (Memorial Hospital South Bend Project) MBIA,
6.25%, 8/15/12...................................................... 924,320
280,000 Waco, Texas, Health Facilities Development Corp., Hospital Rev.
(Hillcrest Baptist Medical Center) MBIA, 9.20%, 9/1/14,
Pre-refunded, 9/1/95................................................ 294,798
Washington State Health Care Facilities Authority Rev.,
Refunding, MBIA
1,395,000 Empire Health Services Spokane, 8.375%, 11/1/06..................... 1,529,311
1,000,000 Virginia-Mason Medical Center, 8.00%, 7/1/15........................ 1,060,380
500,000 West Virginia State Hospital Finance Authority, Hospital Rev.
(Monongalia General Hospital) BIG, 8.60%, 7/1/17,
Pre-refunded, 7/1/97................................................ 538,100
1,000,000 Wisconsin State Health & Educational Rev. (Milwaukee Regional
Medical Center, Inc. Project) AMBAC, 7.50%, 8/1/11.................. 1,012,400
------------
TOTAL HOSPITALS..................................................... 29,904,532
------------
</TABLE>
F-21
<PAGE> 114
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
HOUSING 4.3%
$ 265,000 Bexar County, Texas, Housing Finance Corp., Rev., Series B,
9.25%, 4/1/16..................................................... $ 271,503
1,280,000 Houston, Texas, Housing Finance Corp., Single Family Mtg. Rev.,
Series A, FSA, 5.95%, 12/1/10..................................... 1,170,214
960,000 Louisiana Public Facilities Authority, Multi-family Housing Rev.
(One Lakeshore Place Apartments) 9.25%, 7/20/20................... 993,658
1,195,000 Minnesota State Housing Finance Agency, Single Family Mtg. Rev.,
6.75%, 1/1/26..................................................... 1,121,209
1,000,000 South Dakota State Housing Development Authority, 6.85%, 5/1/26...... 971,250
------------
TOTAL HOUSING..................................................... 4,527,834
------------
INDUSTRIAL DEVELOPMENT REVENUE 4.0%
2,000,000 Clark County, Nevada (Nevada Power Co. Project), AMBAC,
7.20%, 10/1/22.................................................... 2,019,340
850,000 Manatee County, Florida (Manatee Hospital & Health System) MBIA,
8.25%, 8/15/14.................................................... 907,996
720,000 Pima County, Arizona, Refunding, FSA, 7.25%, 7/15/10................. 723,542
500,000 Parish of St. Charles, Louisiana, Solid Waste Disposal Rev.,
7.05, 4/1/22...................................................... 498,730
------------
TOTAL INDUSTRIAL DEVELOPMENT REVENUE.............................. 4,149,608
------------
MISCELLANEOUS 6.9%
600,000 Arizona State Municipal Financing Program, Certificates of
Participation, Series 17, BIG, 8.125%, 8/1/17..................... 635,088
1,000,000 Charleston County, South Carolina, Certificates of Participation,
Charleston Public Facilities Corp., MBIA, 7.10%, 6/1/11........... 1,072,130
875,000 Chicago, Illinois, Public Building Commission, Building Rev.
(Community College, District #508) Series B, BIG,
8.75%, 1/1/07..................................................... 937,807
1,000,000 Dade County, Florida, Special Obligation (Miami Beach Convention
Center Project) Series B, FGIC, 8.80%, 12/1/02.................... 1,097,280
310,000 Louisiana Public Facilities Authority Rev. (Medical Center Louisiana
at New Orleans Project) CONN, 6.25%, 10/15/10..................... 290,148
1,000,000 Pennsylvania Convention Center Authority Rev., Series A, FGIC,
6.00%, 9/1/19..................................................... 906,920
1,500,000 Philadelphia, Pennsylvania, Municipal Authority Rev., Refunding
Lease, Series A, FGIC, 5.625%, 11/15/14........................... 1,289,190
1,000,000 South Dakota, Lease Rev., Series A, CGIC, 6.625%, 9/1/12............. 956,690
------------
TOTAL MISCELLANEOUS............................................... 7,185,253
------------
MUNICIPAL UTILITY DISTRICT 0.7%
425,000 Maple Run at Austin, Texas Contract, Rev., FGIC, 8.25%, 11/15/05..... 456,238
250,000 Montgomery County, Texas, MBIA, 6.25%, 3/1/14........................ 235,838
------------
TOTAL MUNICIPAL UTILITY DISTRICT.................................. 692,076
------------
POLLUTION CONTROL REVENUE 14.2%
Beaver County, Pennsylvania, Industrial Development Authority,
Refunding (Ohio Edison Co. Mansfield), Series A, FGIC
1,000,000 7.10%, 6/1/18..................................................... 990,980
500,000 7.75%, 9/1/24..................................................... 531,030
</TABLE>
F-22
<PAGE> 115
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
POLLUTION CONTROL REVENUE-continued
Brazos River Authority, Texas, Rev.
$ 1,870,000 Houston Lighting & Power, Refunding, Series B, FGIC,
7.20%, 12/1/18...................................................... $ 1,941,153
1,000,000 Series C, BIG, 8.10%, 5/1/19........................................ 1,074,210
1,270,000 Texas Utilities Electric Co., FGIC, 9.875%, 10/1/17................. 1,419,136
1,000,000 Emery County, Utah, Refunding (Pacificorp Project) Series A,
AMBAC, 5.65%, 11/1/23............................................... 808,160
1,000,000 Lehigh County, Pennsylvania, Industrial Development Authority
(Pennsylvania Power & Light Co. Project) Series A, MBIA,
6.40%, 11/1/21...................................................... 908,650
1,000,000 Matagorda County, Texas, Navigation District #1 (Houston
Lighting & Power) Series D, FGIC, 7.60%, 10/1/19.................... 1,072,490
Monroe County, Michigan (Detroit Edison Co.)
750,000 Series A, AMBAC, 9.625%, 12/1/15.................................... 805,065
1,000,000 Series I-B, MBIA, 6.55%, 9/1/24..................................... 905,940
1,500,000 Ohio State Air Quality Development Authority Rev. (Cleveland Co.
Project) FGIC, 8.00%, 12/1/13....................................... 1,659,780
200,000 Parish of West Feliciana, Louisiana (Gulf State Utilities) Series A,
7.50%, 5/1/15....................................................... 195,494
1,000,000 Pope County, Arkansas (Arkansas Power & Light Co. Project) FSA,
10.625%, 12/1/15.................................................... 1,072,820
1,000,000 Rockport, Indiana (Indiana & Michigan Electric Co.) Series A,
BIG, 9.25%, 8/1/14.................................................. 1,041,100
500,000 Warren County, New Jersey, Pollution Control Financing Authority,
Series A, FGIC, 9.00%, 12/1/06...................................... 550,920
------------
TOTAL POLLUTION CONTROL REVENUE..................................... 14,976,928
------------
PUBLIC IMPROVEMENT 0.5%
465,000 Dallas, Texas, Civic Center, Sr. Lien, AMBAC, 7.00%, 1/1/10............ 479,554
------------
SALES TAX REVENUE 2.4%
Arvada, Colorado, Sales & Use Tax Rev., Refunding & Improvement,
FGIC
250,000 6.25%, 12/1/12...................................................... 235,597
500,000 6.25%, 12/1/17...................................................... 463,330
250,000 Broken Arrow, Oklahoma, Municipal Authority Utility System &
Sales Tax Rev., FGIC, 9.75%, 5/1/05................................. 262,620
1,000,000 Marion County, Indiana, Convention & Recreational Facilities,
Series A, AMBAC, 7.00%, 6/1/21...................................... 1,012,090
500,000 Rhode Island, Depositors Economic Corp., Special Obligation,
Series A, FSA, 6.625%, 8/1/19, Pre-refunded, 8/1/02................. 521,990
------------
TOTAL SALES TAX REVENUE............................................. 2,495,627
------------
TRANSPORTATION 6.3%
Chicago, Illinois, O'Hare International Airport, Special Facility Rev.
(International Terminal) Series A, MBIA
500,000 7.50%, 1/1/17....................................................... 505,135
500,000 7.625%, 1/1/10...................................................... 516,480
500,000 Harris County, Texas, Refunding, Toll Road Sr. Lien, Series B,
AMBAC, 6.625%, 8/15/17.............................................. 516,970
Hawaii State, Airports System Rev.
350,000 AMBAC, 7.375%, 7/1/11............................................... 356,052
500,000 2nd Series, MBIA, 7.00%, 7/1/18..................................... 498,810
1,250,000 Louisville & Jefferson County, Kentucky, Regional Airport Authority
Rev., Series A, MBIA, 8.50%, 7/1/17................................. 1,339,900
</TABLE>
F-23
<PAGE> 116
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
TRANSPORTATION-CONTINUED
$ 500,000 Memphis-Shelby County, Tennessee, Airport Authority Rev., MBIA,
8.125%, 2/15/12 ......................................................... $ 536,490
1,700,000 Palm Beach County, Florida, Airport System Rev., MBIA,
7.75%, 10/01/10.......................................................... 1,829,710
500,000 Tulsa, Oklahoma, Airport Improvement, General Rev., MBIA,
7.50%, 6/1/08............................................................ 525,585
------------
TOTAL TRANSPORTATION...................................................... 6,625,132
------------
UTILITIES 16.4%
1,000,000 Austin, Texas, Utility Systems Rev., BIG, 8.625%, 11/15/12 ................. 1,149,170
1,000,000 Chicago, Illinois, Waste Water Transmission, Rev., FGIC,
6.30%, 1/1/12 ............................................................ 1,018,420
565,000 City of Brownsville, Texas, Utilities System Priority Rev., Series 1990,
AMBAC, 6.50%, 9/1/17 ..................................................... 539,790
1,000,000 Colorado River, Texas, Municipal Water District (Water
Transmission Facilities Project-A) AMBAC, 6.625%, 1/1/21 ................. 1,031,150
100,000 Farmington, New Mexico, Utility System Rev., FGIC,
9.75%, 5/15/13, Pre-refunded, 5/15/96 .................................... 108,458
2,000,000 Lower Colorado River Authority, Texas, Rev., Refunding, FSA,
5.625%, 1/1/17 ........................................................... 1,704,565
700,000 Missouri State Environmental Improvement & Energy Resource
Authority, Environment Improvement Rev., AMBAC,
7.40%, 5/1/20 ............................................................ 730,303
2,000,000 M-S-R Public Power Agency, California, San Juan Project Rev.,
Refunding, Series F, AMBAC, 6.00%, 7/1/20 ................................ 1,741,980
200,000 New York City, New York, Municipal Water Finance Authority,
Water & Sewer System Rev., Series A, 9.00%, 6/15/17,
Pre-refunded, 6/15/97 .................................................... 220,624
1,000,000 North Carolina Municipal Power Agency, Catawba Electric Rev.,
MBIA, 5.75%, 1/1/20 ...................................................... 842,820
1,000,000 Northern Minnesota, Municipal Power Agency, Series A, AMBAC,
7.25%, 1/1/16 ............................................................ 1,039,670
215,000 Piedmont Municipal Power Agency, South Carolina Electric Rev.,
Refunding, Series A, AMBAC, 9.25%, 1/1/19, Pre-refunded,
1/1/96 ................................................................... 230,639
500,000 Provo City, Utah, Energy System Rev., Series A, AMBAC,
9.50%, 11/1/10 ........................................................... 536,160
1,500,000 Reedy Creek, Florida, Improvement District Utilities Rev., Series 1,
MBIA, 9.00%, 10/1/07 ..................................................... 1,646,280
400,000 Rock Hill, South Carolina, Utility Systems Rev., FGIC,
8.00%, 1/1/18 ............................................................ 433,580
600,000 Tacoma, Washington, Electric Systems Rev., AMBAC,
8.00%, 1/1/11, Pre-refunded, 1/1/98 ...................................... 650,370
Washington State Public Power Supply System Rev. (Nuclear
Project No. 3)
450,000 BIG, 7.25%, 7/1/16 ....................................................... 482,841
2,000,000 MBIA, 5.60%, 7/1/15 ...................................................... 1,647,900
1,500,000 MBIA, 5.60%, 7/1/17 ...................................................... 1,218,330
250,000 Refunding, Rev., BIG, 6.00%, 7/1/18 ...................................... 213,170
------------
TOTAL UTILITIES........................................................... 17,186,220
------------
WASTE DISPOSAL 0.8%
1,000,000 Montgomery County, Maryland, Solid Waste System Rev., Series A,
AMBAC, 5.875%, 6/1/13 .................................................... 867,010
------------
TOTAL MUNICIPAL BONDS (Cost $105,401,512)................................. 101,304,692
------------
</TABLE>
F-24
<PAGE> 117
INSURED MUNICIPAL PORTFOLIO INVESTMENT PORTFOLIO, continued
November 30, 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Principal Market
Amount Value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Municipal Variable Rate Demand Notes+ 1.2%
$ 200,000 California Statewide Communities Development Corp. Rev., Series A,
3.60%, 8/1/19 ........................................................... $ 200,000
100,000 Dearborn, Michigan, Economic Development Corp. Rev. (Oakbrook
Project) 3.75%, 3/1/23 .................................................. 100,000
400,000 Panola County, Mississippi (Moog Automotive, Inc. Project),
3.75%, 9/1/10 ........................................................... 400,000
600,000 Tarrant County, Texas, Health Facilities Development Corp.,
3.80%, 9/1/18 ........................................................... 600,000
------------
TOTAL MUNICIPAL VARIABLE RATE DEMAND NOTES
(Cost $1,300,000) ....................................................... 1,300,000
------------
TOTAL INVESTMENTS (Cost $106,701,512) 97.8%................................ 102,604,692
Other assets and liabilities, net 2.2% .................................... 2,249,797
------------
NET ASSETS 100%........................................................... $104,854,489
============
</TABLE>
+ Interest rates are as of November 30, 1994
Rev.--Revenue bond
Insurers:
AMBAC--AMBAC Indemnity Corp.
BIG--Bond Investors Guaranty Insurance Corp.
CGIC--Capital Guaranty Insurance Corp.
CONN--Connie Lee
FGIC--Financial Guaranty Insurance Corp.
FSA--Financial Security Assurance Corp.
MBIA--Municipal Bond Investors' Assurance Corp.
See Notes to Financial Statements
F-25
<PAGE> 118
INSURED MUNICIPAL PORTFOLIO STATEMENT OF ASSETS AND LIABILITIES
November 30, 1994
<TABLE>
<S> <C>
ASSETS
Investments, at market value (Cost $106,701,512)................ $102,604,692
Interest receivable............................................. 2,431,085
Receivable for investments sold................................. 541,086
Receivable for Fund shares sold................................. 79,996
Other assets.................................................... 16,979
------------
105,673,838
------------
LIABILITIES
Payable for Fund shares redeemed................................ 364,842
Dividends payable............................................... 234,220
Due to Distributor.............................................. 68,938
Due to Adviser.................................................. 49,969
Bank overdraft.................................................. 47,535
Accrued expenses................................................ 45,995
Due to shareholder service agent................................ 7,850
------------
819,349
------------
NET ASSETS, equivalent to $10.55 per share for Class A and
Class B shares, and $10.54 per share for Class C shares....... $104,854,489
============
NET ASSETS WERE COMPRISED OF:
Shares of beneficial interest, at par; 6,379,617 Class A and
3,379,577 Class B and 180,188 Class C shares outstanding...... $ 99,394
Capital surplus................................................. 114,706,725
Accumulated net realized loss on securities..................... (5,876,339)
Net unrealized depreciation of securities....................... (4,096,820)
Undistributed net investment income............................. 21,529
------------
NET ASSETS at November 30, 1994................................. $104,854,489
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-26
<PAGE> 119
INSURED MUNICIPAL PORTFOLIO STATEMENT OF OPERATIONS
Year Ended November 30, 1994
- -------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME
Interest..................................................... $7,473,020
----------
EXPENSES
Management fees.............................................. 641,145
Service fees-Class A......................................... 180,174
Distribution and service fees-Class B........................ 378,659
Distribution and service fees-Class C........................ 15,952
Shareholder service agent's fees and expenses................ 118,640
Registration and filing fees................................. 92,838
Accounting services.......................................... 86,031
Reports to shareholders...................................... 28,650
Audit fees................................................... 22,702
Trustees' fees and expenses.................................. 11,975
Legal fees................................................... 11,762
Custodian fees............................................... 6,915
Miscellaneous................................................ 7,096
------------
Total expenses............................................. 1,602,539
------------
Net investment income...................................... 5,870,481
------------
REALIZED AND UNREALIZED LOSS ON SECURITIES
Net realized loss on securities.............................. (464,507)
Net unrealized depreciation of securities during the year.... (10,201,344)
------------
Net realized and unrealized loss on securities............. (10,665,851)
------------
Decrease in net assets resulting from operations...........$ (4,795,370)
============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-27
<PAGE> 120
INSURED MUNICIPAL PORTFOLIO STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------
1994 1993
------------ -------------
<S> <C> <C>
NET ASSETS, beginning of year............................... $109,719,511 $ 74,387,518
------------ -------------
OPERATIONS
Net investment income..................................... 5,870,481 5,137,222
Net realized loss on securities........................... (464,507) (228,375)
Net unrealized appreciation (depreciation) of securities
during the year......................................... (10,201,344) 2,393,531
------------ -------------
Increase (decrease) in net assets resulting
from operations........................................... (4,795,370) 7,302,378
------------ -------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS
From net investment income
Class A................................................. (3,998,830) (4,006,512)
Class B................................................. (1,770,263) (1,129,616)
Class C................................................. (73,782) --
------------ -------------
(5,842,875) (5,136,128)
------------ -------------
In excess of net investment income
Class A................................................. -- (21,356)
Class B................................................. -- (9,946)
Class C................................................. -- --
------------ -------------
-- (31,302)
------------ -------------
TOTAL DIVIDENDS AND DISTRIBUTIONS....................... (5,842,875) (5,167,430)
------------ -------------
SHARE TRANSACTIONS
Proceeds from shares sold
Class A................................................. 11,790,509 17,447,835
Class B................................................. 10,898,379 25,351,509
Class C................................................. 2,707,049 --
------------ -------------
25,395,937 42,799,344
------------ -------------
Proceeds from shares issued for dividends reinvested
Class A................................................. 2,032,068 2,050,353
Class B................................................. 1,023,631 657,194
Class C................................................. 58,216 --
------------ -------------
3,113,915 2,707,547
------------ -------------
Cost of shares redeemed
Class A................................................. (14,932,364) (10,204,699)
Class B................................................. (7,093,131) (2,105,147)
Class C................................................. (711,134) --
------------ -------------
(22,736,629) (12,309,846)
------------ ------------
Increase in net assets resulting from share transactions.. 5,773,223 33,197,045
------------ ------------
INCREASE (DECREASE) IN NET ASSETS........................... (4,865,022) 35,331,993
------------ ------------
NET ASSETS, end of year..................................... $104,854,489 $109,719,511
============ ============
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-28
<PAGE> 121
NOTES TO FINANCIAL STATEMENTS
Note 1-Significant Accounting Policies
American Capital Tax-Exempt Trust (the "Fund") is comprised of two municipal
bond portfolios: High Yield Municipal Portfolio ("High Yield") and Insured
Municipal Portfolio ("Insured"), and is registered under the Investment
Company Act of 1940, as amended, as a diversified open-end management
investment company.
Each portfolio is accounted for as a separate entity. The following is a
summary of significant accounting policies consistently followed by the Fund
in the preparation of its financial statements.
A. Investment Valuations
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. Securities for which market
quotations are not readily available are valued at a fair value as
determined in good faith by the Board of Directors of the Fund.
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.
High yield investments include lower rated and unrated debt securities
which may be more susceptible to adverse economic conditions than
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. Securities
rated below investment grade and comparable unrated securities
represented approximately 74% of High Yield's investment portfolio at
November 30, 1994.
Issuers of certain securities owned by Insured have obtained insurance
guaranteeing their timely payment of principal at maturity and interest.
The insurance reduces credit risk but not market risk of the security.
B. Repurchase Agreements
A repurchase agreement is a short-term investment in which a Fund
acquires ownership of a debt security and the seller agrees to
repurchase the security at a future time and specified price. The Fund
may invest independently in repurchase agreements, or transfer
uninvested cash balances into a pooled cash account along with other
investment companies advised by Van Kampen American Capital Asset
Manager, Inc. ("The Adviser"), the daily aggregate of which is invested
in repurchase agreements. Repurchase agreements are collateralized by
the underlying debt securities. The Fund will make payment for such
securities only upon physical delivery or evidence of book entry
transfer to the account of the custodian bank. The seller is required to
maintain the value of the underlying security at not less than the
repurchase proceeds due the Fund.
C. Futures Contracts
Transactions in futures contracts are utilized in strategies to manage
the market risk of the Fund's investments by increasing or decreasing
the percentage of assets effectively invested. The purchase of a futures
contract increases the impact of changes in the market price of
investments on net asset value. There is also a risk that the market
movement of such instruments may not be in the direction forecasted.
Upon entering into futures contracts, the Fund maintains, in a
segregated account with its custodian, securities with a value equal to
its obligation under the futures contracts. A portion of these funds is
held as collateral in an account in the name of the broker, the Fund's
agent in acquiring the futures position. During the period the futures
contract is open, changes in the value of the contract ("variation
margin") are recognized by marking the contract to market on a daily
basis. As unrealized gains or losses are incurred, variation margin
payments are received from or made to the broker. Upon the closing or
cash settlement of a contract, gains and losses are realized. The cost
of securities acquired through delivery under a contract is adjusted by
the unrealized gain or loss on the contract.
F-29
<PAGE> 122
D. Federal Income Taxes
No provision for federal income taxes is required because the Fund has
elected to be taxed as "regulated investment companies" 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 capital gains will be made until
tax basis capital loss carryforwards, if any, expire or are offset by
net realized capital gains.
E. 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.
F. Dividends and Distributions
The Fund declares dividends from net investment income of each portfolio
on each business day. The Fund intends to continue to invest principally
in tax-exempt obligations sufficient in amount to qualify it to pay
"exempt-interest dividends" as defined in the Internal Revenue Code.
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 a portfolio's financial statement earnings.
G. Debt Discount or Premium
The Fund accounts for discounts and premiums on the same basis as is
used for federal income tax reporting. Accordingly, original issue debt
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.
H. When-Issued Securities
Delivery and payment for securities purchased on a when-issued basis may
take place up to 45 days after the day of the transaction. The
securities purchased are subject to market fluctuation during this
period. To meet the payment obligations, 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
The Adviser serves as the investment manager of the Fund. Management fees are
paid monthly, based on the aggregate average daily net assets of the Fund at an
annual rate of .60% of the first $300 million of the aggregate average daily
net assets, .55% of the next $300 million, and .50% of the amount in excess of
$600 million, and are allocated on a pro-rata basis to each portfolio. From
time to time, the Adviser may voluntarily elect to subsidize a portion of the
Fund's expenses. The voluntary subsidy may be discontinued at any time without
prior notice. There were no subsidies during the fiscal year ended November 30,
1994.
Other transactions with affiliates during the year were as follows:
<TABLE>
<CAPTION>
High Yield Insured
---------- --------
<S> <C> <C>
Accounting services (accounting officers cost... $ 12,752 $ 7,296
Legal fees...................................... 19,142 10,864
Shareholder service agent's fees................ 561,481 92,670
Sales of Fund shares:
Distributor commissions....................... 406,466 27,152
Retail Dealer commissions..................... 81,508 8,526
</TABLE>
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.
These charges included 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. These services provided by the
Adviser are at cost.
Legal fees were for services rendered by O'Melveny & Myers, counsel for the
Fund. Lawrence J. Sheehan, of counsel to that firm, is a trustee of the Fund.
F-30
<PAGE> 123
Van Kampen American Capital Shareholder Services, Inc., an affiliate of the
Adviser, serves as the Fund's shareholder service agent. These services are
provided at cost plus a profit.
The Fund was informed that Van Kampen American Capital Distributors, Inc.
(the "Distributor") and Advantage Capital Corporation (the "Retail Dealer"),
both affiliates of the Adviser, received commissions charged on sales of Fund
shares during the year.
Under the terms of the Distribution plans, each portfolio pays up to .25% per
annum of its average daily net assets to reimburse the Distributor for
expenses and service fees incurred. Class B and Class C shares pay an
additional distribution fee of up to .75% per annum of their average net
assets to reimburse the Distributor for its distribution expenses. Actual
distribution expenses incurred by the Distributor for Class B and Class C
shares may exceed the amounts reimbursed to the Distributor by the portfolios.
At November 30, 1994, the unreimbursed expenses by the Distributor under the
Class B and Class C plans aggregated approximately $5.8 million and $126,000,
respectively, for High Yield and approximately $1.5 million and $36,000,
respectively, for Insured 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
reimbursements of distribution fees.
Certain officers and trustees 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:
<TABLE>
<CAPTION>
High Yield Insured
------------ -----------
<S> <C> <C>
Purchases............................... $297,374,429 $16,297,871
Sales................................... 183,879,756 5,427,250
</TABLE>
The following table presents the identified cost of investments at November
30, 1994 for the federal income tax purposes with the associated net
unrealized depreciation and the net realized capital loss carryforward.
<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Identified cost......................... $593,217,322 $106,701,512
============ ============
Gross unrealized appreciation........... $ 9,456,793 $ 2,150,516
Gross unrealized depreciation........... (28,900,212) (6,247,336)
------------ ------------
Net unrealized depreciation............. $(19,443,419) $ (4,096,820)
============ ============
Net realized capital loss carryforward . $ 27,073,800 $ 5,876,339
============ ============
</TABLE>
The net realized capital loss carryforwards at November 30, 1994 may be
utilized to offset any future capital gains until expiration from 1995
through 2002. Additionally, approximately $1 million of financial
statement capital losses for High Yield are deferred for tax purposes
to the 1995 fiscal year.
At November 30, 1994, High Yield held 405 short United States Treasury Bond
financial futures contracts expiring in March 1995. The market value of such
contracts at November 30, 1994 was $39,715,313 and the unrealized
depreciation was $506,300.
During the year, the cost of purchases and proceeds from sales of investments
resulting from transactions between High Yield, Insured and other investment
companies advised by the Adviser were:
<TABLE>
<CAPTION>
High Yield Insured
------------ ------------
<S> <C> <C>
Purchases................................ $9,650,000 $1,240,000
Sales.................................... 2,450,000 6,185,000
</TABLE>
Such transactions were at current market prices on the dates of the
transactions for cash payment against prompt delivery, with no brokerage
commissions. The sales transactions did not result in a net realized gain or
loss to either High Yield or Insured.
F-31
<PAGE> 124
Note 4-Trustee Compensation
Trustee fees for the year and the liability for deferred compensation at
November 30, 1994 were:
<TABLE>
<CAPTION>
High Yield Insured
---------- -------
<S> <C> <C>
Trustee fees.............................. $15,738 $10,514
Deferred compensation liability........... 10,326 7,238
</TABLE>
Trustees who are not affiliated with the Adviser are compensated by the Fund at
the annual rate of $2,510 plus a fee of $65 per day for the Board and Committee
meetings attended. The Chairman receives additional fees at an annual rate of
$940. The trustees 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 general accounts. Funds for the payment of obligations
under the Plan will not be reserved or set aside by any form of trust or
escrow. Each director covered by the Plan has elected 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
Each portfolio 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 a higher distribution services fee 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.
Each portfolio has an unlimited number of $.01 par value shares of beneficial
interest authorized. Transactions in shares of beneficial interest were as
follows:
<TABLE>
<CAPTION>
High Yield Insured
------------------------- ------------------------
Year Ended November 30 Year Ended November 30
------------------------- ------------------------
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares sold
Class A.............................. 9,122,951 12,107,184 1,040,502 1,513,883
Class B.............................. 6,562,885 7,638,462 959,397 2,200,973
Class C.............................. 1,487,816 -- 240,049 --
---------- ---------- ---------- ----------
17,173,652 19,745,646 2,239,948 3,714,856
---------- ---------- ---------- ----------
Shares issued for dividends reinvested
Class A.............................. 1,092,261 934,043 182,323 177,668
Class B.............................. 342,025 135,852 91,999 56,831
Class C.............................. 21,563 -- 5,302 --
---------- ---------- ---------- ----------
1,455,849 1,069,895 279,624 234,499
---------- ---------- ---------- ----------
Shares redeemed
Class A.............................. (7,290,648) (4,825,070) (1,344,232) (882,537)
Class B.............................. (999,142) (318,824) (640,367) (181,615)
Class C.............................. (43,571) -- (65,163) --
----------- ---------- ---------- ----------
(8,333,361) (5,143,894) (2,049,762) (1,064,152)
----------- ---------- ---------- ----------
Increase in shares outstanding......... 10,296,140 15,671,647 469,810 2,885,203
=========== ========== ========== ==========
</TABLE>
F-32
<PAGE> 125
HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
---------------------------------------------------------------
YEAR ENDED NOVEMBER 30
---------------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.......... $11.19 $10.95 $10.78 $10.72 $10.91
------- -------- ------- ------- -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .87 .9310 .93 .885 1.005
Expenses................................... (.11) (.1178) (.115) (.115) (.105)
------- -------- ------- ------- -------
Net investment income...................... .76 .8132 .815 .77 .90
Net realized and unrealized gain
or loss on securities.................... (.744) .2303 .195 .13 (.23)
------- -------- ------- ------- -------
Total from investment operations........... .016 1.0435 1.01 .90 .67
------- -------- ------- ------- -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.766) (.8035) (.84) (.84) (.86)
------- -------- ------- ------- -------
Net asset value, end of year............... $10.44 $11.19 $10.95 $10.78 $10.72
======= ======== ======= ======= =======
TOTAL RETURN(1)............................ .10% 9.65% 9.77% 8.73% 6.43%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year(millions).......... $411.1 $408.0 $309.5 $225.3 $222.3
Average net assets (millions).............. $419.5 $357.8 $257.5 $220.5 $226.8
Ratios to average net assets(2)
Expenses................................. 1.02% 1.03% 1.07% 1.06% 0.97%
Expenses, without expense reimbursement.. -- -- -- -- 1.06%
Net investment income.................... 6.98% 7.13% 7.45% 7.20% 8.34%
Net investment income, without expense...
reimbursement.......................... -- -- -- -- 8.27%
Portfolio turnover rate.................... 33% 27% 24% 20% 29%
</TABLE>
(1) Total return does not consider the effect of sales charges.
(2) See note 2.
See Notes to Financial Statements.
F-33
<PAGE> 126
HIGH YIELD MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
---------------------------------- -----------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
---------------------- NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- -------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year............. $11.18 $10.96 $11.08 $11.29
------- -------- -------- --------
INCOME FROM INVESTMENT OPERATIONS
Investment income.............................. .87 .8905 .35 .81
Expenses....................................... (.19) (.1986) (.08) (.18)
------- -------- -------- --------
Net investment income.......................... .68 .6919 .27 .63
Net realized and unrealized gain
or loss on securities......................... (.748) .2476 (.1122) (.8363)
------- -------- -------- --------
Total from investment operations............... (.068) .9395 .1578 (.2063)
------- -------- -------- --------
DIVIDENDS FROM NET INVESTMENT INCOME........... (.682) (.7195) (.2778) (.6637)
------- -------- -------- --------
Net asset value, end of year................... $10.43 $11.18 $10.96 $10.42
======= ======== ======== ========
TOTAL RETURN(3)................................ (.76%) 8.84% 1.45% (1.80%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)............. $159.3 $104.8 $21.0 $15.3
Average net assets (millions).................. $133.6 $54.9 $13.4 $6.7
Ratios to average net assets
Expenses...................................... 1.77% 1.77% 1.71%(4) 1.75%(4)
Net investment income......................... 6.19% 6.15% 5.88%(4) 6.07%(4)
Portfolio turnover rate........................ 33% 27% 24% 33%
</TABLE>
(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) Annualized.
See Notes to Financial Statements.
F-34
<PAGE> 127
INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS A
------------------------------------------------------
YEAR ENDED NOVEMBER 30
------------------------------------------------------
1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year.... $11.59 $11.30 $11.07 $10.86 $10.95
INCOME FROM INVESTMENT OPERATIONS
Investment income..................... .74 .790 .810 .86 .84
Expenses.............................. (.13) (.127) (.135) (.13) (.12)
Net investment income................. .61 .663 .675 .73 .72
Net realized and unrealized gain or
loss on securities................... (1.0425) .274 .240 .19 (.07)
Total from investment operations...... (.4325) .937 .915 .92 .65
DIVIDENDS FROM NET INVESTMENT INCOME.. (.6075) (.647) (.685) (.71) (.74)
Net asset value, end of year.......... $10.55 $11.59 $11.30 $11.07 $10.86
TOTAL RETURN(1)....................... (3.88%) 8.47% 8.48% 8.73% 6.21%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions).... $67.3 $75.3 $64.3 $52.2 $42.3
Average net assets (millions)......... $73.6 $72.0 $57.8 $48.6 $39.3
Ratios to average net assets(2)
Expenses............................. 1.15% 1.07% 1.20% 1.20% 1.08%
Expenses, without expense
reimbursement ...................... -- 1.17% -- -- 1.20%
Net investment income................ 5.45% 5.57% 5.98% 6.59% 6.63%
Net investment income, without
expense reimbursement............... -- 5.47% -- -- 6.51%
Portfolio turnover rate............... 5% 5% 3% 5% 1%
</TABLE>
(1) TOTAL RETURN DOES NOT CONSIDER THE EFFECT OF SALES CHARGES.
(2) SEE NOTE 2.
SEE NOTES TO FINANCIAL STATEMENTS.
F-35
<PAGE> 128
INSURED MUNICIPAL PORTFOLIO FINANCIAL HIGHLIGHTS, continued
Selected data for a share of beneficial interest outstanding throughout each of
the periods indicated.
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------- ------------
JULY 20, DECEMBER
1992(2) 10, 1993(2)
YEAR ENDED NOVEMBER 30 THROUGH THROUGH
------------------------ NOVEMBER NOVEMBER
1994 1993(1) 30, 1992(1) 30, 1994(1)
-------- ------- ----------- -----------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of year......... $11.58 $11.30 $11.39 $11.66
-------- ------- ------ -------
INCOME FROM INVESTMENT OPERATIONS
Investment income.......................... .74 .754 .28 .77
Expenses................................... (.21) (.205) (.08) (.22)
-------- ------- ------ -------
Net investment income...................... .53 .549 .20 .55
Net realized and unrealized gain or
loss on securities....................... (1.0365) .294 (.07) (1.161)
-------- ------- ------ -------
Total from investment operations........... (.5065) .843 .13 (.611)
-------- ------- ------ -------
DIVIDENDS FROM NET INVESTMENT INCOME....... (.5235) (.563) (.22) (.509)
-------- ------- ------ -------
Net asset value, end of year............... $10.55 $11.58 $11.30 $10.54
======== ======= ======= =======
TOTAL RETURN(3)............................ (4.52%) 7.59% 1.16% (5.38%)
RATIOS/SUPPLEMENTAL DATA
Net assets, end of year (millions)......... $35.6 $34.4 $10.1 $ 1.9
Average net assets (millions).............. $37.9 $23.8 $ 5.2 $ 1.6
Ratios to average net assets(4)
Expenses................................. 1.91% 1.77% 1.82%(5) 1.89%(5)
Expenses, without expense reimbursement.. -- 1.87% -- --
Net investment income.................... 4.71% 4.74% 4.33%(5) 4.64%(5)
Net investment income, without
expense reimbursement.................. -- 4.64% -- --
Portfolio turnover rate.................... 5% 5% 3% 5%
</TABLE>
(1) Based on average month-end shares.
(2) Commencement of offering of sales.
(3) Total return for periods of less than one year are not annualized. Total
return does not consider the effect of sales charges.
(4) See Note 2.
(5) Annualized
See Notes to Financial Statements.
F-36
<PAGE> 129
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees of American Capital Tax-Exempt Trust
In our opinion, the accompanying statements of assets and liabilities,
including the investment portfolios of High Yield Municipal Portfolio and
Insured Municipal 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 each of the two portfolios
constituting American Capital Tax-Exempt Trust (the "Trust") at November 30,
1994, the results of each of their operations for the year then ended, the
changes in each of their net assets for each of the two years in the period
then ended and the selected per share data and ratios for each of the 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 reponsibility of the Trust'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 obtian reasonable assurance about whether the
financial statements are free of material misstatements. 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 November 30, 1994 by correspondence with the custodian and
brokers, provide a reasonable basis for the opinon expressed above.
/s/ PRICE WATERHOUSE LLP
Houston, Texas
January 16, 1995
F-37
