<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 1, 1995
REGISTRATION NOS. 2-99715
811-4386
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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
<TABLE>
<S> <C>
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Post-Effective Amendment No. 37 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 38 /X/
</TABLE>
VAN KAMPEN AMERICAN CAPITAL
TAX FREE TRUST
(Exact Name of Registrant as Specified in Agreement and Declaration of Trust)
One Parkview Plaza, Oakbrook Terrace, Illinois 60181
(Address of Principal Executive Offices)
(708) 684-6000
(Registrant's Telephone Number)
Ronald A. Nyberg, Esq.
Executive Vice President,
General Counsel and Secretary,
Van Kampen American Capital, Inc.
One Parkview Plaza
Oakbrook Terrace, IL 60181
(Name and Address of Agent for Service)
Copy to:
Wayne W. Whalen, Esq.
Thomas A. Hale, Esq.
Skadden, Arps, Slate, Meagher & Flom
333 West Wacker Drive
Chicago, IL 60606
(312) 407-0700
------------------------
Approximate Date of Proposed Public Offering: As soon as practicable
following effectiveness of this Registration Statement.
------------------------
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE: (CHECK APPROPRIATE
BOX)
/X/ IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
/ / ON (DATE) PURSUANT TO PARAGRAPH (B)
/ / 60 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(1)
/ / ON (DATE) PURSUANT TO PARAGRAPH (A)(1)
/ / 75 DAYS AFTER FILING PURSUANT TO PARAGRAPH (A)(2)
/ / ON (DATE) PURSUANT TO PARAGRAPH (A)(2) OF RULE 485
IF APPROPRIATE CHECK THE FOLLOWING:
/ / THIS POST-EFFECTIVE AMENDMENT DESIGNATES A NEW EFFECTIVE DATE FOR
A PREVIOUSLY FILED POST-EFFECTIVE AMENDMENT.
DECLARATION PURSUANT TO RULE 24F-2
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND WILL FILE WITH
THE SECURITIES AND EXCHANGE COMMISSION A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1995 ON OR ABOUT FEBRUARY 28, 1996.
PURSUANT TO A MERGER EFFECTIVE AS OF JULY 31, 1995, VAN KAMPEN AMERICAN
CAPITAL TAX FREE TRUST, A DELAWARE BUSINESS TRUST (THE "REGISTRANT"), IS THE
SUCCESSOR OF VAN KAMPEN MERRITT TAX FREE FUND, A MASSACHUSETTS BUSINESS TRUST.
UPON EFFECTIVENESS OF THE MERGER AND PURSUANT TO RULE 414 UNDER THE SECURITIES
ACT OF 1933, REGISTRANT ADOPTS AND SUCCEEDS TO THE REGISTRATION STATEMENT OF VAN
KAMPEN MERRITT TAX FREE FUND AND TO ANY PRIOR RULE 24F-2 NOTICES OF VAN KAMPEN
MERRITT TAX FREE FUND.
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<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two Prospectuses and three Statements
of Additional Information describing three of the twelve series of the
Registrant. The Registration Statement is organized as follows:
Facing Page
Cross Reference Sheet with respect to Van Kampen American Capital Insured
Tax Free Income Fund and Van Kampen American Capital California Insured
Tax Free Fund
Cross Reference Sheet with respect to Van Kampen American Capital Municipal
Income Fund
Prospectus relating to Van Kampen American Capital Insured Tax Free Income
Fund and Van Kampen American Capital California Insured Tax Free Fund
Statement of Additional Information relating to Van Kampen American Capital
Insured Tax Free Income Fund
Statement of Additional Information relating to Van Kampen American Capital
California Insured Tax Free Fund
Prospectus relating to Van Kampen American Capital Municipal Income Fund
Statement of Additional Information relating to Van Kampen American Capital
Municipal Income Fund.
Part C Information
Exhibits
-------------------------
The Prospectus and Statement of Additional Information with respect to each
of Van Kampen American Capital California Tax Free Income Fund, Van Kampen
American Capital Michigan Tax Free Income Fund, Van Kampen American Capital
Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax Free
Income Fund, four other series of the Registrant, included in Post-Effective
Amendment No. 31 to the Registration Statement of the Registrant are included
herein by reference and no changes thereto are affected hereby.
The Prospectus and Statement of Additional Information with respect to each
of Van Kampen American Capital Tax Free High Income Fund, Van Kampen American
Capital Limited Term Municipal Income Fund, Van Kampen American Capital Florida
Insured Tax Free Income Fund, Van Kampen American Capital New Jersey Tax Free
Income Fund and Van Kampen American Capital New York Tax Free Income Fund, five
other series of the Registrant, included in Post-Effective Amendment No. 35 to
the Registration Statement of the Registrant are included herein by reference
and no changes thereto are affected hereby.
<PAGE> 3
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
EACH A SERIES OF
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
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<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... SHAREHOLDER TRANSACTION EXPENSES--INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--
CALIFORNIA INSURED FUND; ANNUAL FUND OPERATING
EXPENSES AND EXAMPLES--
INSURED FUND; ANNUAL FUND OPERATING EXPENSES AND
EXAMPLES--CALIFORNIA INSURED FUND; FUND PERFORMANCE
Item 3. Condensed Financial
Information............... FINANCIAL HIGHLIGHTS--INSURED FUND; FINANCIAL
HIGHLIGHTS--CALIFORNIA INSURED FUND
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUNDS; INVESTMENT OBJECTIVES
AND POLICIES; MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; INSURANCE; SHAREHOLDER SERVICES; ADDITIONAL
INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--INSURED
FUND; ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--
CALIFORNIA INSURED FUND; INVESTMENT PRACTICES;
INVESTMENT ADVISORY SERVICES; SHAREHOLDER SERVICES;
THE DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM
THE FUNDS
Item 6. Capital Stock and
Other Securities.......... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
SHAREHOLDER SERVICES; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM THE
FUNDS; TAX STATUS; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES-- INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--CALIFORNIA INSURED
FUND; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; REDEMPTION OF SHARES;
THE DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM
THE FUNDS; FUND PERFORMANCE
Item 8. Redemption or Repurchase.... SHAREHOLDER TRANSACTION EXPENSES-- INSURED FUND;
SHAREHOLDER TRANSACTION EXPENSES--CALIFORNIA INSURED
FUND; ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF
SHARES; SHAREHOLDER SERVICES; REDEMPTION OF SHARES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(i)
<PAGE> 4
<TABLE>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Investment Advisory and Other Services;
Custodian and Independent Auditors; Officers and
Trustees; The Distributor; Legal Counsel; Notes to
Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocations
Item 18. Capital Stock and
Other Securities.......... The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the captions:
FINANCIAL HIGHLIGHTS--INSURED FUND; FINANCIAL
HIGHLIGHTS--CALIFORNIA INSURED FUND; Independent
Auditors' Report; Financial Statements; Notes to
Financial Statements; Officers and Trustees
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(ii)
<PAGE> 5
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
A SERIES OF
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CROSS REFERENCE SHEET
(AS REQUIRED BY ITEM 501(B) OF REGULATION S-K)
<TABLE>
<CAPTION>
ITEM NUMBER OF
FORM N-1A LOCATION OR CAPTION
------------------------------------------------------
<S> <C> <C>
PART A
Item 1. Cover Page.................. Cover Page
Item 2. Synopsis.................... SHAREHOLDER TRANSACTION EXPENSES; ANNUAL FUND
OPERATING EXPENSES AND EXAMPLE; FUND PERFORMANCE
Item 3. Condensed Financial
Information............... FINANCIAL HIGHLIGHTS
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUND; INVESTMENT OBJECTIVE AND
POLICIES; MUNICIPAL SECURITIES; INVESTMENT PRACTICES;
SPECIAL CONSIDERATIONS REGARDING THE FUND; SHAREHOLDER
SERVICES; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES;
INVESTMENT PRACTICES; INVESTMENT ADVISORY SERVICES;
SHAREHOLDER SERVICES; THE DISTRIBUTION AND SERVICE
PLANS; DISTRIBUTIONS FROM THE FUND
Item 6. Capital Stock and
Other Securities.......... ALTERNATIVE SALES ARRANGEMENTS; PURCHASE OF SHARES;
SHAREHOLDER SERVICES; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; DISTRIBUTIONS FROM THE
FUND; TAX STATUS; DESCRIPTION OF SHARES OF THE FUND;
ADDITIONAL INFORMATION
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES; THE DISTRIBUTION AND
SERVICE PLANS; DISTRIBUTIONS FROM THE FUND; FUND
PERFORMANCE
Item 8. Redemption or Repurchase.... SHAREHOLDER TRANSACTION EXPENSES; ALTERNATIVE SALES
ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 9. Pending Legal Proceedings... Not Applicable
</TABLE>
(iii)
<PAGE> 6
<TABLE>
<S> <C> <C>
PART B
Item 10. Cover Page.................. Cover Page
Item 11. Table of Contents........... Table of Contents
Item 12. General Information
and History............... The Fund and The Trust
Item 13. Investment Objectives
and Policies.............. Investment Policies and Restrictions; Additional
Investment Considerations
Item 14. Management of the Fund...... Officers and Trustees
Item 15. Control Persons and
Principal Holders of
Securities................ Officers and Trustees
Item 16. Investment Advisory and
Other Services............ Contained in Prospectus under captions: INVESTMENT
ADVISORY SERVICES; ALTERNATIVE SALES ARRANGEMENTS;
PURCHASE OF SHARES; THE DISTRIBUTION AND SERVICE
PLANS; Investment Advisory and Other Services;
Officers and Trustees; The Distributor; Legal Counsel;
Notes to Financial Statements
Item 17. Brokerage Allocation........ Portfolio Transactions and Brokerage Allocations
Item 18. Capital Stock and
Other Securities.......... The Fund and The Trust
Item 19. Purchase, Redemption and
Pricing of Securities
Being
Offered................... Contained in Prospectus under captions: ALTERNATIVE
SALES ARRANGEMENTS; PURCHASE OF SHARES; SHAREHOLDER
SERVICES; REDEMPTION OF SHARES
Item 20. Tax Status.................. Contained in Prospectus under caption: TAX STATUS; Tax
Status of the Fund
Item 21. Underwriters................ The Distributor; Notes to Financial Statements
Item 22. Calculations of Performance
Data...................... Continued in Prospectus under caption: FUND
PERFORMANCE; Performance Information
Item 23. Financial Statements........ Contained in the Prospectus under the captions:
FINANCIAL HIGHLIGHTS; Independent Auditors' Report;
Financial Statements; Notes to Financial Statements;
Officers and Trustees
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
(iv)
<PAGE> 7
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VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
--------------------------------------------------------------------------------
INVESTORS SHOULD REFER TO THE SECTION OF THE PROSPECTUS ENTITLED "INSURANCE"
FOR A DISCUSSION OF THE NATURE AND LIMITATIONS OF THE INSURANCE APPLICABLE TO
MUNICIPAL SECURITIES HELD IN THE FUND'S PORTFOLIO.
Van Kampen American Capital Insured Tax Free Income Fund, formerly known as
Van Kampen Merritt Insured Tax Free Income Fund (the "Insured Fund"), is a
separate diversified mutual fund, organized as a series of Van Kampen American
Capital Tax Free Trust. The Insured Fund's investment objective is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. Insured municipal
securities in which the Insured Fund may invest include conventional fixed-rate
municipal securities, variable rate municipal securities and other types of
municipal securities described herein. See "Municipal Securities." All of the
municipal securities in the Insured Fund's portfolio will be insured by AMBAC
Indemnity Corporation or by other municipal bond insurers whose claims-paying
ability is rated "AAA" by Standard & Poor's Ratings Group on the date of
purchase.
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VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
--------------------------------------------------------------------------------
Van Kampen American Capital California Insured Tax Free Fund, formerly known
as Van Kampen Merritt California Insured Tax Free Fund (the "California Insured
Fund"), is a separate diversified mutual fund, organized as a series of Van
Kampen American Capital Tax Free Trust. The California Insured Fund's investment
objective is to
(Continued on next page.)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, 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 FUNDS INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
Statements of Additional Information, dated July 31, 1995, containing
additional information about the Funds have been filed with the Securities and
Exchange Commission and are hereby incorporated by reference in their entirety
into this Prospectus. A copy of either Fund's respective Statement of Additional
Information may be obtained without charge by calling (800) 421-5666, or for
Telecommunication Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED JULY 31, 1995.
<PAGE> 8
(Continued from previous page.)
provide only California investors with a high level of current income exempt
from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. Insured municipal securities in which the
California Insured Fund may invest include conventional fixed-rate municipal
securities, variable rate municipal securities and other types of municipal
securities described herein. See "Municipal Securities." All of the municipal
securities in the California Insured Fund's portfolio will be insured by AMBAC
Indemnity Corporation or by other municipal bond insurers whose claims-paying
ability is rated "AAA" by Standard & Poor's Ratings Group on the date of
purchase.
Van Kampen American Capital Investment Advisory Corp. is the investment
adviser for both the Insured Fund and the California Insured Fund (each a "Fund"
or collectively the "Funds"). There is no assurance that the Funds will achieve
their respective investment objectives. This Prospectus sets forth certain
information about the Funds that a prospective investor should know before
investing in either of the Funds. Please read it carefully and retain it for
future reference. Each Fund's address is One Parkview Plaza, Oakbrook Terrace,
Illinois 60181, and each Fund's telephone number is (800) 421-5666.
The Funds currently offer three classes of shares (the "Alternative Sales
Arrangements") which may be purchased at a price equal to their net asset value
per share, plus sales charges which, at the election of the investor, may be
imposed (i) at the time of purchase ("Class A Shares") or (ii) on a contingent
deferred basis (Class A Share accounts over $1 million, "Class B Shares" and
"Class C Shares"). The Alternative Sales Arrangements permit an investor to
choose the method of purchasing shares that is more beneficial to the investor,
taking into account the amount of the purchase, the length of time the investor
expects to hold the shares and other circumstances.
Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% of a Fund's average
daily net assets attributable to the Class A Shares, (ii) for Class B Shares, up
to 1.00% of a Fund's average daily net assets attributable to the Class B Shares
and (iii) for Class C Shares, up to 1.00% of a Fund's average daily net assets
attributable to the Class C Shares. Investors should understand that the purpose
and function of the deferred sales charge and the distribution and service fees
with respect to the Class A Share accounts over $1 million, Class B Shares and
the Class C Shares are the same as those of the initial sales charge and
distribution and service fees with respect to the Class A Share accounts below
$1 million. Each share of a Fund represents an identical interest in the
investment portfolio of such Fund and has the same rights, except that (i) each
class of shares bears those distribution fees, service fees and administrative
expenses applicable to the respective class of shares as a result of its sales
arrangements, which will cause the different classes of shares to have different
expense ratios and to pay different rates of dividends, (ii) each class has
exclusive voting rights with respect to those provisions of such Fund's Rule
12b-1 distribution plan which relate only to such class and (iii) the classes
have different exchange privileges. Class B Shares of each Fund automatically
will convert to Class A Shares of the respective Fund after the number of years
set forth herein, in the circumstances and subject to the qualifications
described in this Prospectus. See "Alternative Sales Arrangements" and "Purchase
of Shares."
2
<PAGE> 9
------------------------------------------------------------------------------
TABLE OF CONTENTS
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses -- Insured Fund............... 7
Annual Fund Operating Expenses and Examples -- Insured Fund.... 8
Shareholder Transaction Expenses -- California Insured Fund.... 10
Annual Fund Operating Expenses and Examples -- California
Insured Fund................................................. 11
Financial Highlights -- Insured Fund........................... 13
Financial Highlights -- California Insured Fund................ 15
The Funds...................................................... 17
Investment Objectives and Policies............................. 17
Municipal Securities........................................... 18
Investment Practices........................................... 22
Insurance...................................................... 25
Investment Advisory Services................................... 25
Alternative Sales Arrangements................................. 27
Purchase of Shares............................................. 29
Shareholder Services........................................... 39
Redemption of Shares........................................... 44
The Distribution and Service Plans............................. 47
Distributions from the Funds................................... 49
Tax Status..................................................... 50
Fund Performance............................................... 54
Additional Information......................................... 56
</TABLE>
NO DEALER, SALESMAN 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 EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS 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
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
3
<PAGE> 10
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PROSPECTUS SUMMARY
------------------------------------------------------------------------------
THE FUNDS. Van Kampen American Capital Insured Tax Free Income Fund (the
"Insured Fund") and Van Kampen American Capital California Insured Tax Free Fund
(the "California Insured Fund") are each separate diversified series of Van
Kampen American Capital Tax Free Trust, an open-end, diversified management
investment company organized as a Delaware business trust (the "Trust"). See
"The Funds."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").
INVESTMENT OBJECTIVES. The INSURED FUND'S investment objective is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities.
The CALIFORNIA INSURED FUND'S investment objective is to provide only
California investors with a high level of current income exempt from federal and
California income taxes, with liquidity and safety of principal, primarily
through investment in a diversified portfolio of insured California municipal
securities. THE CALIFORNIA INSURED FUND IS AVAILABLE ONLY TO CALIFORNIA
RESIDENTS. Distribution to corporations subject to the California franchise tax
will be included in such corporation's gross income for purposes of determining
the California franchise tax. In addition, corporations subject to the
California corporate income tax may, in certain circumstances, be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. See "Tax Status."
INVESTMENT POLICIES. Municipal securities in which the Insured Fund and
California Insured Fund (each a "Fund" or collectively the "Funds") may invest
include fixed and variable rate securities, municipal notes, municipal leases,
tax exempt commercial paper, custodial receipts, participation certificates and
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions (as defined herein) in
which the Funds may engage. Each Fund may invest up to 15% of its total assets
in derivative variable rate securities such as inverse floaters, whose rates
vary inversely with changes in market rates of interest or range or capped
floaters, whose rates are subject to periodic or lifetime caps. There is no
assurance that either Fund will achieve its investment objectives. The net asset
value per share of the Funds may increase or decrease depending on changes in
interest rates and other factors affecting the municipal credit markets. See
"Investment Objectives and Policies."
INVESTMENT PRACTICES. In certain circumstances the Funds may enter into when-
issued or delayed delivery transactions and various strategic transactions,
which entail certain risks. See "Municipal Securities" and "Investment
Practices."
4
<PAGE> 11
INSURANCE. Each municipal security in the portfolio of the respective Funds is
insured as to the timely payment of principal and interest under one or more
policies obtained by the issuer or purchased by such Fund. No representation is
made as to the ability of any insurer to perform its obligations. See
"Insurance."
INVESTMENT RESULTS. The investment results of the Funds since their inception
are shown in the tables under the captions "Financial Highlights -- Insured
Fund" and "Financial Highlights -- California Insured Fund."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the tables under the
captions "Annual Fund Operating Expenses and Examples -- Insured Fund" and
"Annual Fund Operating Expenses and Examples -- California Insured Fund," set
forth examples of the charges applicable to each class of shares.
Each Fund currently offer three classes of shares which may be purchased at a
price equal to their net asset value per share plus sales charges which, at the
election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."
Class A Shares. Class A Shares of the Insured Fund are subject to an initial
sales charge equal to 4.75% of the public offering price (4.99% of the net
amount invested), reduced on investments of $100,000 or more. Class A Shares of
the California Insured Fund are subject to an initial sales charge equal to
3.25% of the public offering price (3.36% of the net amount invested), reduced
on investments of $25,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
respective Fund's average daily net assets attributable to the Class A Shares.
Certain purchases of Class A Shares qualify for reduced or no initial sales
charges and may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased. Class B Shares of the Insured Fund are subject to a CDSC if redeemed
within six years of purchase, which charge is equal to 4.00% of the lesser of
the then current net asset value or the original purchase price of such shares
in the first year after purchase and is reduced each year thereafter. Class B
Shares of the California Insured Fund are subject to a CDSC if redeemed within
four years of purchase, which charge is equal to 3.00% of the lesser of the then
current net asset value or
5
<PAGE> 12
the original purchase price of such shares in the first year after purchase and
is reduced each year thereafter. Class B Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 1.00% of the
respective Fund's average daily net assets attributable to the Class B Shares.
Class B Shares of the Insured Fund automatically will convert to Class A Shares
of the Insured Fund seven years after the end of the calendar month in which the
investor's order to purchase was accepted. Class B Shares of the California
Insured Fund automatically will convert to Class A Shares of the California
Insured Fund six years after the end of the calendar month in which the
investor's order to purchase was accepted.
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased. Class C Shares are subject to a CDSC equal to 1.00% of the lesser of
the then current net asset value or the original purchase price on Class C
Shares redeemed during the first year after purchase. Class C Shares are subject
to ongoing distribution and service fees at an aggregate annual rate of up to
1.00% of the respective Fund's average daily net assets attributable to the
Class C Shares.
REDEMPTION. Class A Shares may be redeemed at net asset value without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary between the Funds and among
each class of CDSC Shares and with the length of time a redeeming shareholder
has owned such shares. CDSC Shares redeemed after the expiration of the CDSC
period applicable to the respective class of CDSC Shares will not be subject to
a deferred sales charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for both of the Funds. See "Investment Advisory
Services."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.
DISTRIBUTIONS FROM THE FUNDS. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner and the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class. See "Distributions from the Funds."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 13
------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge imposed
on purchases (as
percentage of the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
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--3.75% After--None
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>
----------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares".
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
7
<PAGE> 14
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLES -- INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of average
daily net assets)(1)........................ .51% .51% .51%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... .20%(3) 1.00% 1.00%
Other expenses (as a percentage of average
daily net assets)........................... .22% .29% .28%
Total Expenses (as a percentage of average
daily net assets)(1)........................ .93% 1.80% 1.79%
</TABLE>
----------------
(1) The Board of Trustees of the Trust and the shareholders of the Insured Fund
approved a material change to the investment advisory agreement which
increased the investment advisory fees effective on August 1, 1995. For the
year ended December 31, 1994, the Management Fees were (i) 0.42% with
respect to Class A Shares, (ii) 0.42% with respect to Class B Shares, and
(iii) 0.42% with respect to Class C Shares and Total Expenses were (i) 0.88%
with respect to Class A Shares, (ii) 1.71% with respect to Class B Shares
and (iii) 1.70% with respect to Class C Shares. See "Investment Advisory
Services." As of June 30, 1995, the Board of Trustees of the Trust reduced
the 12b-1 and service fees for the Insured Fund's Class A Shares to 0.25%.
See "The Distribution and Service Fees."
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Insured Fund as compensation for ongoing services rendered to
investors. With respect to each class of shares, amounts in excess of 0.25%,
if any, represent an asset based sales charge. The asset based sales charge
with respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' brokers, dealers or financial intermediaries as
sales compensation. See "The Distribution and Service Fees."
(3) The Insured Fund's distribution and service plans with respect to Class A
Shares provide that 12b-1 and service fees are charged only with respect to
Class A Shares of the Insured Fund sold after the implementation date of
such plans. Due to the incremental "phase-in" of such plans with respect to
Class A Shares, it is anticipated that 12b-1 and service fees attributable
to Class A Shares will increase in accordance with such plans to a maximum
aggregate amount of 0.25% of the net assets attributable to the Insured
Fund's Class A Shares. Accordingly, it is unlikely that future expenses will
remain consistent with those disclosed in the fee table. See "The
Distribution and Service Plans."
8
<PAGE> 15
EXAMPLES:
You would pay the following expenses on a $1,000 investment in the Insured
Fund, assuming (i) an operating expense ratio of 0.93% for Class A Shares, 1.80%
for Class B Shares and 1.79% for Class C Shares, (ii) a 5% annual return and
(iii) redemption at the end of each time period. Insured Fund does not charge a
fee for redemptions (other than any applicable contingent deferred sales
charge):
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 57 $76 $ 97 $ 156
Class B Shares.................... 57 89 108 172*
Class C Shares.................... 29 56 97 211
</TABLE>
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 57 $76 $ 97 $ 156
Class B Shares.................... 17 54 93 172*
Class C Shares.................... 18 56 97 211
</TABLE>
----------------
* Based on conversion to Class A Shares.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Insured Fund will bear
directly or indirectly. The "Examples" reflect expenses based on the "Annual
Fund Operating Expenses" table as shown above carried out to future years. Due
to the incremental "phase-in" of the Insured Fund's 12b-1 plans and service
plans, it is anticipated that 12b-1 and service fees applicable to Insured Fund
will increase in accordance with such plans to a maximum amount of 0.25% of such
Fund's net assets. The ten year amount with respect to the Class B Shares of the
Insured Fund reflects the lower aggregate 12b-1 and service fees applicable to
such shares after conversion to Class A Shares. 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
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."
9
<PAGE> 16
------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES -- CALIFORNIA INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
-------- ------------- -------------
<S> <C> <C> <C>
Maximum sales charge
imposed on purchases (as
percentage of the
offering price).......... 3.25%(1) None None
Maximum sales charge
imposed on reinvested
dividends (as a
percentage of the
offering price).......... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................ None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.50% After--None
Year 3--2.00%
Year 4--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................ None None None
Exchange fees.............. None None None
</TABLE>
----------------
(1) Reduced on investments of $25,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
10
<PAGE> 17
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLES -- CALIFORNIA INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees(1) (as a percentage of average
daily net assets)............................ .18% .18% .18%
12b-1 Fees(2) (as a percentage of average
daily net assets)........................... .25% 1.00% 1.00%
Other Expenses (as a percentage of average
daily net assets)........................... .30% .34% .33%
Total Expenses(1) (as a percentage of average
daily net assets)........................... .73% 1.52% 1.51%
</TABLE>
----------------
(1) Expenses include a waiver of $495,999 of management fees by the Adviser. If
the Adviser did not waive fees for the fiscal year ending December 31, 1994,
the "Management Fee" would have been 0.48% and "Total Expenses" would have
been (i) 1.08% with respect to Class A Shares, (ii) 1.82% with respect to
Class B Shares and (iii) 1.81% with respect to Class C Shares. See
"Investment Advisory Services." As of June 30, 1995, the Board of Trustees
of the Trust reduced the 12b-1 and service fees for the California Insured
Fund's Class A Shares to 0.25%. See "The Distribution and Service Plans."
(2) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the California Fund as compensation for ongoing services rendered to
investors. With respect to each class of shares, amounts in excess of 0.25%,
if any, represent an asset based sales charge. The asset based sales charge
with respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. See "The
Distribution and Service Plans."
11
<PAGE> 18
EXAMPLES:
You would pay the following expenses on a $1,000 investment in the California
Insured Fund, assuming (i) an operating expense ratio of 0.73% for Class A
Shares, 1.52% for Class B Shares and 1.51% for Class C Shares, (ii) a 5% annual
return and (iii) redemption at the end of each time period. California Insured
Fund does not charge a fee for redemptions (other than any applicable contingent
deferred sales charge):
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 40 $55 $ 72 $ 120
Class B Shares.................... 45 68 83 140*
Class C Shares.................... 45 48 82 180
</TABLE>
An investor would pay the following expenses on the same $1,000 investment
assuming no redemption at the end of each period:
<TABLE>
<CAPTION>
ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Class A Shares.................... $ 40 $55 $ 72 $ 120
Class B Shares.................... 15 48 83 140*
Class C Shares.................... 15 48 82 180
</TABLE>
----------------
* Based on conversion to Class A Shares.
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the California Insured Fund
will bear directly or indirectly. The "Examples" reflect expenses based on the
"Annual Fund Operating Expenses" table as shown above carried out to future
years. Additionally, as the California Insured Fund's assets increase, the fees
waived or expenses reimbursed by the Adviser are expected to decrease.
Accordingly, it is unlikely that future expenses as projected will remain
consistent with those determined based on the table of the "Annual Fund
Operating Expenses." The ten year amount with respect to the Class B Shares of
the California Insured Fund reflects the lower aggregate 12b-1 and service fees
applicable to such shares after conversion to Class A Shares. 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
LESSER THAN THOSE SHOWN. For a more complete description of such costs and
expenses, see "Investment Advisory Services" and "The Distribution and Service
Plans."
12
<PAGE> 19
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- INSURED FUND (for a share outstanding throughout the
period)
--------------------------------------------------------------------------------
The following financial highlights for one Class A Share, one Class B Share
and one Class C Share of the Insured Fund outstanding throughout the periods
indicated. The financial highlights have been audited by KPMG Peat Marwick LLP,
independent certified public accountants, for each of the periods indicated and
their reports thereon appear in Insured Fund's related Statement of Additional
Information. This information should be read in conjunction with the financial
statements and related notes thereto included in the related Statements of
Additional Information.
<TABLE>
<CAPTION>
INSURED FUND -- CLASS A SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................... $ 19.587 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394
------------ ------------ ------------ ------------ ------------ ------
Net Investment Income................ 1.051 1.107 1.146 1.153 1.160 1.182
Net Realized and Unrealized Gain/Loss
on Investments..................... (2.280) 1.145 .561 .681 .037 .391
------------ ------------ ------------ ------------ ------------ ------
Total from Investment Operations...... (1.229) 2.252 1.707 1.834 1.197 1.573
------------ ------------ ------------ ------------ ------------ ------
Less:
Distributions from Net Investment
Income............................. 1.056 1.116 1.140 1.160 1.170 1.169
Distributions from Net Realized
Gain............................... -0- -0- .324 .021 -0- -0-
------------ ------------ ------------ ------------ ------------ ------
Total Distributions................... 1.056 1.116 1.464 1.181 1.170 1.169
------------ ------------ ------------ ------------ ------------ ------
Net Asset Value, End of Period........ $ 17.572 $ 19.857 $ 18.721 $ 18.478 $ 17.825 $ 17.798
============ ============ ============ ============ ============ ============
Total Return
(Non-annualized)..................... (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37%
Net Assets at End of Period (in
millions)............................ $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0
Ratio of Expenses to Average Net
Assets (Annualized).................. .88% .84% .83% .88% .87% .88%
Ratio of Net Investment Income to
Average Net Assets (Annualized)...... 5.70% 5.69% 6.14% 6.39% 6.63% 6.73%
Portfolio Turnover.................... 48.46% 78.73% 111.90% 113.25% 107.79% 81.28%
<CAPTION>
YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1988 1987 1986 1985
------------ ------------ ------------ ------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of
Period............................... $ 16.700 $ 17.945 $ 16.189 $ 14.474
------------ ------------ ------ ------
Net Investment Income................ 1.184 1.198 1.249 1.220
Net Realized and Unrealized Gain/Loss
on Investments..................... .682 (1.226) 1.846 1.780
------------ ------------ ------ ------
Total from Investment Operations...... 1.866 (.028) 3.095 3.000
------------ ------------ ------ ------
Less:
Distributions from Net Investment
Income............................. 1.172 1.215 1.231 1.285
Distributions from Net Realized
Gain............................... -0- .002 .108 --
------------ ------------ ------ ------
Total Distributions................... 1.172 1.217 1.339 1.285
------------ ------------ ------ ------
Net Asset Value, End of Period........ $ 17.394 $ 16.700 $ 17.945 $ 16.189
============ ============ ============ ============
Total Return
(Non-annualized)..................... 11.48% .27% 19.73% 21.08%
Net Assets at End of Period (in
millions)............................ $ 555.3 $ 502.5 $ 418.1 $ 188.2
Ratio of Expenses to Average Net
Assets (Annualized).................. .85% .71% .76% .89%
Ratio of Net Investment Income to
Average Net Assets (Annualized)...... 6.92% 7.04% 7.07% 8.00%
Portfolio Turnover.................... 132.85% 119.89% 31.00% 98.19%
</TABLE>
(Table continued on following page)
See Financial Statements and Notes Thereto
13
<PAGE> 20
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INSURED FUND
------------------------------
CLASS B SHARES
------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................................ $ 19.824 $19.320
------ ------
Net Investment Income.......................................................................... .899 .619
Net Realized and Unrealized Gain/Loss on Investments........................................... (2.276) .513
------ ------
Total from Investment Operations................................................................ (1.377) 1.132
------ ------
Less:
Distributions from Net Investment Income....................................................... .884 .628
Distributions from Net Realized Gain........................................................... -- --
------ ------
Total Distributions............................................................................. .884 .628
------ ------
Net Asset Value, End of Period.................................................................. $ 17.563 $19.824
============ ===============
Total Return
(Non-annualized)............................................................................... (7.03%) 5.92%
Net Assets at End of Period (in millions)....................................................... $ 30.0 $ 20.8
Ratio of Expenses to Average Net Assets (Annualized)............................................ 1.71% 1.68%
Ratio of Net Investment Income to Average Net Assets (Annualized)............................... 4.88% 4.25%
Portfolio Turnover.............................................................................. 48.46% 78.73%
<CAPTION>
CLASS C SHARES
------------------------------
AUGUST 13,
1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ -------------
<S> <C> <C>
Net Asset Value, Beginning of Period............................................................ $ 19.823 $19.650
------ ------
Net Investment Income.......................................................................... .908 .350
Net Realized and Unrealized Gain/Loss on Investments........................................... (2.279) .181
------ ------
Total from Investment Operations................................................................ (1.371) .531
------ ------
Less:
Distributions from Net Investment Income....................................................... .884 .358
Distributions from Net Realized Gain........................................................... -- --
------ ------
Total Distributions............................................................................. .884 .358
------ ------
Net Asset Value, End of Period.................................................................. $ 17.568 $19.823
============ ===============
Total Return
(Non-annualized)............................................................................... (6.98%) 2.70%
Net Assets at End of Period (in millions)....................................................... $ 3.5 $ 5.0
Ratio of Expenses to Average Net Assets (Annualized)............................................ 1.70% 1.68%
Ratio of Net Investment Income to Average Net Assets (Annualized)............................... 4.89% 4.21%
Portfolio Turnover.............................................................................. 48.46% 78.73%
</TABLE>
----------------
See Financial Statements and Notes Thereto
14
<PAGE> 21
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- CALIFORNIA INSURED FUND (for a share outstanding
throughout the period)
--------------------------------------------------------------------------------
The following financial highlights for one Class A Share, one Class B Share
and one Class C Share of the California Insured Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their reports thereon appear in California Insured Fund's related
Statement of Additional Information. This information should be read in
conjunction with the financial statements and related notes thereto included in
the related Statements of Additional Information.
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
---------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227
------ ------ ------ ------ ------ ------
Net Investment Income.................. .912 .967 1.004 .990 .990 .988
Net Realized and Unrealized Gain/Loss
on Investments....................... (2.484) 1.441 .585 .529 .123 .381
------ ------ ------ ------ ------ ------
Total from Investment Operations........ (1.572) 2.408 1.589 1.519 1.113 1.369
Less Distributions from Net
Investment Income...................... .912 .980 .990 .990 .990 .989
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period.......... $ 15.802 $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607
============ ============ ============ ============ ============ ============
Total Return(1)
(Non-annualized)....................... (8.75%) 14.54% 10.08% 9.98% 7.44% 9.22%
Net Assets at End of Period (in
millions).............................. $ 130.3 $ 151.1 $ 74.2 $ 60.2 $ 50.6 $ 46.6
Ratio of Expenses to Average Net
Assets(1)
(Annualized)........................... .78% .69% .69% .55% .69% .75%
Ratio of Net Investment Income to
Average Net Assets(1) (Annualized)..... 5.46% 5.37% 6.07% 6.20% 6.42% 6.38%
Portfolio Turnover...................... 56.38% 36.17% 60.70% 69.85% 34.03% 32.18%
<CAPTION>
DECEMBER 13, 1985
(COMMENCEMENT
YEAR YEAR YEAR OF INVESTMENT
ENDED ENDED ENDED OPERATIONS) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1988 1987 1986 1985
------------ ------------ ------------ -----------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of Period.... $ 14.719 $ 16.274 $ 14.464 $14.265
------------ ------ ------ ------
Net Investment Income.................. .981 1.041 1.034 .024
Net Realized and Unrealized Gain/Loss
on Investments....................... .519 (1.566) 1.832 .175
------------ ------ ------ ------
Total from Investment Operations........ 1.500 (.525) 2.866 .199
Less Distributions from Net
Investment Income...................... .992 1.030 1.056 .000
------------ ------ ------ ------
Net Asset Value, End of Period.......... $ 15.227 $ 14.719 $ 16.274 $14.464
============ ============ ============ =================
Total Return(1)
(Non-annualized)....................... 10.51% (2.72%) 20.01% 1.19%
Net Assets at End of Period (in
millions).............................. $ 37.3 $ 31.5 $ 12.9 $ 1.1
Ratio of Expenses to Average Net
Assets(1)
(Annualized)........................... .65% .14% .16% 1.01%
Ratio of Net Investment Income to
Average Net Assets(1) (Annualized)..... 6.53% 7.02% 6.05% 3.18%
Portfolio Turnover...................... 100.50% 68.82% 21.45% 0%
</TABLE>
----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of expenses to average net assets
(Annualized)............................ 1.08% 1.01% 1.08% 1.04% 1.06% 1.10%
Ratio of net investment income to average
net assets (Annualized)................. 5.16% 5.05% 5.68% 5.71% 6.05% 6.04%
<CAPTION>
Ratio of expenses to average net assets
Ratio of net investment income to average
net assets (Annualized)................. 6.08% 6.19% 3.23% 2.68%
<CAPTION>
(Annualized)............................ 1.11% .97% 2.98% 1.51%
</TABLE>
(Table continued on following page)
See Financial Statements and Notes Thereto
15
<PAGE> 22
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED (for a share outstanding throughout the period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND
-------------------------------
CLASS B SHARES
-------------------------------
MAY 1, 1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................................................... $ 18.266 $ 17.570
------ ------
Net Investment Income......................................................................... .785 .549
Net Realized and Unrealized Gain/Loss on Investments.......................................... (2.482) .705
------ ------
Total from Investment Operations............................................................... (1.697) 1.254
Less Distributions from Net Investment Income.................................................. .764 .558
------ ------
Net Asset Value, End of Period................................................................. $ 15.805 $ 18.266
============ ===============
Total Return(1) (Non-annualized)............................................................... (9.39%) 7.25%
Net Assets at End of Period (in millions)...................................................... $ 17.1 $ 15.3
Ratio of Expenses to Average Net Assets(1) (Annualized)........................................ 1.52% 1.45%
Ratio of Net Investment Income to Average Net Assets(1) (Annualized)........................... 4.71% 4.06%
Portfolio Turnover............................................................................. 56.38% 36.17%
<CAPTION>
CLASS C SHARES
-------------------------------
AUGUST 13,
1993
(COMMENCEMENT
OF
YEAR DISTRIBUTION)
ENDED TO
DECEMBER 31, DECEMBER 31,
1994 1993
------------ --------------
<S> <C> <C>
Net Asset Value, Beginning of Period........................................................... $ 18.257 $ 18.010
------ ------
Net Investment Income......................................................................... .773 .307
Net Realized and Unrealized Gain/Loss on Investments.......................................... (2.486) .258
------ ------
Total from Investment Operations............................................................... (1.695) .565
Less Distributions from Net Investment Income.................................................. .764 .318
------ ------
Net Asset Value, End of Period................................................................. $ 15.798 $ 18.257
============ ===============
Total Return(1) (Non-annualized)............................................................... (9.40%) 3.17%
Net Assets at End of Period (in millions)...................................................... $ 2.8 $ 4.0
Ratio of Expenses to Average Net Assets(1) (Annualized)........................................ 1.51% 1.45%
Ratio of Net Investment Income to Average Net Assets(1) (Annualized)........................... 4.71% 3.82%
Portfolio Turnover............................................................................. 56.38% 36.17%
</TABLE>
----------------
(1) If certain expenses had not been assumed by the Adviser, Total Return would
have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C>
Ratio of expenses to average net assets (Annualized)........................................... 1.82% 1.77%
Ratio of net investment income to average net assets (Annualized).............................. 4.41% 3.74%
<CAPTION>
Ratio of expenses to average net assets (Annualized)........................................... 1.82% 1.76%
<S> <C> <C>
Ratio of net investment income to average net assets (Annualized).............................. 4.39% 3.52%
</TABLE>
See Financial Statements and Notes Thereto
16
<PAGE> 23
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THE FUNDS
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Van Kampen American Capital Insured Tax Free Income Fund (the "Insured Fund")
and Van Kampen American Capital California Insured Tax Free Fund (the
"California Insured Fund") are each separate diversified series of the Van
Kampen American Capital Tax Free Trust (the "Trust"), an open-end management
investment company, commonly known as a "mutual fund," which is organized as a
Delaware business trust.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Insured Fund and
California Insured Fund (each a "Fund" and collectively the "Funds"). The
Adviser and its affiliates also manage other mutual funds distributed by Van
Kampen American Capital Distributors, Inc. (the "Distributor"). To obtain
prospectuses and other information on any of these other funds, please call the
telephone number on the cover page of the Prospectus.
------------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES
------------------------------------------------------------------------------
INSURED FUND. The investment objective of the Insured Fund is to provide
investors with a high level of current income exempt from federal income taxes,
with liquidity and safety of principal, primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the Insured Fund's portfolio, except for investments in tax exempt
money market funds as noted below, will be insured as to timely payment of both
principal and interest. However, there are market risks inherent in all
investments in securities; accordingly there can be no assurance that the
Insured Fund will achieve its objective.
The Insured Fund will generally invest all of its assets in municipal
securities, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax. See
"Municipal Securities." From time to time the Insured Fund temporarily may also
invest up to 10% of its assets in tax exempt money market funds. Such
instruments will be treated as investments in municipal securities.
CALIFORNIA INSURED FUND. The investment objective of the California Insured
Fund is to provide only California investors with a high level of current income
exempt from federal and California income taxes, with liquidity and safety of
principal, primarily through investment in a diversified portfolio of insured
California municipal securities. All of the municipal securities in the
California Insured Fund's portfolio, except for investments in tax exempt money
funds as noted below, will be insured as to timely payment of both principal and
interest. However, there are market risks inherent in all investments in
securities; and accordingly there can be no assurance that the California
Insured Fund will achieve its objective. THE CALIFORNIA INSURED FUND IS
AVAILABLE ONLY TO RESIDENTS OF CALIFORNIA.
17
<PAGE> 24
The California Insured Fund will generally invest all of its assets in
California municipal securities, the interest on which, in the opinion of bond
counsel or other counsel to the issuer of such securities, is exempt from
federal and California income tax. Distribution to corporations subject to the
California franchise tax will be included in such corporation's gross income for
purposes of determining the California franchise tax. In addition, corporations
subject to the California corporate income tax may, in certain circumstances, be
subject to such taxes with respect to distributions from the California Insured
Fund. Accordingly, an investment in shares of the California Insured Fund may
not be appropriate for corporations subject to either tax. See "Municipal
Securities" and "Tax Status." From time to time the California Insured Fund
temporarily may also invest up to 10% of its assets in California tax exempt
money market funds. Such instruments will be treated as investments in municipal
securities.
Investments in the Funds may not be appropriate for all investors. The Funds
are 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 Funds. Investments in the Funds are
intended to be long-term investments and should not be used as trading vehicles.
------------------------------------------------------------------------------
MUNICIPAL SECURITIES
------------------------------------------------------------------------------
GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of each of the
Fund's assets will be invested in such municipal securities. The foregoing is a
fundamental policy of each of the Funds and cannot be changed without approval
of the shareholders of the respective Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually 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. Industrial development bonds are usually revenue securities, the
credit quality of which is normally directly related to the credit standing of
the industrial user involved.
Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements
18
<PAGE> 25
of, or are similar in effect to, certain Strategic Transactions (as defined
below) in which the Funds may engage. Variable rate securities bear rates of
interest that are adjusted periodically according to formulae intended to
reflect market rates of interest and include securities whose rates vary
inversely with changes in market rates of interest. Neither Fund will invest
more than 15% of its total assets in derivative municipal securities such as
inverse floaters, whose rates vary inversely with changes in market rates of
interest, or range floaters or capped floaters whose rates are subject to
periodic or lifetime caps. Such securities may also pay a rate of interest
determined by applying a multiple to the variable rate. The extent of increases
and decreases in the value of securities whose rates vary inversely with market
rates of interest generally will be larger than comparable changes in the value
of an equal principal amount of a fixed rate municipal security having similar
credit quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Some municipal securities may not be backed by the faith,
credit and taxing power of the issuer. Custodial receipts are underwritten by
securities dealers or banks and evidence ownership of future interest payments,
principal payments or both on certain municipal securities. Participation
certificates are obligations issued by state or local governments or authorities
to finance the acquisition of equipment and facilities. They may represent
participations in a lease, an installment purchase contract or a conditional
sales contract. Some municipal securities may not be backed by the faith, credit
and taxing power of the issuer. Certain of the municipal securities in which the
Funds may invest represent relatively recent innovations in the municipal
securities markets. While markets for such recent innovations progress through
stages of development, such markets may be less developed than more fully
developed markets for municipal securities. A more detailed description of the
types of municipal securities in which the Funds may invest is included in each
Fund's Statement of Additional Information.
The net asset value of each of the Funds will change with changes in the value
of their respective portfolio securities. Because the Funds will invest
primarily in fixed income municipal securities, the net asset value of each of
the Funds can be expected to change as general levels of interest rates
fluctuate. When interest rates decline, the value of a portfolio invested in
fixed income securities generally can be expected to rise. Conversely, when
interest rates rise, the value of a portfolio invested in fixed income
securities generally can be expected to decline. Volatility may be greater
during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal
19
<PAGE> 26
securities. If such a proposal were enacted, the ability of the Funds to pay tax
exempt interest dividends might be adversely affected.
INSURED MUNICIPAL SECURITIES. With respect to its investments in municipal
securities, each of the Insured Fund and the California Insured Fund may invest
only in municipal securities insured under one of the insurance policies meeting
the standards described in this Prospectus. See "Insurance." Although each
insurer's quality standards may vary from time to time, such insurers generally
insure only those municipal securities that are rated at the date of purchase
(1) in the case of long-term debt, in the four highest ratings by Standard &
Poor's Ratings Group (S&P) (AAA, AA, A and BBB) or by Moody's Investors Service,
Inc. (Moody's) (Aaa, Aa, A and Baa); (2) in the case of short-term notes, SP-1+
through SP-2 by S&P or MIG 1 through MIG 4 by Moody's; or (3) in the case of
tax-exempt commercial paper, A-1+ through A-2 by S&P or Prime-1 through Prime-2
by Moody's. Such ratings are relative and subjective and are not absolute
standards of quality. Any insurer may also insure, and each of the Insured Fund
and California Insured Fund may invest in, unrated municipal securities of
similar quality, as determined by the Adviser, if such securities meet the
insurance standards of such insurer. The Insured Fund and California Insured
Fund may invest, without limitation as to rating category, in any securities for
which such Funds obtain insurance coverage. For a description of such ratings
see the respective Fund's Statement of Additional Information incorporated by
reference into this Prospectus.
SPECIAL CONSIDERATIONS REGARDING CALIFORNIA MUNICIPAL SECURITIES. Investors
should be aware of certain factors that might affect the financial condition of
the issuers of California municipal securities. With respect to an investment in
the Fund, through popular initiative and legislative activity, the ability of
the State of California (the "State") and its local governments to raise money
through property taxes and to increase spending has been the subject of
considerable debate and change in recent years. Various State Constitutional
amendments, for example, have been adopted which have the effect of limiting
property tax and spending increases, while legislation has sometimes added to
these limitations and has at other times sought to reduce their impact. To date,
these Constitutional, legislative and budget developments do not appear to have
severely decreased the ability of the State and local governments to pay
principal and interest on their obligations. It can be expected that similar
types of State legislation or Constitutional proposals will continue to be
introduced. The impact of future developments in these areas is unclear.
From 1990 until 1994, the State experienced the worst economic, fiscal and
budget conditions since the 1930's. The recession seriously affected State tax
revenues and caused increased expenditures for health and welfare programs. As a
result, the State faced several budget imbalances and used up many of its
available cash resources. Accordingly, rating agencies have reduced the State's
credit ratings several times during recent years.
20
<PAGE> 27
Although revenue obligations of the State of California or its political
subdivisions may be payable from a specific project or source, including lease
rentals, there can be no assurance that future economic difficulties and the
resulting impact on State and local government finances will not adversely
affect the market value of the portfolio of the Fund or the ability of the
respective obligors to make timely payments of principal and interest on such
obligations.
More detailed information concerning California municipal securities is
included in the California Insured Fund's Statement of Additional Information.
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for each
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the particular
investment policies of such Fund. As a result, the Funds will not necessarily
invest in the highest yielding tax-exempt municipal securities permitted by
their respective investment policies if the Adviser determines that market risks
or credit risks associated with such investments would subject a Fund's
portfolio to excessive risk. The potential for realization of capital gains
resulting from possible changes in interest rates will not be a major
consideration. There is no limitation as to the maturity of municipal securities
in which a Fund may invest. The Adviser may adjust the average maturity of a
Fund's portfolio from time to time, depending on its assessment of the relative
yields available on securities of different maturities and its expectations of
future changes in interest rates. Other than for tax purposes, frequency of
portfolio turnover will generally not be a limiting factor if any of the Funds
considers it advantageous to purchase or sell securities. The Funds may have
annual portfolio turnover rates in excess of 100%. A high rate of portfolio
turnover involves correspondingly greater brokerage commission expenses or
dealer costs than a lower rate, which expenses and costs must be borne by the
respective Fund and its shareholders. High portfolio turnover may also result in
the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status."
DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing a Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of such Fund's assets. In
implementing these "defensive" strategies, a Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
such Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase
21
<PAGE> 28
agreements with respect to any of the foregoing investments; or any other fixed-
income securities that the Adviser considers consistent with such strategy.
------------------------------------------------------------------------------
INVESTMENT PRACTICES
------------------------------------------------------------------------------
In connection with the investment policies described above, the Funds also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions generally will not be treated as investments in tax-exempt
municipal securities for purposes of the Funds' 80% investment policy with
respect thereto.
STRATEGIC TRANSACTIONS. The Funds may purchase and sell derivative
instruments such as exchange-listed and over-the-counter put and call options on
securities, financial futures, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and enter into
various interest rate transactions such as swaps, caps, floors or collars.
Collectively, all of the above are referred to as "Strategic Transactions."
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for a
Fund's portfolio resulting from securities markets, to protect such Fund's
unrealized gains in the value of its portfolio securities, to facilitate the
sale of such securities for investment purposes, to manage the effective
maturity or duration of such Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities. Any or all of these investment techniques may be used at
any time and there is no particular strategy that dictates the use of one
technique rather than another, as use of any Strategic Transaction is a function
of numerous variables including market conditions. The ability of a Fund to
utilize these Strategic Transactions successfully will depend on the Adviser's
ability to predict pertinent market movements, which cannot be assured. The
Funds will comply with applicable regulatory requirements when implementing
these strategies, techniques and instruments. Strategic Transactions involving
financial futures and options thereon will be purchased, sold or entered into
only for bona fide hedging, risk management or portfolio management purposes and
not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to a
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation such Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a Fund creates the possibility that losses on the hedging instrument
may be greater than gains in the value of such Fund's position. In addition,
futures and
22
<PAGE> 29
options markets may not be liquid in all circumstances and certain
over-the-counter options may have no markets. As a result, in certain markets, a
Fund might not be able to close out a transaction without incurring substantial
losses, if at all. Although the contemplated use of these futures contracts and
options thereon should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time they tend to limit any potential
gain which might result from an increase in value of such position. Finally, the
daily variation margin requirements for futures contracts would create a greater
ongoing potential financial risk than would purchases of options, where the
exposure is limited to the cost of the initial premium. Losses resulting from
the use of Strategic Transactions would reduce net asset value, and possibly
income, and such losses can be greater than if the Strategic Transactions had
not been utilized. The Strategic Transactions that a Fund may use and some of
their risks are described more fully in the respective Fund's Statement of
Additional Information.
Income earned or deemed to be earned, if any, by a Fund from its Strategic
Transactions will be distributed to its shareholders in taxable distributions.
See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Funds may also
purchase and sell municipal securities on a "when issued" and "delayed delivery"
basis. No income accrues to the Funds on municipal securities in connection with
such purchase transactions prior to the date the Funds actually take delivery of
such securities. These transactions are subject to market fluctuation; the value
of the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Funds rely on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Funds missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Funds are the
buyer in such a transaction, however, they will maintain, in a segregated
account with their custodian, cash or high-grade municipal portfolio securities
having an aggregate value equal to the amount of such purchase commitments until
payment is made. The Funds will make commitments to purchase municipal
securities on such basis only with the intention of actually acquiring these
securities, but the Funds may sell such securities prior to the settlement date
if such sale is considered to be advisable. No specific limitation exists as to
the percentage of each Fund's assets which may be used to acquire securities on
a "when issued" or "delayed delivery" basis. To the extent a Fund engages in
"when issued" and "delayed delivery" transactions, they will do so for the
purpose of acquiring securities for the respective Fund's portfolio consistent
with such Fund's respective investment objectives and policies and not for the
purposes of investment leverage. No specific limitation exists as to the
percentage of a Fund's assets which may be used to acquire securities on a "when
issued" or "delayed delivery" basis.
23
<PAGE> 30
OTHER PRACTICES. The Funds have no restrictions on the maturity of municipal
bonds in which they may invest. Each Fund will seek to invest in municipal bonds
of such maturities that, in the judgment of such Fund and the Adviser, will
provide a high level of current income consistent with liquidity requirements
and market conditions.
The Funds may borrow amounts up to 5% of their respective net assets in order
to pay for redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of their respective net
assets to secure such borrowings.
A Fund generally will not invest more than 25% of its total assets in any
industry, nor will a Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that a Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Advisor determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Insured Fund reserves the right to invest more than 25% of its
assets in industrial development bonds or in issuers located in the same state,
although it has no present intention to invest more than 25% of its assets in
issuers located in the same state. If the Insured Fund were to invest more than
25% of its assets in issuers located in the same state, it would be more
susceptible to adverse economic, business, or regulatory conditions in that
state. The California Insured Fund invests primarily in a diversified portfolio
of insured California municipal securities.
ALLOCATION OF BROKERAGE TRANSACTIONS. In effecting purchases and sales of the
Funds' portfolio securities, the Adviser and the Funds may place orders with and
pay brokerage commissions to brokers, including brokers which may be affiliated
with the Funds, the Adviser and the Distributor or dealers participating in the
offering of the Funds' shares. In addition, in selecting among firms to handle a
particular transaction, the Adviser and the Funds may take into account whether
the firm has sold or is selling shares of the Funds.
24
<PAGE> 31
------------------------------------------------------------------------------
INSURANCE
------------------------------------------------------------------------------
All of the municipal securities in the portfolios of the Insured Fund and the
California Insured Fund will be insured by municipal bond insurers whose claims-
paying ability is rated "AAA" by S&P on the date of purchase. Timely payment of
all principal and interest of each municipal security in the portfolios of the
Insured Fund and the California Insured Fund either will be pre-insured under a
policy obtained for such securities prior to the purchase of the securities by
such Funds or will be insured under policies obtained by such Funds to cover
otherwise uninsured securities. With respect to municipal securities that are
not pre-insured, the Insured Fund and the California Insured Fund have each
obtained a mutual fund portfolio insurance policy from AMBAC Indemnity
Corporation ("AMBAC") whose claims-paying ability is rated "AAA" by S&P. The
Insured Fund and the California Insured Fund may obtain portfolio insurance from
other insurers in the future. No representation is made as to any insurer's
ability to meet its commitments.
Each insurance policy guarantees the timely payment of all principal and
interest on the municipal securities. Each policy provides, in general, that in
the event of nonpayment of interest or principal, when due, in respect of an
insured municipal security, the insurer is obligated to make such payment not
later than 30 days after it has been notified by the respective Fund that such
nonpayment has occurred (but not earlier than the date when such payment is
due). For these purposes, a payment of principal is due only at scheduled
maturity, including required sinking fund payments and mandatory redemptions, of
the security and not at any earlier time. The insurance does not guarantee the
market value of the municipal securities or the value of the shares of the
Funds.
More detailed information concerning such insurance policies, and concerning
AMBAC, is included in the respective Fund's Statement of Additional Information.
------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Funds. The Adviser is a
wholly-owned subsidiary of Van Kampen American Capital, Inc. ("Van Kampen
American Capital"). Van Kampen American Capital is a diversified asset
management company with more than two million retail investor accounts,
extensive capabilities for managing institutional portfolios, and over $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 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.
25
<PAGE> 32
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 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
ADVISORY AGREEMENT. The business and affairs of each of the Funds will be
managed under the direction of the Board of Trustees of the Trust, of which each
Fund is a separate series. Subject to their authority, the Adviser and the
respective officers of the Funds will supervise and implement the Funds'
investment activities and will be responsible for overall management of the
Funds' business affairs. Each Fund will pay the Adviser a fee equal to a
percentage of the average daily net assets of the respective Fund as follows:
<TABLE>
<CAPTION>
INSURED FUND CALIFORNIA FUND
----------------------------------- -----------------------------------
<S> <C> <C> <C>
AVERAGE DAILY NET AVERAGE DAILY NET
ASSETS % PER ANNUM ASSETS % PER ANNUM
---------------------- ----------- ---------------------- -----------
First $500 million.... 0.525% First $100 million.... 0.500%
Next $500 million..... 0.500% Next $150 million..... 0.450%
Next $500 million..... 0.475% Next $250 million..... 0.425%
Over $1,500 million... 0.450% Over $500 million..... 0.400%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor, or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.
PERSONAL INVESTING POLICIES. The Funds and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between each Fund and
the Adviser and its employees. The Codes permit trustees/directors, officers and
26
<PAGE> 33
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. Joseph A. Piraro, a Vice President of the Adviser, is
primarily responsible for the day-to-day management of each Fund's portfolio.
Mr. Piraro has been employed by the Adviser since 1992. Prior to 1992, Mr.
Piraro was employed by First Chicago Capital Markets.
------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Funds, and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution fees with respect to each class of shares that may be
incurred over the anticipated duration of their investment in the Funds.
Each Fund currently offers three classes of shares, designated Class A Shares,
Class B Shares and Class C Shares. Shares of each class are offered at a price
equal to their net asset value per share plus a sales charge which, at the
election of the purchaser, may be imposed (a) at the time of purchase ("Class A
Shares") or (b) on a contingent deferred basis (Class A Share accounts over $1
million, "Class B Shares" and "Class C Shares"). Class A Share accounts over $1
million or otherwise subject to a contingent deferred sales charge ("CDSC"),
Class B Shares and Class C Shares sometimes are referred to herein collectively
as "Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of
27
<PAGE> 34
such Class A Shares would not have all of his or her funds invested initially
and, therefore, would initially own fewer shares than if Class B Shares or Class
C Shares had been purchased. On the other hand, an investor whose purchase would
not qualify for price discounts applicable to Class A Shares and intends to
remain invested until after the expiration of the applicable CDSC may wish to
defer the sales charge and have all his or her funds initially invested in Class
B Shares or Class C Shares. If such an investor anticipates that he or she will
redeem such shares prior to the expiration of the CDSC period applicable to
Class B Shares, the investor may wish to acquire Class C Shares. Investors must
weigh the benefits of deferring the sales charge and having all of their funds
invested against the higher aggregate distribution and service fee applicable to
Class B Shares and Class C Shares (discussed below). Investors who intend to
hold their shares for a significantly long time may not wish to continue to bear
the ongoing distribution and service expenses of Class C Shares which, in the
aggregate, eventually would exceed the aggregate amount of initial sales charge
and distribution and service expenses applicable to Class A Shares, irrespective
of the fact that a CDSC would eventually not apply to a redemption of Class C
Shares.
Each class of shares represents an interest in the same portfolio of
investments of a Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the respective Fund's Rule 12b-1 distribution plan which relate only to such
class and (iii) has a different exchange privilege. Only the Class B Shares are
subject to a conversion feature (discussed below). Generally, a class of shares
subject to a higher ongoing distribution fee, service fee or, where applicable,
the conversion feature will have a higher expense ratio and pay lower dividends
than a class of shares subject to a lower ongoing distribution fee, service fee
or not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Funds will be
determined as described in this Prospectus under "Purchase of Shares -- Net
Asset Value."
The administrative expenses that may be allocated to a specific class of
shares will consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified
28
<PAGE> 35
that should be properly allocated to one or more classes of shares that shall be
approved by the SEC pursuant to an amended exemptive order. All such expenses
incurred by a class will be borne on a pro rata basis by the outstanding shares
of such class. All allocations of administrative expenses to a particular class
of shares will be limited to the extent necessary to preserve the respective
Fund's qualification as a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code").
------------------------------------------------------------------------------
PURCHASE OF SHARES
------------------------------------------------------------------------------
Shares of the Funds are continuously offered through Van Kampen American
Capital Distributors, Inc. (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") acting as securities dealers ("dealers") and through NASD members
acting as brokers for investors ("brokers") or eligible non-NASD members acting
as agents for investors ("financial intermediaries"). Each of the Funds reserves
the right to suspend or terminate the continuous public offering of its shares
at any time and without prior notice.
The Funds' shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or with the Distributor plus any
applicable sales charge. Sales personnel of brokers, dealers and financial
intermediaries distributing the Funds' shares may receive differing compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Funds generally will determine net asset value once
each business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
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 or dealer 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
29
<PAGE> 36
shares of the Funds. Also, the Distributor in its discretion may from time to
time, pursuant to objective criteria established by it, pay fees to, and sponsor
business seminars for, qualifying brokers, dealers or financial intermediary for
certain services or activities which are primarily intended to result in sales
of shares of the Funds. 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 a Fund will not exceed in the
aggregate 1.25% of the average total daily net assets of such Fund on an annual
basis. In addition, the Distributor may provide additional compensation to
Edward D. Jones & Co. ("Edward D. Jones") or an affiliate thereof based on a
combination of its sales of shares and increases in assets under management.
Such payments to brokers, dealers and financial intermediaries for sales
contests, other sales programs and seminars are made by the Distributor out of
its own assets and not out of the assets of the Funds. These programs will not
change the price an investor will pay for shares or the amount that the
respective Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The tables below with
respect to the Funds show total sales charges and dealer concessions reallowed
to dealers and agency commissions paid to brokers with respect to sales of Class
A Shares. The sales charge is allocated between the investor's broker, dealer or
financial intermediary and the Distributor. As indicated previously, at the
discretion of the Distributor, the entire sales charge may be reallowed to such
broker, dealer or financial intermediary. The staff of the SEC has taken the
position that brokers, dealers and financial intermediaries who receive more
than 90% or more of the sales charge may be deemed to be "underwriters" as that
term is defined in the Securities Act of 1933.
SALES CHARGE TABLES
INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
<S> <C> <C> <C>
---------------------------------------------------------------------------
Less than $100,000.................... 4.75% 4.99% 4.25%
$100,000 but less than $250,000....... 3.75 3.90 3.25
$250,000 but less than $500,000....... 2.75 2.83 2.25
$500,000 but less than $1,000,000..... 2.00 2.04 1.75
$1,000,000 or more*................... * * *
</TABLE>
30
<PAGE> 37
CALIFORNIA INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
COMMISSION
TOTAL SALES CHARGE ----------
------------------------- PERCENTAGE
PERCENTAGE PERCENTAGE OF
SIZE OF TRANSACTION OF OFFERING OF NET OFFERING
AT OFFERING PRICE PRICE ASSET VALUE PRICE
<S> <C> <C> <C>
---------------------------------------------------------------------------
Less than $25,000..................... 3.25% 3.36% 3.00%
$25,000 but less than $250,000........ 2.75 2.83 2.50
$250,000 but less than $500,000....... 1.75 1.78 1.50
$500,000 but less than $1,000,000..... 1.50 1.52 1.25
$1,000,000 or more*................... * * *
</TABLE>
----------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Funds imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% 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. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
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 respective Fund whenever a quantity discount is applicable to purchases.
Upon such notification, an investor will receive the lowest applicable sales
charge. Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) 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 is 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 ("Money Market Fund"), Van Kampen American Capital Tax Free
Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve Fund
("Reserve Fund") and The Govett Funds, Inc.
31
<PAGE> 38
VOLUME DISCOUNTS. The size of investment shown in the preceding tables applies
to the total dollar amount being invested by any person at any one time in Class
A Shares of a Fund alone, or in combination with other shares of such Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
tables may also be determined by combining the amount being invested in Class A
Shares of a Fund with other shares of such Fund and shares of Participating
Funds plus the current offering price of all shares of such Fund and other
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 amount being invested over a
13-month period to determine the sales charge as outlined in the preceding
tables. The size of investment shown in the preceding table includes the amount
of intended purchases of Class A Shares of a Fund with other shares of such Fund
and shares of the Participating Funds plus the value of all shares of such Fund
and other Participating Funds previously purchased during such 13-month period
and still owned. An investor may elect to compute the 13-month period starting
up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of the investment goal. If trades not initially made under a
Letter of Intent subsequently qualify for a lower sales charge through the
90-day back-dating provision, an adjustment will be made at the expiration of
the Letter of Intent to give effect to the lower charge. If the goal is not
achieved within the 13-month period, the investor must pay the difference
between the charges applicable to the purchases made and the charges previously
paid. When an investor signs a Letter of Intent, shares equal to at least 5% of
the total purchase amount of the level selected will be restricted from sale or
redemption by the investor until the Letter of Intent is satisfied or any
additional sales charges have been paid; if the Letter of Intent is not
satisfied by the investor and any additional sales charges are not paid,
sufficient restricted shares will be redeemed by the Fund to pay such charges.
Additional information is contained in the application accompanying this
Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
respective Fund or the Distributor. The Funds reserve the right to modify or
terminate these arrangements at any time.
32
<PAGE> 39
UNIT TRUST REINVESTMENT PROGRAMS. Each of the Funds permits unitholders of
unit investment trusts to reinvest distributions from such trusts in Class A
Shares of such Fund 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 such Fund and the Distributor. The total sales charge for all
investments made from unit trust distributions will be 1.00% of the offering
price (1.01% of net asset value). Of this amount, the Distributor will pay to
the 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 broker, dealer or financial
intermediary 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
respective Fund during each distribution period by all investors who choose to
invest in such Fund through the program and (2) provide such Fund's transfer
agent with appropriate backup data for each participating investor in a
computerized format fully compatible with the transfer agent's processing
system.
As further requirements for obtaining these special benefits, the respective
Fund also requires that all dividends and other distributions by such Fund be
reinvested in additional shares without any systematic withdrawal program. There
will be no minimum for reinvestments from unit investment trusts. The Fund will
send account activity statements to such participants on a monthly basis only,
even if their investments are made more frequently.
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 Asset Management, Inc. 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.
33
<PAGE> 40
(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 Class A Shares of a Fund alone, or in any
combination of shares of such Fund and shares of other Participating Funds
as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of a Fund with redemption proceeds from other
mutual fund complexes on which the investor has paid a front-end sales
charge or was subject to a deferred sales charge, whether or not paid, if
such redemption has occurred no more than 30 days prior to such purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the respective Fund imposes a contingent
deferred sales charge of 1.00% in the event of redemptions within one year
of the purchase other than redemptions required to make payments to
participants under the terms of the plan. The contingent deferred sales
charge incurred upon certain redemptions is paid to the Distributor in
reimbursement for distribution-related expenses. A commission will be paid
to dealers who initiate and are responsible for such purchases as follows:
1.00% on sales to $5 million, plus 0.50% on the next $5 million, plus
0.25% on the excess over $10 million.
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 brokers, dealers or financial intermediaries as described above or
directly with the respective Fund's transfer agent, the investment adviser,
trust company or bank trust department, provided that such Fund's transfer agent
receives federal funds for the purchase by the close of business on the next
business day following acceptance of the order. An authorized broker, dealer or
financial intermediary may
34
<PAGE> 41
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.
The Funds may terminate, or amend the terms of, offering shares of the Funds at
net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Funds may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of the
assets of the respective Fund, at a percentage rate of the dollar value of the
CDSC Shares purchased from such Fund by such brokers, dealers and financial
intermediaries, which percentage rate will be equal to (i) with respect to Class
A Shares, 1.00% 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; (ii) 4.00%
with respect to Class B Shares of the Insured Fund; (iii) 3.00% with respect to
Class B Shares of the California Insured Fund; and (iv) 1.00% with respect to
Class C Shares of each Fund. Such compensation will not change the price an
investor will pay for CDSC Shares or the amount that the respective Fund will
receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
amount of the contingent deferred sales charge will vary depending on (i) the
class of CDSC Shares to which such shares belong and (ii) the number of years
from the time of payment for the purchase of the CDSC Shares until the time of
their redemption. The charge will be assessed on an amount equal to the lesser
of the then current market value or the original purchase price of the CDSC
Shares being redeemed. Accordingly, no sales charge will be imposed on increases
in net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchase of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.
Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
respective Fund in connection with the sale of shares of such class of CDSC
Shares, such as the payment of compensation to selected dealers and agents for
selling such shares. The combination of the contingent deferred sales charge and
the distribution and
35
<PAGE> 42
services fees facilitates the ability of the respective Fund to sell such CDSC
Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares, if any, and fourth of CDSC Shares held
longest during the period of time that a contingent deferred sales charge is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value per share since the time of
purchase.
To provide an example, assume an investor purchased 100 Class B Shares of the
Insured Fund (as set forth below) 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 10 additional Class B Shares upon dividend
reinvestment. If at such time the investor makes his first redemption of 50
shares (proceeds of $600), 10 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
will be charged at a rate of 3.75% (the applicable rate in the second year after
purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the respective Fund may impose a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are responsible
for purchases of $1 million or more as follows: 1.00% 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.
CLASS B SHARES. Class B Shares redeemed within the number of years of purchase
set forth below generally will be subject to a contingent deferred sales
36
<PAGE> 43
charge at the rates set forth below, charged as a percentage of the dollar
amount subject thereto:
INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
-------------------- -------------------
<S> <C> <C>
First................................ 4.00%
Second............................... 3.75%
Third................................ 3.50%
Fourth............................... 2.50%
Fifth................................ 1.50%
Sixth................................ 1.00%
Seventh and after.................... 0.00%
</TABLE>
CALIFORNIA INSURED FUND
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
-------------------- -------------------
<S> <C> <C>
First................................ 3.0%
Second............................... 2.5%
Third................................ 2.0%
Fourth............................... 1.0%
Fifth and after...................... 0.0%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
Conversion Feature. Class B Shares of the Insured Fund automatically will
convert to Class A Shares of the Insured Fund seven years after the end of the
month in which a shareholder's order to purchase such Class B Shares was
accepted and thereafter will be subject to the lower aggregate distribution and
service fees applicable to Class A Shares of the Insured Fund. Class B Shares of
the California Insured Fund automatically will convert to Class A Shares of the
California Insured Fund six years after the end of the month in which a
shareholder's order to purchase such Class B Shares was accepted and thereafter
will be subject to the lower aggregate distribution and service fees applicable
to Class A Shares of the California Insured Fund. The purpose of the conversion
feature is to relieve the holders of Class B Shares that have been outstanding
for a period of time sufficient
37
<PAGE> 44
for the Distributor to have been compensated for distribution expenses related
to the Class B Shares from most of the burden of such distribution-related
expenses.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to a Class B Share of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of a Fund prior to conversion, a Class B Share of
such Fund issued in connection with an exercise of the exchange privilege, or a
series of exchanges, shall be deemed to have been issued on the date on which
the investor's order to purchase the exchanged Class B Share was accepted or, in
the case of a series of exchanges, when the investor's order to purchase the
original Class B Share was accepted.
The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and transfer agency costs
with respect to Class B Shares does not result in a Fund's dividends or
distributions constituting "preferential dividends" under the Code and (ii) that
the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.
CLASS C SHARES. Class C Shares of each Fund redeemed within the first twelve
months of purchase generally will be subject to a contingent deferred sales
charge of 1.00% of the dollar amount subject thereto. Class C Shares redeemed
thereafter will not be subject to a contingent deferred sales charge. Class C
Shares of each Fund do not convert to Class A Shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder
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<PAGE> 45
Services" and "Redemption of Shares" for further discussion of the waiver
provisions.
NET ASSET VALUE
The net asset value per share of each of the Funds is determined by
calculating the total value of such Fund's assets, deducting its total
liabilities, and dividing the result by the number of shares of such Fund
outstanding. The net asset value is computed once daily as of 5:00 p.m. Eastern
time, Monday through Friday, except on customary business holidays, or except on
any day on which no purchase or redemption orders are received, or there is not
a sufficient degree of trading in such Fund's portfolio securities such that the
Fund's net asset value per share might be materially affected. Each of the Funds
reserves the right to calculate the net asset value and to adjust the public
offering price based thereon more frequently than once a day if deemed
desirable.
Fixed income securities are valued by using market quotations, prices provided
by market makers or estimates of market values obtained from yield data relating
to instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Trustees of the Trust, of which each
Fund is a separate series. Short-term securities with remaining maturities of
less than 60 days are valued at amortized cost when amortized cost is determined
in good faith by or under the direction of the Board of Trustees of the Trust to
be representative of the fair value at which it is expected such securities may
be resold. Other assets are valued at fair value as determined in good faith by
or under direction of the Trustees. The net asset values per share of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset value of the different classes of
shares may differ.
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SHAREHOLDER SERVICES
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Each of the Funds offers a number of shareholder services designed to
facilitate investment in its shares at little or no extra cost to the investor.
Below is a description of such services. Unless otherwise described below, each
of these services may be modified or terminated by the respective Fund at any
time.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Funds and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. 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
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<PAGE> 46
the activity in the account. Each shareholder will receive statements at least
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 brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Funds will not issue share certificates.
However, upon written or telephone request to the respective Fund, a share
certificate will be issued, representing shares (with the exception of
fractional shares) of such Fund. A shareholder will be required to surrender
such certificates upon redemption thereof. In addition, if such certificates are
lost the shareholder must write to Van Kampen American Capital Funds, c/o
ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256, requesting an "affidavit of
loss" and to obtain a Surety Bond in a form acceptable to ACCESS. On the date
the letter is received ACCESS will calculate a fee for replacing the lost
certificate equal to no more than 2.00% of the net asset value of the issued
shares and bill the party to whom the replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the respective Fund. Such shares are acquired at net asset value (without sales
charge) on the record date of such dividend or distribution. Unless the
shareholder instructs otherwise, the reinvestment plan is automatic. This
instruction may be made by telephone by calling (800) 421-5666 ((800) 772-8889
for the hearing impaired) or in writing to ACCESS. The investor may, on the
initial application or prior to any declaration, instruct that dividends be paid
in cash and capital gains distributions be reinvested at net asset value, or
that both dividends and capital gains distributions be paid in cash. For further
information, see "Distributions from the Funds."
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 the respective Fund. Additional
information is available from the Distributor or authorized brokers, dealers or
financial intermediaries.
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
of shares of the respective Fund invested into shares of the same class of any
other Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund
so long as a pre-existing account for such class of shares exists for such
shareholder.
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<PAGE> 47
If the 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 a Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or the
Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. Before effecting an exchange, shareholders in the Fund should obtain
and read a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.
In general, shares of a Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of a Fund registered in a
shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, each of the Funds will increase the number of days shares
must be registered in a shareholder's name prior to an exchange to 30 days.
Exchanges of Class A Shares of a Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to a Fund will have the sales
charge differential imposed upon exchange into such Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of a Fund upon exchange into such
Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of a Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
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<PAGE> 48
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 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Funds 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, a shareholder agrees that
neither VKAC nor the respective Fund will be liable for following telephone
instructions which it reasonably believes to be genuine. VKAC and the respective
Fund may be liable for any losses due to unauthorized or fraudulent instructions
if reasonable procedures are not followed. 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 options) and broker, dealer or
financial intermediary 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 dividend diversification
options for the new account, an exchanging shareholder must file a specific
written request. Each of the Funds reserves the right to reject any order to
acquire its shares through exchange. In addition, each of the Funds may restrict
or terminate the exchange privilege at any time on 60 days' notice to its
shareholders of any termination or material amendment.
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 taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the respective Fund at the
time the election to participate in the plan is made. See "Purchase of
Shares -- Deferred Sales Charge Alternatives -- Waiver of Contingent Deferred
Sales Charge."
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<PAGE> 49
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 purchases of additional shares ordinarily will be
disadvantageous to the shareholder because of the duplication of sales charges.
Each of the Funds reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the Funds 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 the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares 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 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 Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the respective Fund or State Street Bank. Retirement plans and accounts that are
subject to backup withholding are not eligible for the privilege. A "stop
payment" system is not available on these checks.
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
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<PAGE> 50
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.
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REDEMPTION OF SHARES
------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the respective Fund (other than, with respect to CDSC Shares, the applicable
contingent deferred sales charge) at any time by sending a written request in
proper form directly to ACCESS, P. O. Box 418256, Kansas City, Missouri
64141-9256, by placing the redemption request through an authorized dealer or by
calling the respective Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would 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. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments 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 it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any gain or loss realized on the redemption of shares
is a taxable event.
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<PAGE> 51
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. 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.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the shareholder and
dealer. Shareholders must submit a written redemption request in proper form (as
described above under "Written Redemption Requests") to the dealer within three
business days after calling the dealer with the sell order. Payment for shares
redeemed (less any sales charge, if applicable) will ordinarily be made by check
mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. Each of the Funds permits redemption of shares
by telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the respective Fund at
(800) 421-5666 ((800) 772-8889 for the hearing impaired) 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 Funds 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, a shareholder agrees that neither VKAC nor the
respective Fund will be liable for following instructions which it reasonably
believes to be genuine. VKAC and the respective Fund may be liable for any
losses due to unauthorized or fraudulent instructions if reasonable procedures
are not followed. Telephone redemptions may not be available if the shareholder
cannot reach ACCESS by telephone, whether because all telephone lines are busy
or for any other reason; in such case, a shareholder would have to use the
respective Fund's other redemption procedures previously described. Requests
received by ACCESS prior to 4:00 p.m., New York time, on a regular business day
will be processed at the net asset value per share determined that day. These
privileges are available for all accounts other than retirement accounts. The
telephone redemption privilege is not available for shares represented by
certificates. If the shares to be redeemed have been recently purchased by
check, ACCESS may delay mailing a redemption check or wiring redemption proceeds
until it confirms that the purchase check has cleared, usually a period of up to
15 days. If an account has multiple owners, ACCESS may rely on the instructions
of any one owner.
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For redemptions authorized by telephone, amounts of $50,000 or less may be
redeemed daily if the proceeds are to be paid by check sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request. Each of the Funds reserves the right at any time to
terminate, limit or otherwise modify this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Funds will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. 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 Funds do 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 Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares 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
Shares 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.
GENERAL REDEMPTION INFORMATION. The respective Fund may redeem any shareholder
account with a net asset value on the date of the notice of redemption less than
the minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the respective Fund may reinstate any portion or all of the
net
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<PAGE> 53
proceeds of such redemption in Class A Shares of such Fund. Holders of Class C
Shares who have redeemed shares of the respective Fund may reinstate any portion
or all of the net proceeds of such redemption in Class C Shares of such Fund
with credit given for any contingent deferred sales charge paid upon such
redemption. Such reinstatement is made at the net asset value 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." Reinstatement at net asset value is also offered to participants in
those eligible retirement plans held or administered by Van Kampen American
Capital Trust Company for repayment of principal (and interest) on their
borrowings on such plans.
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THE DISTRIBUTION AND SERVICE PLANS
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Each of the Funds has adopted a distribution plan (the "Distribution Plan")
with respect to each class of its shares pursuant to Rule 12b-1 under the 1940
Act. Each of the Funds also has adopted a service plan (the "Service Plan") with
respect to each class of shares. The Distribution Plan and Service Plan of each
Fund provide that the respective Fund may spend a portion of such Fund's average
daily net assets attributable to each class of its shares in connection with the
distribution of respective class of shares and in connection with the provision
of ongoing services to shareholders of each class. Each Distribution Plan and
Service Plan is being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. Each of the Funds may spend an aggregate amount up to 0.25%
per year of the average daily net assets attributable to the Class A Shares of
the respective Fund pursuant to its Distribution Plan and Service Plan. From
such amount, the respective Fund may spend up to 0.25% per year of the average
daily net assets attributable to its Class A Shares pursuant to its Service Plan
in connection with the ongoing provision of services to holders of such shares
by the Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. Each of the
Funds pays the Distributor the lesser of the balance of the 0.25% not paid to
such brokers, dealers or financial intermediaries or the amount of the
Distributor's actual distribution related expense.
CLASS B SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class B Shares of the respective
Fund pursuant to the Distribution Plan. In addition, each of the Funds may spend
up to 0.25% per year of such Fund's average daily net assets attributable to the
Class B Shares of the respective Fund pursuant to its Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor
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<PAGE> 54
and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
CLASS C SHARES. Each of the Funds may spend up to 0.75% per year of the
average daily net assets attributable to the Class C Shares of the respective
Fund pursuant to the Distribution Plan. From such amount, each of the Funds, or
the Distributor as agent for the respective Fund, pays brokers, dealers or
financial intermediaries in connection with the distribution of the Class C
Shares up to 0.75% of the respective Fund's average daily net assets
attributable to Class C Shares maintained in such Fund more than one year by
such broker's, dealer's or financial intermediary's customers. Each of the Funds
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense. In addition, each of the Funds may spend up
to 0.25% per year of the average daily net assets attributable to the Class C
Shares of the respective Fund pursuant to its Service Plan in connection with
the ongoing provision of services to holders of such shares by the Distributor
and by brokers, dealers or financial intermediaries and in connection with the
maintenance of such shareholders' accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the respective Fund (up to the
amount of the actual expenses incurred) in future years so long as such
Distribution Plan is in effect. Except as mandated by applicable law, the Funds
do not impose any limit with respect to the number of years into the future that
such unreimbursed expenses may be carried forward (on a fund level basis).
Because such expenses are accounted on a fund level basis, in periods of extreme
net asset value fluctuation such amounts with respect to a particular CDSC Share
may be greater or less than the amount of the initial commission (including
carrying cost) paid by the Distributor with respect to such CDSC Share. In such
circumstances, a shareholder of such CDSC Share may be deemed to incur expenses
attributable to other shareholders of such class. Each of the Funds will
disclose in its prospectus from time to time the then current amount of any such
unreimbursed expenses with respect to each class of CDSC Shares expressed as a
dollar amount and as a percent of the respective Fund's total net assets. As of
December 31, 1994, there were $38,971 and $2,788 of unreimbursed distribution
expenses with respect to Class B
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<PAGE> 55
Shares and Class C Shares, respectively of the Insured Fund, representing less
than 0.01% and less than 0.01% of the Insured Fund's total net assets. As of
December 31, 1994, there were $20,141 and $4,129 of unreimbursed distribution
expenses with respect to Class B Shares and Class C Shares, respectively of the
California Insured Fund, representing 0.01% and less than 0.01% of the
California Insured Fund's total net assets. If the Distribution Plan was
terminated or not continued, the Funds would not be contractually obligated to
pay the Distributor for any expenses not previously reimbursed by the Fund or
recovered through contingent deferred sales charges.
Because each of the Funds is a series of the Trust, amounts paid to the
Distributor as reimbursement for expenses of one series of the Trust may
indirectly benefit the other funds which are series of the Trust. The
Distributor will endeavor to allocate such expenses among such funds in an
equitable manner. The Distributor will not use the proceeds from the contingent
deferred sales charge applicable to a particular class of CDSC Shares to defray
distribution related expenses attributable to any other class of CDSC Shares.
Various federal and state laws prohibit national banks and some state-chartered
commercial banks from underwriting or dealing in the Funds' shares. In addition,
state securities laws on this issue may differ from the interpretations of
federal law, and banks and financial institutions may be required to register as
dealers pursuant to state law. In the unlikely event that a court were to find
that these laws prevent such banks from providing such services described above,
the Funds would seek alternate providers and expects that shareholders would not
experience any disadvantage.
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DISTRIBUTIONS FROM THE FUNDS
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Each Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of such Fund. Each Fund's net recognized
investment income consists of all of its respective interest income, dividends
and other ordinary income earned by such Fund on its portfolio assets, less all
expenses of such Fund. Expenses of the Funds are accrued each day. Net long- and
short-term capital gains, if any, are expected to be distributed, to the extent
permitted by applicable law, to shareholders at least annually. Distributions
cannot be assured, and the amount of each monthly distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or, where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.
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<PAGE> 56
Investors will be entitled to begin receiving dividends on their shares on the
business day after such Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day such Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. Each Fund will
automatically credit dividend distributions and any net long-term capital gain
distributions to a shareholder's account in additional shares of the respective
Fund valued at net asset value, without a sales charge. Unless a shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS.
------------------------------------------------------------------------------
TAX STATUS
------------------------------------------------------------------------------
FEDERAL TAXES. The Funds each have qualified and intend to continue to
qualify as regulated investment companies under Subchapter M of the Code. To
qualify as a regulated investment company, each Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If each Fund so qualifies and if it
distributes to its shareholders at least 90% of its net investment income
(including tax-exempt interest and other taxable income including net short-term
capital gains, but not net capital gains, which is the excess of net long-term
capital gains over net short-term capital losses), it will not be required to
pay federal income taxes on any income distributed to shareholders. Each Fund
intends to distribute at least the minimum amount of net investment income to
satisfy the 90% distribution requirement. Each Fund will not be subject to
federal income tax on any net capital gain distributed to its shareholders. In
order to avoid a 4% excise tax each Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, a Fund will be treated
as having been distributed.
50
<PAGE> 57
If a Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of such Fund's
taxable year, at least 50% of the total of such Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), such Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of a Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from
such Fund.
The Internal Revenue Service has publicly ruled that payments of insurance
proceeds representing interest on defaulted tax-exempt obligations are
excludable from gross income to the same extent that such payments would have
been excludable if they had been directly made by the issuer of the insured
obligations. Accordingly, insurance proceeds received by the Insured Fund and
the California Insured Fund under a policy obtained for such securities prior to
their purchase by such Funds or from AMBAC and any other insurer with whom the
Insured Fund and the California Insured Fund maintains a policy described in
this Prospectus will be tax-exempt interest income of the Insured Fund and the
California Insured Fund to the same extent as if such payments were made by the
issuer of the insured obligations, and will be includable by the Insured Fund
and the California Insured Fund in calculating their exempt-interest dividends.
With respect to municipal leases with "non-appropriation" clauses, however,
there can be no assurance that payments made by the insurers on such lease
obligations will be tax-exempt interest income of the Insured Fund or the
California Insured Fund to the same extent as if such payments were made by the
issuer of the obligations and, therefore, includable by the Funds in calculating
their exempt-interest dividends.
Distributions of a Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of a Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of such Fund
have been held by such shareholders. Distributions in excess of the Funds'
earnings and profits, such as distributions of principal, will first reduce the
adjusted tax basis of the shares held by the shareholders and, after such
adjusted tax basis is reduced to zero, will constitute capital gains to such
shareholders (assuming such shares are held as a capital asset). Each Fund will
inform shareholders of the source and tax status of such distributions promptly
after the
51
<PAGE> 58
close of each calendar year. Distributions from the Funds will not be eligible
for the dividends received deduction for corporations.
Exempt-interest dividends allocable to interest received by a Fund on certain
"private activity" obligations issued after August 7, 1986 will be treated as
interest on such obligations and thus will give rise to an item of tax
preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in a Fund may cause shareholders to be subject to (or result in an
increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Redemption or resale of shares of a Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of such Fund and the amount received. If such shares are held as a capital
asset, the gain or loss will be a capital gain or loss and will generally be
long-term if such shareholders have held shares for more than one year. Any loss
realized on shares held for six months or less will be disallowed to the extent
of any exempt-interest dividends received with respect to such shares. If such
loss is not entirely disallowed, it will be treated as a long-term capital loss
to the extent of any capital gains dividends received with respect to such
shares.
Some of the Funds' investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of a Fund
and affect the holding period of the securities held by a Fund and the character
of gains or losses realized by a Fund. These provisions may also require a Fund
to mark-to-market some of the positions in its portfolio (i.e., treat them as if
they were closed out), which may cause such Fund to recognize income without
receiving cash with which to make distributions in amounts necessary to satisfy
the 90% distribution requirement and the distribution requirement for avoiding
income taxes. Each Fund will monitor its transactions and may make certain tax
elections in order to mitigate the effect of these rules and prevent
disqualification of such Fund as a regulated investment company.
Investments of each Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, each
Fund will be required
52
<PAGE> 59
to accrue as income each year a portion of the discount and to distribute such
income each year in order to maintain its qualification as a regulated
investment company and to avoid federal income taxes. In order to generate
sufficient cash to make distributions necessary to satisfy the 90% distribution
requirement and avoid federal income taxes, a Fund may have to dispose of
securities that it would otherwise have continued to hold. Discount relating to
certain stripped tax-exempt obligations may constitute taxable income when
distributed to shareholders.
A Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of a Fund's gross income be derived from the disposition of securities held
for less than three months.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution is actually made.
Each Fund is required, in certain circumstances, to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
CALIFORNIA TAX STATUS. Under existing California income tax law, if at the
close of each quarter of the California Insured Fund's taxable year at least 50%
of the value of its total assets consists of obligations of the State of
California and its political subdivisions, shareholders of the California
Insured Fund who are subject to the California personal income tax will not be
subject to such tax on distributions with respect to their shares of the
California Insured Fund to the extent that such distributions are attributable
to such tax-exempt interest from such obligations (less expenses applicable
thereto). If such distributions are received by a corporation subject to the
California franchise tax, however, the distributions will be includable in its
gross income for purposes of determining its California franchise tax.
Corporations subject to the California corporate income tax may be subject to
such taxes with respect to distributions from the California Insured Fund.
Accordingly, an investment in shares of the California Insured Fund may not be
appropriate for corporations subject to either tax. Under California personal
property tax law, securities owned by the California Insured Fund and any
interest thereon are exempt from such personal property tax. Any proceeds paid
to the California Insured Fund under the insurance policy which represents
matured interest on
53
<PAGE> 60
defaulted obligations should be exempt from California personal income tax if,
and to the same extent as, such interest would have been exempt if paid by the
issuer of such defaulted obligations. Recent amendments to California tax laws
substantially incorporate those provisions of the Code governing the treatment
of regulated investment companies.
GENERAL. The federal and California income tax discussions set forth above are
for general information only. Prospective investors should consult their tax
advisors regarding the specific federal and California tax consequences of
holding and disposing of shares as well as the effects of other state, local and
foreign tax laws.
------------------------------------------------------------------------------
FUND PERFORMANCE
------------------------------------------------------------------------------
From time to time advertisements and other sales materials for each respective
Fund may include information concerning the historical performance of such Fund.
Any such information will include the average total return of such Fund
calculated on a compounded basis for specified periods of time. 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 a Fund's shares. In lieu of or in addition to total
return and yield calculations, such information may include performance rankings
and similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
The yield quotations are determined for each class of a Fund's shares on a
monthly basis with respect to the immediately preceding 30 day period. Yield is
computed by dividing the respective Fund's net investment income per share
earned during such 30 day period by such Fund's maximum offering price per share
on the last day of such period. Net investment income per share for a class of
shares is determined by taking the interest earned by the respective Fund during
the period and allocable to the class of shares, subtracting the expenses (net
of reimbursements) accrued for the period and allocable to the class of shares,
and dividing the result by the product of (a) the average daily number of such
class of shares of the respective Fund outstanding during the period that were
entitled to receive dividends and (b) such Fund's maximum offering price per
share on the last day of the period. The yield calculation formula assumes net
investment income is earned and reinvested at a constant rate and annualized at
the end of a six month period.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of a Fund's yield. A tax-equivalent yield
quotation for a 30 day period as described above is computed for each class of a
Fund's shares by dividing that portion of the yield of such Fund (as computed
above) which is tax-exempt by a percentage equal to 100% minus a stated
percentage income tax rate and adding the result to that portion of such Fund's
yield, if any, that is not tax-exempt.
54
<PAGE> 61
The average compounded total return for each class of a Fund's shares is
calculated by determining the redemption value at the end of specified periods
(after adding back all dividends and other distributions made during the period)
of a $1,000 investment in a class of shares of such Fund (less the maximum sales
charge) at the beginning of the period, annualizing the increase or decrease
over the specified period with respect to such initial investment and expressing
the result as a percentage.
Total return figures utilized by each Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share can be expected to fluctuate over time, and accordingly upon
redemption a shareholder's shares may be worth more or less than their original
cost.
Each of the Funds may, in supplemental sales literature, advertise
non-standardized total return figures representing the cumulative,
non-annualized total return of such Fund from a given date to a subsequent given
date. Cumulative non-standardized total return is calculated by measuring the
value of an initial investment in such Fund at a given time, including or
excluding any applicable sales charge as indicated, deducting the respective
Fund's maximum sales charge, determining the value of all subsequent reinvested
distributions, and dividing the net change in the value of the investment as of
the end of the period by the amount of the initial investment and expressing the
result as a percentage.
From time to time either Fund may include in its supplemental sales literature
and shareholder reports a quotation of the current "distribution rate" for the
respective Fund. Distribution rate is a measure of the level of income and
short-term capital gain dividends, if any, distributed for a specified period.
Distribution rate is determined by annualizing the distributions per share for a
stated period and dividing the result by the public offering price for the same
period. It differs from yield, which is a measure of the income actually earned
by a Fund's investments, and from total return, which is a measure of the income
actually earned by, plus the effect of any realized and unrealized appreciation
or depreciation of, such investments during a stated period. Distribution rate
is, therefore, not intended to be a complete measure of a Fund's performance.
Distribution rate may sometimes be greater than yield since, for instance, it
may not include the effect of amortization of bond premiums, and may include
non-recurring short-term capital gains and premiums from futures transactions
engaged in by a Fund. Distribution rates will be calculated separately for each
class of a Fund's shares.
From time to time, a Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, a Fund may utilize sales literature that
includes hypotheticals.
55
<PAGE> 62
Further information about the respective Fund's performance is contained in
its Annual Report and its Statement of Additional Information each of which can
be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
Shareholders will receive annual and semiannual reports with financial
statements, as well as proxy statements for shareholders' meetings, if any. Each
Fund is a separate series of the Trust, a Delaware business trust. The Insured
Fund was originally organized as a Maryland corporation under the name Van
Kampen Merritt Insured Tax Free Fund Inc., was subsequently reorganized into a
sub-trust of Van Kampen Merritt Tax Free Fund, a Massachusetts business trust,
under the name Van Kampen Merritt Insured Tax Free Income Fund as of February
22, 1988 and was again reorganized as a series of the Trust on July 31, 1995.
The California Insured Fund was organized under the name Van Kampen Merritt
California Insured Tax Free Fund as a sub-trust of Van Kampen Merritt Tax Free
Fund and was reorganized as a series of the Trust on July 31, 1995. Shares of
the Trust entitle their holders to one vote per share; however, separate votes
are taken by each series on matters affecting an individual series. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of two-thirds of the shares then outstanding cast in person or by proxy at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Funds to the extent required by the 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information of each Fund.
Each Fund's fiscal year ends on December 31. Each of the Funds send to their
shareholders, at least semi-annually, reports showing the respective Fund's
portfolio and other information. An annual report, containing financial
statements audited by independent public accountants, is sent to shareholders
each year. After the end of each year, shareholders will receive federal income
tax information regarding dividends and capital gains distributions.
Shareholder inquiries should be directed to the Van Kampen American Capital
Insured Tax Free Income Fund or Van Kampen American Capital California Insured
Tax Free Fund, as applicable, One Parkview Plaza, Oakbrook Terrace, Illinois
60181, Attn: Correspondence.
56
<PAGE> 63
For Automated Telephone Service which provides 24 hour direct dial access to
fund facts and shareholder account information dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) Dial (800)
772-8889.
57
<PAGE> 64
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'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) 421-5666.
VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
------------------
VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
------------------
One Parkview Plaza
Oakbrook Terrace, IL 60181
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
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
Attn: Van Kampen American Capital Funds
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
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 65
INSURED TAX FREE
INCOME FUND
------------------------------------------------------------------------------
CALIFORNIA INSURED
TAX FREE FUND
P R O S P E C T U S
JULY 31, 1995
------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 66
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
The Van Kampen American Capital Insured Tax Free Income Fund, formerly known
as Van Kampen Merritt Insured Tax Free Income Fund (the "Fund"), is a separate
diversified series of Van Kampen American Capital Tax Free Trust, a Delaware
business trust (the "Trust"). The Trust is an open-end management investment
company, commonly known as a mutual fund. The Fund's investment objective is to
provide investors with a high level of current income exempt from federal income
taxes, with liquidity and safety of principal primarily through investment in a
diversified portfolio of insured municipal securities. All of the municipal
securities in the portfolios of the Fund will be insured by AMBAC Indemnity
Corporation or by other municipal bond insurers whose claims-paying ability is
rated "AAA" by Standard & Poor's Ratings Group on the date of purchase. The
Fund's portfolio is managed by Van Kampen American Capital Investment Advisory
Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling (800) 421-5666.
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. This omitted information may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Description of Municipal Securities Ratings............................................. B-15
Officers and Trustees................................................................... B-20
Investment Advisory and Other Services.................................................. B-26
Custodian and Independent Auditors...................................................... B-27
Portfolio Transactions and Brokerage Allocations........................................ B-27
Tax Status of the Fund.................................................................. B-28
The Distributor......................................................................... B-28
Legal Counsel........................................................................... B-30
Performance Information................................................................. B-30
Independent Auditors' Report............................................................ B-32
Financial Statements.................................................................... B-33
Notes to Financial Statements........................................................... B-49
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.
B-1
<PAGE> 67
THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust is an unincorporated
business trust established under the laws of the State of Delaware by an
Agreement and Declaration of Trust dated as of May 10, 1995, (the "Declaration
of Trust"). The Declaration of Trust permits the Trustees to create one or more
separate investment portfolios and issue a series of shares for each portfolio.
The Trustees can further sub-divide each series of shares into one or more
classes of shares for each portfolio. At present, the Fund, Van Kampen American
Capital Tax Free High Income Fund, Van Kampen American Capital California
Insured Tax Free Fund, Van Kampen American Capital Municipal Income Fund, Van
Kampen American Capital Limited Term Municipal Income Fund, Van Kampen American
Capital Florida Insured Tax Free Income Fund, Van Kampen American Capital New
Jersey Tax Free Income Fund and Van Kampen American Capital New York Tax Free
Income Fund have been organized as series of the Trust and have commenced
investment operations. Van Kampen American Capital California Tax Free Income
Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen
American Capital Missouri Tax Free Income Fund and Van Kampen American Capital
Ohio Tax Free Income Fund have been organized as series of the Trust but have
not commenced investment operations. Other series may be organized and offered
in the future. The Fund was originally organized as a Maryland corporation under
the name Van Kampen Merritt Insured Tax Free Fund Inc., was subsequently
reorganized into a sub-trust of Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust, under the name Van Kampen Merritt Insured Tax Free
Income Fund as of February 22, 1988 and was again reorganized as a series of the
Trust on July 31, 1995.
Each share in a series of the Trust represents an equal proportionate interest
in the assets of such series with each other share in such series and no
interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights other than
those described in the Prospectus. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the outstanding shares of each affected
series entitled to vote (or such higher vote as may be required by the
Investment Company Act of 1940, as amended (the "1940 Act"), or other applicable
law).
Statements contained in this Statement of Additional Information to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objectives and Policies." There can be no assurance that the
Fund will achieve its objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund would hold more than 10% of the outstanding voting
securities of any single issuer.
B-2
<PAGE> 68
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described in the
Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax exempt money market funds that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax exempt money market fund or securities of any tax exempt money
market fund aggregating in value more than 5% of the total assets of the
Fund.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities the Fund may invest in are considered to be interests in real
estate.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were one year or less are excluded from such calculation. The Fund anticipates
that its annual portfolio turnover rate will normally be less than 100%.
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The Fund does not intend to invest in certain "private activity" obligations
issued after August 7, 1986. Interest on such "private activity" obligations is
treated as a preference item for the purpose of calculating the alternative
minimum tax. If the Fund were to invest in such "private activity" obligations,
dividends paid to an investor who is subject to the alternative minimum tax
might not be completely tax exempt or might cause an investor to be subject to
such tax.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds 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 tax or other specific revenue source such as from the user of the
facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included within the term Municipal Securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract. Some
municipal leases and participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes
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plus accrued interest. The interest rate on a floating rate demand note is based
on a known lending rate, such as a bank's prime rate, and is adjusted
automatically each time such rate is adjusted. The interest rate on a variable
rate demand note is adjusted automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative variable
rate municipal securities such as inverse floaters whose rates vary inversely
with changes in market rates of interest. Such derivative variable rate
municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
The Fund may also acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain municipal securities. The underwriter of
these certificates or receipts typically purchases municipal securities and
deposits the securities in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Although under the terms of a custodial receipt, the
Fund typically would be authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights as may exist against the underlying
issuer. Thus, in the event the underlying issuer fails to pay principal and/or
interest when due, the Fund may be subject to delays, expenses and risks that
are greater than those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
recognition of any taxes paid.
Although the municipal securities in which the Fund may invest will be insured
as to timely payment of both principal and interest, municipal securities, like
other debt obligations, are subject to the risk of non-payment. The ability of
issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income.
INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference
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between the value of the index at the close of the last trading day of the
contract and the price at which the future was originally written. A financial
future is an agreement between two parties to buy and sell a security for a set
price on a future date. An index future has similar characteristics to a
financial future except that settlement is made through delivery of cash rather
than the underlying securities. An example is the Long-Term Municipal Bond
futures contract traded on the Chicago Board of Trade. It is based on the Bond
Buyer's Municipal Bond Index, which represents an adjusted average price of the
forty most recent long-term municipal issues of $50 million or more ($75 million
in the instance of housing issues) rated A or better by either Moody's Investors
Service, Inc. ("Moody's") or Standard & Poor's Ratings Group ("S&P"), maturing
in no less than nineteen years, having a first call in no less than seven nor
more than sixteen years, and callable at par.
The Fund may engage in "when issued" and "delayed delivery" transactions and
utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.
STRATEGIC TRANSACTIONS.
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called "Strategic Transactions").
Strategic Transactions may be used to attempt to protect against possible
changes in the market value of securities held in or to be purchased for the
Fund's portfolio resulting from securities markets fluctuations, to protect the
Fund's unrealized gains in the value of its portfolio securities, to facilitate
the sale of such securities for investment purposes, to manage the effective
maturity or duration of the Fund's portfolio, or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
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price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such options. The discussion below uses the
OCC as a paradigm, but is also applicable to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the
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relevant market for that option on that exchange would cease to exist, although
outstanding options on that exchange would generally continue to be exercisable
in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market
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changes, for duration management and for risk management purposes. Futures are
generally bought and sold on the commodities exchanges where they are listed
with payment of initial and variation margin as described below. The purchase of
a futures contract creates a firm obligation by the Fund, as purchaser, to take
delivery from the seller the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the
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desired portfolio management goal, it is possible that the combination will
instead increase such risks or hinder achievement of the portfolio management
objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will
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equal 100% of the exercise price in the case of a non cash-settled put, the same
as an OCC guaranteed listed option sold by the Fund, or the in-the-money amount
plus any sell-back formula amount in the case of a cash-settled put or call. In
addition, when the Fund sells a call option on an index at a time when the
in-the-money amount exceeds the exercise price, the Fund will segregate, until
the option expires or is closed out, cash or cash equivalents equal in value to
such excess. OCC issued and exchange listed options sold by the Fund other than
those above generally settle with physical delivery, and the Fund will segregate
an amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
Illiquid Securities. The Fund may invest up to 15% of its total assets in
illiquid securities, securities the disposition of which is subject to
substantial legal or contractual restrictions on resale and securities that are
not readily marketable. The sale of restricted and illiquid securities often
requires more time and results in higher brokerage charges or dealer discounts
and other selling expenses than does the sale of securities eligible for trading
on national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
Original Issue Insurance. Original Issue Insurance is purchased with respect
to a particular issue of municipal securities by the issuer thereof or a third
party in conjunction with the original issuance of such municipal securities.
Under such insurance, the insurer unconditionally guarantees to the holder of
the insured municipal security the timely payment of principal and interest on
such obligation when and as such payments
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shall become due but shall not be paid by the issuer, except that in the event
of any acceleration of the due date of the principal by reason of mandatory or
optional redemption (other than acceleration by reason of a mandatory sinking
fund payment), default or otherwise, the payments insured may be made in such
amounts and at such times as payments of principal would have been due had there
not been such acceleration. The insurer is responsible for such payments less
any amounts received by the holder from any trustee for the municipal security
issuers or from any other source. Original Issue Insurance generally does not
insure payment on an accelerated basis, the payment of any redemption premium
(except with respect to certain premium payments in the case of certain small
issue industrial development and pollution control municipal securities), the
value of the Shares of the Fund or the market value of municipal securities, or
payments of any under purchase price upon the tender of the municipal
securities. Original Issue Insurance does not insure against nonpayment of
principal of or interest on municipal securities resulting from the insolvency,
negligence or any other act or omission of the trustee or other paying agent for
such obligations.
In the event that interest on or principal of a municipal security covered by
insurance is due for payment but is unpaid by reason of nonpayment by the issuer
thereof, the applicable insurer will make payments to its fiscal agent (the
"Fiscal Agent") equal to such unpaid amounts of principal and interest not later
than one business day after the insurer has been notified that such nonpayment
has occurred (but not earlier than the date such payment is due). The Fiscal
Agent will disburse to the Fund the amount of principal and interest which is
then due for payment but is unpaid upon receipt by the Fiscal Agent of (i)
evidence of the Fund's right to receive payment of such principal and interest
and (ii) evidence, including any appropriate instruments of assignment, that all
of the rights of payment of such principal or interest then due for payment
shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respect to such payment.
Original Issue Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
Consequently, Original Issue Insurance may be considered to represent an element
of market value with respect to the municipal securities so insured, but the
exact effect, if any, of this insurance on such market value cannot be
estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of a
municipal security, the Fund or a third party may, upon the payment of a single
premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to a
particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
Portfolio Insurance. The portfolio insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof,
and compliance with investment restrictions imposed under the
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<PAGE> 78
policy will reduce the yield to shareholders of the Fund. If a municipal
security already is covered by Original Issue Insurance or Secondary Market
Insurance, the Fund is not required to additionally insure any such municipal
security under any policy of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal security
that has been redeemed from or sold by the Fund on the date of such redemption
or the settlement date of such sale, and an insurer shall not have any liability
thereafter under a policy as to any such municipal security, except that if the
date of such redemption or the settlement date of such sale occurs after a
record date and before the related payment date with respect to any such
municipal security, the policy will terminate as to such municipal security on
the business day immediately following such payment date. Each policy will
terminate as to all municipal securities covered thereby on the date on which
the last of the covered municipal securities mature, are redeemed or are sold by
the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant to
an irrevocable commitment of the insurer, with the option to exercise the right
to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because such Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
by Original Issue Insurance or Secondary Market Insurance that are in default or
in significant risk of default.
It is anticipated that certain of the municipal securities to be purchased by
the Fund will be insured under policies obtained by persons other than the Fund.
In instances in which the Fund purchases municipal securities insured under
policies obtained by persons other than the Fund, the Fund does not pay the
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premiums for such policies; rather the cost of such policies may be reflected in
a higher purchase price for such municipal securities. Accordingly, the yield on
such municipal securities may be lower than that on similar uninsured municipal
securities. Premiums for a Portfolio Insurance Policy generally are paid by the
Fund monthly, and are adjusted for purchases and sales of municipal securities
covered by the policy during the month. The yield on the Fund's portfolio is
reduced to the extent of the insurance premiums paid by the Fund which, in turn,
will depend upon the characteristics of the covered municipal securities held by
the Fund. In the event the Fund were to purchase Secondary Market Insurance with
respect to any municipal securities then covered by a Portfolio Insurance
policy, the coverage and the obligation of the Fund to pay monthly premiums
under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
or if the Adviser anticipates such a lowering or otherwise does not believe an
insurer's claims-paying ability merits its existing triple-A rating, the Fund
could seek to obtain additional insurance from an insurer whose claims-paying
ability is rated AAA by S&P or, if the Adviser determines that the cost of
obtaining such additional insurance outweigh the benefits, the Fund may elect
not to obtain additional insurance. In making such determination, the Adviser
will consider the cost of the additional insurance, the new claims-paying
ability rating and financial condition of the existing insurer and the
creditworthiness of the issuer and/or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims-paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honor their
obligations under all circumstances. In that regard, it should be noted that the
claims-paying abilities and debt ratings of several large insurers (at least one
of which insured municipal securities) recently have been lowered by one or more
of the nationally recognized securities rating agencies and that many insurers
currently are experiencing adverse results in their investment portfolios. In
addition, certain insurers' operations recently have been assumed by their state
regulatory agencies. The Fund cannot predict the consequences of a state
takeover of an insurer's obligations and, in particular, whether such an insurer
(or its state regulatory agency) could or would honor all of the insurer's
contractual obligations including any outstanding insurance contracts insuring
the timely payment of principal and interest on municipal securities. The Fund
cannot predict the impact which such events might have on the market values of
such municipal security. In the event of a default by an insurer on its
obligations with respect to any municipal securities in the Fund's portfolio,
the Fund would look to the issuer and/or guarantor of the relevant municipal
securities for payments of principal and interest and such issuer and/or
guarantor may not be rated AAA by S&P. Accordingly, the Fund could be exposed to
greater risk of non-payment in such circumstances which could adversely affect
the Fund's net asset value and the market price per Share. Alternatively, the
Fund could elect to dispose of such municipal securities; however, the market
prices for such municipal securities may be lower than the Fund's purchase price
for them and the Fund could sustain a capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Shares.
AMBAC Indemnity Corporation. AMBAC Indemnity is a Wisconsin-domiciled stock
insurance corporation regulated by the Insurance Department of the State of
Wisconsin and licensed to do business in 50 states and the District of Columbia.
On December 31, 1991, AMBAC Indemnity had admitted assets of approximately
$1,431,000,000, total liabilities of approximately $684,400,000 and statutory
capital of approximately $830,000,000. Statutory capital consists of AMBAC
Indemnity's policyholders' surplus and statutory
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contingency reserve. AMBAC Indemnity was formerly a wholly-owned subsidiary of
Citicorp Financial Guaranty Holdings, Inc. ("Holdings") (formerly known as AMBAC
Inc.), a financial holding company and itself a wholly-owned subsidiary of
Citibank, N.A. ("Citibank"). According to Best Insurance Report (1991 edition),
AMBAC Indemnity's aggregate exposure under all Class I (municipal bond
insurance) financial guaranty bonds, the only class set forth therein, in force
as of December 31, 1990 was $86,200,000,000.
On May 1, 1991, AMBAC Inc. ("AMBAC Inc."), a financial holding company formed
by Holdings, registered for sale with the Securities and Exchange Commission
17,600,000 shares of its common stock. The registration statement with respect
to such sale was declared effective on July 11, 1991. As a result of the sale,
Citibank, through its affiliate Holdings, owns approximately 49% of the total
equity of AMBAC Inc., with a right to cast 20% of the total number of votes of
all shares of outstanding common stock of AMBAC Inc. until such time as
Citibank, including its affiliates, reduces its equity ownership to less than
25% of AMBAC Inc. (at which time the shares owned by it become non-voting). As
of the date of the consummation of the sale of common stock, AMBAC Indemnity
became a direct wholly owned subsidiary of AMBAC Inc. The Wisconsin Insurance
Department has stated that the sale of common stock described herein does not
require its prior approval. Both Moody's and S&P have reaffirmed that the sale
of the common stock of AMBAC Inc. does not affect AMBAC Indemnity's triple-A
claims-paying ability ratings.
AMBAC Indemnity has entered into pro rata reinsurance agreements under which a
percentage of the insurance underwritten pursuant to certain municipal bond
insurance programs of AMBAC Indemnity has been and will be assumed by a number
of foreign and domestic unaffiliated reinsurers.
Copies of AMBAC Indemnity's financial statements prepared in accordance with
statutory accounting standards are available from AMBAC Indemnity. The address
of AMBAC Indemnity's administrative offices and its telephone number are One
State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or 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 it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of 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;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
</TABLE>
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<TABLE>
<S> <C>
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher 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 in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
</TABLE>
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<PAGE> 82
<TABLE>
<S> <C>
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
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
judgement with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS
TERRITORIES are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not
take into account currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS--Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the
top four categories ("AAA", "AA", "A", "BBB", commonly known as "investment
grade" ratings) are generally regarded as eligible for bank investment. In
addition, the laws of various states governing legal investments impose
certain rating or other standards for obligations eligible for investment
by savings banks, trust companies, insurance companies, and fiduciaries
generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
Note rating symbols are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
</TABLE>
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<PAGE> 83
<TABLE>
<S> <C>
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
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 several categories, ranging from
'A-1' for the highest-quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell a security. The
ratings are based on current information furnished to S&P by the issuer or obtained by
S&P from other sources it considers reliable. The ratings may be changed, suspended, or
withdrawn as a result of changes in or unavailability of, such information.
</TABLE>
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
</TABLE>
B-18
<PAGE> 84
<TABLE>
<S> <C>
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest 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.
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. 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 the
parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
B-19
<PAGE> 85
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
OFFICERS AND TRUSTEES
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
</TABLE>
B-20
<PAGE> 86
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor 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.
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.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 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. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
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. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
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. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
B-21
<PAGE> 87
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
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., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. 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. 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 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
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. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
</TABLE>
B-22
<PAGE> 88
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
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. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
</TABLE>
B-23
<PAGE> 89
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.
The Fund will pay trustees who are not affiliated persons of the VK Adviser,
the Distributor or Van Kampen American Capital an annual retainer of $2,500 per
year and $125 per regular quarterly meeting of the Fund, plus expenses. No
additional fees are proposed at the present time to be paid for special
meetings, committee meetings or to the chairman of the board. The trustees have
approved an aggregate annual compensation cap from the combined fund complex of
$84,000 per trustee (excluding any retirement benefits) until December 31, 1996,
based upon the current net assets and the current number of Van Kampen American
Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end
funds advised by the VK Adviser would receive additional compensation for
serving as a trustee of such funds). In addition, the VK Adviser has agreed to
reimburse the Fund through December 31, 1996, for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.
B-24
<PAGE> 90
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
PENSION OR
RETIREMENT TOTAL COMPENSATION
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FROM REGISTRANT AND
COMPENSATION AS PART OF FUND BENEFITS UPON FUND COMPLEX PAID
NAME FROM REGISTRANT(2) EXPENSES(3) RETIREMENT(4) TO TRUSTEE(5)
-------------------------------- ------------------ ---------------- ---------------- -------------------
<S> <C> <C> <C> <C>
R. Craig Kennedy................ $ 21,968 $ 45 $2,500 $62,362
Philip G. Gaughan............... 21,928 996 2,500 63,250
Donald C. Miller................ 23,768 2,017 2,500 62,178
Jack A. Nelson.................. 23,858 520 2,500 62,362
Jerome L. Robinson.............. 23,801 832 2,500 58,475
Wayne W. Whalen................. 17,553 339 2,500 49,875
</TABLE>
---------------
(1) Messrs. McDonnell and Powell, trustees of the Trust are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its 1994 fiscal year.
(2) The Registrant is Van Kampen American Capital Tax Free Trust (the "Trust")
which currently is comprised of 8 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 8 series during such series' fiscal year ended December 31,
1994. Beginning in October 1994, each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation. The total
combined amount of deferred compensation (including interest) accrued with
respect to each trustee from the Fund Complex (as defined herein) as of
December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr. Miller $14,553;
Mr. Nelson $14,737 and Mr. Robinson $13,725.
(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant. The
amounts in this column are the retirement benefits accrued during the Fund's
fiscal year ended December 31, 1994.
(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by the Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service may receive
reduced retirement benefits from the Fund.
(5) As of December 31, 1994 the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual funds
in the Fund Complex during the calendar year ended December 31, 1994. The VK
Adviser also serves as investment adviser for other investment companies;
however, with the exception of Messrs. Powell, McDonnell and Whalen, such
investment companies do not have the same trustees as the Fund Complex.
Combining the Fund Complex with other investment companies advised by the VK
Adviser, Mr. Whalen received Total Compensation of $161,850.
As of July 17, 1995, the trustees and officers as a group owned less than 1%
of the shares of the Fund.
No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.
To the knowledge of the Fund, as of July 17, 1995 no person owned of record or
beneficially 5% or more of the Fund's Class A Shares or Class B Shares.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Richard K. Bolen, 4000 Club House Drive,
Champaign, IL 61821-9281, 15%; and Robert J. Holuba, Stanley J. Holuba TR,
Angela Holuba Term Trust, FBO Angela Holuba DTD 7/28/87, 2 Hackensack Avenue,
Kearny, NJ 07032-4611, 19%.
B-25
<PAGE> 91
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn 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, Inc. own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 11% of the common stock of VK/AC
Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The advisory agreement will continue in effect from year to year if
specifically approved by the Trustees of the Trust, of which the Fund is a
separate series, (or by the Fund's shareholders) and by the disinterested
Trustees in compliance with the requirements of the 1940 Act. The agreement may
be terminated without penalty upon 60 days written notice by either party and
will automatically terminate in the event of assignment.
The investment advisory agreement specifies that the Adviser will reimburse
each of the Funds for annual expenses of such Funds which exceed the most
stringent limit prescribed by any State in which the Fund's shares are offered
for sale. Currently, the most stringent limit in any State would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of any of the Funds.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $5,028,401, $4,796,312 and $3,877,766, respectively.
OTHER AGREEMENTS.
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such
B-26
<PAGE> 92
services are expected to enable the Fund to more closely monitor and maintain
its accounts and records. The Fund shares with the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor in
the cost of providing such services, with 25% of such costs shared
proportionately based on the number of outstanding classes of securities per
Fund and with the remaining 75 percent of such cost being paid by the Fund and
such other Van Kampen American Capital funds based proportionally on their
respective net assets.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $31,650, $19,250 and $18,300, respectively,
representing the VK Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $25,100, $22,700 and $11,300, respectively,
representing Van Kampen American Capital's cost of providing legal services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services is made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital funds distributed by
the Distributor, shared such costs proportionately among themselves based upon
their respective net asset values.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $597,765, $423,425 and $359,270, respectively,
representing the Distributor's cost of providing certain support services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATIONS
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firms' professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund and the investment adviser, including
quotations necessary to determine the value of the
B-27
<PAGE> 93
Fund's net assets. Any research benefits derived are available for all clients
of the investment adviser. Since statistical and other research information is
only supplementary to the research efforts of the Adviser and still must be
analyzed and reviewed by its staff, the receipt of research information is not
expected to materially reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund and the Adviser, (ii) have sold or are selling
shares of the Fund and (iii) may select firms that are affiliated with the Fund,
its investment adviser or its distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
The Trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the Securities and Exchange Commission under the 1940 Act which
requires that the commission paid to the Distributor and other affiliates of the
Fund must be reasonable and fair compared to the commissions, fees or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities during a comparable period
of time. The rule and procedures also contain review requirements and require
the Adviser to furnish reports to the Trustees and to maintain records in
connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor 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. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.
B-28
<PAGE> 94
Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
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. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 7% 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. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The public offering price of Class A Shares for purchasers choosing the
initial sales charge alternative is equal to the net asset value plus an initial
sales charge which is a variable percentage of the offering price depending upon
the amount of the sale. The net asset value will be determined as described in
the Prospectus under "Net Asset Value." It is the responsibility of an investor,
or an investor's broker, dealer or financial intermediary, to promptly forward
payment to the Fund for shares being purchased.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein collectively as the Plans. The Plans provide that the
Fund may spend a portion of the Fund's average daily net assets attributable to
each class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement or Selling Agreement. To the
extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein
B-29
<PAGE> 95
with respect to either class of shares without approval by a vote of a majority
of the outstanding voting shares of such class, and all material amendments to
either of the Plans must be approved by the Trustees and also by the
disinterested Trustees. Each of the Plans may be terminated with respect to
either class of shares at any time by a vote of a majority of the disinterested
Trustees or by a vote of a majority of the outstanding voting shares of such
class.
For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $2,804,735, $270,245 and $46,842 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $2,469,995 and $63,660
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares and Class B Shares, respectively. For the year ended December 31,
1994, the Fund has reimbursed the Distributor $208,207 and $8,129 for
advertising expenses, and $58,830 and $7,493 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
CLASS A SHARES
The average total return, including payment of the maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1994 was (10.66%); (ii) the five year period ended December 31, 1994 was 5.41%;
(iii) the ten year period ended December 31, 1994 was 8.72%; and (iv) the period
from December 14, 1984 (the commencement of investment operations of the Fund)
through December 31, 1994 was 8.85%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.44%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 8.50%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.73%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 133.54%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 144.98%.
CLASS B SHARES
The average total return, including payment of CDSC, with respect to the Class
B Shares for (i) the one year period ended December 31, 1994 was (10.58%) and
(ii) the approximately one year, eight month period from May 1, 1993 (the
commencement of distribution) through December 31, 1994 was (2.99%).
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.94%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 7.72%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.04%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (4.94%).
B-30
<PAGE> 96
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was (1.53%).
CLASS C SHARES
The average total return, including payment of CDSC, with respect to the Class
C Shares for (i) the one year period ended December 31, 1994 was (7.87%) and
(ii) the approximately one year, five month period from August 13, 1993
(commencement of distribution) through December 31, 1994 was (3.18%).
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.94%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 36% tax
rate) was 7.72%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.03%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.47%).
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.47%).
B-31
<PAGE> 97
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen Merritt Insured Tax Free Income Fund:
We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt Insured Tax Free Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement of
operations for the year then ended, the statement of changes in net assets for
each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the financial
position of Van Kampen Merritt Insured Tax Free Income Fund as of December 31,
1994, the results of its operations for the year then ended, the changes in its
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented, in conformity with
generally accepted accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1995
B-32
<PAGE> 98
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds
Alabama 2.7%
$ 2,250 Alabama St Brd Edl Rev Shelton St Cmnty College (MBIA Insd) ......... AAA Aaa 6.000% 10/01/14 $ 2,116,057
2,000 Alabama Wtr Pollutn Ctl Auth Ser A (AMBAC Insd) .................... AAA Aaa 6.750 8/15/17 2,025,480
4,700 Huntsville, AL Hlthcare Auth Hlthcare Fac Rev Ser B (MBIA Insd) ..... AAA Aaa 6.500 6/01/13 4,645,057
5,500 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd) ..................... AAA Aaa 7.700 12/01/19 5,783,910
1,450 Limestone Cnty, AL Wtr Auth Wtr Rev (FGIC Insd) ..................... AAA Aaa 5.250 12/01/20 1,183,824
2,930 Montgomery, AL BMC Spl Care Fac Fin Auth Rev Baptist
Med Cent (AMBAC Insd) <F3> .......................................... A A 9.750 10/01/15 3,089,626
5,500 Morgan Cnty Decatur, AL Hlthcare Auth Hosp Rev Decatur
Genl Hosp Rfdg (Connie Lee Insd) ................................... AAA NR 6.250 3/01/13 5,235,945
2,100 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd) ................. AAA Aaa 6.400 4/01/13 2,062,074
2,400 Muscle Shoals, AL Util Brd Wtr & Swr Rev (FSA Insd) ................. AAA Aaa 6.500 4/01/16 2,365,728
500 Pelham, AL Single Family Mtg Rev Warrants (AMBAC Insd) <F3> ......... AAA Aaa 6.250 11/01/22 474,130
1,600 West Morgan East Lawrence Wtr Auth AL Wtr Rev (FSA Insd) ............ AAA Aaa 6.800 8/15/14 1,613,888
------------
30,595,719
------------
Alaska 0.2%
2,355 Ketchikan, AK Muni Util Rev Ser R (FSA Insd) ........................ AAA Aaa 6.600 12/01/07 2,395,930
------------
Arizona 1.1%
11,000 Arizona St Ctfs Partn Ser B Rfdg (AMBAC Insd) <F3> .................. AAA Aaa 6.250 9/01/10 10,858,320
2,000 Pima Cnty, AZ Indl Dev Auth Indl Rev Lease Oblig Ser A
Irvington Proj Rfdg (FSA Insd) ..................................... AAA Aaa 7.250 7/15/10 2,101,680
------------
12,960,000
------------
California 24.8%
2,000 Alameda Cnty, CA Ctfs Partn Santa Rita Jail Proj Rfdg (MBIA Insd) ... AAA Aaa 5.700 12/01/14 1,781,680
2,835 Bay Area Govt Assn CA Rev Tax Alloc CA Redev Agy Pool A
(Cap Guar Insd) .................................................... AAA Aaa 6.000 12/15/14 2,621,099
2,555 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) .................... AAA Aaa 5.875 8/01/12 2,346,333
1,985 Berkeley, CA Unified Sch Dist Ser C (AMBAC Insd) .................... AAA Aaa 5.875 8/01/14 1,809,665
5,000 Beverly Hills, CA Pub Fin Auth Lease Rev Ser A (Inverse Fltg)
(MBIA Insd) ......................................................... AAA Aaa 5.650 6/01/15 4,365,150
10,000 California Hlth Fac Fin Auth Rev Sutter Hosp Ser A Rfdg
(AMBAC Insd) ....................................................,... AAA Aaa 6.700 1/01/13 10,048,800
2,000 California Hsg Fin Agy Rev Multi Unit Rent Hsg Ser C 11
(MBIA Insd) ......................................................... AAA Aaa 6.150 8/01/14 1,884,980
3,655 California Pub Cap Impt Fin Auth Rev Pooled Proj Ser B (BIGI Insd)... AAA Aaa 8.100 3/01/18 3,947,400
15,000 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/15 13,929,900
16,900 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/16 15,667,483
10,875 California St (FGIC Insd) ........................................... AAA Aaa 6.000 8/01/19 9,962,805
2,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison Coalinga Ser B (MBIA Insd) ................................ AAA Aaa 5.375 12/01/19 1,653,720
15,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA St
Prison Susanville Ser D (Cap Guar Insd) ............................. AAA Aaa 5.250 6/01/15 12,452,700
16,250 California St Pub Wks Brd Lease Rev Var Univ CA Projs Ser A
(AMBAC Insd) ........................................................ AAA Aaa 6.400 12/01/16 15,874,950
600 California St Var Purp (FGIC Insd) .................................. AAA Aaa 6.500 9/01/10 606,996
3,700 California St Var Purp (MBIA Insd) ................................. AAA Aaa 6.000 10/01/10 3,561,102
4,210 California Statewide Cmnty Dev Auth Rev Ctfs Partn Sisters
Charity Leavenworth (MBIA Insd) .................................... AAA Aaa 5.375 12/01/12 3,613,148
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 99
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$ 9,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys Impt Proj Ser A
Rfdg (MBIA Insd) ....................................................... AAA Aaa 6.000% 8/01/18 $ 8,267,670
10,500 Cerritos, CA Pub Fin Auth Rev Los Coyotes Redev Proj Ln
Ser A (AMBAC Insd) ..................................................... AAA Aaa 5.750 11/01/22 9,153,060
3,000 Chino, CA Ctfs Partn Redev Agy (MBIA Insd) ............................. AAA Aaa 6.200 9/01/18 2,822,820
200 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
(Prerefunded @ 07/01/96) (AMBAC Insd) .................................. AAA Aaa 9.000 7/01/13 214,946
220 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
Ser 3 (BIGI Insd) ...................................................... AAA Aaa 8.000 7/01/18 237,582
10,280 Concord, CA Redev Agy Tax Alloc Cent Concord Redev Proj
Ser 3 (Prerefunded @ 07/01/98) (BIGI Insd) ............................. AAA Aaa 8.000 7/01/18 11,269,039
2,595 Contra Costa Cnty, CA Santn Dist No 7 A Ctfs Partn Sub-Delta
Diablo Fin Corp (Prerefunded @ 12/01/98) (BIGI Insd) ................... AAA Aaa 7.600 12/01/08 2,826,578
1,250 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refinancing
(FGIC Insd) ............................................................ AAA Aaa 6.300 9/01/12 1,221,250
2,500 Cucamonga, CA Cnty Wtr Dist Ctfs Partn Fac Refinancing
(FGIC Insd) ............................................................ AAA Aaa 6.500 9/01/22 2,449,425
5,000 East Bay, CA Muni Util Dist Wtr Sys Rev Sub Rfdg (MBIA Insd) ........... AAA Aaa 5.000 6/01/14 4,069,850
6,500 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd) ............... AAA Aaa * 11/15/21 960,765
1,166 Kern Cnty, CA Home Mtg Rev Ser A (MBIA Insd) ........................... AAA Aaa * 3/01/14 146,332
1,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ......... AAA Aaa 6.500 11/01/12 998,830
7,000 La Habra, CA Ctfs Partn Pk La Habra & Viewpark Proj (FSA Insd) ......... AAA Aaa 6.625 11/01/22 6,950,720
4,750 Lodi, CA Unified Sch Dist Ctfs Partn Edl Support Cent Rfdg
(FSA Insd) ............................................................. AAA Aaa 5.750 9/01/20 4,168,600
500 Long Beach, CA Redev Agy Downtown Redev Proj A
(Prerefunded @ 11/01/98) (AMBAC Insd) .................................. AAA Aaa 7.750 11/01/10 546,495
3,500 Los Angeles Cnty, CA Cap Asset Lease Corp Leasehold Rev
Rfdg (AMBAC Insd) ..................................................... AAA Aaa 6.000 12/01/16 3,235,400
6,420 Los Angeles, CA Unified Sch Dist Ctfs Partn Multi Ppty Proj
Rfdg (FSA Insd) ....................................................... AAA Aaa 5.625 11/01/13 5,705,775
4,750 Los Angeles, CA Wastewtr Sys Rev Ser A Rfdg (MBIA Insd) ................ AAA Aaa 5.700 6/01/20 4,137,108
24,820 Los Angeles, CA Wastewtr Sys Rev Ser C Rfdg (MBIA Insd) ................ AAA Aaa 5.600 6/01/20 21,318,395
1,000 Los Angeles, CA Wastewtr Sys Rev Ser D Rfdg (FGIC Insd) ................ AAA Aaa 5.200 11/01/21 803,710
7,500 Manteca, CA Redev Agy Tax Alloc Redev Proj No 1 Ser A Rfdg
(MBIA Insd) ............................................................ AAA Aaa 6.700 10/01/21 7,523,100
1,000 Martinez, CA Ctfs Partn Martinez Pub Impt Corp
(Prerefunded @ 12/01/98) (AMBAC Insd) .................................. AAA Aaa 7.700 12/01/18 1,100,800
5,830 Moreno Vly, CA Spl Tax Towngate Cmnty Fac 87-1-A Rfdg
(Cap Guar Insd) ....................................................... AAA Aaa 5.875 12/01/15 5,238,313
13,610 Norco, CA Redev Agy Tax Alloc Norco Redev Proj Area
No 1 Rfdg (MBIA Insd) .................................................. AAA Aaa 6.250 3/01/19 12,880,096
2,860 Orange Cnty, CA Ctfs Partn Juvenile Justice Cent Fac Rfdg
(AMBAC Insd) ........................................................... AAA Aaa 6.000 6/01/17 2,574,257
2,760 Palmdale, CA Civic Auth Rev Merged Redev Proj Areas Ser A
(MBIA Insd) ............................................................ AAA Aaa 6.000 9/01/15 2,574,335
2,180 Petaluma, CA City Jt Union High Sch Dist Formerly Petaluma, CA
City High Sch Dist Ser B (FGIC Insd) .................................. AAA Aaa * 8/01/18 419,214
1,000 Riverside, CA Swr Rev (Prerefunded @ 08/01/97) (AMBAC Insd) ............ AAA Aaa 7.700 8/01/12 1,073,180
4,000 Sacramento, CA Muni Util Dist Elec Rev Ser A Rfdg (MBIA Insd) ......... AAA Aaa 5.750 8/15/13 3,618,360
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 100
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$13,800 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd) .............................................................. AAA Aaa 5.310% 7/01/16 $ 11,162,682
1,775 San Jose, CA Redev Agy Tax Alloc Merged Area Redev Proj
(MBIA Insd) .............................................................. AAA Aaa 6.000 8/01/15 1,654,016
3,900 San Mateo Cnty, CA Tran Dist Sales Tax Rev Crossover Ser A
Rfdg (MBIA Insd) ......................................................... AAA Aaa 5.200 6/01/14 3,265,704
3,720 San Pablo, CA Redev Agy Sub Tax Alloc Merged Proj Area
(FGIC Insd) .............................................................. AAA Aaa 5.250 12/01/16 3,063,941
2,500 Santa Clara Cnty, CA Fin Auth Lease Rev VMC Fac Replacement
Proj Ser A (AMBAC Insd) .................................................. AAA Aaa 6.875 11/15/14 2,555,725
1,000 Santa Rosa, CA Wastewtr Svc Fac Dist Rfdg & Impt (AMBAC Insd) ........... AAA Aaa 6.200 7/02/09 979,420
2,000 Santa Rosa, CA Wtr Rev Ser B Rfdg (FGIC Insd) ........................... AAA Aaa 6.200 9/01/09 1,958,360
2,050 Santee, CA Redev Agy Tax Alloc Santee Cmnty Redev Proj Rfdg
(MBIA Insd) .............................................................. AAA Aaa 7.900 11/01/13 2,153,197
2,510 Solano Cnty, CA Ctfs Partn Solano Park Hosp Proj (FSA Insd) .............. AAA Aaa 5.750 8/01/14 2,244,291
2,000 Stockton, CA Hlth Fac Rev Saint Joseph Med Cent Ser A
(MBIA Insd) .............................................................. AAA Aaa 5.625 6/01/13 1,778,160
4,460 University of CA Rev Hsg Sys Ser A Rfdg (MBIA Insd) ...................... AAA Aaa 5.500 11/01/18 3,793,988
5,000 University of CA Rev Multi Purp Proj Ser C Rfdg (AMBAC Insd) ............. AAA Aaa 5.000 9/01/23 3,855,150
10,000 University of CA Rev Multi Purp Proj Ser D (MBIA Insd) ................... AAA Aaa 6.250 9/01/13 9,636,700
3,845 Vista, CA Unified Sch Dist Ctfs Partn Ser A Rfdg (FSA Insd) ............. AAA Aaa * 11/01/17 745,430
-------------
283,480,680
-------------
Colorado 4.4%
2,500 Aurora, CO Muni Bldg Corp Rev 1st Mtg Rfdg
(Prerefunded @ 12/01/97) (FGIC Insd) ..................................... AAA Aaa 9.200 12/01/09 2,781,075
300 Colorado Hlth Fac Auth Rev Kaiser Permanente Med Care
Proj Ser A (AMBAC Insd) .................................................. AA NR 9.125 8/01/15 309,450
12,750 Colorado Hlth Fac Auth Rev PSL Hlth Sys Proj Ser A (FSA Insd) ............ AAA Aaa 7.250 2/15/16 13,287,667
2,340 Colorado Hlth Fac Auth Rev Sisters Of Charity Hlth Care Ser A
(MBIA Insd) .............................................................. AAA Aaa 6.000 5/15/13 2,232,220
1,000 Colorado Wtr Res & Pwr Dev Auth Small Wtr Res Rev Ser A
(Prerefunded @ 11/01/00) (FGIC Insd) ..................................... AAA Aaa 7.400 11/01/10 1,086,900
3,100 Denver, CO City & Cnty Excise Tax Rev (Prerefunded @ 09/01/97)
(BIGI Insd) .............................................................. AAA Aaa 8.250 9/01/07 3,349,023
795 Jefferson Cnty, CO Single Family Mtg Rev Ser A Rfdg (MBIA Insd) ......... AAA Aaa 8.875 10/01/13 845,570
1,000 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(AMBAC Insd) ............................................................. A- Baa2 6.125 1/01/07 945,210
1,500 Moffat Cnty, CO Pollutn Ctl Rev Tri-State Generation & Transmission
(AMBAC Insd) ............................................................. AAA Aaa 6.125 1/01/07 1,499,820
2,050 Thornton, CO Rfdg (FGIC Insd) ............................................ AAA Aaa * 12/01/11 690,174
1,700 Thornton, CO Rfdg (FGIC Insd) ............................................ AAA Aaa * 12/01/15 436,220
9,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ................... AAA Aaa 6.250 11/15/12 8,809,740
13,900 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ................... AAA Aaa 6.400 11/15/22 13,598,231
-------------
49,871,300
-------------
Connecticut 0.1%
1,700 Connecticut St Hlth & Edl Fac Auth Rev Newington Childrens
Hosp Ser A (MBIA Insd) ................................................... AAA Aaa 6.250 7/01/15 1,644,750
-------------
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 101
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
District of Columbia 0.4%
$ 4,140 District of Columbia Hsg Fin Agy Mtg Rev Ser D Rfdg (MBIA Insd) ........ AAA Aaa 6.375% 7/01/24 $ 3,892,262
250 District of Columbia Ser B Rfdg (MBIA Insd) ............................ AAA Aaa * 6/01/04 137,883
500 District of Columbia Ser C (Prerefunded @ 06/01/98)
(AMBAC Insd)............................................................ AAA Aaa 8.000 6/01/08 547,080
------------
4,577,225
------------
Florida 3.7%
1,010 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/03 1,154,723
690 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/04 793,431
1,180 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/05 1,362,817
1,275 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/06 1,493,560
1,375 Dade Cnty, FL Seaport Rev Ser E Rfdg (MBIA Insd) ....................... AAA Aaa 8.000 10/01/07 1,610,730
2,095 Dade Cnty, FL Util Pub Impt Rfdg (FGIC Insd) <F3> ..................... AAA Aaa 12.000 10/01/04 3,026,165
305 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd) ............................................................ AAA Aaa 7.650 9/01/10 321,321
1,090 Duval Cnty, FL Hsg Fin Auth Single Family Mtg Rev Ser C
(FGIC Insd) ............................................................ AAA Aaa 7.700 9/01/24 1,159,171
1,000 Hillsborough Cnty, FL Indl Dev Auth Indl Dev Rev Univ
Cmnty Hosp (MBIA Insd) ................................................ AAA Aaa 5.750 8/15/14 915,340
1,000 Hillsborough Cnty, FL Indl Dev Auth Indl Dev Rev Univ
Cmnty Hosp (MBIA Insd) ................................................ AAA Aaa 6.500 8/15/19 1,001,120
1,000 Key West, FL Util Brd Elec Rev Ser D (AMBAC Insd) ...................... AAA Aaa * 10/01/13 303,030
4,000 Lee Cnty, FL Hosp Brd Dir Hosp Rev (Inverse Fltg) (MBIA Insd) .......... AAA Aaa 9.013 4/01/20 3,920,000
1,000 Marion Cnty, FL Hosp Dist Rev Rfdg Munroe Regl Med Cent
(FGIC Insd) ............................................................ AAA Aaa 6.250 10/01/12 980,980
6,000 Orange Cnty, FL Hlth Fac Auth Rev (Inverse Fltg) (MBIA Insd) ........... AAA Aaa 8.290 10/29/21 5,617,500
2,000 Palm Beach Cnty, FL Sch Brd Ctfs Partn Ser A (AMBAC Insd) .............. AAA Aaa 6.375 8/01/15 1,978,400
1,090 Sarasota Cnty, FL Util Sys Rev (FGIC Insd) ............................. AAA Aaa 6.500 10/01/14 1,094,295
5,000 Sunrise, FL Pub Svcs Tax Rev (Prerefunded @ 10/01/97)
(AMBAC Insd) ........................................................... AAA Aaa 8.750 10/01/04 5,519,650
10,000 Tallahassee, FL Hlth Fac Rev Tallahassee Mem Regl Med Ser A
Rfdg (MBIA Insd) ....................................................... AAA Aaa 6.625 12/01/13 10,151,600
------------
42,403,833
------------
Georgia 4.0%
1,250 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ..... AAA Aaa 6.250 12/01/08 1,249,913
1,750 Atlanta, GA Ctfs Partn Atlanta Pretrial Detention Cent (MBIA Insd) ..... AAA Aaa 6.250 12/01/17 1,670,078
2,560 Burke Cnty, GA Dev Auth Pollutn Ctl Rev Oglethorpe Pwr Co
Vogtle Proj Rfdg (MBIA Insd) ........................................... AAA Aaa 7.800 1/01/08 2,852,096
2,500 Fayette Cnty, GA Wtr Rev (Prerefunded @ 10/01/97) (AMBAC Insd) ......... AAA Aaa 8.000 10/01/20 2,711,750
6,500 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd) .................. AAA Aaa * 1/01/07 3,084,185
4,750 Georgia Muni Elec Auth Pwr Rev Genl Ser B (BIGI Insd) .................. AAA Aaa * 1/01/08 2,099,452
3,000 Georgia Muni Elec Auth Pwr Rev Genl Ser B (FGIC Insd) .................. AAA Aaa 6.250 1/01/12 2,932,530
8,430 Metropolitan Atlanta Rapid Tran Auth GA Sales Tax Rev Bonds
Ser J (Prerefunded @ 07/01/98) (FGIC Insd) ............................. AAA Aaa 8.000 7/01/18 9,238,268
14,550 Municipal Elec Auth GA Spl Oblig Fifth Crossover Ser Proj One
(AMBAC Insd) ........................................................... AAA Aaa 6.400 1/01/13 14,473,030
5,000 Municipal Elec Auth, GA Spl Oblig Fifth Crossover Proj Ser One
(MBIA Insd) ............................................................ AAA Aaa 6.500 1/01/17 4,959,550
------------
45,270,852
------------
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 102
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Hawaii 1.1%
$12,785 Hawaii St Arpt Sys Rev Ser 1993 Rfdg (MBIA Insd) ....................... AAA Aaa 6.400% 7/01/08 $ 12,852,760
-------------
Illinois 12.0%
565 Aurora, IL Hosp Fac Rev Mercy Cent Hlthcare Svcs Ser A
(AMBAC Insd) ........................................................... AAA Aaa 9.625 10/01/09 594,742
15,200 Chicago, IL Brd Edl Lease Ctfs Ser A Rfdg (MBIA Insd) ................. AAA Aaa 6.000 1/01/20 13,815,128
1,000 Chicago, IL Gas Supply Rev Peoples Gas Lt & Coke Proj Ser D
(AMBAC Insd) ........................................................... AA- Aa3 10.250 3/01/15 1,030,760
5,000 Chicago, IL O'Hare Intl Arpt Rev Genl Arpt Second Lien
Ser A Rfdg (MBIA Insd) ................................................. AAA Aaa 6.375 1/01/15 4,811,700
3,480 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) .................. AAA Aaa * 1/01/06 1,742,158
3,105 Chicago, IL Pub Bldg Comm Bldg Rev Ser A (MBIA Insd) .................. AAA Aaa * 1/01/07 1,447,830
1,000 Chicago, IL St Univ Rev Aux Fac Sys (MBIA Insd) ........................ AAA Aaa 6.000 12/01/12 936,420
1,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.400 1/01/01 1,129,140
5,550 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) . .......................................................... AAA Aaa 8.750 1/01/03 6,524,192
8,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) <F3> ....................................................... AAA Aaa 8.750 1/01/04 10,040,751
2,460 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.750 1/01/05 2,942,775
3,000 Cook Cnty, IL Cmnty College Dist No 508 Chicago Ctfs Partn
(FGIC Insd) ............................................................ AAA Aaa 8.750 1/01/07 3,626,700
1,280 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood & Flossmor
(AMBAC Insd) ........................................................... AAA Aaa * 12/01/05 643,482
8,280 Cook Cnty, IL Cnty Juvenile Detention A (AMBAC Insd) ................... AAA Aaa * 11/01/08 3,515,274
2,500 Des Plaines, IL Hosp Fac Rev Holy Family Hosp Rfdg
(AMBAC Insd) ........................................................... AAA Aaa 9.250 1/01/14 2,635,825
915 Eastern IL Univ Rev Aux Fac Sys Rfdg (AMBAC Insd) ..................... A- NR 9.500 4/01/16 943,008
11,000 Illinois Dev Fin Auth Pollutn Ctl Rev Con Edison Co Proj Ser D
Rfdg (AMBAC Insd) ..................................................... AAA Aaa 6.750 3/01/15 10,986,580
35,000 Illinois Dev Fin Auth Pollutn Ctl Rev IL Pwr Co Proj Ser A 1st
Mtg Rfdg (MBIA Insd) ................................................... AAA Aaa 7.400 12/01/24 36,898,400
2,000 Illinois Dev Fin Auth Rev Sch Dist Pgm Rockford Sch 205
(FSA Insd) ............................................................. AAA Aaa 6.650 2/01/11 2,031,500
1,332 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B
(MBIA Insd) ............................................................ AAA Aaa 7.900 8/15/03 1,379,339
20 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B
(Prerefunded @ 08/15/95) (MBIA Insd) ................................... AAA Aaa 7.900 8/15/03 20,735
210 Illinois Hlth Fac Auth Rev Cmnty Prov Pooled Pgm Ser B Rfdg
(MBIA Insd) ............................................................ AAA Aaa 7.900 8/15/03 237,445
500 Illinois Hlth Fac Auth Rev Grant Hosp Chicago Ser A Rfdg
(Prerefunded @ 06/01/95) (AMBAC Insd) .................................. AAA NR 10.300 6/01/13 522,235
5,000 Illinois Hlth Fac Auth Rev Hosp Sisters Svcs (Inverse Fltg)
(MBIA Insd) ............................................................ AAA Aaa 9.117 6/19/15 4,831,250
5,000 Illinois Hlth Fac Auth Rev Methodist Hlth Proj (Inverse Fltg)
(MBIA Insd) ............................................................ AAA Aaa 9.111 5/01/21 4,981,250
3,400 Illinois Hlth Fac Auth Rev Rush Presb Saint Luke Hosp
(Inverse Fltg) (MBIA Insd) ............................................. AAA Aaa 9.361 10/01/24 3,302,250
1,230 Kankakee Cnty, IL Sch Dist No 111 Kankakee (AMBAC Insd) ................ AAA Aaa 6.375 1/01/12 1,208,118
1,660 Lake Cnty, IL Sch Dist No 037 Cap Appreciation (Cap Guar Insd) ......... AAA Aaa * 12/01/12 480,719
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 103
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Illinois (Continued)
$ 1,825 Lake Cnty, IL Sch Dist No 037 Cap Appreciation (Cap Guar Insd) ......... AAA Aaa * % 12/01/13 $ 488,662
2,000 Lake Cnty, IL Sch Dist No 037 Cap Appreciation (Cap Guar Insd) ......... AAA Aaa * 12/01/14 499,420
4,060 Madison, Macoupin Cntys, IL Cmnty College Dist No 536 Ser A
(AMBAC Insd) ........................................................... AAA Aaa 6.450 11/01/19 3,890,211
2,210 Northwest Suburban Muni Jt Action Wtr Agy IL Wtr Supply Sys
Rev Ser A Rfdg (MBIA Insd) ............................................ AAA Aaa 5.900 5/01/15 2,005,862
6,110 Rosemont, IL C Tax Increment 3 (FGIC Insd) ............................. AAA Aaa * 12/01/06 2,860,824
3,000 Rosemont, IL C Tax Increment 3 (FGIC Insd) ............................. AAA Aaa * 12/01/07 1,306,530
1,185 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd) ............................ AAA Aaa 8.000 12/01/04 1,353,471
1,285 Saint Clair Cnty, IL Ctfs Partn (MBIA Insd) ............................ AAA Aaa 8.000 12/01/05 1,473,034
-------------
137,137,720
-------------
Indiana 1.2%
2,000 Indiana Bond Bank Spl Pgm Ser A (AMBAC Insd) ........................... AAA Aaa 9.750 8/01/09 2,424,920
3,840 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosp of IN (MBIA Insd) ........ AAA Aaa 7.000 7/01/21 3,874,176
5,000 Indiana Hlth Fac Fin Auth Hosp Rev Cmnty Hosp Proj Rfdg & Impt
(MBIA Insd) ............................................................ AAA Aaa 6.400 5/01/12 4,881,950
1,375 Indiana St Edl Fac Auth Rev Butler Univ Ser B (MBIA Insd) ............. AAA Aaa * 1/01/15 358,187
1,200 Indiana St Edl Fac Auth Rev Butler Univ Ser B (MBIA Insd) ............. AAA Aaa * 1/01/16 291,084
650 Petersburg, IN Pollutn Ctl Rev Indianapolis Pwr & Lt Co Proj
(AMBAC Insd) ........................................................... AA- Aa2 10.625 12/01/14 664,339
1,000 Saint Joseph Cnty, IN Hosp Auth Hosp Fac Rev Mem Hosp
of South Bend Ser A Rfdg (MBIA Insd) .................................. AAA Aaa 7.000 8/15/20 1,009,530
-------------
13,504,186
----------
Iowa 0.0%
30 Iowa Hsg Fin Auth Single Family Hsg Rev Ser 1984 A (AMBAC Insd) ........ AA Aaa 10.750 9/01/04 31,194
----------
Kansas 3.6%
36,250 Burlington, KS Pollutn Ctl Rev KS Gas & Elec Co Proj Rfdg
(MBIA Insd) ............................................................ AAA Aaa 7.000 6/01/31 36,808,975
4,500 Kansas City, KS Util Sys Rev Rfdg & Impt (FGIC Insd) ................... AAA Aaa 6.375 9/01/23 4,403,880
----------
41,212,855
----------
Kentucky 0.2%
500 Daviess Cnty, KY Hosp Rev Mercy Hlth Care Sys Ser A
(Prerefunded @ 09/01/97) (AMBAC Insd) .................................. AAA Aaa 9.750 9/01/11 554,115
500 Jefferson Cnty, KY Pollutn Ctl Rev Louisville Gas & Elec
Ser 85 A (AMBAC Insd) ................................................. AA Aa2 9.250 7/01/15 520,350
105 Kentucky Cntys, 1987 Single Family Mtg Rev Rfdg (MBIA Insd) ............ AAA Aaa 8.625 9/01/15 112,677
1,500 Kentucky Econ Dev Fin Auth Hosp Fac Rev Saint Claire Med Cent
Proj Rfdg (Connie Lee Insd) ............................................ AAA NR 5.625 9/01/21 1,268,055
----------
2,455,197
----------
Louisiana 1.6%
4,065 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee Insd) .................................. AAA NR 6.375 12/01/12 3,903,498
5,530 Calcasieu Parish, LA Mem Hosp Svcs Dist Hosp Rev Lake Charles
Mem Hosp Proj Ser A (Connie Lee Insd) .................................. AAA NR 6.500 12/01/18 5,309,685
3,150 Louisiana Pub Fac Auth Rev Pgm Hlth & Edl Cap Fac C Our Lady
Med Cent (BIGI Insd) ................................................... AAA Aaa 8.200 12/01/15 3,440,902
10,000 New Orleans, LA Home Mtg Auth Single Family Mtg Rev 1985
Ser A (MBIA Insd) ...................................................... AAA Aaa * 9/15/16 993,900
13,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ............................ AAA Aaa * 2/01/15 3,129,880
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 104
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Louisiana (Continued)
$ 2,000 Saint Tammany Parish, LA Hosp Svc Dist No 2 Hosp Rev
Slidell Mem Hosp & Med Cent (Connie Lee Insd) .......................... AAA NR 6.250% 10/01/14 $ 1,872,900
------------
18,650,765
------------
Maine 0.5%
2,750 Easton, ME Indl Dev McCain Food Inc Proj Ser 1985 (AMBAC Insd).......... AA- NR 9.200 8/01/99 2,765,290
1,000 Maine Hlth & Higher Edl Fac Auth Rev Ser A (FSA Insd) ................. AAA Aaa 6.000 7/01/24 894,070
1,750 Maine Hlth & Higher Edl Fac Auth Rev Ser B (FSA Insd) ................. AAA Aaa 7.100 7/01/14 1,787,222
------------
5,446,582
------------
Maryland 0.4%
1,000 Anne Arundel Cnty, MD Mtg Rev Mill Pond Apts Ser A Rfdg
(MBIA Insd) ............................................................ AAA Aaa 6.000 1/01/26 879,740
500 Baltimore, MD Ctfs Partn Ser A Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd) ............................................................ AAA Aaa 7.200 4/01/10 542,675
195 Baltimore, MD Ctfs Partn Ser C Rfdg (MBIA Insd) ........................ AAA Aaa 7.200 4/01/10 204,106
55 Baltimore, MD Ctfs Partn Ser C Rfdg (Prerefunded @ 04/01/00)
(MBIA Insd) ............................................................ AAA Aaa 7.200 4/01/10 59,694
2,000 Maryland St Hlth & High Edl Fac Auth Rev Kernan Hosp Issue
(Connie Lee Insd) ...................................................... AAA NR 6.000 7/01/14 1,852,920
40 Maryland St Hlth & High Edl Fac Auth Rev North Arundel
Hosp Issue (Prerefunded @ 07/01/98) (BIGI Insd) ........................ AAA Aaa 7.875 7/01/21 43,638
700 Prince Georges Cnty, MD Ctfs Partn Real Estate Acquisition
Prog II (MBIA Insd) .................................................... AAA Aaa 6.000 9/15/14 658,378
------------
4,241,151
------------
Massachusetts 1.6%
1,550 Chelsea, MA Sch Proj Ln Act 1948 (AMBAC Insd) .......................... AAA Aaa 6.000 6/15/14 1,455,295
3,240 Massachusetts St Hlth & Edl Fac Auth Rev MA Genl Hosp Ser F1
(AMBAC Insd) ........................................................... AAA Aaa 6.000 7/01/15 3,006,104
1,400 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp Ser A
(Prerefunded @ 07/01/98) (MBIA Insd) ................................... AAA Aaa 7.875 7/01/18 1,530,116
1,700 Massachusetts St Hlth & Edl Fac Auth Rev Mt Auburn Hosp
Ser B-1 (MBIA Insd) .................................................... AAA Aaa 6.250 8/15/14 1,638,494
4,000 Massachusetts St Hlth & Edl Fac Auth Rev Newton-Wellesley
Hosp Issue C (BIGI Insd) ............................................... AAA Aaa 8.000 7/01/18 4,258,240
6,800 Massachusetts St Hsg Fin Agy Hsg Proj Ser A (AMBAC Insd) ............... AAA Aaa 6.150 10/01/15 6,268,920
------------
18,157,169
------------
Michigan 2.2%
1,535 Airport, MI Cmnty Sch Dist Rfdg (AMBAC Insd) .......................... AAA Aaa 5.125 5/01/22 1,230,333
2,325 Bay City, MI (AMBAC Insd) .............................................. AAA Aaa * 6/01/15 598,316
1,000 Bay City, MI (AMBAC Insd) .............................................. AAA Aaa * 6/01/16 239,790
3,785 Chippewa Vly, MI Schs Rfdg (FGIC Insd) ................................. AAA Aaa 5.125 5/01/15 3,146,130
500 Kalkaska, MI Pub Sch (AMBAC Insd) ..................................... AAA Aaa * 5/01/15 129,385
14,750 Livonia, MI Pub Sch Dist Ser II (Crossover Refunding @ 05/01/07)
(FGIC Insd) ............................................................ AAA Aaa * 5/01/14 3,855,797
21,000 Livonia, MI Pub Sch Dist Ser II (Crossover Refunding @ 05/01/07)
(FGIC Insd) ............................................................ AAA Aaa * 5/01/21 3,379,950
2,015 Marquette, MI Area Pub Sch Rfdg (FGIC Insd) ............................ AAA Aaa 5.250 5/01/21 1,647,081
1,580 Michigan High Edl Fac Auth Rev Ltd Oblig Hope College Proj
Rfdg (Connie Lee Insd) ................................................. AAA NR 7.000 10/01/13 1,616,609
1,680 Michigan High Edl Fac Auth Rev Ltd Oblig Hope College Proj
Rfdg (Connie Lee Insd) ................................................. AAA NR 7.000 10/01/14 1,717,565
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 105
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Michigan (Continued)
$ 2,000 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B (Inverse Fltg)
(AMBAC Insd) ............................................................ AAA Aaa 3.160% 4/01/04 $ 1,618,720
1,500 Monroe Cnty, MI Pollutn Ctl Rev Insd Detroit Edison Co Ser A
(AMBAC Insd) ............................................................ AAA Aaa 9.625 12/01/15 1,604,325
5,000 Mount Clemens, MI Cmnty Sch Dist Cap Apprec
(Prerefunded @ 05/01/07) (MBIA Insd) .................................... AAA Aaa * 5/01/17 1,117,250
1,500 Romulus, MI Cmnty Sch Rfdg (FSA Insd) .................................. AAA Aaa * 5/01/15 388,155
2,210 Romulus, MI Cmnty Sch Rfdg (FSA Insd) .................................. AAA Aaa * 5/01/16 532,875
3,490 Warren, MI Cons Sch Dist Ser 2 Rfdg (FGIC Insd) ......................... AAA Aaa 5.250 5/01/21 2,856,425
------------
25,678,706
------------
Minnesota 0.6%
5,600 Minneapolis-Saint Paul, MN Hsg & Redev Auth Hlthcare Sys Rev
Hlth One Ser A (MBIA Insd) ............................................. AAA Aaa 7.400 8/15/11 5,963,608
1,000 Plymouth, MN Hlth Fac Rev Westhealth Proj Ser A (Cap Guar Insd) ......... AAA Aaa 6.250 6/01/16 958,990
------------
6,922,598
------------
Mississippi 0.1%
1,000 Harrison Cnty, MS Wastewtr Mgmt Dist Rev Wastewtr Treatment
Fac Ser A Rfdg (FGIC Insd) .............................................. AAA Aaa 8.500 2/01/13 1,195,840
------------
Missouri 3.4%
2,700 Central MO St Univ Rev Hsg Sys (Prerefunded @ 07/01/01)
(MBIA Insd) ............................................................. AAA Aaa 7.000 7/01/14 2,927,502
6,290 Green Cnty, MO Single Family Mtg Rev (AMBAC Insd) ...................... AAA Aaa * 12/01/16 688,503
920 Jackson Cnty, MO Pub Fac Auth Insd Leasehold Rev Cap Impts
Proj Rfdg & Impt (MBIA Insd) ............................................ AAA Aaa 6.125 12/01/15 878,756
2,015 Jackson Cnty, MO Single Family Mtg Rev Tax Exempt
Multiplier Bond (AMBAC Insd) ............................................ AAA Aaa * 12/01/16 217,338
2,250 Kansas City, MO Muni Assistance Corp Rev Leasehold H Roe
Bartle Ser B1 Rfdg (AMBAC Insd) ......................................... AAA Aaa 7.125 4/15/16 2,313,900
2,150 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @ 02/15/01) (FGIC Insd) ....................... AAA Aaa 6.800 2/15/06 2,298,802
2,350 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Christian Hlth Ser A
Rfdg & Impt (Prerefunded @ 02/15/01) (FGIC Insd) ....................... AAA Aaa 6.875 2/15/21 2,525,427
2,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Heartland Hlth Sys
Proj (AMBAC Insd) ....................................................... AAA Aaa 6.350 11/15/17 1,935,480
7,650 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlthcare Proj
Rfdg (MBIA Insd) ........................................................ AAA Aaa 6.250 6/01/16 7,323,651
9,250 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev SSM Hlthcare Proj
Rfdg (Prerefunded @ 06/01/98) (BIGI Insd) ............................... AAA Aaa 7.750 6/01/16 10,040,690
1,000 Missouri St Hlth & Edl Fac Auth Rev Saint Lukes Hosp KC Proj
Rfdg & Impt (Prerefunded @ 11/15/01) (MBIA Insd) ........................ AAA Aaa 7.000 11/15/13 1,086,590
680 Saint Louis Cnty, MO Single Family Mtg Rev (AMBAC Insd) ................ AAA Aaa 9.250 10/01/16 712,654
1,550 Saint Louis, MO Muni Fin Corp Leasehold Rev Rfdg & Impt
(FGIC Insd) ............................................................. AAA Aaa 6.250 2/15/12 1,517,993
1,000 Saint Louis, MO Wtr Rev Rfdg & Impt (FGIC Insd) ......................... AAA Aaa 6.000 7/01/14 943,060
2,000 Sikeston, MO Elec Rev Rfdg (MBIA Insd) .................................. AAA Aaa 6.200 6/01/10 1,974,500
1,000 Springfield, MO Sch Dist No R12 Ser B Rfdg (FGIC Insd) ................. AAA Aaa 9.500 3/01/07 1,286,420
------------
38,671,266
------------
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 106
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nebraska 0.3%
$ 1,250 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd) ......................................................... AAA Aaa 6.900% 9/01/11 $ 1,291,775
1,500 Douglas Cnty, NE Hosp Auth No 1 Rev Immanuel Med Cent Inc Rfdg
(AMBAC Insd) ......................................................... AAA Aaa 7.000 9/01/21 1,531,995
500 Lancaster Cnty, NE Hosp Auth No 1 Hosp Rev Bryan Mem Hosp Proj
(MBIA Insd) .......................................................... AAA Aaa 6.700 6/01/22 501,345
------------
3,325,115
------------
Nevada 1.4%
3,200 Clark Cnty, NV Pollutn Ctl Rev NV Pwr Co Proj Ser B Rfdg
(FGIC Insd) .......................................................... AAA Aaa 6.600 6/01/19 3,161,536
2,040 Las Vegas, NV Ltd Tax Remarketed Rfdg (Prerefunded @ 11/01/97)
(MBIA Insd) .......................................................... AAA Aaa 7.625 11/01/02 2,194,958
3,320 Reno, NV Hosp Rev Dates Saint Marys Hosp Inc Ser B
(Prerefunded @ 01/01/00) (BIGI Insd) ................................. AAA Aaa 7.750 7/01/15 3,673,480
5,035 Reno, NV Hosp Rev Dates Saint Marys Hosp Inc Ser C
(Prerefunded @ 01/01/00) (BIGI Insd) ................................. AAA Aaa 7.750 7/01/15 5,571,077
3,720 Washoe Cnty, NV Impt & Rfdg (MBIA Insd) .............................. AAA Aaa * 7/01/07 1,664,105
------------
16,265,156
------------
New Hampshire 0.2%
2,500 New Hampshire St Tpk Sys Rev Rfdg (Inverse Fltg) (FGIC Insd) ......... AAA Aaa 9.292 11/01/17 2,500,000
------------
New Jersey 1.7%
3,120 Atlantic Cnty, NJ Util Auth Swr Rev Formerly Atlantic Cnty, NJ
Sewage Auth Ser A Rfdg (AMBAC Insd) .................................. AAA Aaa 5.850 1/15/15 2,881,320
1,950 Camden Cnty, NJ Muni Util Auth Swr Rev (FGIC Insd) ................... AAA Aaa 8.250 12/01/17 2,114,950
1,250 Middlesex Cnty, NJ Ctfs Partn (MBIA Insd) ............................ AAA Aaa 6.000 8/15/14 1,183,775
1,000 New Jersey Hlthcare Fac Fin Auth Rev Burdette Tomlin Mem Hosp
Ser C (Prerefunded @ 07/01/97) (FGIC Insd) ........................... AAA Aaa 8.125 7/01/12 1,082,210
1,750 New Jersey Hlthcare Fac Fin Auth Rev Saint Clares Riverside
Med Cent (MBIA Insd) ................................................ AAA Aaa 5.750 7/01/14 1,586,358
3,700 New Jersey Hlthcare Fac Fin Newark Bethlehem Israel Med Cent
(FSA Insd) ........................................................... AAA Aaa 6.000 7/01/16 3,454,912
3,940 New Jersey St Hsg & Mtg Fin Agy Rev (MBIA Insd) ...................... AAA Aaa 8.100 10/01/17 4,127,386
2,250 Sussex Cnty, NJ Muni Util Auth Solid Waste Rev Ser A
(Prerefunded @ 12/01/98) (BIGI Insd) ................................. AAA Aaa 7.875 12/01/13 2,476,530
------------
18,907,441
------------
New York 4.0%
2,000 New York City Ser B (MBIA Insd) ..................................... AAA Aaa 6.950 8/15/12 2,059,260
1,750 New York City Indl Dev Agy Civic Fac Rev USTA Natl Tennis
Cent Proj (FSA Insd) ................................................. AAA Aaa 6.375 11/15/14 1,714,160
5,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser A
(Prerefunded @ 06/15/97) (BIGI Insd) ................................. AAA Aaa 8.750 6/15/10 5,501,150
2,250 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev Ser B
(Prerefunded @ 06/15/97) (MBIA Insd) ................................. AAA Aaa 8.250 6/15/16 2,449,845
1,000 New York City Ser A (Prerefunded @ 11/01/97) (AMBAC Insd) ............ A- Aaa 8.500 11/01/12 1,100,500
50 New York City Ser C Subser C-1 (MBIA Insd) .......................... AAA Aaa 6.250 8/01/09 49,199
1,500 New York St Dorm Auth Rev March Of Dimes Fndtn
(Prerefunded @ 07/01/97) (AMBAC Insd) ................................ AAA Aaa 9.200 7/01/12 1,661,010
675 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (MBIA Insd) .................................................... AAA Aaa 7.750 8/15/10 725,821
435 New York St Med Care Fac Fin Agy Rev IBC Mental Hlth Svcs
Ser A (Prerefunded @ 02/15/00) (MBIA Insd) ........................... AAA Aaa 7.750 8/15/10 482,063
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 107
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York (Continued)
$ 1,000 New York St Med Care Fac Fin Agy Rev Mental Hlth Ser E
(Cap Guar Insd) ......................................................... AAA Aaa 6.500% 8/15/15 $ 980,990
13,600 New York St Med Care Fac Fin Agy Rev New York Hosp Mtg Ser A
(AMBAC Insd) <F2> ....................................................... AAA Aaa 6.750 8/15/14 13,631,960
50 New York St Med Care Fac Fin Agy Rev Saint Marys Hosp Private
Ins Pgm (Prerefunded @ 11/01/95) (AMBAC Insd) ........................... AAA Aaa 8.375 11/01/14 52,403
3,400 New York St Muni Bond Bank Agy Spl Pgm Rev Rochester Ser A
(MBIA Insd) ............................................................. AAA Aaa 6.625 3/15/06 3,497,988
1,500 New York St Thruway Auth Hwy & Brdg Trust Fd Ser B (FGIC Insd) ......... AAA Aaa 6.000 4/01/14 1,411,830
6,000 New York St Thruway Auth Svc Contract Rev Loc Hwy & Brdg
(MBIA Insd) ............................................................. AAA Aaa 5.750 4/01/13 5,522,340
5,400 New York St Urban Dev Corp Rev Youth Fac (MBIA Insd) .................... AAA Aaa 5.700 4/01/14 4,868,478
------------
45,708,997
------------
North Carolina 0.2%
1,250 Franklin Cnty, NC Ctfs Partn Jail & Sch Projs (FGIC Insd) ............... AAA Aaa 6.625 6/01/14 1,255,363
500 North Carolina Eastn Muni Pwr Agy Pwr Sys Rev Ser A
(AMBAC Insd) ............................................................ AAA Aaa 12.900 1/01/97 571,410
------------
1,826,773
------------
North Dakota 0.1%
1,250 Grand Forks, ND Hlthcare Fac Rev United Hosp Oblig Group
(MBIA Insd) ............................................................. AAA Aaa 6.100 12/01/09 1,203,763
------------
Ohio 2.6%
3,600 Akron Bath Copley, OH St Twp Hosp Dist Rev Akron Genl Med
Cent Proj (AMBAC Insd) .................................................. AAA Aaa 6.500 1/01/19 3,561,192
1,000 Akron Bath Copley, OH St Twp Hosp Dist Rev Childrens Hosp
Med Cent Akron (Prerefunded @ 11/15/00) (AMBAC Insd) .................... AAA Aaa 7.450 11/15/20 1,104,310
250 Clermont Cnty, OH Hosp Fac Rev Mercy Hlth Care Sys Prov
Cincinnati Ser A (AMBAC Insd) ........................................... AAA Aaa 9.750 9/01/13 262,628
5,000 Clermont Cnty, OH Hosp Fac Rev Muni (Inverse Fltg)
(AMBAC Insd) ............................................................ AAA Aaa 9.641 10/05/21 4,968,750
2,010 Cleveland, OH (MBIA Insd) ............................................... AAA Aaa 6.500 11/15/09 2,041,376
2,285 Cleveland, OH (MBIA Insd) ............................................... AAA Aaa 6.500 11/15/10 2,314,956
1,000 Cuyahoga Cnty, OH Hosp Rev Richmond Heights Genl Hosp
Rfdg (AMBAC Insd) ...................................................... B NR 10.000 12/01/11 988,610
8,625 Hamilton, OH Elec Sys Mtg Rev Mtg City of Hamilton Ser B
(Prerefunded @ 10/15/98) (FGIC Insd) .................................... AAA Aaa 8.000 10/15/22 9,499,489
2,100 Lakota, OH Local Sch Dist (AMBAC Insd) .................................. AAA Aaa 6.250 12/01/14 2,062,347
2,500 Ohio St Air Quality Dev Auth Rev Pollutn Ctl OH Edison A Rfdg
(FGIC Insd) ............................................................. AAA Aaa 7.450 3/01/16 2,629,675
650 Richland Cnty, OH Hosp Impt Mtg Rev Mansfield Genl Hosp Rfdg
(AMBAC Insd) ............................................................ AAA Aaa 9.375 12/01/09 687,375
------------
30,120,708
------------
Oklahoma 0.5%
1,000 Norman, OK Regl Hosp Auth Hosp Rev (MBIA Insd) ......................... AAA Aaa 6.900 9/01/21 1,003,740
4,700 Oklahoma Hsg Fin Agy Single Family Rev Mtg Ser A (MBIA Insd) ........... AAA Aaa 7.200 3/01/11 4,845,371
------------
5,849,111
------------
Oregon 0.7%
2,750 Emerald Peoples Util Dist OR Elec Sys Rev Rfdg (AMBAC Insd) ............. AAA Aaa 5.750 11/01/16 2,513,885
2,145 Marion County, OR Union High Sch Dist No 007
Silverton (FSA Insd)..................................................... AAA Aaa 6.000 6/01/13 2,052,808
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 108
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Oregon (Continued)
$ 1,960 Tillamook Cnty, OR (FGIC Insd) .......................................... AAA Aaa 6.250% 1/01/14 $ 1,927,915
1,000 Wasco Cnty, OR Vets Home (FSA Insd) ..................................... AAA Aaa 6.200 6/01/13 981,120
------------
7,475,728
------------
Pennsylvania 3.2%
5,500 Berks Cnty, PA Muni Auth Hosp Rev Reading Hosp & Med Cent
Proj B (MBIA Insd) ...................................................... AAA Aaa 6.000 10/01/14 5,115,055
2,000 Dauphin Cnty, PA Genl Auth Hosp Rev Hapsco Phoenixville Hosp
Proj B (FGIC Insd) ..................................................... AAA Aaa 6.125 7/01/10 1,919,880
1,000 Emmaus, PA Genl Auth Rev Var Loc Govt Bond Pool Pgm Ser B Var
Rate Cpn (BIGI Insd) .................................................... AAA Aaa 8.000 5/15/18 1,049,420
2,050 Harrisburg, PA Redev Auth Rev Cap Impt Ser A (FGIC Insd) ................ AAA Aaa 7.875 11/02/16 2,209,900
1,000 Montgomery Cnty, PA High Edl & Hlth Auth Hosp Rev Abington
Mem Hosp Ser A Rfdg (AMBAC Insd) ........................................ AAA Aaa 6.000 6/01/22 904,520
3,750 Montgomery Cnty, PA Indl Dev Auth Rev Pollutn Ctl Ser E Rfdg
(MBIA Insd) ............................................................. AAA Aaa 6.700 12/01/21 3,757,162
1,000 Northeastern PA Hosp & Edl Auth College Rev Gtd Luzerne
Cnty Cmnty College (AMBAC Insd) <F2> .................................... AAA Aaa 6.625 8/15/15 992,680
12,600 Pennsylvania Intergvtl Coop Auth Spl Tax Rev City Of Philadelphia
Funding Pgm (MBIA Insd) ................................................. AAA Aaa 5.600 6/15/15 11,068,092
2,250 Philadelphia, PA Gas Wks Rev 14th Ser A Rfdg (FSA Insd) ................. AAA Aaa 6.375 7/01/14 2,192,490
1,000 Saint Mary Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth
Saint Mary Ser A (MBIA Insd) ............................................ AAA Aaa 6.500 7/01/22 975,010
1,000 Saint Mary Hosp Auth Bucks Cnty, PA Rev Franciscan Hlth Sys
Ser B (MBIA Insd) ....................................................... AAA Aaa 6.500 7/01/12 993,800
1,000 State Pub Sch Bldg Auth PA Sch Rev Burgettstown Sch Dist
Ser D (MBIA Insd) <F2> .................................................. AAA Aaa 6.500 2/01/14 993,440
4,500 Upper Darby, PA Sch Dist (AMBAC Insd) ................................... AAA Aaa 5.250 2/15/13 3,867,120
1,250 Westmoreland Cnty, PA Indl Dev Auth Rev Hosp Westmoreland
Hlth Sys Ser A (AMBAC Insd) ............................................. AAA Aaa 6.000 7/01/22 1,133,475
------------
37,172,044
------------
Rhode Island 1.7%
2,000 Rhode Island St Hlth & Edl Bldg Corp Rev Higher Edl Fac
Roger Williams (Connie Lee Insd) ........................................ AAA NR 7.250 11/15/24 2,046,120
18,000 Rhode Island St Hlth & Edl Bldg Corp Rev RI Hosp
(Inverse Fltg) (FGIC Insd) .............................................. AAA Aaa 8.701 8/15/21 17,932,500
------------
19,978,620
------------
South Carolina 1.2%
1,500 Charleston Cnty, SC Ctfs Partn Ser B (MBIA Insd) ........................ AAA Aaa 6.875 6/01/14 1,529,595
3,000 Florence Cnty, SC Pub Fac Corp Ctfs Partn Law Enforcement Proj
Civic Cent (Prerefunded @ 03/01/00) (AMBAC Insd) ........................ AAA Aaa 7.600 3/01/14 3,286,890
1,000 Greenville, SC Hosp Sys Hosp Fac Rev Ser A
(Prerefunded @ 05/01/98) (FGIC Insd) .................................... AAA Aaa 7.800 5/01/15 1,085,490
1,500 Greenwood Cnty, SC Hosp Rev Self Mem Hosp Ser A
(Prerefunded @ 10/01/97) (BIGI Insd) .................................... AAA Aaa 8.375 10/01/17 1,641,270
1,700 Greenwood Cnty, SC Hosp Rev Self Mem Hosp Ser B
(Prerefunded @ 10/01/97) (BIGI Insd) .................................... AAA Aaa 8.375 10/01/17 1,860,106
2,000 Lexington Cnty, SC Sch Dist No 1 Ctfs Partn Pgm Ser A
(FGIC Insd) ............................................................. AAA Aaa 6.000 9/01/09 1,935,460
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 109
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
South Carolina (Continued)
$ 1,235 Piedmont Muni Pwr Agy SC Elec Rev Rfdg (FGIC Insd) ........................ AAA Aaa 6.750% 1/01/20 $ 1,251,450
635 Saint Andrews, SC Pub Svcs Dist Swr Sys Rev (FGIC Insd) .................. AAA Aaa 7.750 1/01/18 667,703
------------
13,257,964
------------
South Dakota 0.7%
4,205 South Dakota St Lease Rev Trust Ctfs Ser A (Cap Guar Insd) ................ AAA Aaa 6.625 9/01/12 4,210,971
4,000 South Dakota St Lease Rev Trust Ctfs Ser A (Cap Guar Insd) ................ AAA Aaa 6.700 9/01/17 3,971,840
------------
8,182,811
------------
Tennessee 0.5%
2,000 Chattanooga-Hamilton Cnty, TN Hosp Auth Hosp Rev Erlanger
Med Cent Ser B (Inverse Fltg) (Prerefunded @ 05/01/01) (FSA Insd) .......... AAA Aaa 9.115 5/25/21 2,280,000
3,320 Johnson City, TN Sch Sales Tax (AMBAC Insd) ................................ AAA Aaa 6.700 5/01/18 3,327,404
----------
5,607,404
----------
Texas 5.2%
3,000 Amarillo, TX Hlth Fac Corp Hosp Rev High Plains Baptist Hosp
(Inverse Fltg) (FSA Insd) ................................................. AAA Aaa 8.838 1/03/22 2,793,750
12,500 Austin, TX Util Sys Rev Comb Ser A Rfdg (MBIA Insd) ....................... AAA Aaa * 11/15/10 4,411,875
9,000 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj B Rfdg
(BIGI Insd) ............................................................... AAA Aaa 8.250 5/01/15 9,747,810
6,515 Brazos River Auth TX Rev Coll Houston Lt & Pwr Co Proj C Rfdg
(BIGI Insd) ............................................................... AAA Aaa 8.100 5/01/19 7,029,229
4,040 Corpus Christi, TX Hsg Fin Corp Single Family Mtg Rev Ser A Rfdg
(MBIA Insd) ............................................................... AAA Aaa 7.700 7/01/11 4,294,359
7,000 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/07 3,106,670
7,250 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/08 2,875,350
8,600 Dallas Cnty, TX Util & Reclamation Dist Rfdg & Impt (MBIA Insd) .......... AAA Aaa * 2/15/09 3,164,800
3,500 East TX Criminal Justice Fac Fin Corp Mtg Rev City Of Henderson
Proj (AMBAC Insd) ......................................................... AAA Aaa 6.125 11/01/14 3,328,290
29,765 El Paso, TX Hsg Fin Corp Mtg Rev Single Family (FGIC Insd) ............... AAA Aaa * 11/01/16 2,918,458
2,000 Grand Prarie, TX Hlth Fac Dev Corp Hosp Rev Dallas-Ft Worth
Med Cent (Prerefunded @ 11/01/95) (AMBAC Insd) ............................ AAA Aaa 9.500 11/01/10 2,113,660
7,250 Harris Cnty, TX Toll Rd Sr Lien Rfdg (FGIC Insd) .......................... AAA Aaa 5.000 8/15/16 5,838,135
4,615 Harris Cnty, TX Toll Rd Tax & Sub Lien Ser A Rfdg (FGIC Insd) ............ AAA Aaa * 8/15/07 2,068,443
1,400 Lubbock, TX Hlth Fac Dev Corp Hosp Rev Methodist Hosp Ser A
Rfdg (AMBAC Insd) ........................................................ AAA Aaa 5.875 12/01/13 1,281,266
3,000 Northeast Hosp Auth TX Rev Northeast Med Cent Hosp Ser A
Rfdg (FGIC Insd) .......................................................... AAA Aaa 6.125 7/01/11 2,875,440
1,975 Tarrant Cnty, TX Hlth Fac Dev Corp Hlth Sys Rev Ser A (FGIC Insd) ......... AAA Aaa 5.000 9/01/15 1,579,526
400 Texas Muni Pwr Agy Rev (Prerefunded @ 09/01/95) (AMBAC Insd) .............. A+ NR 7.000 9/01/14 406,352
----------
59,833,413
----------
Utah 1.3%
5,085 Beaver Cnty, UT Sch Dist (Prerefunded @ 11/01/02) (AMBAC Insd) ............ AAA Aaa 6.625 11/01/12 5,355,420
1,680 Payson City, UT Cnty UT Elec Pwr Rev (BIGI Insd) .......................... AAA Aaa 8.000 8/15/03 1,829,285
750 Provo, UT Elec Rev 1984 Ser A Rfdg (AMBAC Insd) ........................... AAA Aaa 10.375 9/15/15 1,065,923
3,500 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg)
(AMBAC Insd) .............................................................. AAA Aaa 9.515 5/15/20 3,395,000
500 Uintah Cnty, UT Pollutn Ctl Rev Natl Rural Util Deseret Ser 1984 F
(Prerefunded @ 06/15/01) (AMBAC Insd) ..................................... AA- Aaa 10.000 6/15/09 614,785
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 110
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Utah (Continued)
$ 5 Utah St Hsg Fin Agy Single Family Mtg Private Insd Mtg Ser A
(AMBAC Insd) ......................................................... AA Aa 10.750% 7/01/08 $ 5,031
7,385 Utah St Muni Fin Coop Loc Govt Rev Pool Cap Salt Lake
(FSA Insd) ........................................................... AAA Aaa * 3/01/09 2,911,167
------------
15,176,611
------------
Virginia 1.1%
2,500 Augusta Cnty, VA Indl Dev Auth Hosp Rev Augusta Hosp Corp Rfdg
(AMBAC Insd) ......................................................... AAA Aaa 5.500 9/01/15 2,161,650
2,315 Chesapeake Bay Brdg & Tunl Comm VA Dist Rev Genl Resolution
Rfdg (MBIA Insd) ..................................................... AAA Aaa 6.375 7/01/22 2,232,262
4,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ............................... AAA Aaa 6.800 3/01/14 4,043,120
2,500 Roanoke Cnty, VA Wtr Sys Rev Rfdg (FGIC Insd) ........................ AAA Aaa 5.000 7/01/21 1,968,525
1,125 Roanoke, VA Indl Dev Auth Hosp Rev Roanoke Mem Hosp Proj
(Prerefunded @ 07/01/00) (MBIA Insd) ................................. AAA Aaa 6.500 7/01/25 1,166,996
750 University of VA Hosp Rev Ser C Rfdg
(Prerefunded @ 06/01/00) (AMBAC Insd) ................................ AAA NR * 6/01/07 714,825
------------
12,287,378
------------
Washington 2.4%
1,250 Franklin Cnty, WA Pub Util Dist No 1 Elec Rev
(Prerefunded @ 09/01/01) (AMBAC Insd) ................................ AAA Aaa 7.100 9/01/08 1,347,988
350 Pierce Cnty, WA Swr Rev Ser A (MBIA Insd) ........................... AAA Aaa 9.000 2/01/05 416,255
1,000 Snohomish Cnty, WA Solid Waste Rev (MBIA Insd) ....................... AAA Aaa 7.000 12/01/10 1,040,220
5,000 Spokane, WA Regl Solid Waste Mgmt Sys Rev (AMBAC Insd) <F2> ...... ... AAA Aaa 6.250 12/01/11 4,862,500
9,435 Washington St Pub Pwr Supply Sys Nuclear Proj No 1 Rev Ser C
Rfdg (FGIC Insd) ..................................................... AAA Aaa 7.750 7/01/08 10,471,340
3,015 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (MBIA Insd) ..................................................... AAA Aaa * 7/01/04 1,684,872
6,500 Washington St Pub Pwr Supply Sys Nuclear Proj No 2 Rev Ser C
Rfdg (Prerefunded @ 01/01/01) (FGIC Insd) ............................ AAA Aaa 7.375 7/01/11 7,132,710
------------
26,955,885
------------
West Virginia 0.1%
1,235 South Charleston, WV Hosp Rev Herbert J Thomas Mem Hosp
Rfdg (Prerefunded @ 10/01/98) (BIGI Insd) ............................ AAA Aaa 8.000 10/01/10 1,360,600
------------
Wyoming 0.1%
1,000 Laramie Cnty, WY Hosp Rev Mem Hosp Proj (AMBAC Insd) ................. AAA Aaa 6.700 5/01/12 1,005,230
------------
Guam 0.1%
1,000 Guam Pwr Auth Rev Ser A (AMBAC Insd) ................................ AAA Aaa 6.375 10/01/08 1,008,170
------------
Total Long-Term Investments 99.2%
(Cost $1,137,588,569) <F1>................................................................................... 1,134,367,200
Short-Term Investments at Amortized Cost 1.1% ............................................................... 13,300,000
Liabilities in Excess of Other Assets (0.3%) ............................................................... (3,917,393)
--------------
Net Assets 100%.............................................................................................. $1,143,749,807
--------------
*Zero coupon bond
<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is
$1,137,588,569; the aggregate gross unrealized appreciation is $30,579,096 and
the aggregate gross unrealized depreciation is $33,668,935, resulting in net
unrealized depreciation including open futures transactions of $3,089,839.
<F2>Securities purchased on a when issued or delayed delivery basis.
<F3>Assets segregated as collateral for when issued or delayed delivery
purchase commitments and open futures transactions.
</FN>
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 111
Van Kampen Merritt Insured Tax Free Income Fund
------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $1,137,588,569) <F1>......................................... $ 1,134,367,200
Short-Term Investments <F1>..................................................................... 13,300,000
Receivables:
Interest........................................................................................ 18,601,231
Investments Sold................................................................................ 2,350,354
Fund Shares Sold................................................................................ 750,384
Margin on Futures <F5>.......................................................................... 78,257
Other........................................................................................... 32,230
----------------
Total Assets.................................................................................... 1,169,479,656
----------------
Liabilities:
Payables:
Investments Purchased........................................................................... 16,998,148
Custodian Bank.................................................................................. 3,083,680
Fund Shares Repurchased ....................................................................... 2,280,231
Income Distributions............................................................................ 1,776,026
Investment Advisory Fee <F2>.................................................................... 404,896
Accrued Expenses................................................................................ 1,186,868
----------------
Total Liabilities............................................................................... 25,729,849
----------------
Net Assets...................................................................................... $ 1,143,749,807
----------------
Net Assets Consist of:
Paid in Surplus <F3> ........................................................................... $ 1,153,762,159
Accumulated Undistributed Net Investment Income................................................. 37,808
Net Unrealized Depreciation on Investments...................................................... (3,089,839)
Accumulated Net Realized Loss on Investments ................................................... (6,960,321)
----------------
Net Assets...................................................................................... $ 1,143,749,807
----------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $1,110,223,546 and
63,181,868 shares of beneficial interest issued and outstanding) <F3>........................... $ 17.57
Maximum sales charge (4.65%* of offering price)................................................. .86
----------------
Maximum offering price to public ............................................................... $ 18.43
----------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $30,025,336 and
1,709,564 shares of beneficial interest issued and outstanding) <F3>............................ $ 17.56
----------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,498,975 and
199,168 shares of beneficial interest issued and outstanding) <F3>.............................. $ 17.57
----------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $1,950 and
111 shares of beneficial interest issued and outstanding) <F3> ................................. $ 17.57
----------------
*On sales of $100,000 or more, the sales charge will be reduced. Effective January 16, 1995, the
maximum sales charge was changed to 4.75%.
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 112
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest.......................................................................................... $ 79,444,087
Amortization of Premium........................................................................... (588,068)
----------------
Total Income...................................................................................... 78,856,019
----------------
Expenses:
Investment Advisory Fee <F2>...................................................................... 5,028,401
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $2,804,735, $270,245,
$46,842 and $5, respectively) <F6> ............................................................... 3,121,827
Shareholder Services ............................................................................. 1,726,834
Legal <F2>........................................................................................ 110,910
Insurance <F1>.................................................................................... 69,569
Trustees Fees and Expenses <F2>................................................................... 34,965
Other............................................................................................. 750,655
----------------
Total Expenses.................................................................................... 10,843,161
----------------
Net Investment Income............................................................................. $ 68,012,858
----------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales............................................................................... $ 677,790,889
Cost of Securities Sold........................................................................... (671,450,339)
----------------
Net Realized Gain on Investments (Including realized loss on expired option
transactions of $161,820 and realized gain on futures transactions of $10,301,737)................ 6,340,550
----------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period........................................................................... 151,851,300
End of the Period (Including unrealized appreciation on open futures transactions of $131,530).... (3,089,839)
----------------
Net Unrealized Depreciation on Investments During the Period...................................... (154,941,139)
----------------
Net Realized and Unrealized Loss on Investments................................................... $ (148,600,589)
----------------
Net Decrease in Net Assets from Operations........................................................ $ (80,587,731)
----------------
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 113
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 68,012,858 $ 64,573,993
Net Realized Gain/Loss on Investments....................................... 6,340,550 (13,356,769)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (154,941,139) 78,379,445
---------------- ----------------
Change in Net Assets from Operations ....................................... (80,587,731) 129,596,669
---------------- ----------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (66,735,561) (64,718,505)
Class B Shares.............................................................. (1,291,269) (289,225)
Class C Shares.............................................................. (222,010) (32,671)
Class D Shares.............................................................. (92) -0-
---------------- ----------------
(68,248,932) (65,040,401)
---------------- ----------------
Distributions from Net Realized Gain on Investments:
Class A Shares.............................................................. -0- (8,548)
---------------- ----------------
Total Distributions......................................................... (68,248,932) (65,048,949)
---------------- ----------------
Net Change in Net Assets from Investment Activities......................... (148,836,663) 64,547,720
---------------- ----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 145,835,342 245,132,660
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 46,938,996 44,478,881
Cost of Shares Repurchased.................................................. (155,893,379) (98,393,313)
---------------- ----------------
Net Change in Net Assets from Capital Transactions.......................... 36,880,959 191,218,228
---------------- ----------------
Total Increase/Decrease in Net Assets....................................... (111,955,704) 255,765,948
Net Assets:
Beginning of the Period..................................................... 1,255,705,511 999,939,563
---------------- ----------------
End of the Period (Including undistributed net investment income of
$37,808 and $273,882, respectively)......................................... $ 1,143,749,807 $ 1,255,705,511
---------------- ----------------
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 114
Van Kampen Merritt Insured Tax Free Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Insured Tax Free Income Fund (the "Fund") was incorporated
under Maryland law on July 1, 1984, and is registered as a diversified open-end
management investment company under the Investment Company Act of 1940, as
amended. The Fund commenced investment operations on December 14, 1984 and was
reorganized as a sub-trust of Van Kampen Merritt Tax Free Fund (the "Trust"), a
Massachusetts business trust as of February 22, 1988. On May 1, 1993, the Fund
commenced the distribution of its Class B shares. The distribution of the
Fund's Class C shares, which were initially introduced as Class D shares and
subsequently renamed Class C shares on March 7, 1994, commenced on August 13,
1993. The distribution of the Fund's fourth class of shares, Class D shares,
commenced on March 14, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in
accordance with procedures established in good faith by the Board of Trustees.
Short-term securities with remaining maturities of less than 60 days are
valued at amortized cost.
B. Security Transactions-Security transactions are recorded on a trade
date basis. Realized gains and losses are determined on an identified cost
basis. The Fund may purchase and sell securities on a "when issued" and "delayed
delivery" basis, with settlement to occur at a later date. The value of the
security so purchased is subject to market fluctuations during this period. The
Fund will maintain, in a segregated account with its custodian, assets having an
aggregate value at least equal to the amount of the when issued or delayed
delivery purchase commitments until payment is made.
C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.
D. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $12,774 which will expire on December 31, 2001.
Net realized gains or losses may differ for financial and tax reporting purposes
primarily as a result of post October 31 losses which are not recognized for tax
purposes until the first day of the following fiscal year.
E. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes.
F. Insurance Expenses-The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
----------------------------------
<S> <C>
First $100 million... .500 of 1%
Next $150 million.... .450 of 1%
Next $250 million.... .425 of 1%
Over $500 million.... .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $654,500 representing Van Kampen American Capital Distributors,
Inc.'s or its affiliates' ("VKAC") cost of providing accounting, legal and
certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 100 shares each of Classes B, C and D.
B-49
<PAGE> 115
Van Kampen Merritt Insured Tax Free Income Fund
------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
------------------------------------------------------------------------------
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1994, paid in surplus aggregated $1,116,662,803, $33,016,541,
$4,080,719 and $2,096 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 6,865,303 $ 128,013,313
Class B....................... 806,590 15,092,543
Class C....................... 151,670 2,727,397
Class D....................... 111 2,089
----------- ----------------
Total Sales .................. 7,823,674 $ 145,835,342
----------- ----------------
Dividend Reinvestment:
Class A....................... 2,505,940 $ 45,999,603
Class B....................... 41,052 750,173
Class C....................... 10,294 189,213
Class D....................... -0- 7
----------- ----------------
Total Dividend Reinvestment... 2,557,286 $ 46,938,996
----------- ----------------
Repurchases:
Class A....................... (8,130,723) $ (148,756,423)
Class B....................... (185,936) (3,383,930)
Class C....................... (213,783) (3,753,026)
Class D....................... -0- -0-
----------- ----------------
Total Repurchases............. (8,530,442) $ (155,893,379)
----------- ----------------
</TABLE>
At December 31, 1993, paid in surplus aggregated $1,091,406,310, $20,557,755
and 4,917,135 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
---------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 11,298,011 $ 219,727,668
Class B........................ 1,045,650 20,514,210
Class C........................ 249,650 4,890,782
----------- ---------------
Total Sales ................... 12,593,311 $ 245,132,660
----------- ---------------
Dividend Reinvestment:
Class A........................ 2,269,086 $ 44,286,925
Class B........................ 8,399 165,603
Class C........................ 1,337 26,353
----------- ---------------
Total Dividend Reinvestment ... 2,278,822 $ 44,478,881
----------- ---------------
Repurchases:
Class A........................ (5,037,816) $ (98,271,255)
Class B........................ (6,191) (122,058)
Class C........................ -0- -0-
----------- ---------------
Total Repurchases.............. (5,044,007) $ (98,393,313)
----------- ---------------
</TABLE>
Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
Contingent Deferred
Sales Charge
<TABLE>
<CAPTION>
Year of Redemption Class B Class C Class D
---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>
For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$648,100 and CDSC on the redeemed shares of Classes B, C and D of approximately
$56,300. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994, were $588,246,932 and
$656,359,642, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where
the recognition of gain or loss is postponed until the disposal of the
security underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
B-50
<PAGE> 116
Van Kampen Merritt Insured Tax Free Income Fund
-------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
-------------------------------------------------------------------------------
A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
Transactions in options for the year ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
Contracts Premium
-----------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993 . 500 $ 161,820
Options Expired (Net) ............ (500) (161,820)
-------- -----------
Outstanding at December 31, 1994 . -0- $ -0-
-------- -----------
</TABLE>
B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
Contracts
<S> <C>
Outstanding at December 31, 1993... 800
Futures Opened..................... 25,685
Futures Closed..................... (25,750)
--------
Outstanding at December 31, 1994... 735
--------
</TABLE>
The futures contracts outstanding as of December 31, 1994, and the descriptions
and unrealized appreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Contracts Appreciation
----------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Mar 1995 - Sells to Open... 300 $ 72,576
Municipal Bond Futures
Mar 1995 - Sells to Open... 435 58,954
--------- ------------
735 $ 131,530
--------- ------------
</TABLE>
C. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed coupon
component of the underlying bond is adjusted by the difference between the
securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, on going
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each of Class A and Class D shares and
1.00% each of Class B and Class C shares are accrued daily. Included in these
fees for the year ended December 31, 1994, are payments to VKAC of approximately
$512,700.
B-51
<PAGE> 117
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
Van Kampen American Capital California Insured Tax Free Fund, formerly
known as Van Kampen Merritt California Insured Tax Free Fund (the "Fund"), is a
separate diversified series of Van Kampen American Capital Tax Free Trust, a
Delaware business trust (the "Trust"). The Trust is an open-end management
investment company, commonly known as a mutual fund. The Fund's investment
objective is to provide investors with a high level of current income exempt
from federal and California income taxes, with liquidity and safety of principal
primarily through investment in a diversified portfolio of insured California
municipal securities. All of the municipal securities in the portfolio of the
Fund will be insured by AMBAC Indemnity Corporation or by other municipal bond
insurers whose claims-paying ability is rated "AAA" by Standard & Poor's Ratings
Group on the date of purchase. The Fund's portfolio is managed by Van Kampen
American Capital Advisory Corp. (the "Adviser").
This Statement of Additional Information is not a prospectus but should be
read in conjunction with the Prospectus for the Fund dated July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge by
calling (800) 421-5666.
The Prospectus and this Statement of Additional Information omit certain
information contained in the registration statement filed with the Securities
and Exchange Commission, Washington, D.C. This omitted information may be
obtained from the Commission upon payment of the fee prescribed, or inspected at
the Commission's office at no charge.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
The Fund and The Trust.................................................................. B-2
Investment Policies and Restrictions.................................................... B-2
Additional Investment Considerations.................................................... B-4
Description of Municipal Securities Ratings............................................. B-23
Officers and Trustees................................................................... B-28
Investment Advisory and Other Services.................................................. B-34
Custodian and Independent Auditors...................................................... B-35
Portfolio Transactions and Brokerage Allocation......................................... B-35
Tax Status of the Fund.................................................................. B-36
The Distributor......................................................................... B-36
Legal Counsel........................................................................... B-38
Performance Information................................................................. B-38
Independent Auditors' Report............................................................ B-40
Financial Statements.................................................................... B-41
Notes to Financial Statements........................................................... B-49
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.
B-1
<PAGE> 118
THE FUND AND THE TRUST
The Fund is a separate diversified series of the Trust, an open-end
diversified management investment company commonly known as a mutual fund. The
Trust is an unincorporated business trust established under the laws of the
State of Delaware by an Agreement and Declaration of Trust dated as of May 10,
1995 (the "Declaration of Trust"). The Declaration of Trust permits the Trustees
to create one or more separate investment portfolios and have a series of shares
for each portfolio. The Trustees can further sub-divide each series of shares
into one or more classes of shares for each portfolio. At present, the Fund, Van
Kampen American Capital Tax Free High Income Fund, Van Kampen American Capital
Municipal Income Fund, Van Kampen American Capital Insured Tax Free Income Fund,
Van Kampen American Capital Limited Term Municipal Income Fund, Van Kampen
American Capital Florida Insured Tax Free Income Fund, Van Kampen American
Capital New Jersey Tax Free Income Fund and Van Kampen American Capital New York
Tax Free Income Fund have been organized as series of the Trust and have
commercial investment operations. Van Kampen American Capital California Tax
Free Income Fund, Van Kampen American Capital Michigan Tax Free Income Fund, Van
Kampen American Capital Missouri Tax Free Income Fund and Van Kampen American
Capital Ohio Tax Free Income Fund have been organized as series of the Trust but
have not commenced investment operations. Other series may be organized and
offered in the future. The Fund was originally organized under the name Van
Kampen Merritt California Insured Tax Free Fund as a sub-trust of Van Kampen
Merritt Tax Free Fund, a Massachusetts business trust, as of organized under a
Declaration of Trust dated August 15, 1985 and was reorganized as a series of
the Trust on July 31, 1995.
Each share in a series of the Trust represents an equal proportionate
interest in the assets of such series with each other share in such series and
no interest in any other series. No series is subject to the liabilities of any
other series. The Declaration of Trust provides that shareholders are not liable
for any liabilities of the Trust or any of its series, requires inclusion of a
clause to that effect in every agreement entered into by the Trust or any of its
series and indemnifies shareholders against any such liability.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights other than
those described in the Prospectus. The Trust does not contemplate holding
regular meetings of shareholders to elect Trustees or otherwise. However, the
holders of 10% or more of the outstanding shares may by written request require
a meeting to consider the removal of Trustees by a vote of two-thirds of the
shares then outstanding cast in person or by proxy at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to
any series) in any manner without shareholder approval, except that the Trustees
may not adopt any amendment adversely affecting the rights of shareholders of
any series without approval by a majority of the outstanding shares of each
affected series entitled to vote (or such higher vote as may be required by the
Investment Company Act of 1940, as amended (the "1940 Act") or other applicable
law).
Statements contained in this Statement of Additional Information to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under
the caption "Investment Objectives and Policies." There can be no assurance that
the Fund will achieve its objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. Purchase any securities (other than tax exempt obligations guaranteed by
the United States Government or by its agencies or instrumentalities), if
as a result more than 5% of the Fund's total assets (taken at current
value) would then be invested in securities of a single issuer or if as a
result the Fund
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would hold more than 10% of the outstanding voting securities or any
single issuer, except that up to 25% of the Fund's total assets may be
invested without regard to such limitation.
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge or hypothecate any assets except in connection with a borrowing and
in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
"when issued" and "delayed delivery" transactions as described in the
Prospectus.
4. Make loans, except to the extent the tax exempt obligations the Fund may
invest in are considered to be loans.
5. Buy any securities "on margin." The deposit of initial or maintained
margin in connection with interest rate or other financial futures or
index contracts or related options is not considered the purchase of a
security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging
transactions in accordance with the requirements of the Securities and
Exchange Commission and the Commodity Futures Trading Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax exempt money market funds that
invest in securities rated comparably to those in which the Fund may
invest so long as the Fund does not own more than 3% of the outstanding
voting stock of any tax exempt money market fund or securities of any tax
exempt money market fund aggregating in value more than 5% of the total
assets of the Fund.
10. Invest in equity interests in oil, gas or other mineral exploration of
development programs.
11. Purchase or sell real estate commodities or commodity contracts, except
as set forth in item 6 above and except to the extent the municipal
securities in which the Fund may invest are considered to be interests
in real estate.
The Fund may not change any of these investment restrictions nor any other
fundamental policy as they apply to the Fund without the approval of the lesser
of (i) more than 50% of the Fund's outstanding shares or (ii) 67% of the Fund's
shares present at a meeting at which the holders of more than 50% of the
outstanding shares are present in person or by proxy. As long as the percentage
restrictions described above are satisfied at the time of the investment or
borrowing, the Fund will be considered to have abided by those restrictions even
if, at a later time, a change in values or net assets causes an increase or
decrease in percentage beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were
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one year or less are excluded from such calculation. The Fund anticipates that
its annual portfolio turnover rate will normally be less than 100%.
The Fund does not intend to invest in certain "private activity"
obligations issued after August 7, 1986. Interest on such "private activity"
obligations is treated as a preference item for the purpose of calculating the
alternative minimum tax. If the Fund were to invest in such "private activity"
obligations, dividends paid to an investor who is subject to the alternative
minimum tax might not be completely tax exempt or might cause an investor to be
subject to such tax.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES. Municipal securities include long-term obligations,
which are often called municipal bonds, as well as shorter term municipal notes,
municipal leases, and tax-exempt commercial paper. Under normal market
conditions, longer term municipal securities generally provide a higher yield
than shorter term municipal securities, and therefore the Fund generally expects
to be invested primarily in longer term municipal securities. The Fund will,
however, invest in shorter term municipal securities when yields are greater
than yields available on longer term municipal securities, for temporary
defensive purposes and when redemption requests are expected. The two principal
classifications of municipal bonds are "general obligation" and "revenue" or
"special obligation" bonds, which include "industrial revenue bonds." General
obligation bonds are secured by the issuer's pledge of its faith, credit, and
taxing power for the payment of principal and interest. Revenue or special
obligation bonds 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 tax or other specific revenue source such as from the user of the
facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included in the term municipal securities are participation
certificates issued by state and local governments or authorities to finance the
acquisition of equipment and facilities. They may represent participations in a
lease, an installment purchase contract, or a conditional sales contract. Some
municipal leases and participation certificates may not be readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
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The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals.
The Fund also may invest up to 15% of its total assets in derivative
variable rate municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest. Such derivative variable
rate municipal securities may pay a rate of interest determined by applying a
multiple to the variable rate. The extent of increases and decreases in the
value of derivative municipal securities whose rates vary inversely with changes
in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
The Fund may also acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain municipal securities. The
underwriter of these certificates or receipts typically purchases municipal
securities and deposits the securities in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Although under the terms of a custodial
receipt, the Fund typically would be authorized to assert its rights directly
against the issuer of the underlying obligation, the Fund could be required to
assert through the custodian bank those rights as may exist against the
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal and/or interest when due, the Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security has been
deposited is determined to be an association taxable as a corporation, instead
of a non-taxable entity, the yield on the underlying security would be reduced
in recognition of any taxes paid.
Although the municipal securities in which the Fund may invest will be
insured as to timely payment of principal and interest, municipal securities,
like other debt obligations, are subject to the risk of non-payment. The ability
of issuers of municipal securities to make timely payments of interest and
principal may be adversely impacted in general economic downturns and as
relative governmental cost burdens are allocated and reallocated among federal,
state and local governmental units. Such non-payment would result in a reduction
of income to the Fund, and could result in a reduction in the value of the
municipal security experiencing non-payment and a potential decrease in the net
asset value of the Fund. Issuers of municipal securities might seek protection
under the bankruptcy laws. In the event of bankruptcy of such an issuer, the
Fund could experience delays and limitations with respect to the collection of
principal and interest on such municipal securities and the Fund may not, in all
circumstances, be able to collect all principal and interest to which it is
entitled. To enforce its rights in the event of a default in the payment of
interest or repayment of principal, or both, the Fund may take possession of and
manage the assets securing the issuer's obligations on such securities, which
may increase the Fund's operating expenses and adversely affect the net asset
value of the Fund. Any income derived from the Fund's ownership or operation of
such assets may not be tax-exempt. In addition, the Fund's intention to qualify
as a "regulated investment company" under the Internal Revenue Code of 1986, as
amended (the "Code"), may limit the extent to which the Fund may exercise its
rights by taking possession of such assets, because as a regulated investment
company the Fund is subject to certain limitations on its investments and on the
nature of its income. See "Tax Status of the Fund."
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
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marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933 that are determined to be liquid by the Adviser under
guidelines adopted by the Board of Trustees of the Trust (under which guidelines
the Adviser will consider factors such as trading activities and the
availability of price quotations), will not be treated as restricted securities
by the Fund pursuant to such rules. The Fund may, from time to time, adopt a
more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
SPECIAL CONSIDERATIONS RELATING TO CALIFORNIA MUNICIPAL SECURITIES. As
described in the Prospectus, except during temporary periods, the Fund will
invest substantially all of its assets in California municipal securities. The
portfolio of the Fund may include securities issued by the State of California
(the "State"), by its various public bodies (the "Agencies") and/or by other
municipal entities located within the State (securities of all such entities are
referred to herein as "California municipal securities").
In addition, the specific California municipal securities in which the Fund
will invest will change from time to time. The Fund is therefore susceptible to
political, economic, regulatory or other factors affecting issuers of California
municipal securities. The following information constitutes only a brief summary
of a number of the complex factors which may impact issuers of California
municipal securities and does not purport to be a complete or exhaustive
description of all adverse conditions to which issuers of California municipal
securities may be subject. Such information is derived from official statements
utilized in connection with the issuance of California municipal securities, as
well as from other publicly available documents. Such information has not been
independently verified by the Fund and the Fund assumes no responsibility for
the completeness or accuracy of such information. Additionally, many factors,
including national, economic, social and environmental policies and conditions,
which are not within the control of such issuers, could have an adverse impact
on the financial condition of such issuers. The Fund cannot predict whether or
to what extent such factors or other factors may affect the issuers of
California municipal securities, the market value or marketability of such
securities or the ability of the respective issuers of such securities acquired
by the Fund to pay interest on or principal of such securities. The
creditworthiness of obligations issued by local California issuers may be
unrelated to the creditworthiness of obligations issued by the State of
California, and there is no assurance on the part of the State of California to
make payments on such local obligations. There may be specific factors that are
applicable in connection with investment in the obligations of particular
issuers located within California, and it is possible the Fund will invest in
obligations of particular issuers as to which such specific factors are
applicable. However, the information set forth below is intended only as a
general summary and not as a discussion of any specific factors that may affect
any particular issuer of California municipal securities.
Constitutional Limits on Spending and Taxes. Certain California municipal
securities may be obligations of issuers which rely in whole or in part,
directly or indirectly, on ad valorem real property taxes as a source of
revenue. In 1978, California voters approved an amendment to the California
Constitution known as Proposition 13, the Jarvis/Gann Initiative, which added
Article XIIIA to the California Constitution. The effect of Article XIIIA is to
limit ad valorem taxes on real property and to restrict the ability of taxing
entities to increase real property tax revenues. On June 18, 1992, the United
States Supreme Court upheld the constitutionality of Article XIIIA.
In 1979, the voters of California passed an amendment adding Article XIIIB
to the California Constitution, the effect of which is to significantly limit
spending by State government and by "local government" (defined as "any city,
county, city and county, school district, special district, authority, or other
political subdivision of or within the state"). Excluded from these limitations
on government entities is "debt service" (defined as "appropriations required to
pay the cost of interest and redemption charges, including the funding of any
reserve or sinking fund required in connection therewith, on indebtedness
existing or legally
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authorized as of January 1, 1979 or on bonded indebtedness thereafter approved"
by the voters of the issuing entity).
In November 1986, California voters approved an amendment to the California
Government Code known as Proposition 62 which added Article 3.7 to Title 5,
Division 2, Chapter 4 of the California Government Code. The effect of Article
3.7 is to limit the abilities of local governments to impose new taxes or
increase existing taxes by requiring certain legislative and voter approvals
prior to the imposition of certain taxes by any local government (defined as any
county, city, city and county, including a chartered city or county, or any
public or municipal corporation) or district (defined as any agency of the
state, formed pursuant to general law or special act, for the local performance
of governmental or proprietary functions within limited boundaries). Article 3.7
can be amended only by a vote of the electorate of the State of California. In
particular, Article 3.7, among other things, requires (i) two-thirds approval of
all members of the applicable legislative body followed by majority approval of
the voters voting in an election in order for a local government or district to
impose any general tax (defined as any tax imposed for general governmental
purposes), and (ii) two-thirds approval of the voters voting in an election in
order for a local government or district to impose any special tax (defined as
any tax imposed for a specific purpose). Those voting requirements do not apply
to ad valorem taxes to pay interest and redemption charges on any indebtedness
approved by the voters prior to the effective date of Article XIIIA of the
California Constitution. Article 3.7 requires (1) that the revenues from a
special tax be used only for the purpose or service for which the tax was
imposed, and (2) any tax subject to the measure imposed by any local government
or district on or after August 1, 1985 be ratified by majority vote of the
voters voting in an election held within two years after the effective date of
the measure in order for the tax to continue to be imposed on and after November
15, 1988. Article 3.7 contains a provision which diminishes the property tax
revenues allocated to a local government or district to the extent that the
local government or district imposed any tax not in compliance with Article 3.7.
Article 3.7 also provides that no local government or district may impose any ad
valorem tax on real property other than as permitted by Section 1 of Article
XIIIA of the California Constitution, and that no local government or district
may impose any transaction tax or sales tax on the sale of real property within
the city, county or district. A 1988 decision of the Fourth Appellate District
of the California Court of Appeals declared that the requirement of local voter
ratification provided for in Article 3.7 violated the California Constitution.
An initiative proposed to re-enact the ratification provisions of Article 3.7 as
a constitutional amendment was defeated by the voters in November 1990, but such
a proposal may be renewed in the future.
On December 19, 1991, the California Supreme Court declared a 1988 San
Diego County Ballot measure that raised sales taxes for the purpose of financing
construction of criminal detention and courthouse facilities unconstitutional
because it was not passed with two-thirds voter approval. The court concluded
that the agency established to finance the facilities is a special district
created to circumvent Article XIIIA. However, in May 1992, the California
Supreme Court let stand two lower court decisions involving sales tax increases
passed by a majority vote. The lower courts had held that the Los Angeles County
Transportation Commission and the Orange County Transportation Authority, the
agencies entitled to collect the taxes, were not formed to circumvent Article
XIIIA, and that, therefore, the taxes were validly passed. On November 10, 1993,
in a closely watched case involving a Santa Clara County transportation
authority created with the parameters of the California Supreme Court's 1991
decision in mind, a California Court of Appeal overturned a sales tax approved
by less than two-thirds of the voters. The case is currently on appeal before
the California Supreme Court. These decisions may continue to cast doubt on
other projects around the State that have been financed with sales tax increases
imposed without two-thirds voter approval.
Because of the complex nature of Articles XIIIA and XIIIB, the ambiguities
and possible inconsistencies in their respective terms, and the applicability of
their respective exemptions and exceptions and the impossibility of predicting
future appropriations, it is not presently possible to determine the impact of
Article XIIIA or XIIIB or any implementing or related legislation on the
California municipal securities in which the Fund may invest, or the abilities
of State or local governments to pay the interest on, or repay the principal of
such California municipal securities.
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Recent Developments. From 1990 until 1994 the State experienced the worst
economic fiscal, and budget conditions since the 1930's. Construction,
manufacturing (especially aerospace), and financial services, among others, have
all been severely affected. Job losses were the worst of any post-war recession.
The recession seriously affected State tax revenues, which basically mirror
economic conditions. It also caused increased expenditures for health and
welfare programs. The State has also been facing a structural imbalance in its
budget with the largest programs supported by the General Fund -- K-14
education, health, welfare and corrections -- growing at rates significantly
higher than the growth rates for the principal revenue sources of the General
Fund. As a result, the State entered a period of chronic budget imbalance, with
expenditures exceeding revenues for four of the last five fiscal years ending
with 1991-2 but being essentially equal in 1992-1993. By June 30, 1992, the
State's Fund had a deficit, on a budget basis, of approximately $2.8 billion.
On February 10, 1992, a San Diego County Superior Court ruled that the
State's formula for allocating property tax dollars to the State's 58 counties
is unconstitutional and ordered the State Legislature to adopt a more equitable
system by July 1993. This decision has been appealed. In addition, the State is
a party to various litigation which, if one or more cases are decided adversely,
could have a material impact on the State Budget.
A further consequence of the large budget imbalances in the 1990-91 and
1991-92 fiscal years was that the State used up all of its available cash
resources. In late June, 1992, the State was required to issue $475 million of
short-term revenue anticipation warrants to cover General Fund obligations
coming due on June 30. These warrants were repaid on July 24, 1992. With the
failure of the Governor and Legislature to adopt a budget for the 1992-93 fiscal
year on time (to allow the State to carry out its usual cash flow borrowing for
the fiscal year), the shortfall of cash forced the State Controller after July
1, 1992 to issue interest-bearing "registered warrants" in lieu of regular
warrants redeemable for cash to many State vendors, suppliers, and employees and
to local government agencies. Until the State budget was adopted on September 2,
1992, the Controller issued registered warrants totaling approximately $3.8
billion to pay valid obligations from the prior fiscal year, and to pay
continuing obligations after July 1 based on special appropriations or court
orders. Certain constitutionally mandated obligations, such as debt service on
bonds and revenue anticipation warrants, were paid with available cash.
Registered warrants had not been issued by the State since the 1930s. State
employees filed suit against the State alleging that payment of their salaries
with registered warrants violated federal labor laws. See "Litigation" below.
As a result of the deterioration in the State's budget and cash situation
since the 1991-92 fiscal year, rating agencies reduced the State's credit
rating. Between October 1991 and October 1992, the rating on the general
obligation bonds was reduced by Standard & Poor's Ratings Group from "AAA" to
"A+", by Moody's Investors Services, Inc. from "Aaa" to "Aa" and by Fitch
Investors Services, Inc. from "AAA" to "AA". On July 15, 1994, all three of the
rating agencies rating the State's long-term debt again lowered their ratings of
the State's general obligation bonds. Moody's Investors Services, Inc. lowered
its rating from "Aa" to "A1", Standard & Poor's Ratings Group lowered its rating
from "A+" to "A" and termed its outlook as "stable", and Fitch Investors Service
lowered its rating from "AA" to "A". There can be no assurance that such ratings
will continue for any given period of time or that they will not in the future
be further revised or withdrawn. It should be noted that the creditworthiness of
obligations issued by local California issuers may be unrelated to the
creditworthiness of obligations issued by the State of California, and there is
no obligation on the part of the State to make payment on such obligations in
the event of default.
In November of 1994, Standard & Poor's Rating Group downgraded the credit
rating of several California counties, including San Francisco, San Diego,
Marin, Los Angeles and San Bernadino. In December and January, Standard & Poor's
Rating Group and Moody's Investors Services, Inc., respectively, downgraded
Orange County to below investment grade as a result of its bankruptcy filing
(see discussion below).
The Legislature and the Governor were unable to agree on a budget for the
1992-93 fiscal year until September 2, 1992, 64 days after the fiscal year
began. The 1992-93 Budget Act closed a "gap" of about $7.9 billion, but budgeted
a reserve at June 30, 1993 of only $28 million. Shortly after the 1992-93 Budget
Act was enacted, it became evident that economic conditions in the State were
not beginning to improve in the second
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half of 1992, as assumed by the Administration's May Revision of economic
estimates, which underlay the Budget. This was exacerbated by enactment of an
Initiative measure in November which reinstated a sales tax exemption for
certain candy, snack foods and bottled water, reducing revenues by about $300
million for a full fiscal year ($200 million in 1992-93). In addition, certain
lawsuits were filed concerning implementation of the K-14 school financing
portion of the Budget Act. As part of this litigation, the State is appealing a
Superior Court ruling In California Teachers Association v. Gould that could
cost the State up to $3.0 billion.
The Governor's Budget for 1993-94, confirmed the earlier forecasts about
the State's economy and the 1992-93 Budget. The 1993-94 Budget Act was signed by
the Governor on June 30, 1993, along with implementing legislation. The 1993-94
Budget Act was predicated upon General Fund revenues and transfers estimated at
$40.6 billion and expenditures of $38.5 billion. The 1993-94 Budget Act reflects
several major adjustments. The Budget Act mandates changes in local government
financing to shift about $2.6 billion in property taxes from cities, counties,
special districts and redevelopment agencies to school and community college
districts, thereby reducing the General Fund support by an equal amount. About
$2.5 billion were permanent, reflecting termination of the State's "bail-out" of
local governments following the property tax cuts of Proposition 13 in 1978. The
property tax revenue losses for cities and counties were offset in part by
additional sales tax revenues and mandated relief. Lawsuits were filed by Los
Angeles, Butte, Contra Costa and San Diego Counties challenging the shift of
property taxes mandated by the 1993-1994 Budget Act. A hearing was held on the
Los Angeles County case on July 28, 1993 which upheld the constitutionality of
the property tax shift. On June 23, 1994, the California Supreme Court said it
would not review Los Angeles County's petition for review, thus upholding the
lower court's decision in favor of the State. Several additional lawsuits
relating to the 1993-1994 and 1994-1995 Budget legislation are still pending.
The 1993-94 Budget Act included about $692 million of aid to the State from the
federal government to offset health and welfare costs associated with foreign
immigrants living in the State. The Act also reduced spending for health and
welfare programs by $600 million. Overall, revenues for the 1993-94 Fiscal Year
were about $800 million lower than original projections, and expenditures were
about $780 million higher, primarily because of higher health and welfare
caseloads, lower property taxes which required greater State support for K-14
education to make up the shortfall, and lower than anticipated federal
government payments for immigration-related costs.
By June 30, 1993, according to the Department of Finance, the State's
Special Fund for Economic Uncertainties had a deficit, on a budget basis, of
approximately $2.8 billion. The 1993-94 Budget Act incorporated a Deficit
Retirement Plan to repay this deficit over two fiscal years. The original budget
for 1993-94 reflected revenues which exceeded expenditures by approximately $2.0
billion. As a result of the recession, the excess of revenues over expenditures
for the fiscal year is now expected to be only about $500 million. Thus the
accumulated budget deficit at June 30, 1994 is now estimated by the Department
of Finance to have been approximately $2.0 billion and the deficit will not be
retired by June 30, 1995 as planned. Consequently, the 1994-95 Budget Act
anticipates deferring retirement of about $1 billion of the carryover-budget
deficit to the 1995-96 Fiscal Year, when it is intended to be fully retired by
June 30, 1996.
The 1994-95 Fiscal Year represented the fourth consecutive year the
Governor and the Legislature were faced with a very difficult budget environment
to produce a balanced budget. The 1994-95 Budget Act signed by the Governor on
July 8, 1994, projected to have $41.9 billion of General Fund revenues and
transfers and $40.9 billion of budgeted expenditures. Included in the $41.9
billion revenues figure is projected receipt of about $360 million from the
federal government to reimburse the State's cost in connection with undocumented
immigrants, most of which was not received. The principal features of the
1994-95 Budget Act also included: (i) reductions of approximately $1.1 billion
in health and welfare costs, and (ii) increase in proposition 98 funding for
K-14 schools by $526 million from 1993-94 Fiscal Year levels. A 2.3 percent
reduction in AFDC payments (equal to $52 million for the entire fiscal year) has
been temporarily suspended by court order. Certain health care funding actions
of the Budget Act also were challenged in a court action.
Because preparation of cash flow estimates for the 1995-96 Fiscal Year is
necessarily more imprecise than for the 1994-1995 fiscal year and entails
greater risks of variance from assumptions, and because the Governor's two-year
budget plan assumes receipt of a large amount of federal aid in the 1995-96
Fiscal Year for immigration-related costs which is uncertain, the Legislature
enacted a backup budget adjustment mechanism that involves a review of the cash
flow projections for the General Fund and a comparison to the projections for
the 1994-95 Fiscal Year. This enactment is intended to mitigate possible
deviations from
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projected revenues, expenditures or internal borrowable resources which might
reduce available cash resources during the two-year plan, so as to assure
repayment of the warrants. Furthermore for the 1995-96 Fiscal Year, additional
legislation prohibits any external borrowing as of June 30, 1996, thereby
requiring the State to rely solely on internal borrowing resources, expenditure
reductions or revenue increases to eliminate any projected cash flow deficit.
On January 17, 1994 an earthquake of the magnitude of an estimated 6.8 on
the Richter Scale struck Los Angeles causing significant damage to public and
private structures and facilities. Current estimates of total property damage
(private and public) are in the range of $20 billion, but these estimates are
still subject to change. Although some individuals and businesses suffered
losses totaling in the billions of dollars, the overall effect of the earthquake
on the regional and State economy is not expected to be serious. The State in
conjunction with the federal government is committed to providing assistance to
local governments, individuals and businesses suffering damage as a result of
the earthquake, as well as to providing for the repair and replacement of
State-owned facilities.
Revised employment data indicate that California's recession ended in 1993,
and following a period of stability, a recovery is now underway. The State's
unemployment rate fell sharply last year, from 10.1 percent in January to 7.7
percent in October and November. The gap between the national and California
jobless rates narrowed from 3.4 percentage points at the beginning of 1994 to an
average or 2 percentage points in October and November. The number of unemployed
Californians fell by nearly 400,000 during the year, while civilian employment
increased more than 300,000.
For the first time in four years, the State enters the 1995-1996 fiscal
year with strengthening revenues based on an improving economy. The Governor's
1995-96 Fiscal Year Budget Proposal (the "Proposed Budget") estimates General
Fund revenues and transfers of $42.5 billion (an increase of 0.2 percent over
1994-95). This nominal increase from the 1994-95 Fiscal Year reflects the (i)
Governor's proposed expansion of the realignment program between the State and
counties, so that counties will take on greater responsibility for welfare and
social services, while the State will take on increased funding of trial court
costs and (ii) the first year of a 15% cut on personal income and corporate tax
rates to be phased in over 3 years commencing in 1996. The California Assembly
has approved the latter of these proposals. The legislation is currently pending
in the Senate. Without these two proposals, General Fund revenues would be
projected at approximately $43.8 billion, or an increase of 3.3 percent over
1994-95. Expenditures are estimated at $41.7 billion (essentially unchanged from
1994-95). The state's 1995-1996 fiscal year the budget has not yet been
approved. Discussions are currently under way with respect to closure of a $2
billion revenue gap.
Budget figures computed by the Controller and the Department of Finance may
differ from each other due to differences in accounting methods and
interpretation. It is not presently possible (1) to know whether, and to what
extent, the State General Fund or any Special Funds will have surplus or deficit
balances in the 1994-1995 fiscal year or in any subsequent fiscal year, or (2)
to determine the overall impact of any deficits on future allocations of the
State revenues to local governments or on the abilities of State or local
governments to pay the interest on, or repay the principal of, any California
municipal securities in which the Fund may invest.
On December 6, 1994, Orange County, California (the "County"), together
with its pooled investment funds (the "Funds") filed for protection under
Chapter 9 of the federal Bankruptcy Code, after reports that the Funds had
suffered significant market losses in their investments, causing a liquidity
crisis for the Funds and the County. More than 180 other public entities, most
of which, but not all, are located in the County, were also depositors in the
Funds. As of mid-January, 1995, following a restructuring of most of the Funds'
assets to increase their liquidity and reduce their exposure to interest rate
increases, the County estimated the Funds' loss at about $1.69 billion, or 22%
of their initial deposits of approximately $7.5 billion. Many of the entities
which deposited moneys in the Funds, including the County, are facing cash flow
difficulties because of the bankruptcy filing and may be required to reduce
programs or capital projects. This may also affect their ability to meet their
outstanding obligations. The County has technically defaulted upon several of
its outstanding debt issues and its ability to meet its outstanding obligations
is unclear.
Orange County voters recently rejected a sales tax hike of one-half cent,
which would have brought the county closer to repaying $800 million of its notes
maturing in July and August. As a result, Standard and
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Poor's has lowered the rating on such notes to a "D" default rating, despite the
nearly unanimous approval to a one-year extension of such notes by the
noteholders.
The Fund is not presently able to predict whether any other municipalities
will face insolvency because of their participation in the Funds, and if so, the
potential impact on such municipalities' ability to meet its outstanding
obligations. The Governor has called a special session of the Legislature which
is expected to consider various responses to the County situation.
The Mexican currency crisis is expected to have some mild dampening effect
on the California economy; however, it should not endanger the recovery. The
peso's devaluation will make California exports much more expensive in Mexican
markets. Although the economic impact of this is unknown, an export reduction of
20 percent would reduce trade by approximately $1.5 billion. This represents
less than two percent of all exports through California ports. San Diego,
however, is likely to be more severely affected due to substantial reductions in
cross-border traffic. Although the long-run impacts of the devaluation are
unclear, the fundamentals of the Mexican economy are much stronger than during
the last crisis twelve years ago.
Heavy rainfall and widespread flooding throughout the State in mid-January
were at least partially responsible for the slight rise in January unemployment.
However, such flooding is not expected to have a significant impact on the
pattern of economic recovery in California that has been evident over the last
year.
As a part of its cash management program, California regularly issues
revenue anticipation notes ("California notes") and revenue anticipation
warrants to meet cash flow needs during the course of a fiscal year. On August
21, 1990, California issued $4.1 billion of California notes which were retired
on June 28, 1991. On August 15, 1991, California issued $3.1 billion of fixed
rate California notes, which matured and were timely repaid, and $1.0 billion of
variable rate California notes, which matured and were timely repaid. On October
8, 1992, California issued $5 billion of California notes, which matured and
were paid. The State issued approximately $3.0 billion of revenue anticipation
notes on April 26, 1993, which matured and were repaid on June 24, 1993, and
$2.0 billion of revenue anticipation warrants on June 23, 1993, which matured
and were repaid on December 23, 1993. To meet additional cash flow needs in the
1993-94 Fiscal Year, on July 28, 1993, the State issued $2.0 billion of revenue
anticipation notes maturing on June 28, 1994, and on February 23, 1994 the State
issued $1.2 billion and $2.0 billion of Revenue Anticipation Warrants maturing
on December 21, 1994 and July 26, 1994, respectively. All such revenue
anticipation notes and warrants were timely repaid. To meet its cash flow needs
in the 1994-1995 Fiscal Year, the State issued in July and August, 1994, $4.0
billion of revenue anticipation notes maturing on April 24, 1996 and $3.1
billion of revenue anticipation notes which matured and were timely repaid on
June 28, 1995. During the first four months of 1995, issuances of debt by state
agencies have aggregated $1.5 billion.
In June 1995, Los Angeles County unveiled an $11.1 billion budget proposal
for fiscal year ended 1996 designed to cut $1.2 billion from county government
and approximately 18,000 jobs. Standard and Poor's has placed Los Angeles County
on CreditWatch, which could be a precursor to a rating downgrade if the county
fails to resolve its funding gap for the fiscal year beginning July 1, 1995. In
addition, Moody's has placed the ratings of all of the county's long-term
obligations under review pending the adoption of the final budget.
Los Angeles County taxpayers have recently filed a lawsuit in Superior
Court entitled Stanley G. Auerbach, Norbert Pactowski and Elroy Fierro vs. Board
of Supervisors, Los Angeles County, et. al., alleging that Los Angeles County
illegally misappropriated $990.6 million from restricted funds to cover its
budget deficit from January to July.
Proposition 98. On November 8, 1988, voters approved Proposition 98, a
combined initiative constitutional amendment and statute called the "Classroom
Instructional Improvement and Accountability Act" (the "Act"). The Act changes
State funding of public education below the university level and the operation
of the State's Appropriations Limit. The Act, as amended, guarantees State
funding for K-12 school districts and community college districts at a level
equal to the greater of (a) in general, a fixed percentage of General Fund
revenues, (b) the amount actually appropriated to such districts from the
General Fund in the previous fiscal year, adjusted for either changes in the
cost of living, or (c) a third test which would replace the test in (b) if the
percentage growth in per capita of General Fund revenues in the prior year plus
one half of one percent is less than the percentage growth in California per
capita personal income. Under the test in (c), the
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schools would receive the amount appropriated in the prior year adjusted for
changes in enrollment and General Fund revenues. The Act permits the
legislature, by two-thirds vote of both houses, with the Governor's concurrence,
to suspend this formula for a one-year period. The Act could cause increasing
pressure on the State's budget over future years, potentially reducing resources
available for other State programs, especially to the extent the Article XIIIB
spending limit would restrain the State's ability to fund such other programs by
raising taxes. The Act also changes how tax revenues in excess of the State's
Appropriations Limit are distributed. Any excess State tax revenues up to a
specified amount would, instead of being returned to taxpayers, be transferred
to K-12 school and community college districts. Such transfer would be excluded
from the Appropriations Limit for K-14 school districts, and the K-14 school
Appropriations Limits for the next year would be automatically increased by the
amount of such transfer. These additional moneys would enter the base funding
calculation for K-14 schools for subsequent years, creating further pressure on
other portions of the state budget, particularly if revenues decline in a year
following such a transfer.
Litigation. At any given time, including the present, there are numerous
civil actions pending against the State (including, but not limited to, those
discussed in the preceding paragraphs and below), which could, if determined
adversely to the State, affect the State's expenditures and, in some cases, its
revenues. The following are certain of the more significant lawsuits pending
against the State.
In the spring of 1991, the Richmond Unified School District ("RUSD") Board
of Directors attempted to end classes six weeks early because of a fiscal
crisis. In response to lawsuits, a lower court judge, in a case called Butt v.
State of California, ordered the State, over objections from the Governor, to
provide funding to allow the school year to be completed, and an emergency loan
was arranged by the State Controller. On appeal, the California Supreme Court in
late December 1992 upheld the lower court's action, ruling that the State
Constitution's guarantee of public education required the State to ensure a full
year's education in all school districts. The Court, however, overturned a
portion of the original order relating to the source of funds for RUSD's
emergency loan: the decision leaves unclear just where the State must find funds
to make any future loans of this kind.
In the Yuba River flood litigation, the trial court has found liability in
inverse condemnation and awarded of $500,000 to 12 sample plaintiffs. Potential
liability to the remaining 30 plaintiffs, from claims filed, ranges from $800
million to $1.5 billion. An appeal has been filed.
In Penny Newman v. J.B. Stringfellow, et al., which involves a damage claim
of $850 million arising from contamination at the Stringfellow toxic waste site,
a group of 17 of the 3,800 plaintiffs has received a verdict against the State
for a total of $159,000. The other cases, which have not been litigated, are in
the process of settlement. In a separate suit, United States, People of the
State of California v. J.B. Stringfellow Jr. et al., the State has been found
liable by the District Court on the counterclaim. The amount of liability is
still being litigated.
In Mervin Morris v. Franchise Tax Board, and related issue cases, the State
is a defendant in a lawsuit involving the exclusion of small business stock
gains from preference tax and in some cases, also from taxation. The Franchise
Tax Board now estimates a combined total of approximately $250 million is at
issue in all (court and administrative) cases with the small business stock
issue. In June 1993 the first Court of Appeal decision on this issue was entered
(in the Lennane case) in favor of the Franchise Tax Board. In August 1993 the
second Court of Appeal decision on this issue was entered (in the Morris case)
in favor of the Franchise Tax Board. On December 28, 1994, the California
Supreme Court decided against the State in Lennane; it has taken no action on
Morris. The State will be losing at least $80 million as a result of the
decision in Lennane.
In Parr v. State of California, a complaint was filed in federal court
claiming that payment of wages in registered warrants violated the Fair Labor
Standards Act ("FLSA"). The federal court held that the issuance of registered
warrants does violate the FLSA. In February 1994, Justice Sandra Day O'Connor
refused to block a U.S. magistrate from ordering California to pay $300 million
in penalties. The federal district court issued an order on February 3, 1995
prohibiting the State from further supporting its good faith defense to
liquidated damages, and referred the matter to the magistrate to conduct further
proceedings regarding the damage, if any, to be awarded. The maximum amount of
damage could be approximately $500 million.
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Certain cases have been filed with respect to the State's reduction in
payments under the Aid to Families with Dependent Children program. In March
1995, the U.S. Supreme Court upheld a State law limiting certain benefits under
the Aid to Families with Dependent Children program ("AFDC"). In a separate case
decided in February 1995, the U.S. Supreme Court vacated a lower court
injunction on a State law which set lower benefit levels under AFDC for persons
residing in the State for less than one year. The Supreme Court concluded that a
failure to obtain a federal waiver already prevented the State from enacting
such legislation. Anticipated savings from such new law had been estimated at
$22 million annually. The outcome of remaining cases and their ultimate impact
on the State's finances cannot be determined at this time.
The State recently lost several tax refund cases concerning the method of
determining gross insurance premiums involving health insurance. The loss to the
State will be approximately $200 million.
Several lawsuits have been filed by Malibu Video Systems in State and
Federal court to challenge the transfer of moneys from special fund accounts
within the State Treasury to the State's General Fund pursuant to the Budget
Acts of 1991, 1992 and 1993. Plaintiffs seek to have the transfers reversed and
the moneys, allegedly totaling approximately $800 million, returned to the
special funds. The State disputes both liability and the amount claimed.
The State is a respondent/defendant in two consolidated cases (American
Lung Association of California v. Wilson; Americans for Nonsmokers' Rights v.
State of California) challenging the purposes of specific appropriations of
funds totaling approximately $65 million for Fiscal Year 1994-95 and
approximately $68 million for Fiscal Year 1995-96 from the Cigarette and Tobacco
Products Surtax Fund created by Proposition 99. The petitioners/plaintiffs argue
that the funds can only be used for health education and tobacco-related disease
research programs. The appropriations primarily fund health care services for
low-income persons. On January 23, 1995, the Superior Court issued an interim
order in the consolidated cases prohibiting the State from further encumbering
the specifically appropriated funds and from issuing or negotiating warrants
from the appropriated funds. A final order is expected to be issued after a
further hearing on the remedy to be granted. The effect on the General Fund is
unclear. A third lawsuit challenging the similar appropriations of Proposition
99 funds for Fiscal Years 1989-90 through 1995-96 has been filed and is pending.
In the case of Board of Administration, California Public Employees'
Retirement System, et al. v. Pete Wilson, Governor, et al., plaintiffs
challenged the constitutionality of legislation which deferred payment of the
State's employer contribution to the Public Employees' Retirement System
beginning in fiscal year 1992-93. On January 11, 1995, the Sacramento County
Superior Court entered a judgment finding that the legislation
unconstitutionally impaired the vested contract rights of PERS members. The
judgment provides for issuance of a writ of mandate directing State defendants
to disregard the provisions of the legislation, to implement the statute
governing employer contributions that existed before the changes in the
legislation found to be constitutional, and to transfer to PERS the 1993-94 and
1994-95 contributions that are unpaid to date. The State defendants have
appealed.
In Jernigan & Burleson v. State, filed in federal district court, the
prison inmate plaintiffs claim they are entitled to minimum wages while working
for the Prison Industry Authority. The inmates claim the State has violated the
Fair Labor Standards Act. Plaintiffs are seeking back pay for the period from
August 1990 onward, and liquidated damages, for a total of approximately $350
million. Both liability and damages are being contested by the State.
Recent Legislation. Recently, legislation has been enacted which (1)
increases, in limited instances, the abilities of both county boards of
supervisors and redevelopment agencies to impose new special taxes; (2) repeals
the existing limitations on the amount of notes of the State of California which
may be sold; (3) eliminates certain restrictions on repayment of general
obligations bonds; (4) allows revenue anticipation notes to be repaid in a
succeeding fiscal year and generally facilitates their issuance; (5) increases
the ability of community redevelopment agencies to issue revenue bonds for the
purpose of refunding bonds of other political subdivisions of the State; and (6)
automatically and proportionately reduces programmed General Fund appropriations
for the next fiscal year (except those mandated by the Constitution) up to 4%,
if the State Director of Finance, with concurrence of the Commission on State
Finance, certifies that revenues for such fiscal year were not expected to meet
programmed budgetary requirements. In November 1992, the
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State's voters enacted an Initiative which reinstated a sales tax exemption for
certain candy, snack foods and bottled water. In November 1993, voters enacted
an Initiative which made permanent a half-cent temporary sales tax which had
been scheduled to expire December 31, 1993. After 1995, the maximum personal
income tax rate is scheduled to return to 9.3 percent from 11 percent, and the
AMT rate is scheduled to drop to 7 percent from 8.5 percent. On November 8,
1994, California voters approved initiatives relating "three strikes" criminal
penalties and illegal immigrations. The State Controller's report indicated that
there was no anticipated cash impact in the 1994-95 Fiscal Year for such
initiatives, but suggested that budgetary pressure may materialize next year.
Additional legislation has been or may be introduced which would create new
regional agencies with the ability to tax and issue debt, alter the definition
of ownership changes that trigger reassessment of business property under
Article XIIIA, modify existing taxes or other revenue-raising measures or which
either would further limit or, alternatively would increase the abilities of
State and local governments to impose new taxes, increase existing taxes
(including sales tax increases to fund earthquake relief), or issue bonds or
other debt instruments. It is not currently possible to predict the extent to
which any such legislation will be enacted. Furthermore, other measures
affecting the taxing or spending authority of California or its political
subdivisions may be approved or enacted in the future. Nor is it currently
possible to determine the impact of any recently enacted or proposed legislation
on California municipal securities in which the Fund may invest or future
allocations of State revenues to local governments.
INVESTMENT PRACTICES. If the Adviser deems it appropriate to seek to hedge
the Fund's portfolio against market value changes, the Fund may buy or sell
derivative instruments such as financial futures contracts and related options,
such as municipal bond index futures contracts and the related put or call
options contracts on such index futures. A tax exempt bond index fluctuates with
changes in the market values of the tax exempt bonds included in the index. An
index future is an agreement pursuant to which two parties agree to receive or
deliver at settlement an amount of cash equal to a specified dollar amount
multiplied by the difference between the value of the index at the close of the
last trading day of the contract and the price at which the future was
originally written. A financial future is an agreement between two parties to
buy and sell a security for a set price on a future date. An index future has
similar characteristics to a financial future except that settlement is made
through delivery of cash rather than the underlying securities. An example is
the Long-Term Municipal Bond futures contract traded on the Chicago Board of
Trade. It is based on the Bond Buyer's Municipal Bond Index, which represents an
adjusted average price of the forty most recent long-term municipal issues of
$50 million or more ($75 million in the instance of housing issues) rated A or
better by either Moody's Investors Service, Inc. ("Moody's") or Standard &
Poor's Ratings Group ("S&P"), maturing in no less than nineteen years, having a
first call in no less than seven nor more than sixteen years, and callable at
par.
The Fund may engage in "when issued" and "delayed delivery" transactions
and utilize futures contracts and options thereon for hedging purposes. The
Securities and Exchange Commission ("SEC") generally requires that when mutual
funds, such as the Fund, effect transactions of the foregoing nature, such funds
must either segregate cash or readily marketable portfolio securities with its
custodian in an amount of its obligations under the foregoing transactions, or
cover such obligations by maintaining positions in portfolio securities, futures
contracts or options that would serve to satisfy or offset the risk of such
obligations. When effecting transactions of the foregoing nature, the Fund will
comply with such segregation or cover requirements.
STRATEGIC TRANSACTIONS. The Fund may, but is not required to, utilize
various other investment strategies as described below to hedge various market
risks (such as interest rates and broad or specific market movements) or to
manage the effective maturity or duration of the Fund's fixed-income securities.
Such strategies are generally accepted by modern portfolio managers and are
regularly utilized by many mutual funds and other institutional investors.
Techniques and instruments may change over time as new instruments and
strategies are developed or regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may
purchase and sell derivative instruments such as exchange-listed and
over-the-counter put and call options on securities, fixed-income indices and
other financial instruments, purchase and sell financial futures contracts and
options thereon, enter into various interest rate transactions such as swaps,
caps, floors or collars (collectively, all the above are called "Strategic
Transactions"). Strategic Transactions may be used to attempt to protect against
possible changes in the market value of securities held in or to be purchased
for the Fund's portfolio resulting from securities
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markets fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there
is no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options
typically have similar structural characteristics and operational mechanics
regardless of the underlying instrument on which they are purchased or sold.
Thus, the following general discussion relates to each of the particular types
of options discussed in greater detail below. In addition, many Strategic
Transactions involving options require segregation of Fund assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium,
the right to sell, and the writer the obligation to buy, the underlying
security, commodity, index, or other instrument at the exercise price. For
instance, the Fund's purchase of a put option on a security might be designed to
protect its holdings in the underlying instrument (or, in some cases, a similar
instrument) against a substantial decline in the market value by giving the Fund
the right to sell such instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy,
and the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options ("OTC
options"). Exchange listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the performance of
the obligations of the parties to such
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options. The discussion below uses the OCC as a paradigm, but is also applicable
to other financial intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours
during which the underlying financial instruments are traded. To the extent that
the option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
If the Fund sells a call option, the premium that it receives may serve as
a partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
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The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial
futures contracts or purchase or sell put and call options on such futures as a
hedge against anticipated interest rate or fixed-income market changes, for
duration management and for risk management purposes. Futures are generally
bought and sold on the commodities exchanges where they are listed with payment
of initial and variation margin as described below. The purchase of a futures
contract creates a firm obligation by the Fund, as purchaser, to take delivery
from the seller the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
index futures and Eurodollar instruments, the net cash amount). The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to index
futures and Eurodollar instruments, the net cash amount). Options on futures
contracts are similar to options on securities except that an option on a
futures contract gives the purchaser the right in return for the premium paid to
assume a position in a futures contract and obligates the seller to deliver such
option.
The Fund's use of financial futures and options thereon will in all cases
be consistent with applicable regulatory requirements and in particular the
rules and regulations of the Commodity Futures Trading Commission and will be
entered into only for bona fide hedging, risk management (including duration
management) or other portfolio management purposes. Typically, maintaining a
futures contract or selling an option thereon requires the Fund to deposit with
a financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except
for closing transactions) if, immediately thereafter, the sum of the amount of
its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the Fund's total assets (taken at current value); however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also
may purchase and sell call and put options on securities indices and other
financial indices and in so doing can achieve many of the same objectives it
would achieve through the sale or purchase of options on individual securities
or other instruments. Options on securities indices and other financial indices
are similar to options on a security or
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other instrument except that, rather than settling by physical delivery of the
underlying instrument, they settle by cash settlement, i.e., an option on an
index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
making up the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into
which the Fund may enter are interest rate and index swaps and the purchase or
sale of related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two
payment streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and,
accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions,
in addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or
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currency. In general, either the full amount of any obligation by the Fund to
pay or deliver securities or assets must be covered at all times by the
securities, instruments or currency required to be delivered, or, subject to any
regulatory restrictions, an amount of cash or liquid high-grade securities at
least equal to the current amount of the obligation must be segregated with the
custodian. The segregated assets cannot be sold or transferred unless equivalent
assets are substituted in their place or it is no longer necessary to segregate
them. For example, a call option written by the Fund will require the Fund to
hold the securities subject to the call (or securities convertible into the
needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities,
financial instruments or indices and OCC issued and exchange listed index
options, will generally provide for cash settlement. As a result, when the Fund
sells these instruments it will only segregate an amount of assets equal to its
accrued net obligations, as there is no requirement for payment or delivery of
amounts in excess of the net amount. These amounts will equal 100% of the
exercise price in the case of a non cash-settled put, the same as an OCC
guaranteed listed option sold by the Fund, or the in-the-money amount plus any
sell-back formula amount in the case of a cash-settled put or call. In addition,
when the Fund sells a call option on an index at a time when the in-the-money
amount exceeds the exercise price, the Fund will segregate, until the option
expires or is closed out, cash or cash equivalents equal in value to such
excess. OCC issued and exchange listed options sold by the Fund other than those
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery, or with an election of either physical delivery or cash
settlement, will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option thereon, the Fund must
deposit initial margin and possible daily variation margin in addition to
segregating assets sufficient to meet its obligation to purchase or provide
securities or currencies, or to pay the amount owed at the expiration of an
index- based futures contract. Such assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess,
if any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by
the requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
INSURANCE. As described in the Prospectus, the Fund will generally invest
only in municipal securities which are either pre-insured under a policy
obtained for such securities prior to the purchase of such securities or will be
insured under policies obtained by the Fund to cover otherwise uninsured
securities.
Original Issue Insurance. Original Issue Insurance is purchased with
respect to a particular issue of municipal securities by the issuer thereof or a
third party in conjunction with the original issuance of such municipal
securities. Under such insurance, the insurer unconditionally guarantees to the
holder of the insured
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municipal security the timely payment of principal and interest on such
obligation when and as such payments shall become due but shall not be paid by
the issuer, except that in the event of any acceleration of the due date of the
principal by reason of mandatory or optional redemption (other than acceleration
by reason of a mandatory sinking fund payment), default or otherwise, the
payments insured may be made in such amounts and at such times as payments of
principal would have been due had there not been such acceleration. The insurer
is responsible for such payments less any amounts received by the holder from
any trustee for the municipal security issuers or from any other source.
Original Issue Insurance generally does not insure payment on an accelerated
basis, the payment of any redemption premium (except with respect to certain
premium payments in the case of certain small issue industrial development and
pollution control municipal securities), the value of the Shares of the Fund or
the market value of municipal securities, or payments of any tender purchase
price upon the tender of the municipal securities. Original Issue Insurance also
does not insure against nonpayment of principal of or interest on municipal
securities resulting from the insolvency, negligence or any other act or
omission of the trustee or other paying agent for such obligations.
In the event that interest on or principal of a municipal security covered
by insurance is due for payment but is unpaid by reason of nonpayment by the
issuer thereof, the applicable insurer will make payments to its fiscal agent
(the "Fiscal Agent") equal to such unpaid amounts of principal and interest not
later than one business day after the insurer has been notified that such
nonpayment has occurred (but not earlier than the date such payment is due). The
Fiscal Agent will disburse to the Fund the amount of principal and interest
which is then due for payment but is unpaid upon receipt by the Fiscal Agent of
(i) evidence of the Fund's right to receive payment of such principal and
interest and (ii) evidence, including any appropriate instruments of assignment,
that all of the rights of payment of such principal or interest then due for
payment shall thereupon vest in the insurer. Upon payment by the insurer of any
principal or interest payments with respect to any municipal securities, the
insurer shall succeed to the rights of the Fund with respects to such payment.
Original Issue Insurance remains in effect as long as the municipal
securities covered thereby remain outstanding and the insurer remains in
business, regardless of whether the Fund ultimately disposes of such municipal
securities. Consequently, Original Issue Insurance may be considered to
represent an element of market value with respect to the municipal securities so
insured, but the exact effect, if any, of this insurance on such market value
cannot be estimated.
Secondary Market Insurance. Subsequent to the time of original issuance of
a municipal security, the Fund or a third party may, upon the payment of a
single premium, purchase insurance on such municipal security. Secondary Market
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance and, as is the case with Original Issue Insurance,
Secondary Market Insurance remains in effect as long as the municipal securities
covered thereby remain outstanding and the insurer remains in business,
regardless of whether the Fund ultimately disposes of such municipal securities.
All premiums respecting municipal securities covered by Original Issue Insurance
or Secondary Market Insurance are paid in advance by the issuer or other party
obtaining the insurance.
One of the purposes of acquiring Secondary Market Insurance with respect to
a particular municipal security would be to enable the Fund to enhance the value
of such municipal security. The Fund, for example, might seek to purchase a
particular municipal security and obtain Secondary Market Insurance with respect
thereto if, in the opinion of the Adviser, the market value of such municipal
security, as insured, would exceed the current value of the municipal security
without insurance plus the cost of the Secondary Market Insurance. Similarly, if
the Fund owns but wishes to sell a municipal security that is then covered by
Portfolio Insurance, the Fund might seek to obtain Secondary Market Insurance
with respect thereto if, in the opinion of the Adviser, the net proceeds of a
sale by the Fund of such obligation, as insured, would exceed the current value
of such obligation plus the cost of the Secondary Market Insurance.
Portfolio Insurance. The Portfolio Insurance policies obtained by the Fund
would insure the payment of principal and interest on specified eligible
municipal securities purchased by the Fund. Except as described below, Portfolio
Insurance generally provides the same type of coverage as is provided by
Original Issue Insurance or Secondary Market Insurance. Municipal securities
insured under one Portfolio Insurance policy generally would not be insured
under any other policy purchased by the Fund. A municipal security is eligible
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for coverage under a policy if it meets certain requirements of the insurer.
Portfolio Insurance is intended to reduce financial risk, but the cost thereof
and compliance with investment restrictions imposed under the policy will reduce
the yield to shareholders of the Fund. If a municipal security already is
covered by Original Issue Insurance of Secondary Market Insurance, the Fund is
not required to additionally insure any such municipal security under any policy
of Portfolio Insurance that the Fund may purchase.
Portfolio Insurance policies are effective only as to municipal securities
owned and held by the Fund, and do not cover municipal securities for which the
contract for purchase fails. A "when-issued" municipal security will be covered
under a Portfolio Insurance policy upon the settlement date of the issue of such
"when-issued" municipal security.
In determining whether to insure municipal securities held by the Fund, an
insurer will apply its own standards, which correspond generally to the
standards it has established for determining the insurability of new issues of
municipal securities. See "Original Issue Insurance" above.
Each Portfolio Insurance policy will be non-cancellable and will remain in
effect so long as the Fund is in existence, the municipal securities covered by
the policy continue to be held by the Fund, and the Fund pays the premiums for
the policy. Each insurer generally will reserve the right at any time upon 90
days written notice to the Fund to refuse to insure any additional securities
purchased by the Fund after the effective date of such notice. The Board of
Trustees of the Fund generally will reserve the right to terminate each policy
upon seven days written notice to an insurer if it determines that the cost of
such policy is not reasonable in relation to the value of the insurance to the
Fund.
Each Portfolio Insurance policy shall terminate as to any municipal
security that has been redeemed from or sold by the Fund on the date of such
redemption or the settlement date of such sale, and an insurer shall not have
any liability thereafter under a policy as to any such municipal security,
except that if the date of such redemption or the settlement date of such sale
occurs after a record date and before the related payment date with respect to
any such municipal security, the policy will terminate as to such municipal
security on the business day immediately following such payment date. Each
policy will terminate as to all municipal securities covered thereby on the date
on which the last of the covered municipal securities mature, are redeemed or
are sold by the Fund.
One or more policies of Portfolio Insurance may provide the Fund, pursuant
to an irrevocable commitment of the insurer, with the option to exercise the
right to obtain permanent insurance ("Permanent Insurance") with respect to a
municipal security that is to be sold by the Fund. The Fund would exercise the
right to obtain Permanent Insurance upon payment of a single, predetermined
insurance premium payable from the proceeds of the sale of such municipal
security. It is expected that the Fund will exercise the right to obtain
Permanent Insurance for a municipal security only if, in the opinion of the
Adviser, upon such exercise the net proceeds from the sale by the Fund of such
obligation, as insured, would exceed the proceeds from the sale of such
obligation without insurance. The Permanent Insurance premium with respect to
each such obligation is determined based upon the insurability of each such
obligation as of the date of purchase by the Fund and will not be increased or
decreased for any change in the creditworthiness of such obligation unless such
obligation is in default as to payment of principal or interest, or both. In
such event, the Permanent Insurance premium shall be subject to an increase
predetermined at the date of purchase by the Fund.
Because each Portfolio Insurance policy will terminate as to municipal
securities sold by the Fund on the date of sale, in which event the insurer will
be liable only for those payments of principal and interest that are then due
and owing (unless Permanent Insurance is obtained by the Fund), the provision
for this insurance will not enhance the marketability of securities held by the
Fund, whether or not the securities are in default or in significant risk of
default. On the other hand, since Original Issue Insurance and Secondary Market
Insurance will remain in effect as long as municipal securities covered thereby
are outstanding, such insurance may enhance the marketability of such securities
even when such securities are in default or in significant risk of default, but
the exact effect, if any, on the marketability cannot be estimated. Accordingly,
the Fund may determine to retain or, alternatively, to sell municipal securities
covered by Original Issue Insurance or Secondary Market Insurance that are in
default or in significant risk of default.
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It is anticipated that certain of the municipal securities to be purchased
by the Fund will be insured under policies obtained by persons other than the
Fund. In instances in which the Fund purchases municipal securities insured
under policies obtained by persons other than the Fund, the Fund does not pay
the premiums for such policies; rather the cost of such policies may be
reflected in a higher purchase price for such municipal securities. Accordingly,
the yield on such municipal securities may be lower than that on similar
uninsured municipal securities. Premiums for a Portfolio Insurance Policy
generally are paid by the Fund monthly, and are adjusted for purchases and sales
of municipal securities covered by the policy during the month. The yield on the
Fund's portfolio is reduced to the extent of the insurance premiums paid by the
Fund which, in turn, will depend upon the characteristics of the covered
municipal securities held by the Fund. In the event the Fund were to purchase
Secondary Market Insurance with respect to any municipal securities then covered
by a Portfolio Insurance policy, the coverage and the obligation of the Fund to
pay monthly premiums under such policy would cease with such purchase.
There can be no assurance that insurance of the kind described above will
continue to be available to the Fund. In the event that such insurance is no
longer available or that the cost of such insurance outweighs the benefits to
the Fund in the view of the Board of Trustees, the Board will consider whether
to modify the investment policies of the Fund, which may require the approval of
shareholders. In the event the claims-paying ability rating of an insurer of
municipal securities in the Fund's portfolio were to be lowered from AAA by S&P,
or if the Adviser anticipates such a lowering or otherwise does not believe an
insurer's claims-paying ability merits its existing triple-A rating, the Fund
could seek to obtain additional insurance from an insurer whose claims-paying
ability is rated AAA by S&P, or if the Adviser determines that the cost of
obtaining such additional insurance outweigh the benefits, the Fund may elect
not to obtain additional insurance. In making such determination, the Adviser
will consider the cost of the additional insurance, the new claims-paying
ability rating and financial condition of the existing insurer and the
creditworthiness of the issuer and/or guarantor of the underlying municipal
securities. The Adviser also may determine not to purchase additional insurance
in such circumstances if it believes that the insurer is taking steps which will
cause its triple-A claims paying ability rating to be restored promptly.
Although the Adviser periodically reviews the financial condition of each
insurer, there can be no assurance that the insurers will be able to honour
their obligations under all circumstances. In that regard, it should be noted
that the claims-paying abilities and debt ratings of several large insurers (at
least one of which insured municipal securities) recently have been lowered by
one or more of the nationally recognized securities rating agencies and that
many insurers currently are experiencing adverse results in their investment
portfolios. In addition, certain insurers' operations recently have been assumed
by their state regulatory agencies. The Fund cannot predict the consequences of
a state takeover of an insurer's obligations and, in particular, whether such an
insurer (or its state regulatory agency) could or would honour all of the
insurer's contractual obligations including any outstanding insurance contracts
insuring the timely payment of principal and interest on municipal securities.
The Fund cannot predict the impact which such events might have on the market
values of such municipal security. In the event of a default by an insurer on
its obligations with respect to any municipal securities in the Fund's
portfolio, the Fund would look to the issuer and/or guarantor of the relevant
municipal securities for payments of principal and interest and such issuer
and/or guarantor may not be rated AAA by S&P. Accordingly, the Fund could be
exposed to greater risk of non-payment in such circumstances which could
adversely affect the Fund's net asset value and the market price per Common
Share. Alternatively, the Fund could elect to dispose of such municipal
securities; however, the market prices for such municipal securities may be
lower than the Fund's purchase price for them and the Fund could sustain a
capital loss as a result.
Although the insurance on municipal securities reduces financial or credit
risk in respect of the insured obligations (i.e., the possibility that owners of
the insured municipal securities will not receive timely scheduled payments of
principal or interest), insured municipal securities remain subject to market
risk (i.e., fluctuations in market value as a result of changes in prevailing
interest rates). Accordingly, insurance on municipal securities does not insure
the market value of the Fund's assets or the net asset value or the market price
for the Common Shares.
AMBAC Indemnity Corporation. AMBAC Indemnity is a Wisconsin-domiciled
stock insurance corporation regulated by the Insurance Department of the State
of Wisconsin and licensed to do business in 50 states
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and the District of Columbia. On December 31, 1991, AMBAC Indemnity had admitted
assets of approximately $1,431,000,000, total liabilities of approximately
$684,400,000 and statutory capital of approximately $830,000,000. Statutory
capital consists of AMBAC Indemnity's policyholders' surplus and statutory
contingency reserve. AMBAC Indemnity was formerly a wholly-owned subsidiary of
Citicorp Financial Guaranty Holdings, Inc. ("Holdings") (formerly known as AMBAC
Inc.), a financial holding company and itself a wholly-owned subsidiary of
Citibank, N.A. ("Citibank"). According to Best Insurance Report (1991 edition),
AMBAC Indemnity's aggregate exposure under all Class I (municipal bond
insurance) financial guaranty bonds, the only class set forth therein, in force
as of December 31, 1990 was $86,200,000,000.
On May 1, 1991, AMBAC Inc. ("AMBAC Inc."), a financial holding company
formed by Holdings, registered for sale with the Securities and Exchange
Commission 17,600,000 shares of its common stock. The registration statement
with respect to such sale was declared effective on July 11, 1991. As a result
of the sale, Citibank, through its affiliate Holdings, owns approximately 49% of
the total equity of AMBAC Inc., with a right to cast 20% of the total number of
votes of all shares of outstanding common stock of AMBAC Inc. until such time as
Citibank, including its affiliates, reduces its equity ownership to less than
25% of AMBAC Inc. (at which time the shares owned by it become non-voting). As
of the date of the consummation of the sale of common stock, AMBAC Indemnity
became a direct wholly owned subsidiary of AMBAC Inc. The Wisconsin Insurance
Department has stated that the sale of common stock described herein does not
require its prior approval. Both Moody's and S&P have reaffirmed that the sale
of the common stock of AMBAC Inc. does not affect AMBAC Indemnity's triple-A
claims-paying ability ratings.
AMBAC Indemnity has entered into pro rata reinsurance agreements under
which a percentage of the insurance underwritten pursuant to certain municipal
bond insurance programs of AMBAC Indemnity has been and will be assumed by a
number of foreign and domestic unaffiliated reinsurers.
Copies of AMBAC Indemnity's financial statements prepared in accordance
with statutory accounting standards are available from AMBAC Indemnity. The
address of AMBAC Indemnity's administrative offices and its telephone number are
One State Street Plaza, 17th Floor, New York, New York 10004 and (212) 668-0340.
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or 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 it considers reliable. S&P does not
perform any audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of 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;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization or other arrangement under the
laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
AAA Debt rated 'AAA' has the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
</TABLE>
B-23
<PAGE> 140
<TABLE>
<S> <C>
AA Debt rated 'AA' has a very strong capacity to pay interest and repay principal
and differs from the higher 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 in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
</TABLE>
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
<TABLE>
<S> <C>
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
</TABLE>
B-24
<PAGE> 141
<TABLE>
<S> <C>
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
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
judgement with respect to such likelihood and risk.
* Continuance of the rating is contingent upon S&P's receipt of an executed
copy of the escrow agreement or closing documentation confirming investments
and cash flows.
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
</TABLE>
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank
regulations issued by the Comptroller of the Currency, bonds rated in the top
four categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment.
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it will be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
B-25
<PAGE> 142
3. COMMERCIAL PAPER
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 several categories, ranging from
'A-1' for the highest-quality obligations to 'D' for the lowest. These
categories are as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>
A 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 or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
</TABLE>
B-26
<PAGE> 143
<TABLE>
<S> <C>
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.
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by rating in parentheses. These are bonds secured by: (a)
earnings of projects under construction, (b) earnings of projects unseasoned in
operation experience, (c) rentals that begin when facilities are completed, or
(d) payments to which some other limiting condition attaches the parenthetical
rating denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
B-27
<PAGE> 144
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
OFFICERS AND TRUSTEES
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
</TABLE>
B-28
<PAGE> 145
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor 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.
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.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 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. Trustee of
each of the Van Kampen American Capital Funds.
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
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. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
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. (SIPC). Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
B-29
<PAGE> 146
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
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., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. 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. 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 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
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. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser.
</TABLE>
B-30
<PAGE> 147
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
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. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
</TABLE>
B-31
<PAGE> 148
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.
The Fund will pay trustees who are not affiliated persons of the VK
Adviser, the Distributor or Van Kampen American Capital an annual retainer of
$2,500 per year and $125 per regular quarterly meeting of the Fund, plus
expenses. No additional fees are proposed at the present time to be paid for
special meetings, committee meetings or to the chairman of the board. The
trustees have approved an aggregate annual compensation cap from the combined
fund complex of $84,000 per trustee (excluding any retirement benefits) until
December 31, 1996, based upon the current net assets and the current number of
Van Kampen American Capital funds (except that Mr. Whalen, who is also a trustee
of the closed-end funds advised by the VK Adviser would receive additional
compensation for serving as a trustee of such funds). In addition, the VK
Adviser has agreed to reimburse the Fund through December 31, 1996, for any
increase in the aggregate trustees' compensation over the aggregate compensation
paid by the Fund in its 1994 fiscal year.
B-32
<PAGE> 149
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
------------------------------- -------------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 21,968 $ 45 $2,500 $62,362
Philip G. Gaughan.............. 21,928 990 2,500 63,250
Donald C. Miller............... 23,768 1,732 2,500 62,178
Jack A. Nelson................. 23,858 511 2,500 62,362
Jerome L. Robinson............. 23,801 830 2,500 58,475
Wayne W. Whalen................ 17,553 329 2,500 49,875
</TABLE>
---------------
(1) Messrs. Merritt and Powell, trustees of the Trust are affiliated persons
of the Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its 1994 fiscal year.
(2) The Registrant is Van Kampen American Capital Tax Free Trust (the
"Trust") which currently is comprised of 8 operating series, including the
Fund. The amounts shown in this column are accumulated from the Aggregate
Compensation of each of these 8 series during such series' fiscal year
ended December 31, 1994. Beginning in October 1994, each Trustee, except
Messrs. Gaughan and Whalen, began deferring his entire aggregate
compensation. The total combined amount of deferred compensation
(including interest) accrued with respect to each trustee from the Fund
Complex (as defined herein) as of December 31, 1994 is as follows: Mr.
Kennedy $14,737; Mr. Miller $14,553; Mr. Nelson $14,737 and Mr. Robinson
$13,725.
(3) The Retirement Plan commenced as of August 1, 1994 for the Registrant.
The amounts in this column are the retirement benefits accrued during the
Fund's fiscal year ended December 31, 1994.
(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.
(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board
of Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual
funds in the Fund Complex during the calendar year ended December 31,
1994. The VK Adviser also serves as investment adviser for other
investment companies; however, with the exception of Messrs. Powell,
McDonnell and Whalen, such investment companies do not have the same
trustees as the Fund Complex. Combining the Fund Complex with other
investment companies advised by the VK Adviser, Mr. Whalen received Total
Compensation of $161,850.
As of July 17, 1995, the trustees and officers as a group own less than 1%
of the shares of the Fund.
No officer or trustee of the Fund owns or would be able to acquire 5% or
more of the common stock of VK/AC Holding, Inc.
To the knowledge of the Fund, as of July 17, 1995, no person owned of
record or beneficially 5% or more of the Fund's Class A or Class B Shares.
As of July 17, 1995, the following persons owned of record or beneficially
5% or more of the Fund's Class C Shares: NFSC FEBO #OBP-238511, Eugene C. and
Joan A. Ostrander, FAM TR U/A 3/1/91, 4440 Cerritos Avenue, Long Beach, CA
90807-2464, 5%; NFSC FEBO #OBP-239577, Abdullah M S AL ATHEL, Lolowa AL ATHEL,
23511 Paseo de Valencia, Laguna Hills, CA 92653, 11%; Dennis W. Zaiko and G.
Linda Ruiz-Zaiko, COTR, U/A 6/10/93, Zaiko Family Trust, 4 Ashford Ct., Alamo,
CA 94507-2406, 5%; Kenneth Henry, TR, U/A 12/10/93, Kenneth Henry Rev Liv Trust,
3599 Well
B-33
<PAGE> 150
Rd., Oakley, CA 94561, 10%; and Carol Ruth Henry TR, U/A 12/10/93, Carol Ruth
Henry Rev Liv Trust, 1105 Ironwood Rd, Alameda, CA 94502-6620, 9%.
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.).
The Adviser's principal office is located at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181. The Adviser is a wholly-owned subsidiary of Van Kampen
American Capital, Inc., which in turn 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, Inc. own, in the aggregate, not more than 7% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 11% of the common stock of VK/AC
Holding, Inc. Presently, and after giving effect to the exercise of such
options, no officer or trustee of the Fund owns or would own 5% or more of the
common stock of VK/AC Holding, Inc.
The investment advisory agreement between the Adviser and the Fund provides
that the Adviser will supply investment research and portfolio management,
including the selection of securities for the Fund to purchase, hold or sell and
the selection of brokers through whom the Fund's portfolio transactions are
executed. The Adviser also administers the business affairs of the Fund,
furnishes offices, necessary facilities and equipment, provides administrative
services, and permits its officers and employees to serve without compensation
as trustees of the Trust and officers of the Fund if duly elected to such
positions.
The agreement provides that the Adviser shall not be liable for any error
of judgment or of law, or for any loss suffered by the Fund in connection with
the matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement will continue in effect from year to year
if specifically approved by the Trustees of the Trust, of which the Fund is a
separate series, (or the Fund's shareholders) and by the disinterested Trustees
in compliance with the requirements of the 1940 Act. The agreement may be
terminated without penalty upon 60 days written notice by either party and will
automatically terminate in the event of assignment.
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any State in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any State would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $297,611, $196,020 and $72,941, respectively.
B-34
<PAGE> 151
OTHER AGREEMENTS.
FUND ACCOUNTING AGREEMENT. The Fund has entered into an accounting services
agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares with the other Van Kampen American Capital mutual funds advised
by the VK Adviser and distributed by the Distributor, in the cost of providing
such services, with 25% of such costs shared proportionately based on the number
of outstanding classes of shares per fund and with the remaining 75 percent of
such cost being paid by the Fund and such other Van Kampen American Capital
funds based proportionally on their respective net assets.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $6,600, $4,467 and $2,747, respectively, representing
the Adviser's cost of providing accounting services.
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent the Fund's change in
transfer agent, the Fund received support services for shareholders, including
the handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Payment by the Fund for
such services is made on cost basis for the employment of the personnel and the
equipment necessary to render the support services. At such time, the Fund, and
the other Van Kampen American Capital mutual funds distributed by the
Distributor, shared such costs proportionately among themselves based upon their
respective net asset values.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $77,000, $49,025 and $27,314, respectively,
representing the Distributor's cost of providing certain support services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen
American Capital funds advised by the VK Adviser and distributed by the
Distributor have entered into Legal Services Agreements pursuant to which Van
Kampen American Capital provides legal services, including without limitation:
accurate maintenance of the fund's minute books and records, preparation and
oversight of the fund's regulatory reports, and other information provided to
shareholders, as well as responding to day-to-day legal issues on behalf of the
funds. Payment by the Fund for such services is made on a cost basis for the
salary and salary related benefits, including but not limited to bonuses, group
insurances and other regular wages for the employment of personnel, as well as
overhead and the expenses related to the office space and the equipment
necessary to render the legal services. Other funds distributed by the
Distributor also receive legal services from Van Kampen American Capital. Of the
total costs for legal services provided to funds distributed by the Distributor,
one half of such costs are allocated equally to each fund and the remaining one
half of such costs are allocated to specific funds based on monthly time
records.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $12,100, $8,900 and $4,300, respectively, representing
Van Kampen American Capital, Inc.'s cost of providing legal services.
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firms' professional services. These services include
B-35
<PAGE> 152
execution, clearance procedures, wire service quotations and statistical and
other research information provided to the Fund and the investment adviser,
including quotations necessary to determine the value of the Fund's net assets.
Any research benefits derived are available for all clients of the investment
adviser. Since statistical and other research information is only supplementary
to the research efforts of the Adviser and still must be analyzed and reviewed
by its staff, the receipt of research information is not expected to materially
reduce its expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
service described above, even if it means the Fund will have to pay a higher
commission (or, if the broker's profit is part of the cost of the security, will
have to pay a higher price for the security) than would be the case if no weight
were given to the broker's furnishing of those research services. This will be
done, however, only if, in the opinion of the Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information to the Fund
and the Adviser, (ii) have sold or are selling shares of the Fund and (iii) may
select firms that are affiliated with the Fund, its investment adviser or its
distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients advised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the funds and the
amount of securities to be purchased or sold. Although it is possible that in
some cases this procedure could have a detrimental effect on the price or volume
of the security as far as the Fund is concerned, it is also possible that the
ability to participate in volume transactions and to negotiate lower brokerage
commissions will be beneficial to the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the Trustees of
the Trust, of which the Fund is a separate series.
The Trustees have adopted certain policies incorporating the standards of
Rule 17e-1 issued by the Securities and Exchange Commission under the 1940 Act
which requires that the commission paid to the Distributor and other affiliates
of the Fund must be reasonable and fair compared to the commissions, fees or
other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities during a comparable
period of time. The rule and procedures also contain review requirements and
require the Adviser to furnish reports to the Trustees and to maintain records
in connection with such reviews. After consideration of all factors deemed
relevant, the Trustees will consider from time to time whether the advisory fee
will be reduced by all or a portion of the brokerage commission given to brokers
that are affiliated with the Fund.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor 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. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.
B-36
<PAGE> 153
Shares of the Fund are offered on a continuous basis through Van Kampen
American Capital Distributors, Inc., One Parkview Plaza, Oakbrook Terrace, IL
60181. Van Kampen American Capital Distributors, Inc. is a wholly owned
subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of VK/AC
Holding, Inc., a Delaware corporation that is controlled through an 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. In addition, certain officers, directors and employees of Van
Kampen American Capital, Inc., and its subsidiaries own, in the aggregate not
more than 7% 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. C & D L.P. is managed by Clayton, Dubilier &
Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C & D
Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan sometimes
are referred to herein collectively as the Plans. The Plans provide that the
Fund may spend a portion of the Fund's average daily net assets attributable to
each class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund that were purchased
prior to all Implementation Dates, the percentage of the total average daily net
asset value of a class of shares that may be utilized pursuant to the
Distribution and Service Agreement will be less than the maximum percentage
amount permissible with respect to such class of shares under the Distribution
and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of
the Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.
B-37
<PAGE> 154
For the year ended December 31, 1994, the Fund has recognized expenses
under the Plans of $434,452, $177,806 and $42,705 for the Class A Shares, Class
B Shares and Class C Shares, respectively, of which $334,597 and $44,221
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares and Class B Shares, respectively. For the year ended December 31,
1994, the Fund has reimbursed the Distributor $51,734 and $3,111 for advertising
expenses, and $21,356 and $5,827 for compensation of the Distributor sales
personnel for the Class A Shares and Class B Shares, respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
CLASS A SHARES
The average total return, including payment of the maximum sales charge,
with respect to the Class A Shares for (i) the one year period ended December
31, 1994 was (11.49%); (ii) the five year period ended December 31, 1994 was
5.70%; and (iii) the approximately nine year, one month period from December 13,
1985 (the commencement of investment operations of the Fund) through December
31, 1994 was 7.21%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.49%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 43% tax
rate) was 9.63%. The Fund's current distribution rate with respect to the Class
A Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
5.60%.
The Fund's cumulative non-standardized total return, including payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 88.15%.
The Fund's cumulative non-standardized total return, excluding payment of
the maximum sales charge, with respect to the Class A Shares from its inception
to the end of the current period was 93.94%.
CLASS B SHARES
The average total return, including payment of the CDSC, with respect to
the Class B Shares for (i) the one year period ended December 31, 1994 was
(11.99%) and (ii) the approximately one year, eight month period of May 1, 1993
(commencement of distribution) through December 31, 1994 was (3.08%).
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.94%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 43% tax
rate) was 8.67%. The Fund's current distribution rate with respect to the Class
B Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.83%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was (5.08%).
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class B Shares from its inception to the end of
the current period was (2.83%).
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to
the Class C Shares for the (i) one year period ending December 31, 1994 was
(10.26%) and (ii) the approximately one year, five month period from August 13,
1993 (commencement of distribution) through December 31, 1994 was (4.65%).
B-38
<PAGE> 155
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 4.92%. The tax-equivalent yield for
the 30 day period ending December 30, 1994 (calculated in the manner described
in the Prospectus under the heading "Fund Performance" and assuming a 43% tax
rate) was 8.63%. The Fund's current distribution rate with respect to the Class
C Shares for the 31 day period ending December 31, 1994 (calculated in the
manner described in the Prospectus under the heading "Fund Performance") was
4.84%.
The Fund's cumulative non-standardized total return, including payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was (6.52%).
The Fund's cumulative non-standardized total return, excluding payment of
the CDSC, with respect to the Class C Shares from its inception to the end of
the current period was (6.52%).
B-39
<PAGE> 156
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Independent Auditors' Report
The Board of Trustees and Shareholders of
Van Kampen Merritt California Insured Tax Free Fund:
We have audited the accompanying statement of assets and liabilities
of Van Kampen Merritt California Insured Tax Free Fund (the "Fund"), including
the portfolio of investments, as of December 31, 1994, and the related statement
of operations for the year then ended, the statement of changes in net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1994, by correspondence with the custodian and brokers. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt California Insured Tax Free Fund as of December 31, 1994, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the periods presented, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 7, 1995
B-40
<PAGE> 157
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Municipal Bonds 100.4%
$ 3,000 Alameda Cnty, CA Ctfs Partn Santa Rita Jail Proj Rfdg (MBIA Insd) ... AAA Aaa 5.700% 12/01/14 $ 2,672,520
1,000 Alameda, CA Ctfs Partn Alameda Swr Impt Fin Corp (AMBAC Insd) ....... AAA Aaa 7.400 3/01/18 1,036,800
4,000 Anaheim, CA Pub Fin Auth Tax Alloc Rev (MBIA Insd) .................. AAA Aaa 6.310 12/28/18 3,847,500
3,000 Baldwin Park, CA Fin Auth Lease Rev
Cmnty Cent Proj Rfdg (AMBAC Insd) ................................... AAA Aaa 6.050 8/01/19 2,766,300
3,000 Bay Area Govt Assn CA Rev Tax Alloc CA
Redev Agy Pool Ser A2 (Cap Guar Insd) ............................... AAA Aaa 6.400 12/15/14 2,895,210
750 Berkeley, CA Ctfs Partn (AMBAC Insd) ................................ AAA Aaa 7.500 6/01/19 778,208
1,000 Brea & Olinda, CA Unified Sch Dist Ctfs Partn
Sr High Sch Pgm Ser A Rfdg (Cap Guar Insd) .......................... AAA Aaa 6.000 8/01/09 943,380
500 Calexico, CA Cmnty Redev Agy Tax Alloc Cent Bus Dist &
Residential Rfdg (Prerefunded @ 04/01/97) (AMBAC Insd) <F3> ......... AAA Aaa 8.000 4/01/17 537,800
1,300 California Edl Fac Auth Rev Univ San Diego Proj (MBIA Insd) ......... AAA Aaa 6.750 10/01/15 1,308,372
150 California Hlth Fac Auth Rev Lakeside Cmnty Hosp
Ser A Rfdg (Prerefunded @ 04/01/95) (AMBAC Insd) .................... AAA Aa 9.375 4/01/15 154,865
2,000 California Hlth Fac Fin Auth Rev
Adventist Hlth Ser A Rfdg (MBIA Insd) <F3> .......................... AAA Aaa 6.500 3/01/14 1,976,040
20 California Hsg Fin Agy Rev Hsg Ser B (MBIA Insd) .................... AAA Aaa 8.625 8/01/15 20,543
1,220 California Pub Cap Impt Fin Auth Rev
Pooled Proj Ser B (BIGI Insd) <F3> .................................. AAA Aaa 8.100 3/01/18 1,317,600
1,500 California St (FGIC Insd) ........................................... AAA Aaa 6.250 9/01/12 1,466,925
4,500 California St Pub Wks Brd Lease Rev Dept of Corrections
CA St Prison Coalinga Ser B (MBIA Insd) ............................. AAA Aaa 5.375 12/01/19 3,720,870
4,000 California St Pub Wks Brd Lease Rev Dept of Corrections
CA St Prison Susanville Ser D (Cap Guar Insd) ....................... AAA Aaa 5.250 6/01/15 3,320,720
1,000 California St Var Purp (MBIA Insd) .................................. AAA Aaa 6.000 10/01/10 962,460
5,000 California St Var Purp (MBIA Insd) .................................. AAA Aaa 6.000 10/01/14 4,655,250
5,620 California Statewide Cmntys Dev Auth Rev Ctfs
Partn Good Samaritan Hlth Sys (CAPMAC Insd) ......................... AAA Aaa 6.250 5/01/14 5,382,611
2,000 Castaic Lake Wtr Agy CA Ctfs Partn Wtr Sys
Impt Proj Ser A Rfdg (MBIA Insd) .................................... AAA Aaa 7.000 8/01/12 2,099,420
1,105 Chino, CA Ctfs Partn Redev Agy (MBIA Insd) .......................... AAA Aaa 6.200 9/01/18 1,039,739
2,350 Chino, CA Unified Sch Dist Ctfs Partn Master Lease Pgm (FSA Insd) ... AAA Aaa 6.250 3/01/09 2,325,818
</TABLE>
See Notes to Financial Statements
B-41
<PAGE> 158
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>>
California Municipal Bonds (Continued)
$ 1,500 Chino, CA Unified Sch Dist Ctfs Partn Master Lease Pgm (FSA Insd) ... AAA Aaa 6.000% 3/01/14 $ 1,398,885
3,085 Clayton, CA Redev Agy Tax Alloc Rev Clayton
Redev Proj Area (Cap Guar Insd) ..................................... AAA Aaa 5.500 8/01/24 2,586,772
1,500 Compton, CA Cmnty Redev Agy Tax Alloc
Walnut Indl Park Ser A Rfdg (AMBAC Insd) ............................ AAA Aaa 7.500 8/01/13 1,574,205
20 Concord, CA Redev Agy Tax Alloc Cent
Concord Redev Proj Ser 3 (BIGI Insd) ................................ AAA Aaa 8.000 7/01/18 21,598
880 Concord, CA Redev Agy Tax Alloc Cent
Concord Redev Proj Ser 3 (Prerefunded @ 07/01/98) (BIGI Insd) ....... AAA Aaa 8.000 7/01/18 964,665
1,000 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd) ......................................... AAA Aaa 7.800 6/01/06 1,087,960
500 Contra Costa Cnty, CA Ctfs Partn Contra Costa
Cnty Pub Fac Co (BIGI Insd) ......................................... AAA Aaa 7.800 6/01/07 541,540
1,000 Contra Costa Cnty, CA Santn Dist No 7 A Ctfs Partn
Sub-Delta Diablo Fin Corp (Prerefunded @ 12/01/98) (BIGI Insd) ...... AAA Aaa 7.600 12/01/08 1,089,240
3,820 Contra Costa, CA Sch Fin Auth Rev Vista Unified
Sch Dist Sch Sites Ser A (Prerefunded @ 09/01/02) (FSA Insd) ........ AAA Aaa * 9/01/17 894,835
5,165 Corona, CA Redev Agy Tax Alloc Redev Proj
Area A Ser A Rfdg (FGIC Insd) ....................................... AAA Aaa 6.250 9/01/13 4,977,356
2,000 Fairfield Suisun, CA Swr Dist Swr Rev Ser A Rfdg (MBIA Insd) ........ AAA Aaa 6.250 5/01/16 1,907,060
2,250 Fairfield, CA Pub Fin Auth Rev Fairfield Redev
Proj Ser C (Cap Guar Insd) .......................................... AAA Aaa 5.250 8/01/13 1,887,052
3,750 Fairfield, CA Pub Fin Auth Rev Fairfield Redev
Proj Ser C (Cap Guar Insd) .......................................... AAA Aaa 5.500 8/01/23 3,122,512
1,000 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd) ....................... AAA Aaa 6.000 10/01/12 943,650
1,400 Folsom, CA Pub Fin Auth Rev Rfdg (AMBAC Insd) ....................... AAA Aaa 6.000 10/01/19 1,283,744
1,615 Gilroy, CA Unified Sch Dist Ctfs Partn Measure
J Cap Projs Rfdg (FSA Insd) ......................................... AAA Aaa 5.750 9/01/05 1,577,161
1,745 Gilroy, CA Unified Sch Dist Ctfs Partn Measure
J Cap Projs Rfdg (FSA Insd) ......................................... AAA Aaa 5.875 9/01/06 1,712,386
1,810 Gilroy, CA Unified Sch Dist Ctfs Partn Measure
J Cap Projs Rfdg (FSA Insd) ......................................... AAA Aaa 6.250 9/01/12 1,731,555
900 Grossmont, CA Hosp Dist Rev Ser A (Prerefunded @ 11/15/97)
(MBIA Insd) ......................................................... AAA Aaa 8.000 11/15/17 978,660
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 159
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 20,000 Grossmont, CA Union High Sch Dist Ctfs Partn (MBIA Insd) ....... AAA Aaa * % 11/15/21 $ 2,956,200
460 Industry, CA (Prerefunded @ 07/01/99) (MBIA Insd) .............. AAA Aaa 8.000 7/01/04 507,182
1,750 Irwindale, CA Cmnty Redev Agy Tax Alloc Indl Dev
Proj Rfdg (AMBAC Insd) ......................................... AAA Aaa 7.000 8/01/15 1,781,710
368 Kern Cnty, CA Home Mtg Rev Ser A (MBIA Insd) ................... AAA Aaa * 3/01/14 46,210
1,250 La Quinta, CA Redev Agy Tax Alloc Redev
Proj Area No 1 Rfdg (MBIA Insd) ................................ AAA Aaa 7.300 9/01/09 1,372,162
1,000 La Quinta, CA Redev Agy Tax Alloc Redev
Proj Area No 1 Rfdg (MBIA Insd) ................................ AAA Aaa 7.300 9/01/10 1,090,690
1,835 Local Govt Fin Auth CA Rev Cap Apprec San Francisco
Redev (MBIA Insd) .............................................. AAA Aaa * 8/01/08 757,543
2,000 Local Govt Fin Jt Pwrs Auth CA Rev Anaheim Redev Agy Ser A
(Prerefunded @ 09/01/98) (MBIA Insd) ........................... AAA Aaa 7.950 9/01/09 2,192,660
1,850 Loma Linda, CA Hosp Rev Loma Linda Univ Med Cent
Proj B Rfdg (AMBAC Insd) ....................................... AAA Aaa 7.000 12/01/15 1,869,998
1,000 Long Beach, CA Redev Agy Downtown Redev Proj A
(Prerefunded @ 11/01/98) (AMBAC Insd) .......................... AAA Aaa 7.750 11/01/10 1,092,990
100 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive View Med Ser A
(Prerefunded @ 04/01/99) (AMBAC Insd) .......................... AAA Aaa 9.100 4/01/01 114,813
85 Los Angeles Cnty, CA Hlth Fac Auth Rev Olive View Med Ser A
(Prerefunded @ 04/01/99) (AMBAC Insd) .......................... AAA Aaa 9.200 4/01/02 97,734
880 Los Angeles Cnty, CA Tran Comm Lease Rev Dia RR
Lease Ltd (FSA Insd) ........................................... AAA Aaa 7.375 12/15/06 949,450
1,975 Los Angeles, CA Convention & Exhibition Cent Auth Lease
Rev Ser A Rfdg (MBIA Insd) ..................................... AAA Aaa 5.375 8/15/18 1,652,285
7,000 Los Angeles, CA Unified Sch Dist Ctfs Partn
Multi Ppty Proj Rfdg (FSA Insd) ................................ AAA Aaa 5.625 11/01/13 6,221,250
1,200 Los Angeles, CA Wastewtr Sys Rev
(Prerefunded @ 08/01/98) (MBIA Insd) ........................... AAA Aaa 7.700 8/01/18 1,306,584
500 M-S-R Pub Pwr Agy CA San Juan Proj Rev Ser E (MBIA Insd) ....... AAA Aaa 6.000 7/01/22 456,285
1,300 Martinez, CA Ctfs Partn Martinez Pub Impt Corp
(Prerefunded @ 12/01/98) (AMBAC Insd) .......................... AAA Aaa 7.700 12/01/18 1,431,040
750 Mesa, CA Cons Wtr Dist Ctfs Partn Mesa Cons Wtr Impt Co Cap Impt
(AMBAC Insd) ................................................... AAA Aaa 7.625 3/15/08 795,135
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 160
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 910 Morgan Hill, CA Redev Agy Tax Alloc Ojo De Agua Cmnty Dev Proj
(Prerefunded @ 03/01/96) (FGIC Insd) ................................ AAA Aaa 7.875% 3/01/12 $ 955,909
500 Northern CA Pwr Agy Pub Pwr Rev Combustion Turbine
Proj 1 Ser A Rfdg (MBIA Insd) ....................................... AAA Aaa 6.000 8/15/10 473,770
400 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj 1 Ser A Rfdg
(Prerefunded @ 07/01/21) (AMBAC Insd) ............................... AAA Aaa 7.500 7/01/23 440,492
1,100 Northern CA Pwr Agy Pub Pwr Rev Hydro Elec Proj 1 Ser A Rfdg
(Prerefunded @ 07/01/96) (AMBAC Insd) ............................... AAA Aaa 7.500 7/01/23 1,158,443
500 Oakland, CA Redev Agy Ctfs Partn Oakland Museum Ser A
(Prerefunded @ 04/01/97) (AMBAC Insd) ............................... AAA Aaa 8.125 4/01/12 539,335
750 Oceanside, CA Ctfs Partn Corp Yd Proj Fin
(Prerefunded @ 08/01/03) (AMBAC Insd) ............................... AAA Aaa 7.300 8/01/21 831,832
2,000 Oxnard, CA Fin Auth Lease Rev Rfdg (FSA Insd) ....................... AAA Aaa 5.375 6/01/16 1,676,880
740 Oxnard, CA Sch Dist Util Ser A
(Prerefunded @ 08/01/96) (MBIA Insd) ................................ AAA Aaa 7.700 8/01/09 782,802
3,000 Palm Desert, CA Fin Auth Tax Alloc Rev (Inverse Fltg) (MBIA Insd) ... AAA Aaa 8.306 4/01/22 2,760,000
1,000 Perris, CA Sch Dist Ctfs Partn Rfdg (FSA Insd) ...................... AAA Aaa 6.100 3/01/16 937,880
1,945 Pittsburg, CA Unified Sch Dist Ctfs Partn (AMBAC Insd) .............. AAA Aaa 6.300 9/01/15 1,870,993
2,200 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg (MBIA Insd) ........... AAA Aaa 6.000 4/01/12 2,086,634
1,360 Port Hueneme, CA Ctfs Partn Cap Impt Pgm Rfdg (MBIA Insd) ........... AAA Aaa 6.000 4/01/19 1,260,244
1,235 Rancho Cucamonga, CA Redev Agy Tax Alloc
Rancho Redev Proj (MBIA Insd) ....................................... AAA Aaa 6.750 9/01/20 1,240,088
1,265 Rancho Cucamonga, CA Redev Agy Tax Alloc Rancho Redev Proj
(Prerefunded @ 09/01/99) (MBIA Insd) ................................ AAA Aaa 6.750 9/01/20 1,346,694
1,000 Redding, CA Elec Sys Rev Ctfs Partn (Inverse Fltg) (MBIA Insd) ...... AAA Aaa 8.264 7/01/22 923,750
1,100 Sacramento, CA Muni Util Dist Elec Rev Ser S
(Prerefunded @ 02/01/97) (FGIC Insd) ................................ AAA Aaa 7.125 2/01/11 1,158,586
530 San Bernardino Cnty, CA Ctfs Partn Rfdg & Cap Impt Proj
(MBIA Insd) ......................................................... AAA Aaa 7.600 7/01/15 555,143
2,500 San Bernardino Cnty, CA Ctfs Partn Ser B (Embedded Swap)
(MBIA Insd) ......................................................... AAA Aaa 5.310 7/01/16 2,022,225
2,000 San Mateo Cnty, CA Jt Pwrs Fin Auth Lease Rev
San Mateo Cnty Hlth Care Cent A (FSA Insd) .......................... AAA Aaa 6.000 7/15/09 1,910,380
</TABLE>
See Notes to Financial Statements
B-44
<PAGE> 161
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California Municipal Bonds (Continued)
$ 1,000 Santa Clara Cnty, CA Fin Auth Lease Rev VMC
Fac Replacement Proj Ser A (AMBAC Insd) ...................... AAA Aaa 6.875% 11/15/14 $ 1,022,290
1,990 South Cnty, CA Regl Wastewtr Auth Rev
Regl Wastewtr Fac Proj Ser A (FGIC Insd) ..................... AAA Aaa 6.000 8/01/14 1,849,347
3,735 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd) ............................... AAA Aaa 7.000 9/01/08 3,891,646
4,785 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd) ............................... AAA Aaa 7.000 9/01/09 4,976,209
3,500 South Orange Cnty, CA Pub Fin Auth Spl Tax Rev
Sr Lien Ser A Rfdg (MBIA Insd) ............................... AAA Aaa 6.200 9/01/13 3,289,930
1,050 Stockton, CA Rev Ctfs Partn Wastewtr Treatment Plant Expansion
Ser A (FGIC Insd) <F2> ....................................... AAA Aaa 6.400 9/01/07 1,060,195
1,015 Stockton, CA Rev Ctfs Partn Wastewtr Treatment Plant Expansion
Ser A (FGIC Insd) <F2> ....................................... AAA Aaa 6.500 9/01/08 1,024,795
2,000 Torrance, CA Hosp Rev Torrance Mem Hosp Rfdg (MBIA Insd) ..... AAA Aaa 6.750 1/01/12 2,009,700
1,500 University of CA Rev Hsg Sys Group A2 Rfdg
(Prerefunded @ 11/01/96) (BIGI Insd) ......................... AAA Aaa 7.800 11/01/15 1,594,590
3,000 University of CA Rev Multi-purp Proj Ser D (MBIA Insd) ....... AAA Aaa 6.300 9/01/14 2,898,090
-----------------
Total Long-Term Investments 100.4%
(Cost $154,915,479) <F1>.................................................................................. 150,750,580
Liabilities in Excess of Other Assets (0.4%).............................................................. (615,783)
-----------------
Net Assets 100%........................................................................................... $ 150,134,797
-----------------
*Zero coupon bond
<FN>
<F1>At December 31, 1994, cost for federal income tax purposes is $154,915,479; the aggregate gross
unrealized appreciation is $3,042,239 and the aggregate gross unrealized depreciation is $7,144,745,
resulting in net unrealized depreciation including open futures transactions of $4,102,506.
<F2>Securities purchased on a when issued or delayed delivery basis.
<F3>Assets segregated as collateral for when issued or delayed delivery purchase commitments and open
futures transactions.
</TABLE>
See Notes to Financial Statements
B-45
<PAGE> 162
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $154,915,479) <F1>.................................. $ 150,750,580
Cash................................................................................... 1,660,655
Receivables:
Interest............................................................................... 2,931,560
Fund Shares Sold....................................................................... 76,546
Margin on Futures <F5>................................................................. 29,634
Other.................................................................................. 3,743
---------------
Total Assets........................................................................... 155,452,718
---------------
Liabilities:
Payables:
Investments Purchased.................................................................. 4,062,463
Fund Shares Repurchased................................................................ 664,810
Income Distributions .................................................................. 300,506
Investment Advisory Fee <F2>........................................................... 19,242
Accrued Expenses....................................................................... 270,900
---------------
Total Liabilities...................................................................... 5,317,921
---------------
Net Assets............................................................................. $ 150,134,797
---------------
Net Assets Consist of:
Paid in Surplus <F3>................................................................... $ 161,685,243
Accumulated Undistributed Net Investment Income........................................ 18,913
Net Unrealized Depreciation on Investments............................................. (4,102,506)
Accumulated Net Realized Loss on Investments........................................... (7,466,853)
---------------
Net Assets............................................................................. $ 150,134,797
---------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $130,294,489 and
8,245,311 shares of beneficial interest issued and outstanding) <F3>................... $ 15.80
Maximum sales charge (3.0%* of offering price)......................................... .49
---------------
Maximum offering price to public....................................................... $ 16.29
---------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $17,054,794 and
1,079,043 shares of beneficial interest issued and outstanding) <F3>................... $ 15.81
---------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $2,785,514 and
176,321 shares of beneficial interest issued and outstanding) <F3>..................... $ 15.80
---------------
*On sales of $100,000 or more, the sales charge will be reduced.
</TABLE>
See Notes to Financial Statements
B-46
<PAGE> 163
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest................................................................................................. $ 10,362,696
Amortization of Premium.................................................................................. (81,395)
--------------
Total Income............................................................................................. 10,281,301
--------------
Expenses:
Investment Advisory Fee <F2>............................................................................. 793,610
Distribution (12b-1) and Service Fees (Allocated to Classes A, B and C of $434,452, $177,806 and $42,705,
respectively) <F6> ................................................................................... 654,963
Shareholder Services .................................................................................... 192,227
Custody.................................................................................................. 111,423
Legal <F2>............................................................................................... 28,581
Trustees Fees and Expenses <F2>.......................................................................... 22,380
Insurance <F1>........................................................................................... 3,906
Other.................................................................................................... 137,223
--------------
Total Expenses........................................................................................... 1,944,313
Less Fees Waived......................................................................................... 495,999
--------------
Net Expenses............................................................................................. 1,448,314
--------------
Net Investment Income.................................................................................... $ 8,832,987
--------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales...................................................................................... $ 95,054,848
Cost of Securities Sold.................................................................................. (100,884,986)
--------------
Net Realized Loss on Investments (Including realized loss on futures transactions of $612,652)........... (5,830,138)
--------------
Net Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.................................................................................. 14,722,480
End of the Period (Including unrealized appreciation on open futures transactions of $62,393)............ (4,102,506)
--------------
Net Unrealized Depreciation on Investments During the Period............................................. (18,824,986)
--------------
Net Realized and Unrealized Loss on Investments.......................................................... $ (24,655,124)
--------------
Net Decrease in Net Assets from Operations............................................................... $ (15,822,137)
--------------
</TABLE>
See Notes to Financial Statements
B-47
<PAGE> 164
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 8,832,987 $ 6,244,498
Net Realized Loss on Investments............................................ (5,830,138) (473,767)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (18,824,986) 8,686,651
----------------- -----------------
Change in Net Assets from Operations ....................................... (15,822,137) 14,457,382
----------------- -----------------
Distributions from Net Investment Income:
Class A Shares.............................................................. (7,808,441) (6,063,538)
Class B Shares.............................................................. (811,323) (201,828)
Class C Shares.............................................................. (194,310) (38,785)
----------------- -----------------
Total Distributions......................................................... (8,814,074) (6,304,151)
----------------- -----------------
Net Change in Net Assets from Investment Activities......................... (24,636,211) 8,153,231
----------------- -----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 31,539,463 94,918,996
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 5,318,194 3,753,640
Cost of Shares Repurchased.................................................. (32,496,252) (10,640,631)
----------------- -----------------
Net Change in Net Assets from Capital Transactions.......................... 4,361,405 88,032,005
----------------- -----------------
Total Increase/Decrease in Net Assets....................................... (20,274,806) 96,185,236
Net Assets:
Beginning of the Period..................................................... 170,409,603 74,224,367
----------------- -----------------
End of the Period (Including undistributed net investment income of
$18,913 and $-0-, respectively)............................................. $ 150,134,797 $ 170,409,603
----------------- -----------------
</TABLE>
See Notes to Financial Statements
B-48
<PAGE> 165
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
--------------------------------------------------------------------------------
1.Significant Accounting Policies
Van Kampen Merritt California Insured Tax Free Fund (the "Fund") was
organized as a subtrust of the Van Kampen Merritt Tax Free Fund, a
Massachusetts business trust, on August 15, 1985, and is registered as
a diversified open-end management investment company under the
Investment Company Act of 1940, as amended. The Fund commenced
investment operations on December 13, 1985. The distribution of the
Fund's Class B shares and Class C shares, which were initially
introduced as Class D shares and subsequently renamed Class C shares
on March 7, 1994, commenced on May 1, 1993, and August 13, 1993,
respectively.
The following is a summary of significant accounting policies
consistently followed by the Fund in the preparation of its financial
statements.
A.Security Valuation-Investments are stated at value using market
quotations or, if such valuations are not available, estimates obtained
from yield data relating to instruments or securities with similar
characteristics in accordance with procedures established in good faith
by the Board of Trustees. Short-term securities with remaining maturities
of less than 60 days are valued at amortized cost.
B.Security Transactions-Security transactions are recorded on a
trade date basis. Realized gains and losses are determined on an
identified cost basis. The Fund may purchase and sell securities on a
"when issued" and "delayed delivery" basis, with settlement to occur at
a later date. The value of the security so purchased is subject to market
fluctuations during this period. The Fund will maintain in a segregated
account with its custodian assets having an aggregate value at least
equal to the amount of the when issued or delayed delivery purchase
commitments until payment is made.
C.Investment Income-Interest income is recorded on an accrual
basis. Bond premium and original issue discount are amortized over the
expected life of each applicable security.
D.Federal Income Taxes-It is the Fund's policy to comply with
the requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its taxable income,
if any, to its shareholders. Therefore, no provision for federal income taxes is
required.
The Fund intends to utilize provisions of the Federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $6,845,254. Of this amount, $100,459,
$1,014,876, $105,997 and $5,623,922 will expire on December 31, 1995, 1996,
2001, and 2002, respectively. Net realized gains or losses may differ for
financial and tax reporting purposes primarily as a result of post October 31
losses which are not recognized for tax purposes until the first day of the
following fiscal year.
E.Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually.
F.Insurance Expense-The Fund typically invests in insured bonds. Any portfolio
securities not specifically covered by a primary insurance policy are insured
secondarily through the Fund's portfolio insurance policy. Insurance premiums
are based on the daily balances of uninsured bonds in the portfolio of
investments and are charged to expense on an accrual basis. The insurance policy
guarantees the timely payment of principal and interest on the securities in the
Fund's portfolio.
2.Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, Van Kampen American
Capital Investment Advisory Corp. (the "Adviser") will provide investment advice
and facilities to the Fund for an annual fee payable monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
----------------------------------
<S> <C>
First $100 million... .500 of 1%
Next $150 million.... .450 of 1%
Next $250 million.... .425 of 1%
Over $500 million.... .400 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
B-49
<PAGE> 166
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
--------------------------------------------------------------------------------
For the year ended December 31, 1994, the Fund recognized
expenses of approximately $95,700 representing Van Kampen American
Capital Distributors, Inc.'s or its affiliates' ("VKAC") cost of providing
accounting, legal and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors
of VKAC. The Fund does not compensate itsofficers or trustees who
are officers of VKAC.
The Fund has implemented deferred compensation and retirement
plans for its Trustees. Under the deferred compensation plan, Trustees
may elect to defer all or a portion of their compensation to a later date.
The retirement plan covers those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 100 shares each of Classes
B and C.
3.Capital Transactions
The Fund has outstanding three classes of common shares, Classes A, B
and C. There are an unlimited number of shares of each class without par
value authorized.
At December 31, 1994, paid in surplus aggregated $138,705,152,
$19,509,963 and $3,470,128 for Classes A, B and C, respectively. For
the year ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 1,342,809 $ 23,002,264
Class B....................... 414,834 7,100,815
Class C....................... 82,157 1,436,384
------------ ----------------
Total Sales................... 1,839,800 $ 31,539,463
------------ ----------------
Dividend Reinvestment:
Class A....................... 281,094 $ 4,667,614
Class B....................... 30,434 504,221
Class C....................... 8,764 146,359
------------ ----------------
Total Dividend Reinvestment... 320,292 $ 5,318,194
------------ ----------------
Repurchases:
Class A....................... (1,641,222) $ (27,094,273)
Class B....................... (206,014) (3,292,413)
Class C....................... (132,758) (2,109,566)
------------ ----------------
Total Repurchases............. (1,979,994) $ (32,496,252)
------------ ----------------
</TABLE>
At December 31, 1993, paid in surplus aggregated $138,129,547, $15,197,340, and
$3,996,951 for Classes A, B and C, respectively. For the year ended December 31,
1993, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
------------------------------------------------------------
<S> <C> <C>
Sales:
Class A....................... 4,190,667 $ 74,706,246
Class B....................... 892,179 16,137,450
Class C....................... 222,434 4,075,300
---------- ----------------
Total Sales................... 5,305,280 $ 94,918,996
---------- ----------------
Dividend Reinvestment:
Class A....................... 201,038 $ 3,595,476
Class B....................... 6,814 123,498
Class C....................... 1,913 34,666
---------- ----------------
Total Dividend Reinvestment... 209,765 $ 3,753,640
---------- ----------------
Repurchases:
Class A....................... (532,018) $ (9,464,008)
Class B....................... (59,204) (1,063,608)
Class C....................... (6,189) (113,015)
---------- ----------------
Total Repurchases............. (597,411) $ (10,640,631)
---------- ----------------
</TABLE>
Class B and C shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within four years of the purchase for Class B and one
year of the purchase for Class C as detailed in the following schedule. The
Class B and C shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C
-----------------------------------------------
<S> <C> <C>
First.................. 3.00% 1.00%
Second................. 2.50% None
Third.................. 2.00% None
Fourth................. 1.00% None
Fifth and Thereafter... None None
</TABLE>
For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$200 and CDSC on the redeemed shares of Classes B and C of approximately
$61,500. Sales charges do not represent expenses of the Fund.
B-50
<PAGE> 167
Van Kampen Merritt California Insured Tax Free Fund
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
--------------------------------------------------------------------------------
4.Investment Transactions
Aggregate purchases and cost of sales of investment securities, excluding
short-term notes, for the year ended December 31, 1994 were $91,001,472 and
$100,884,986, respectively.
5.Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly.
Summarized below are the specific types of derivative financial instruments used
by the Fund.
A. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.
Transactions in futures contracts, each with a par value of $100,000, for the
year ended December 31, 1994, were as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
Contracts
<S> <C>
Outstanding at December 31, 1993... -0-
Futures Opened..................... 2,750
Futures Closed..................... (2,350)
--------
Outstanding at December 31, 1994... 400
--------
</TABLE>
The futures contracts outstanding as of December 31, 1994, and the descriptions
and unrealized appreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Contracts Appreciation
----------------------------------------------------
<S> <C> <C>
US Treasury Bond Futures
Mar 1995 - Sells to Open... 200 $ 29,634
Municipal Bond Futures
Mar 1995 - Sells to Open... 200 32,759
--------- ------------
400 $ 62,393
--------- ------------
</TABLE>
B. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed coupon
component of the underlying bond is adjusted by the difference between the
securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to enhance
the yield of the portfolio.
6.Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% of Class A shares and 1.00% each of
Class B and Class C shares are accrued daily. Included in these fees for the
year ended December 31, 1994, are payments to VKAC of approximately $245,200.
B-51
<PAGE> 168
--------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
--------------------------------------------------------------------------------
Van Kampen American Capital Municipal Income Fund, formerly known as Van
Kampen Merritt Municipal Income Fund (the "Fund"), is a separate diversified
mutual fund, organized as a series of Van Kampen American Capital Tax Free
Trust. The Fund's investment objective is to provide a high level of current
income exempt from federal income tax, consistent with preservation of capital.
The Fund seeks to achieve its investment objective by investing at least 80% of
its assets in a diversified portfolio of tax-exempt municipal securities rated
investment grade at the time of investment. Investment grade securities are
securities rated BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa
or higher by Moody's Investors Service, Inc. ("Moody's"). Up to 20% of the
Fund's total assets may consist of tax-exempt municipal securities rated below
investment grade (but not rated lower than B- by S&P or B3 by Moody's) and
unrated tax-exempt municipal securities believed by the Fund's investment
adviser to be of comparable quality, which involve special risk considerations.
Municipal securities in which the Fund may invest include conventional
fixed-rate municipal securities, variable rate municipal securities and other
types of municipal securities described herein. See "Municipal Securities." The
Fund may invest a substantial portion of its assets in municipal securities that
pay interest that is subject to the alternative minimum tax. There is no
assurance that the Fund will achieve its investment objective.
The investment adviser for the Fund is Van Kampen American Capital
Investment Advisory Corp. This Prospectus sets forth the information about the
Fund that a prospective investor should know before investing in the Fund.
Please read it carefully and retain it for future reference. The address of the
Fund is One Parkview Plaza, Oakbrook Terrace, Illinois 60181, and its telephone
number is (800) 421-5666.
(Continued on next page)
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, GUARANTEED OR
ENDORSED BY, ANY BANK OR DEPOSITORY INSTITUTION; FURTHER, SUCH SHARES ARE NOT
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL
RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY. SHARES OF THE FUND INVOLVE
INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
A Statement of Additional Information, dated July 31, 1995, containing
additional information about the Fund has been filed with the Securities and
Exchange Commission and is hereby incorporated by reference in its entirety into
this Prospectus. A copy of the Fund's Statement of Additional Information may be
obtained without charge by calling (800) 421-5666, or for Telecommunication
Device for the Deaf at (800) 772-8889.
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED JULY 31, 1995.
<PAGE> 169
(Continued from previous page.)
The Fund currently offers three classes of its shares (the "Alternative
Sales Arrangements") which may be purchased at a price equal to their net asset
value per share, plus sales charges which, at the election of the investor, may
be imposed (i) at the time of purchase (the "Class A Shares") or (ii) on a
contingent deferred basis (Class A Share accounts over $1 million, "Class B
Shares" and "Class C Shares"). The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances.
Each class of shares pays ongoing distribution and service fees at an
aggregate annual rate of (i) for Class A Shares, up to 0.25% of the Fund's
average daily net assets attributable to the Class A Shares, (ii) for Class B
Shares, up to 1.00% of the Fund's average daily net assets attributable to the
Class B Shares and (iii) for Class C Shares up to 1.00% of the Fund's average
daily net assets attributable to the Class C Shares. Investors should understand
that the purpose and function of the deferred sales charge and the distribution
and service fees with respect to the Class A Share accounts over $1 million,
Class B Shares and Class C Shares are the same as those of the initial sales
charge and distribution and service fees with respect to the Class A Share
accounts below $1 million. Each share of the Fund represents an identical
interest in the investment portfolio of the Fund and has the same rights, except
that (i) each class of shares bears those distribution fees, service fees and
administrative expenses applicable to the respective class of shares as a result
of its sales arrangements, which will cause the different classes of shares to
have different expense ratios and to pay different rates of dividends, (ii) each
class has exclusive voting rights with respect to those provisions of the Fund's
Rule 12b-1 distribution plan which relate only to such class and (iii) the
classes have different exchange privileges. Class B Shares automatically will
convert to Class A Shares six years after the end of the calendar month in which
the investor's order to purchase was accepted, in the circumstances and subject
to the qualifications described in this Prospectus. See "Alternative Sales
Arrangements" and "Purchase of Shares."
2
<PAGE> 170
------------------------------------------------------------------------------
TABLE OF CONTENTS
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary............................................. 4
Shareholder Transaction Expenses............................... 7
Annual Fund Operating Expenses and Example..................... 8
Financial Highlights........................................... 10
The Fund....................................................... 12
Investment Objective and Policies.............................. 12
Municipal Securities........................................... 13
Investment Practices........................................... 16
Special Considerations Regarding the Fund...................... 20
Investment Advisory Services................................... 21
Alternative Sales Arrangements................................. 23
Purchase of Shares............................................. 25
Shareholder Services........................................... 34
Redemption of Shares........................................... 39
The Distribution and Service Plans............................. 42
Distributions from the Fund.................................... 44
Tax Status..................................................... 45
Fund Performance............................................... 48
Description of Shares of the Fund.............................. 49
Additional Information......................................... 49
</TABLE>
NO DEALER, SALESMAN 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 EITHER OF THE FUNDS, THE ADVISER, OR THE
DISTRIBUTOR. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER BY THE FUNDS 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
FUNDS TO MAKE SUCH AN OFFER IN SUCH JURISDICTION.
3
<PAGE> 171
------------------------------------------------------------------------------
PROSPECTUS SUMMARY
------------------------------------------------------------------------------
THE FUND. Van Kampen American Capital Municipal Income Fund (the "Fund") is a
separate diversified series of Van Kampen American Capital Tax Free Trust (the
"Trust"), an open-end management investment company organized as a Delaware
business trust. See "The Fund."
MINIMUM PURCHASE. $500 minimum initial investment for each class of shares and
$25 minimum for each subsequent investment for each class of shares (or less as
described under "Purchase of Shares").
INVESTMENT OBJECTIVE. The Fund's investment objective is to provide investors
with a high level of current income exempt from federal income tax, consistent
with preservation of capital.
INVESTMENT POLICY. The Fund seeks to achieve its investment objective by
investing at least 80% of its assets in a diversified portfolio of tax-exempt
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") in the case of long-term obligations, and have equivalent ratings in
the case of short-term obligations. Up to 20% of the Fund's total assets may be
invested in tax-exempt municipal securities rated, at the time of investment,
between BB and B-(inclusive) by S&P or between Ba and B3 (inclusive) by Moody's
(or equivalently rated short-term obligations) and unrated tax-exempt municipal
securities that the Fund's investment adviser believes are of comparable
quality. See "Special Considerations Regarding the Fund."
Municipal securities in which the Fund may invest include fixed and variable
rate securities, municipal notes, municipal leases, tax exempt commercial paper,
custodial receipts, participation certificates and derivative municipal
securities the terms of which include elements of, or are similar in effect to,
certain Strategic Transactions (as defined herein) in which the Fund may engage.
The Fund may invest up to 15% of its total assets in derivative variable rate
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range or capped floaters, whose rates are subject to
periodic of lifetime caps. There is no assurance that the Fund will achieve its
investment objective. Debt securities rated below investment grade are commonly
referred to as "junk bonds." The net asset value per share of the Fund may
increase or decrease depending on changes in interest rates and other factors
affecting the municipal credit markets. See "Investment Objective and Policies."
INVESTMENT PRACTICES. The Fund also may use various investment techniques
including engaging in risk management transactions and entering into when-issued
or delayed delivery transactions and various strategic transactions. Such
transactions entail certain risks. See "Municipal Securities" and "Investment
Practices." The Fund may invest a substantial portion of its assets in municipal
securities that
4
<PAGE> 172
pay interest that is subject to the federal alternative minimum tax. The Fund
may not be a suitable investment for investors who are already subject to the
federal alternative minimum tax or who would become subject to the federal
alternative minimum tax as a result of an investment in the Fund. See "Tax
Status."
INVESTMENT RESULTS. The investment results of the Fund since its inception are
shown in the table of "Financial Highlights."
ALTERNATIVE SALES ARRANGEMENTS. The Alternative Sales Arrangements permit an
investor to choose the method of purchasing shares that is more beneficial to
the investor, taking into account the amount of the purchase, the length of time
the investor expects to hold the shares and other circumstances. Investors
should consider such factors together with the amount of sales charges and
accumulated distribution and service fees with respect to each class of shares
that may be incurred over the anticipated duration of their investment in the
Fund. To assist investors in making this determination, the table under the
caption "Annual Fund Operating Expenses and Example" sets forth examples of the
charges applicable to each class of shares.
The Fund currently offers three classes of its shares which may be purchased
at a price equal to their net asset value per share plus sales charges which, at
the election of the investor, may be imposed either (i) at the time of purchase
("Class A Shares") or (ii) on a contingent deferred basis (Class A Share
accounts over $1 million, "Class B Shares," and "Class C Shares"). Class A Share
accounts over $1 million or otherwise subject to a contingent deferred sales
charge ("CDSC"), Class B Shares, and Class C Shares sometimes are referred to
herein collectively as "CDSC Shares."
Class A Shares. Class A Shares are subject to an initial sales charge equal to
4.75% of the public offering price (4.99% of the net amount invested), reduced
on investments of $100,000 or more. Class A Shares are subject to ongoing
distribution and service fees at an aggregate annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A Shares. Certain
purchases of Class A Shares qualify for reduced or no initial sales charges and
may be subject to a CDSC.
Class B Shares. Class B Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within six years of
purchase. Class B Shares are subject to a CDSC equal to 4.00% of the lesser of
the then current net asset value or the original purchase price on Class B
Shares redeemed during the first year after purchase, which charge is reduced
each year thereafter. Class B Shares are subject to ongoing distribution and
service fees at an aggregate annual rate of up to 1.00% of the Fund's average
daily net assets attributable to the Class B Shares. Class B Shares
automatically will convert to Class A Shares six years after the end of the
calendar month in which the investor's order to purchase was accepted, in the
circumstances and subject to the qualifications described in this Prospectus.
5
<PAGE> 173
Class C Shares. Class C Shares do not incur a sales charge when they are
purchased, but are subject to a sales charge if redeemed within the first year
after purchase. Class C Shares are subject to a CDSC equal to 1.00% of the
lesser of the then current net asset value or the original purchase price on
Class C Shares redeemed within the first year after purchase. Class C Shares are
subject to ongoing distribution and service fees at an aggregate annual rate of
up to 1.00% of the Fund's aggregate average daily net assets attributable to the
Class C Shares.
REDEMPTION. Class A Shares may be redeemed at net asset value, without charge,
subject to conditions set forth herein. CDSC Shares may be redeemed at net asset
value less a deferred sales charge which will vary among each class of CDSC
Shares and with the length of time a redeeming shareholder has owned such
shares. CDSC Shares redeemed after the expiration of the CDSC period applicable
to the respective class of CDSC Shares will not be subject to a deferred sales
charge. See "Redemption of Shares."
INVESTMENT ADVISER. Van Kampen American Capital Investment Advisory Corp. is
the investment adviser for the Fund. See "Investment Advisory Services."
DISTRIBUTOR. Van Kampen American Capital Distributors, Inc.
DISTRIBUTIONS FROM THE FUND. Distributions from net investment income are
declared daily and paid monthly; net realized capital gains, if any, are
distributed annually. Distributions with respect to each class of shares will be
calculated in the same manner on the same day and will be in the same amount
except that the different distribution and service fees and administrative
expenses relating to each class of shares will be borne exclusively by the
respective class of shares. See "Distributions from the Fund."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 174
------------------------------------------------------------------------------
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 the offering
price).................... 4.75%(1) None None
Maximum sales charge imposed
on reinvested dividends
(as a percentage of the
offering price)........... None None(3) None(3)
Deferred sales charge (as a
percentage of the lesser
of the original purchase
price or redemption
proceeds)................. None(2) Year Year
1--4.00% 1--1.00%
Year After--None
2--3.75%
Year
3--3.50%
Year
4--2.50%
Year
5--1.50%
Year
6--1.00%
After--None
Redemption fees (as a
percentage of amount
redeemed)................. None None None
Exchange fees............... None None None
</TABLE>
----------------
(1) Reduced on investments of $100,000 or more. See "Purchase of Shares -- Class
A Shares."
(2) Investments of $1 million or more are not subject to a sales charge at the
time of purchase, but a contingent deferred sales charge of 1.00% may be
imposed on redemptions made within one year of the purchase.
(3) CDSC Shares received as reinvested dividends are subject to a 12b-1 fee, a
portion of which may indirectly pay for the initial sales commission
incurred on behalf of the investor. See "The Distribution and Service
Plans."
7
<PAGE> 175
------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES AND EXAMPLE
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
SHARES SHARES SHARES
------- ------- -------
<S> <C> <C> <C>
Management Fees (as a percentage of
average daily net assets)............. .48% .48% .48%
12b-1 Fees (as a percentage of average
daily net assets)(1).................. .25% 1.00% 1.00%
Other expenses (as a percentage of
average daily net assets)............. .21% .22% .26%
Total (as a percentage of average daily
net
assets)............................... .94% 1.70% 1.74%
</TABLE>
----------------
(1) Includes a service fee of up to 0.25% (as a percentage of net asset value)
paid by the Fund as compensation for ongoing services rendered to investors.
With respect to each class of shares, amounts in excess of 0.25%, if any,
represent an asset based sales charge. The asset based sales charge with
respect to Class C Shares includes 0.75% (as a percentage of net asset
value) paid to investors' broker-dealers as sales compensation. As of June
30, 1995, the Board of Trustees of the Trust reduced 12b-1 and service fees
for the Fund's Class A Shares to 0.25%. See "The Distribution and Service
Plans."
8
<PAGE> 176
EXAMPLE:
<TABLE>
<CAPTION>
ONE THREE FIVE TEN
YEAR YEARS YEARS YEARS
---- ----- ---- ----
<S> <C> <C> <C> <C>
You would pay the following expenses on a
$1,000 investment, assuming (i) an
operating expense ratio of .94% for Class
A Shares, 1.70% for Class B Shares and
1.74% for Class C Shares, (ii) 5% annual
return and (iii) redemption at the end of
each time period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $57 $89 $107 $162*
Class C Shares............................ $28 $55 $ 94 $205
You would pay the following expenses on the
same $1,000 investment assuming no
redemption at the end of each period:
Class A Shares............................ $57 $76 $ 97 $157
Class B Shares............................ $17 $54 $ 92 $162*
Class C Shares............................ $18 $55 $ 94 $205
</TABLE>
----------------
* Based on conversion to Class A shares after six years.
The purpose of the foregoing table is to assist an investor in understanding
the various costs and expenses that an investor in the Fund will bear directly
or indirectly. The "Example" reflects expenses based on the "Annual Fund
Operating Expenses" table as shown above carried out to future years. The ten
year amount with respect to Class B Shares of the Fund reflects the lower
aggregate 12b-1 and service fees applicable to such shares after conversion of
Class A Shares. 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 LESSER THAN THOSE SHOWN. For a more complete description of such
costs and expenses, see "Investment Advisory Services" and "The Distribution and
Service Plans."
9
<PAGE> 177
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (for a share outstanding throughout the period)
--------------------------------------------------------------------------------
The following schedule presents financial highlights for one Class A Share, one
Class B Share and one Class C Share of the Fund outstanding throughout the
periods indicated. The financial highlights have been audited by KPMG Peat
Marwick LLP, independent certified public accountants, for each of the periods
indicated and their report thereon appears in the Fund's related Statement of
Additional Information. This information should be read in conjunction with the
financial statements and related notes thereto included in the related Statement
of Additional Information.
<TABLE>
<CAPTION>
CLASS A SHARES
--------------------------------------------------------------------- CLASS B
AUGUST 1,
1990 SHARES
(COMMENCEMENT ------------
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1994
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 16.164 $ 15.310 $ 15.071 $ 14.250 $14.263 $ 16.139
Net Investment Income.................... .886 .964 1.041 1.066 .406 .780
Net Realized and Unrealized Gain/Loss on
Investments............................ (1.907) .862 .374 .853 (.049) (1.890)
------ ------ ------ ------ ------ ------
Total from Investment Operations.......... (1.021) 1.826 1.415 1.919 .357 (1.110)
------ ------ ------ ------ ------ ------
Less:
Distributions from and in Excess of Net
Investment Income(2)................... .882 .972 1.044 1.098 .370 .768
Distributions from and in Excess of Net
Realized Gains(2)...................... .000 .000 .132 .000 .000 .000
------ ------ ------ ------ ------ ------
Total Distributions....................... .882 .972 1.176 1.098 .370 .768
------ ------ ------ ------ ------ ------
Net Asset Value, End of Period............ $ 14.261 $ 16.164 $ 15.310 $ 15.071 $14.250 $ 14.261
============ ============ ============ ============ =============== ============
Total Return (Non-annualized)(1).......... (6.37%) 12.20% 9.69% 13.98% 2.57% (6.96%)
Net Assets at End of Period (in
millions)................................ $ 495.8 $ 597.6 $ 463.6 $ 293.7 $ 146.6 $ 158.7
<CAPTION>
CLASS C SHARES
------------------------------
AUGUST 24, 1992 AUGUST 13, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1994 1993
------------ ---------------- ------------ ----------------
<S> <<C> <C> <C> <C>
Net Asset Value, Beginning of Period...... $ 15.308 $ 15.481 $ 16.141 $ 15.990
Net Investment Income.................... .852 .320 .783 .300
Net Realized and Unrealized Gain/Loss on
Investments............................ .845 (.033) (1.894) .171
------ ------ ------ ------
Total from Investment Operations.......... 1.697 .287 (1.111) .471
------ ------ ------ ------
Less:
Distributions from and in Excess of Net
Investment Income(2)................... .866 .328 .768 .320
Distributions from and in Excess of Net
Realized Gains(2)...................... .000 .132 .000 .000
------ ------ ------ ------
Total Distributions....................... .866 .460 .768 .320
------ ------ ------ ------
Net Asset Value, End of Period............ $ 16.139 $ 15.308 $ 14.262 $ 16.141
============ ================= ============ =================
Total Return (Non-annualized)(1).......... 11.33% 1.90% (6.97%) 2.96%
Net Assets at End of Period (in
millions)................................ $ 168.2 $ 48.4 $ 3.9 $ 4.1
</TABLE>
(Continued on following page)
See Financial Statements and Notes Thereto
10
<PAGE> 178
--------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS -- continued (for a share outstanding throughout the
period)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A SHARES
------------------------------------------------------------------------ CLASS B
AUGUST 1,
1990 SHARES
(COMMENCEMENT ------------
OF INVESTMENT
OPERATIONS)
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED TO YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1994
------------ ------------ ------------ ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)(1)............ .99% .87% .86% .59% .89% 1.70%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)...................... 5.93% 6.08% 6.76% 7.29% 7.11% 5.22%
Portfolio Turnover................. 74.96% 81.78% 91.57% 105.99% 108.79% 74.96%
<CAPTION>
CLASS C SHARES
------------------------------
AUGUST 24, 1992 AUGUST 13, 1993
(COMMENCEMENT OF (COMMENCEMENT OF
YEAR ENDED DISTRIBUTION) TO YEAR ENDED DISTRIBUTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1993 1992 1994 1993
------------ ---------------- ------------ ----------------
<S> <<C> <C> <C> <C>
Ratio of Expenses to Average Net
Assets (annualized)(1)............ 1.65% 1.66% 1.74% 1.85%
Ratio of Net Investment Income to
Average Net Assets(1)
(annualized)...................... 5.19% 5.23% 5.19% 3.95%
Portfolio Turnover................. 81.78% 91.57% 74.96% 81.78%
</TABLE>
----------------
(1) During the time period noted for Class C Shares, no expenses were assumed by
the investment adviser. If certain expenses had not been waived or assumed
by the investment adviser for Class A Shares and Class B Shares, total
return would have been lower and the ratios would have been as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Ratio of Expenses to
Average Net Assets
(annualized)................. -- .98% 1.00% 1.07% 1.19% --
Ratio of Net Investment Income
to Average Net Assets
(annualized)................. -- 5.97% 6.62% 6.81% 6.81% --
<CAPTION>
Ratio of Expenses to
(annualized)................. 1.73% 2.42% -- --
Ratio of Net Investment Income
to Average Net Assets
(annualized)................. 5.11% 4.48% -- --
<CAPTION>
Average Net Assets
</TABLE>
(2) Distributions in excess result from temporary differences inherent in the
recognition of interest income and capital gains under generally accepted
accounting principles and for federal income tax purposes.
See Financial Statements and Notes Thereto
11
<PAGE> 179
------------------------------------------------------------------------------
THE FUND
------------------------------------------------------------------------------
Van Kampen American Capital Municipal Income Fund (the "Fund") is a separate
diversified series of Van Kampen American Capital Tax Free Trust (the "Trust"),
which is an open-end management investment company, commonly known as a "mutual
fund," organized as a Delaware business trust. Mutual funds sell their shares to
investors and invest the proceeds in a portfolio of securities. A mutual fund
allows investors to pool their money with that of other investors in order to
obtain professional investment management. Mutual funds generally make it
possible for investors to obtain greater diversification of their investments
and to simplify their recordkeeping.
Van Kampen American Capital Investment Advisory Corp. (the "Adviser") provides
investment advisory and administrative services to the Fund. The Adviser and its
affiliates also manage other mutual funds distributed by Van Kampen American
Capital Distributors, Inc. (the "Distributor"). To obtain prospectuses and other
information on any of these other funds, please call the telephone number on the
cover page of the Prospectus.
------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
------------------------------------------------------------------------------
The investment objective of the Fund is to provide investors with a high level
of current income exempt from federal income tax, consistent with preservation
of capital. The Fund's investment objective is a fundamental policy and may not
be changed without shareholder approval. Under normal market conditions, the
Fund invests at least 80% of its total assets in tax-exempt municipal securities
rated investment grade. The Fund's policy with respect to ratings is not a
fundamental policy, and thus may be changed by the Trustees without shareholder
approval. See "Municipal Securities." The Fund intends, however, to maintain at
all times at least 80% of its total assets in tax-exempt municipal securities
rated investment grade or deemed by the investment adviser to be of comparable
quality at the time of investment. Investment grade securities are securities
rated BBB or higher by Standard & Poor's Ratings Group ("S&P") or Baa or higher
by Moody's Investors Service, Inc. ("Moody's") in the case of long-term
obligations, and have equivalent ratings in the case of short-term obligations.
According to published guidelines, securities rated BBB by S&P are regarded by
S&P as having an adequate capacity to pay interest and repay principal. Whereas
such securities normally exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more likely, in the opinion of
S&P, to lead to a weakened capacity to pay interest and repay principal for debt
in this category than in higher rated categories. According to published
guidelines, securities rated Baa by Moody's are considered by Moody's as medium
grade obligations. Such securities are, in the opinion of Moody's, neither
highly protected nor poorly secured. Interest payments and principal security
appear to Moody's to be adequate for the present but certain
12
<PAGE> 180
protective elements may be lacking or may be characteristically unreliable over
any great length of time. In the opinion of Moody's they lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Up to 20% of the Fund's total assets may be invested in tax-exempt municipal
securities rated, at the time of investment, between BB and B- (inclusive) by
S&P or between Ba and B3 (inclusive) by Moody's (or equivalently rated
short-term obligations) and unrated tax-exempt securities that the Adviser
considers to be comparable quality. These securities are below investment grade
and are regarded by S&P, on balance, as predominantly speculative with respect
to capacity to pay interest and repay principal in accordance with the terms of
the obligation. While in the opinion of S&P such securities will likely have
some quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions. These securities
are regarded by Moody's as generally lacking characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the securities' contract over any long period of time may, in the
opinion of Moody's, be small. Debt securities rated below investment grade are
commonly referred to as "junk bonds." For a description of S&P's and Moody's
ratings see the Statement of Additional Information. From time to time the Fund
temporarily may also invest up to 10% of its assets in tax exempt money market
funds. Such instruments will be treated as investments in municipal securities.
An investment in the Fund may not be appropriate for all investors. The Fund
is not intended to be a complete investment program, and investors should
consider their long-term investment goals and financial needs when making an
investment decision with respect to the Fund. An investment in the Fund is
intended to be a long-term investment and should not be used as a trading
vehicle.
------------------------------------------------------------------------------
MUNICIPAL SECURITIES
------------------------------------------------------------------------------
GENERAL. Tax-exempt municipal securities are debt obligations issued by or on
behalf of the governments of states, territories or possessions of the United
States, the District of Columbia and their political subdivisions, agencies and
instrumentalities, certain interstate agencies and certain territories of the
United States, the interest on which, in the opinion of bond counsel or other
counsel to the issuer of such securities, is exempt from federal income tax.
Under normal market conditions, up to 100% but not less than 80%, of the Fund's
assets will be invested in municipal securities. The foregoing is a fundamental
policy of the Fund and cannot be changed without approval of the shareholders of
the Fund.
The two principal classifications of municipal securities are "general
obligation" and "revenue" securities. "General obligation" securities are
secured by the issuer's pledge of its faith, credit and taxing power for the
payment of principal and interest. "Revenue" securities are usually payable only
from the revenues derived from a particular facility or class of facilities or,
in some cases, from the proceeds of a
13
<PAGE> 181
special excise tax or other specific revenue source. Industrial development
bonds are usually revenue securities, the credit quality of which is normally
directly related to the credit standing of the industrial user involved.
Within these principal classifications of municipal securities there are a
variety of categories of municipal securities, including fixed and variable rate
securities, municipal bonds, municipal notes, municipal leases, custodial
receipts, participation certificates and derivative municipal securities the
terms of which include elements of, or are similar in effect to, certain
Strategic Transactions (as defined below) in which the Fund may engage. Variable
rate securities bear rates of interest that are adjusted periodically according
to formulae intended to reflect market rates of interest and include securities
whose rates vary inversely with changes in market rates of interest. The Fund
will not invest more than 15% of its total assets in derivative municipal
securities such as inverse floaters, whose rates vary inversely with changes in
market rates of interest or range floaters or capped floaters whose rates are
subject to periodic or lifetime caps. Such securities may also pay a rate of
interest determined by applying a multiple to the variable rate. The extent of
increases and decreases in the value of securities whose rates vary inversely
with market rates of interest generally will be larger than comparable changes
in the value of such municipal securities generally will fluctuate in response
to changes in market rates of interest to a greater extent than the value of an
equal principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. Municipal notes include tax,
revenue and bond anticipation notes of short maturity, generally less than three
years, which are issued to obtain temporary funds for various public purposes.
Municipal leases are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Certain
municipal lease obligations may include "non-appropriation" clauses which
provide that the municipality has no obligation to make lease or installment
purchase payments in future years unless money is appropriated for such purpose
on a yearly basis. Custodial receipts are underwritten by securities dealers or
banks and evidence ownership of future interest payments, principal payments or
both on certain municipal securities. Participation certificates are obligations
issued by state or local governments or authorities to finance the acquisition
of equipment and facilities. They may represent participations in a lease, an
installment purchase contract, or a conditional sales contract. Some municipal
securities may not be backed by the faith, credit and taxing power of the
issuer. Certain of the municipal securities in which the Fund may invest
represent relatively recent innovations in the municipal securities markets.
While markets for such recent innovations progress through stages of
development, such markets may be less developed than more fully developed
markets for municipal securities. A more detailed description of the types of
municipal securities in which the Fund may invest is included in the Statement
of Additional Information.
The net asset value of the Fund will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the net asset value of the Fund can be expected to change
as general
14
<PAGE> 182
levels of interest rates fluctuate. When interest rates decline, the value of a
portfolio invested in fixed income securities generally can be expected to rise.
Conversely, when interest rates rise, the value of a portfolio invested in fixed
income securities generally can be expected to decline. Volatility may be
greater during periods of general economic uncertainty.
From time to time, proposals have been introduced before Congress that would
have the effect of reducing or eliminating the federal tax exemption on
municipal securities. If such a proposal were enacted, the ability of the Fund
to pay tax exempt interest dividends might be adversely affected.
LOWER GRADE MUNICIPAL SECURITIES. The Fund may invest up to 20% of its total
assets in lower grade tax-exempt municipal securities or in unrated municipal
securities considered by the Adviser to be of comparable quality. Lower grade
municipal securities are rated between BB and B- by S&P or between Ba and B3 by
Moody's, in each case inclusive of such rating categories. Higher yields are
generally available from municipal securities of such grade. With respect to
such 20% of the Fund's total assets, the Fund has not established any limit on
the percentage of its portfolio which may be invested in securities in any one
rating category.
Investors should carefully consider the risks of owning shares of an
investment company which invests in lower grade municipal securities before
making an investment in the Fund. The higher yield on certain securities held by
the Fund reflects a greater possibility that the financial condition of the
issuer, or adverse changes in general economic conditions, or both, may impair
the ability of the issuer to make payments of income and principal. See "Special
Considerations Regarding the Fund."
The Adviser seeks to minimize the risks involved in investing in lower grade
municipal securities through diversification and careful investment analysis. To
the extent that there is no established retail market for some of the lower
grade municipal securities in which the Fund may invest, trading in such
securities may be relatively inactive. The Adviser is responsible for
determining the net asset value of the Fund, subject to the supervision of the
Board of Trustees of the Trust. During periods of reduced market liquidity and
in the absence of readily available market quotations for lower grade municipal
securities held in the Fund's portfolio, the ability of the Adviser to value the
Fund's securities becomes more difficult and the Adviser's use of judgment may
play a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. The effects of adverse publicity and
investor perceptions may be more pronounced for securities for which no
established retail market exists as compared with the effects on securities for
which such a market does exist. Further, the Fund may have more difficulty
selling such securities in a timely manner and at their stated value than would
be the case for securities for which an established retail market does exist.
See "Special Considerations Regarding the Fund."
15
<PAGE> 183
SELECTION OF INVESTMENTS. The Adviser will buy and sell securities for the
Fund's portfolio with a view to seeking a high level of current income exempt
from federal income tax and will select securities which the Adviser believes
entail reasonable credit risk considered in relation to the investment policies
of the Fund. As a result, the Fund will not necessarily invest in the highest
yielding tax-exempt municipal securities permitted by the investment policies if
the Adviser determines that market risks or credit risks associated with such
investments would subject the Fund's portfolio to excessive risk. The potential
for realization of capital gains resulting from possible changes in interest
rates will not be a major consideration. There is no limitation as to the
maturity of municipal securities in which the Fund may invest. The Adviser may
adjust the average maturity of the Fund's portfolio from time to time, depending
on its assessment of the relative yields available on securities of different
maturities and its expectations of future changes in interest rates. Other than
for tax purposes, frequency of portfolio turnover will generally not be a
limiting factor if the Fund considers it advantageous to purchase or sell
securities. The Fund may have annual portfolio turnover rates in excess of 100%.
A high rate of portfolio turnover involves correspondingly greater brokerage
commission expenses or dealer costs than a lower rate, which expenses and costs
must be borne by the Fund and its shareholders. High portfolio turnover may also
result in the realization of substantial net short-term capital gains and any
distributions resulting from such gains will be taxable. See "Tax Status" in
this Prospectus and "Investment Policies and Restrictions" in the Statement of
Additional Information.
DEFENSIVE STRATEGIES. At times conditions in the markets for tax-exempt
municipal securities may, in the Adviser's judgment, make pursuing the Fund's
basic investment strategy inconsistent with the best interests of its
shareholders. At such times, the Adviser may use alternative strategies
primarily designed to reduce fluctuations in the value of the Fund's assets. In
implementing these "defensive" strategies, the Fund may invest to a substantial
degree in high-quality, short-term municipal obligations. If these high-quality,
short-term municipal obligations are not available or, in the Adviser's
judgment, do not afford sufficient protection against adverse market conditions,
the Fund may invest in taxable obligations. Such taxable obligations may
include: obligations of the U.S. Government, its agencies or instrumentalities;
other debt securities rated within the four highest grades by either S&P or
Moody's; commercial paper rated in the highest grade by either rating service;
certificates of deposit and bankers' acceptances; repurchase agreements with
respect to any of the foregoing investments; or any other fixed-income
securities that the Adviser considers consistent with such strategy.
------------------------------------------------------------------------------
INVESTMENT PRACTICES
------------------------------------------------------------------------------
In connection with the investment policies described above, the Fund also may
engage in strategic transactions and purchase and sell securities on a "when
issued" and "delayed delivery" basis. These investments entail risks. Strategic
transactions
16
<PAGE> 184
generally will not be treated as investments in tax-exempt municipal securities
for purposes of the Fund's 80% investment policy with respect thereto.
STRATEGIC TRANSACTIONS. The Fund may purchase and sell derivative instruments
such as exchange-listed and over-the-counter put and call options on securities,
financial futures, fixed-income indices and other financial instruments,
purchase and sell financial futures contracts and enter into various interest
rate transactions such as swaps, caps, floors or collars. Collectively, all of
the above are referred to as "Strategic Transactions." Strategic Transactions
may be used to attempt to protect against possible changes in the market value
of securities held in or to be purchased for the Fund's portfolio resulting from
securities markets, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities. Any or all of these investment
techniques may be used at any time and there is no particular strategy that
dictates the use of one technique rather than another, as use of any Strategic
Transaction is a function of numerous variables including market conditions. The
ability of the Fund to utilize these Strategic Transactions successfully will
depend on the Adviser's ability to predict pertinent market movements, which
cannot be assured. The Fund will comply with applicable regulatory requirements
when implementing these strategies, techniques and instruments. Strategic
Transactions involving financial futures and options thereon will be purchased,
sold or entered into only for bona fide hedging, risk management or portfolio
management purposes and not for speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale of portfolio securities at inopportune times or for prices
other than at current market values, limit the amount of appreciation the Fund
can realize on its investments or cause the Fund to hold a security it might
otherwise sell. The use of options and futures transactions entails certain
other risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of the Fund creates the possibility that losses on the hedging
instrument may be greater than gains in the value of the Fund's position. In
addition, futures and options markets may not be liquid in all circumstances and
certain over-the-counter options may have no markets. As a result, in certain
markets, the Fund might not be able to close out a transaction without incurring
substantial losses, if at all. Although the contemplated use of these futures
contracts and options thereon should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time they tend to limit
any potential gain which might result from an increase in value of such
position. Finally, the daily variation margin requirements for futures contracts
would create a greater ongoing
17
<PAGE> 185
potential financial risk than would purchases of options, where the exposure is
limited to the cost of the initial premium. Losses resulting from the use of
Strategic Transactions would reduce net asset value, and possibly income, and
such losses can be greater than if the Strategic Transactions had not been
utilized. The Strategic Transactions that the Fund may use and some of their
risks are described more fully in the Fund's Statement of Additional
Information.
Income earned or deemed to be earned, if any, by the Fund from its Strategic
Transactions will generally be taxable income of the Fund. See "Tax Status."
"WHEN ISSUED" AND "DELAYED DELIVERY" TRANSACTIONS. The Fund may also purchase
and sell municipal securities on a "when issued" and "delayed delivery" basis.
No income accrues to the Fund on municipal securities in connection with such
purchase transactions prior to the date the Fund actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher or lower than yields on the municipal securities obtained
pursuant to such transactions. Because the Fund relies on the buyer or seller,
as the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Fund is the
buyer in such a transaction, however, it will maintain, in a segregated account
with its custodian, cash or high-grade municipal portfolio securities having an
aggregate value equal to the amount of such purchase commitments until payment
is made. The Fund will make commitments to purchase municipal securities on such
basis only with the intention of actually acquiring these securities, but the
Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in "when issued" and
"delayed delivery" transactions, it will do so for the purpose of acquiring
securities for the Fund's portfolio consistent with the Fund's investment
objective and policies and not for the purposes of investment leverage. No
specific limitation exists as to the percentage of the Fund's assets which may
be used to acquire securities on a "when issued" or "delayed delivery" basis.
OTHER PRACTICES. The Fund has no restrictions on the maturity of municipal
bonds in which it may invest. The Fund will seek to invest in municipal bonds of
such maturities that, in the judgment of the Fund and the Adviser, will provide
a high level of current income consistent with liquidity requirements and market
conditions.
The Fund may borrow amounts up to 5% of its net assets in order to pay for
redemptions when liquidation of portfolio securities is considered
disadvantageous or inconvenient and may pledge up to 10% of its net assets to
secure such borrowings.
18
<PAGE> 186
The Fund generally will not invest more than 25% of its total assets in any
industry, nor will the Fund generally invest more than 5% of its assets in the
securities of any single issuer. Governmental issuers of municipal securities
are not considered part of any "industry." However, municipal securities backed
only by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to such obligations. It is nonetheless possible that the Fund may invest
more than 25% of its assets in a broader segment of the municipal securities
market, such as revenue obligations of hospitals and other health care
facilities, housing agency revenue obligations, or airport revenue obligations
if the Adviser determines that the yields available from obligations in a
particular segment of the market justified the additional risks associated with
a large investment in such segment. Although such obligations could be supported
by the credit of governmental users, or by the credit of nongovernmental users
engaged in a number of industries, economic, business, political and other
developments generally affecting the revenues of such users (for example,
proposed legislation or pending court decisions affecting the financing of such
projects and market factors affecting the demand for their services or products)
may have a general adverse effect on all municipal securities in such a market
segment. The Fund reserves the right to invest more than 25% of its assets in
industrial development bonds or in issuers located in the same state, although
it has no present intention to invest more than 25% of its assets in issuers
located in the same state. If the Fund were to invest more than 25% of its
assets in issuers located in the same state, it would be more susceptible to
adverse economic, business, or regulatory conditions in that state.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION. The Adviser is responsible
for decisions to buy and sell securities for the Fund, the selection of brokers
and dealers to effect the transactions and the negotiation of prices and any
brokerage commissions. The securities in which the Fund invests are traded
principally in the over-the-counter market. In the over-the-counter market,
securities are generally traded on a net basis with dealers acting as principal
for their own accounts without a stated commission, although the price of the
security usually includes a mark-up to the dealer. Securities purchased in
underwritten offerings generally include, in the price, a fixed amount of
compensation for the managers, underwriters and dealers. The Fund may also
purchase certain money market instruments directly from an issuer, in which case
no commissions or discounts are paid. Purchases and sales of bonds on a stock
exchange are effected through brokers who charge a commission for their
services.
The Adviser is responsible for effecting securities transactions of the Fund
and will do so in a manner deemed fair and reasonable to shareholders of the
Fund and not according to any formula. The Adviser's primary considerations in
selecting the manner of executing securities transactions for the Fund will be
prompt execution of orders, the size and breadth of the market for the security,
the reliability, integrity and financial condition and execution capability of
the firm, the size of and difficulty in executing the order, and the best net
price. There are many instances
19
<PAGE> 187
when, in the judgment of the Adviser, more than one firm can offer comparable
execution services. In selecting among such firms, consideration is given to
those firms which supply research and other services in addition to execution
services. However, it is not the policy of the Adviser, absent special
circumstances, to pay higher commissions to a firm because it has supplied such
services.
In effecting purchases and sales of the Fund's portfolio securities, the
Adviser and the Fund may place orders with and pay brokerage commissions to
brokers, including brokers which may be affiliated with the Fund, the Adviser
and the Distributor or dealers participating in the offering of the Fund's
shares. In addition, in selecting among firms to handle a particular
transaction, the Adviser and the Fund may take into account whether the firm has
sold or is selling shares of the Fund. See "Portfolio Transactions and Brokerage
Allocation" in the Statement of Additional Information for more information.
------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS REGARDING THE FUND
------------------------------------------------------------------------------
In normal circumstances, the Fund may invest up to 20% of its total assets in
lower grade tax-exempt municipal securities or in unrated municipal securities
considered by the Adviser to be of comparable quality. Lower grade municipal
securities are rated between BB and B- by S&P or between Ba and B3 by Moody's,
in each case inclusive of such rating categories. Investment in lower grade
municipal securities involves special risks as compared with investment in
higher grade municipal securities. The market for lower grade municipal
securities is considered to be less liquid than the market for investment grade
municipal securities which may adversely affect the ability of the Fund to
dispose of such securities in a timely manner at a price which reflects the
value of such security in the Adviser's judgement. The market price for less
liquid securities tends to be more volatile than the market price for more
liquid securities. Illiquid securities and the absence of readily available
market quotations with respect thereto may make the Adviser's valuation of such
securities more difficult, and the Adviser's judgment may play a greater role in
the valuation of the Fund's securities. Lower grade municipal securities
generally involve greater credit risk than higher grade municipal securities and
are more sensitive to adverse economic changes, significant increases in
interest rates and individual issuer developments. Because issuers of lower
grade municipal securities frequently choose not to seek a rating of their
municipal securities, the Fund will rely more heavily on the Adviser's ability
to determine the relative investment quality of such securities than if the Fund
invested exclusively in higher grade municipal securities. The Fund may, if
deemed appropriate by the Adviser, retain a security whose rating has been
downgraded below B- by S&P or below B3 by Moody's, or whose rating has been
withdrawn. More detailed information concerning the risks associated with
instruments in lower grade municipal securities is included in the Fund's
Statement of Additional Information.
20
<PAGE> 188
The Fund may invest a substantial portion of its assets in municipal
securities that pay interest that is subject to the federal alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the federal alternative minimum tax or who would become subject to
the federal alternative minimum tax as a result of an investment in the Fund.
The table below sets forth the percentages of the Fund's assets invested
during the fiscal year ended December 31, 1994 in the various Moody's and S&P
rating categories and in unrated securities determined by the Adviser to be of
comparable quality. The percentages are based on the dollar-weighted average of
credit ratings of all municipal securities held by the Fund during the 1994
fiscal year, computed on a monthly basis.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
---------------------------------------------------
UNRATED SECURITIES OF
RATED SECURITIES COMPARABLE QUALITY
RATING AS A PERCENTAGE OF AS A PERCENTAGE OF
CATEGORY PORTFOLIO VALUE PORTFOLIO VALUE
---------------------------------- ---------------------- -------------------------
<S> <C> <C>
AAA/Aaa........................... 39.02% 0.00%
AA/Aa............................. 8.05 0.00
A/A............................... 14.77 0.00
BBB/Baa........................... 18.18 12.02
BB/Ba............................. 3.13 2.41
B/B............................... 0.32 1.48
CCC/Caa........................... 0.00 0.00
CC/Ca............................. 0.00 0.00
C/C............................... 0.00 0.00
D................................. 0.00 0.62
------ ------
Percentage of Rated and Unrated
Securities...................... 83.47% 16.53%
================= ===================
</TABLE>
The portfolio composition shown in the table above reflects the allocation of
assets by the Fund during periods of relative instability in the market for
lower grade securities. The percentage of the Fund's assets invested in
securities of various grades may from time to time vary substantially from those
set forth above.
------------------------------------------------------------------------------
INVESTMENT ADVISORY SERVICES
------------------------------------------------------------------------------
THE ADVISER. Van Kampen American Capital Investment Advisory Corp. (the
"Adviser") is the investment adviser for the Fund. The Adviser is a wholly-owned
subsidiary of Van Kampen American Capital, Inc. ("Van Kampen American Capital").
Van Kampen American Capital is a diversified asset management company with more
than two million retail investor accounts, extensive capabilities for managing
institutional portfolios, and over $50 billion under management or supervision.
Van Kampen American Capital's more than 40 open-end and 38
21
<PAGE> 189
closed-end funds and more than 2,700 unit investment trusts are professionally
distributed by leading financial advisers nationwide.
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 7% of the common stock of
VK/AC Holding, Inc. and have the right to acquire, upon the exercise of options,
approximately an additional 11% of the common stock of VK/AC Holding, Inc.
Presently, and after giving effect to the exercise of such options, no officer
or trustee of the Fund owns or would own 5% or more of the common stock of VK/AC
Holding, Inc.
ADVISORY AGREEMENT. The business and affairs of the Fund will be managed under
the direction of the Board of Trustees of the Trust, of which the Fund is a
separate series. Subject to their authority, the Adviser and the respective
officers of the Fund will supervise and implement the Fund's investment
activities and will be responsible for overall management of the Fund's business
affairs. The Fund will pay the Adviser a fee equal to a percentage of the
average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
AVERAGE DAILY NET ASSETS % PER ANNUM
--------------------------------------------------------- -----------
<S> <C>
First $500 million....................................... 0.500 of 1%
Over $500 million........................................ 0.450 of 1%
</TABLE>
Under its investment advisory agreement with the Adviser, the Fund has agreed
to assume and pay the charges and expenses of the Fund's operation, including
the compensation of the Trustees of the Trust (other than those who are
affiliated persons, as defined in the Investment Company Act of 1940, as amended
(the "1940 Act"), of the Adviser, the Distributor or Van Kampen American
Capital), the charges and expenses of independent accountants, legal counsel,
any transfer or dividend disbursing agent and the custodian (including fees for
safekeeping of securities), costs of calculating net asset value, costs of
acquiring and disposing of portfolio securities, interest (if any) on
obligations incurred by the Fund, costs of share certificates, membership dues
in the Investment Company Institute or any similar organization, reports and
notices to shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes and fees to
federal, state or other governmental agencies.
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<PAGE> 190
PERSONAL INVESTING POLICIES. The Fund and the Adviser have adopted Codes of
Ethics designed to recognize the fiduciary relationship between the Fund and the
Adviser and its employees. The Codes permit trustees/directors, officers and
employees to buy and sell securities for their personal accounts subject to
procedures designed to prevent conflicts of interest including, in some
instances, preclearance of trades.
PORTFOLIO MANAGEMENT. David C. Johnson, a Senior Vice President of the
Adviser, is primarily responsible for the day-to-day management of the Fund's
portfolio. Mr. Johnson has been employed by the Adviser for the last five years.
------------------------------------------------------------------------------
ALTERNATIVE SALES ARRANGEMENTS
------------------------------------------------------------------------------
The Alternative Sales Arrangements permit an investor to choose the method of
purchasing shares that is more beneficial to the investor, taking into account
the amount of the purchase, the length of time the investor expects to hold the
shares, whether the investor wishes to receive dividends in cash or to reinvest
them in additional shares of the Fund, and other circumstances. Investors should
consider such factors together with the amount of sales charges and accumulated
distribution fees with respect to each class of shares that may be incurred over
the anticipated duration of their investment in the Fund.
The Fund offers three classes of shares, designated Class A Shares, Class B
Shares and Class C Shares. Shares of each class are offered at a price equal to
their net asset value per share plus a sales charge which, at the election of
the purchaser, may be imposed (a) at the time of purchase ("Class A Shares") or
(b) on a contingent deferred basis (Class A Share accounts over $1 million,
"Class B Shares" and "Class C Shares"). Class A Share accounts over $1 million
or otherwise subject to a contingent deferred sales charge ("CDSC"), Class B
Shares and Class C Shares sometimes are referred to herein collectively as
"Contingent Deferred Sales Charge Shares" or "CDSC Shares."
The minimum initial investment with respect to each class of shares is $500.
The minimum subsequent investment with respect to each class of shares is $25.
It is presently the policy of the Distributor, not to accept any order for Class
B Shares or Class C Shares in an amount of $1 million or more because it
ordinarily will be more advantageous for an investor making such an investment
to purchase Class A Shares.
An investor should carefully consider the sales charges applicable to each
class of shares and the estimated period of their investment to determine which
class of shares is more beneficial for the investor to purchase. For example,
investors who would qualify for a significant purchase price discount from the
maximum sales charge on Class A Shares may determine that payment of such a
reduced front-end sales charge is superior to electing to purchase Class B
Shares or Class C Shares, each with no front-end sales charge but subject to a
CDSC and a higher aggregate distribution and service fee. However, because
initial sales charges are deducted at the time of purchase of Class A Share
accounts under $1 million, a purchaser of
23
<PAGE> 191
such Class A Shares would not have all of his or her funds invested initially
and, therefore, would initially own fewer shares than if Class B Shares or Class
C Shares had been purchased. On the other hand, an investor whose purchase would
not qualify for price discounts applicable to Class A Shares and intends to
remain invested until after the expiration of the applicable CDSC may wish to
defer the sales charge and have all his or her funds initially invested in Class
B Shares or Class C Shares. If such an investor anticipates that he or she will
redeem such shares prior to the expiration of the CDSC period applicable to
Class B Shares, the investor may wish to acquire Class C Shares. Investors must
weigh the benefits of deferring the sales charge and having all of their funds
invested against the higher aggregate distribution and service fee applicable to
Class B Shares and Class C Shares (discussed below). Investors who intend to
hold their shares for a significantly long time may not wish to continue to bear
the ongoing distribution and service expenses of Class C Shares which in the
aggregate, eventually would exceed the aggregate amount of initial sales charge
and distribution and service expenses applicable to Class A Shares, irrespective
of the fact that a CDSC would eventually not apply to a redemption of such Class
C Shares.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except each class of shares (i)
bears those distribution fees, service fees and administrative expenses
applicable to the respective class of shares as a result of its sales
arrangements, (ii) has exclusive voting rights with respect to those provisions
of the Fund's Rule 12b-1 distribution plan which relate only to such class and
(iii) has a different exchange privilege. Only the Class B Shares are subject to
a conversion feature (discussed below). Generally, a class of shares subject to
a higher ongoing distribution fee, service fee or, where applicable, the
conversion feature will have a higher expense ratio and pay lower dividends than
a class of shares subject to a lower ongoing distribution fee, service fee or
not subject to the conversion feature. The per share net asset values of the
different classes of shares are expected to be substantially the same; from time
to time, however, the per share net asset values of the classes may differ. The
net asset value per share of each class of shares of the Fund will be determined
as described in this Prospectus under "Purchase of Shares -- Net Asset Value."
The administrative expenses that may be allocated to a specific class of
shares may consist of (i) transfer agency expenses attributable to a specific
class of shares, which expenses typically will be higher with respect to classes
of shares subject to the conversion feature; (ii) printing and postage expenses
related to preparing and distributing materials such as shareholder reports,
prospectuses and proxy statements to current shareholders of a specific class;
(iii) Securities and Exchange Commission (the "SEC") registration fees incurred
by a class of shares; (iv) the expense of administrative personnel and services
as required to support the shareholders of a specific class; (v) Trustees' fees
or expense incurred as a result of issues relating to one class of shares; (vi)
accounting expenses relating solely to one class of shares; and (vii) any other
incremental expenses subsequently identified that should be properly allocated
to one or more classes of shares that shall be
24
<PAGE> 192
approved by the SEC pursuant to an amended exemptive order. All such expenses
incurred by a class will be borne on a pro rata basis by the outstanding shares
of such class. All allocations of administrative expenses to a particular class
of shares will be limited to the extent necessary to preserve the Fund's
qualification as a regulated investment company under the Internal Revenue Code
of 1986, as amended (the "Code").
------------------------------------------------------------------------------
PURCHASE OF SHARES
------------------------------------------------------------------------------
The Fund offers shares for sale to the public on a continuous basis through
Van Kampen American Capital Distributors, Inc. (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") acting as securities dealers ("dealers") and
through NASD members acting as brokers for investors ("brokers") or eligible
non-NASD members acting as agents for investors ("financial intermediaries").
The Fund reserves the right to suspend or terminate the continuous public
offering of its shares at any time and without prior notice.
The Fund's shares are offered at the net asset value per share next computed
after an investor places an order to purchase directly with the investor's
broker, dealer or financial intermediary or directly with the Distributor plus
any applicable sales charge. Sales personnel or brokers, dealers and financial
intermediaries distributing the Fund's shares may receive different compensation
for selling different classes of shares. It is the responsibility of the
investor's broker, dealer or financial intermediary to transmit the order to the
Distributor. Because the Fund generally will determine net asset value once each
business day as of the close of business, purchase orders placed through an
investor's broker, dealer or financial intermediary must be transmitted to the
Distributor by such broker, dealer or financial intermediary prior to such time
in order for the investor's order to be fulfilled on the basis of the net asset
value to be determined that day. Any change in the purchase price due to the
failure of the Distributor to receive a purchase order prior to such time must
be settled between the investor and the broker, dealer or financial intermediary
submitting the order.
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 intermediary at the public offering price during
such programs. Other programs provide, among other things and subject to certain
conditions, for certain favorable distribution arrangements for shares of the
Fund. Also, the Distributor in its discretion may from time to time, pursuant to
objective criteria established by it,
25
<PAGE> 193
pay fees to, and sponsor business seminars for, qualifying brokers, dealers or
financial intermediaries for certain services or activities which are primarily
intended to result in sales of shares of the Fund. Fees may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
invited registered representatives and members of their families to locations
within or outside of the United States for meetings or seminars of a business
nature. Such fees paid for such services and activities with respect to the Fund
will not exceed in the aggregate 1.25% of the average total daily net assets of
the Fund on an annual basis. In addition, the Distributor may provide additional
compensation to Edward D. Jones & Co. ("Edward D. Jones") or an affiliate
thereof based on a combination of its sales of shares and increases in assets
under management. Such payments to brokers, dealers and financial intermediaries
for sales contests, other sales programs and seminars are made by the
Distributor out of its own assets and not out of the assets of the Fund. These
programs will not change the price an investor pays for shares or the amount
that the Fund will receive from such sale.
CLASS A SHARES
The public offering price of Class A Shares is equal to the net asset value
per share plus an initial sales charge which is a variable percentage of the
offering price depending upon the amount of the sale. The table below shows
total sales charges and dealer concessions reallowed to dealers and agency
commissions paid to brokers with respect to sales of Class A Shares. The sales
charge is allocated between an investor's broker, dealer or financial
intermediary and the Distributor. As indicated previously, at the discretion of
the Distributor, the entire sales charge may be reallowed to such broker, dealer
or financial intermediary. The staff of the SEC has taken the position that
brokers, dealers or financial intermediaries who receive 90% or more of the
sales charge may be deemed to be "underwriters" as that term is defined in the
Securities Act of 1933.
SALES CHARGE TABLE
<TABLE>
<CAPTION>
DEALER
CONCESSION
OR AGENCY
TOTAL SALES CHARGE COMMISSION
---------------------------------- --------------
SIZE OF TRANSACTION PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AT OFFERING PRICE OFFERING PRICE NET ASSET VALUE OFFERING PRICE
<S> <C> <C> <C>
--------------------------------------------------------------------------------------
Less than $100,000................ 4.75% 4.99% 4.25%
$100,000 but less than $250,000... 3.75 3.90 3.25
$250,000 but less than $500,000... 2.75 2.83 2.25
$500,000 but less than
$1,000,000...................... 2.00 2.04 1.75
$1,000,000 or more*............... * * *
</TABLE>
------------------------------------------------------------------------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, although for such investments the Fund imposes a contingent
deferred sales charge of 1.00% on redemptions made within one year of the
purchase. A commission will be paid to dealers who initiate and are
responsible for purchases of $1 million or more as follows: 1.00% 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. See "Purchase of Shares -- Deferred
Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
26
<PAGE> 194
QUANTITY DISCOUNTS
Investors purchasing Class A Shares may, under certain circumstances, be
entitled to pay reduced sales charges. The circumstances under which such
investors may pay reduced sales charges are described below.
Investors, or their brokers, dealers or financial intermediaries, must notify
the Fund whenever a quantity discount is applicable to purchases. Upon such
notification, an investor will receive the lowest applicable sales charge.
Quantity discounts may be modified or terminated at any time. For more
information about quantity discounts, investors should contact their broker,
dealer or financial intermediary or the Distributor.
As used herein, "any person" eligible for a reduced sales charge includes an
individual, their spouse and minor children (and any trust or custodial accounts
for their benefit) 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 is 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 ("Money Market Fund"), Van Kampen American Capital Tax Free
Money Fund ("Tax Free Money Fund"), Van Kampen American Capital Reserve Fund
("Reserve Fund") 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 at any one time in Class
A Shares of the Fund alone, or in combination with other shares of the Fund and
shares of other Participating Funds although other Participating Funds may have
different sales charges.
CUMULATIVE PURCHASE DISCOUNT. The size of investment shown in the preceding
table may also be determined by combining the amount being invested in Class A
Shares of the Fund with other shares of the Fund and shares of Participating
Funds plus the current offering price of all shares of the Fund and other
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 amount being invested 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 includes the amount
of intended purchases of Class A Shares of the Fund with other shares of the
Fund and shares of the Participating Funds plus the value of all shares of the
Fund and other Participating Funds previously purchased during such 13-month
period and still owned. An investor may elect to compute the 13-month period
starting up to 90 days before the date of execution of a Letter of Intent. Each
investment made during the period receives the reduced sales charge applicable
to the total amount of
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<PAGE> 195
the investment goal. If trades not initially made under a Letter of Intent
subsequently qualify for a lower sales charge through the 90-day back-dating
provision, an adjustment will be made at the expiration of the Letter of Intent
to give effect to the lower charge. If the goal is not achieved within the
13-month period, the investor must pay the difference between the charges
applicable to the purchases made and the charges previously paid. When an
investor signs a Letter of Intent, shares equal to at least 5% of the total
purchase amount of the level selected will be restricted from sale or redemption
by the investor until the Letter of Intent is satisfied or any additional sales
charges have been paid; if the Letter of Intent is not satisfied by the investor
and any additional sales charges are not paid, sufficient restricted shares will
be redeemed by the Fund to pay such charges. Additional information is contained
in the application accompanying this Prospectus.
OTHER PURCHASE PROGRAMS
Purchasers of Class A Shares may be entitled to reduced initial sales charges
in connection with unit trust reinvestment programs and purchases by registered
representatives of selling firms or purchases by persons affiliated with the
Fund or the Distributor. The Fund reserves the right to modify or terminate
these arrangements at any time.
UNIT TRUST REINVESTMENT PROGRAMS. The Fund permits unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Fund with no minimum initial or subsequent investment requirement, and
with a lower sales charge if the administrator of an investor's unit investment
trust program meets certain uniform criteria relating to cost savings by the
Fund and the Distributor. The total sales charge for all investments made from
unit trust distributions will be 1.00% 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 broker, dealer or financial intermediary or the Distributor.
The administrator of such a unit investment trust must have an agreement with
the Distributor pursuant to which the administrator will (1) submit a single
bulk order and make payment with a single remittance for all investments in the
Fund during each distribution period by all investors who choose to invest in
the Fund through the program and (2) provide the Fund's transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
As further requirements for obtaining these special benefits, the Fund also
requires that all dividends and other distributions by the Fund be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Fund will send
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<PAGE> 196
account activity statements to such participants on a monthly basis only, even
if their investments are made more frequently.
NAV PURCHASE OPTIONS. Class A Shares of the Fund may be purchased at net asset
value, upon written assurance that the purchase is made for investment purposes
and that the shares will not be resold except through redemption by the Fund,
by:
(1) Current or retired Trustees/Directors of funds advised by the Adviser, Van
Kampen American Capital Asset Management, Inc. 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 Class A Shares of the Fund alone, or in
any combination of shares of the Fund and shares of other Participating
Funds as described herein under "Purchase of Shares -- Class A Shares --
Quantity Discounts," during the 13-month period commencing with the first
investment pursuant hereto equals at least $1 million. The Distributor may
pay brokers, dealers or financial intermediaries through which purchases
are made an amount up to 0.50% of the amount invested, over a twelve-month
period following such transaction.
(5) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10 million or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(6) Accounts as to which a broker, dealer or financial intermediary charges an
account management fee ("wrap accounts"), provided the broker, dealer or
financial intermediary has a separate agreement with the Distributor.
(7) Investors purchasing shares of the Fund with redemption proceeds from
other mutual fund complexes on which the investor has paid a front-end
sales charge or was subject to a deferred sales charge, whether or not
paid, if such redemption has occurred no more than 30 days prior to such
purchase.
(8) Full service participant directed profit sharing and money purchase plans,
full service 401(k) plans, or similar full service recordkeeping programs
29
<PAGE> 197
made available through Van Kampen American Capital Trust Company with at
least 50 eligible employees or investing at least $250,000 in the
Participating Funds, Money Market Fund, Tax Free Money Fund or Reserve
Fund. For such investments the Fund imposes a contingent deferred sales
charge of 1.00% in the event of redemptions within one year of the
purchase other than redemptions required to make payments to participants
under the terms of the plan. The contingent deferred sales charge incurred
upon certain redemptions is paid to the Distributor in reimbursement for
distribution-related expenses. A commission will be paid to dealers who
initiate and are responsible for such purchases as follows: 1.00% on sales
to $5 million, plus 0.50% on the next $5 million, plus 0.25% on the excess
over $10 million.
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 brokers, dealers or financial intermediaries as described above or
directly with the Fund's transfer agent, the investment adviser, trust company
or bank trust department, provided that the Fund's transfer agent receives
federal funds for the purchase by the close of business on the next business day
following acceptance of the order. An authorized broker, dealer or financial
intermediary 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. The Fund may terminate, or amend the terms of, offering shares
of the Fund at net asset value to such groups at any time.
DEFERRED SALES CHARGE ALTERNATIVES
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1 million or more, Class B Shares or Class C Shares. The
public offering price of a CDSC Share is equal to the net asset value per share
without the imposition of a sales charge at the time of purchase. CDSC Shares
are sold without an initial sales charge so that the Fund may invest the full
amount of the investor's purchase payment. The Distributor will compensate
brokers, dealers and financial intermediaries participating in the continuous
public offering of the CDSC Shares out of its own assets, and not out of assets
of the Fund, as a percentage rate of the dollar value of the CDSC Shares
purchased from the Fund by such brokers, dealers and financial intermediaries
which percentage rate will be equal to (i) with respect to Class A Shares, 1.00%
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; (ii) 4.00% with respect to
Class B Shares; and (iii) 1.00% with respect to Class C Shares. Such
compensation will not change the price an investor will pay for CDSC Shares or
the amount that the Fund will receive from such sale.
CDSC Shares redeemed within a specified period of time generally will be
subject to a contingent deferred sales charge at the rates set forth below. The
30
<PAGE> 198
amount of the contingent deferred sales charge will vary depending on (i) the
class of CDSC Shares to which such shares belong and (ii) the number of years
from the time of payment for the purchase of the CDSC Shares until the time of
their redemption. The charge will be assessed on an amount equal to the lesser
of the then current market value or the original purchase price of the CDSC
Shares being redeemed. Accordingly, no sales charge will be imposed on increases
in net asset value above the initial purchase price. In addition, no contingent
deferred sales charge will be assessed on CDSC Shares derived from reinvestment
of dividends or capital gains distributions. Solely for purposes of determining
the number of years from the time of any payment for the purchases of CDSC
Shares, all payments during a month will be aggregated and deemed to have been
made on the last day of the month.
Proceeds from the contingent deferred sales charge applicable to a class of
CDSC Shares are paid to the Distributor and are used by the Distributor to
defray its expenses related to providing distribution related services to the
Fund in connection with the sale of shares of such class of CDSC Shares, such as
the payment of compensation to selected dealers and agents and for selling such
shares. The combination of the contingent deferred sales charge and the
distribution and service fees facilitates the ability of the Fund to sell such
CDSC Shares without a sales charge being deducted at the time of purchase.
In determining whether a contingent deferred sales charge is applicable to a
redemption of CDSC Shares, it will be assumed that the redemption is made first
of any CDSC Shares acquired pursuant to reinvestment of dividends or
distributions, second of CDSC Shares that have been held for a sufficient period
of time such that the contingent deferred sales charge no longer is applicable
to such shares, third of Class A Shares in the shareholder's Fund account that
have converted from Class B Shares, if any, and fourth of CDSC Shares held
longest during the period of time that a contingent deferred sales charge is
applicable to such CDSC Shares. The charge will not be applied to dollar amounts
representing an increase in the net asset value since the time of purchase.
To provide an example, assume an investor purchased 100 Class B 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 10
additional Class B Shares upon dividend reinvestment. If at such time the
investor makes his first redemption of 50 shares (proceeds of $600), 10 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 will be charged at a rate of 3.75% (the
applicable rate in the second year after purchase).
CLASS A SHARE PURCHASES OF $1 MILLION OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1 million or more,
although for such investments the Fund imposes a contingent deferred sales
charge of 1.00%
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<PAGE> 199
on redemptions made within one year of the purchase. A commission will be paid
to dealers who initiate and are responsible for purchases of $1 million or more
as follows: 1% 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.
CLASS B SHARES. Class B Shares redeemed within six years of purchase generally
will be subject to a contingent deferred sales charge at the rates set forth
below, charged as a percentage of the dollar amount subject thereto:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
SALES CHARGE AS A
PERCENTAGE OF
DOLLAR AMOUNT
YEAR SINCE PURCHASE SUBJECT TO CHARGE
------------------- -------------------
<S> <C> <C>
First................................................ 4.00%
Second............................................... 3.75%
Third................................................ 3.50%
Fourth............................................... 2.50%
Fifth................................................ 1.50%
Sixth................................................ 1.00%
Seventh and after.................................... 0.00%
</TABLE>
The contingent deferred sales charge generally is waived on redemptions of
Class B Shares made pursuant to the Systematic Withdrawal Plan. See "Shareholder
Services -- Systematic Withdrawal Plan."
Conversion Feature. Six years after the end of the month in which a
shareholder's order to purchase a Class B Share of the Fund was accepted, such
Class B Share automatically will convert to a Class A Share and will no longer
be subject to the higher aggregate distribution and service fees. The purpose of
the conversion feature is to relieve the holders of Class B Shares that have
been outstanding for a period of time sufficient for the Distributor to have
been compensated for distribution expenses related to the Class B Shares from
most of the burden of such distribution-related expenses. The Fund does not
expect to issue any stock certificates upon conversion.
For purposes of conversion to Class A Shares, Class B Shares purchased through
the reinvestment of dividends and distributions paid in respect of Class B
Shares in a shareholder's account will be considered to be held in a separate
sub-account. Each time any Class B Shares in the shareholder's account (other
than those in the sub-account) convert to Class A Shares, an equal pro rata
portion of the Class B Shares in the sub-account also will convert to Class A
Shares. The holding period applicable to a Class B Share acquired through the
use of the exchange privilege (discussed below) shall be the holding period
applicable to a Class B Share of such Fund acquired other than through use of
the exchange privilege. For purposes of calculating the holding period
applicable to a Class B Share of the Fund prior to conversion, a Class B Share
of the Fund issued in connection with an exercise of the exchange privilege, or
a series of exchanges, shall be deemed to have been issued on
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the date on which the investor's order to purchase the exchanged Class B Share
was accepted or, in the case of a series of exchanges, when the investor's order
to purchase the original Class B Share was accepted.
The conversion of Class B Shares to Class A Shares is subject to the
continuing availability of an opinion of counsel to the effect that (i) the
assessment of the higher distribution services fee and transfer agency costs
with respect to Class B Shares does not result in the Fund's dividends or
distributions constituting "preferential dividends" under the Code and (ii) that
the conversion of Class B Shares does not constitute a taxable event under
federal income tax law. The conversion of Class B Shares to Class A Shares may
be suspended if such an opinion is no longer available. In that event, no
further conversions of Class B Shares would occur, and Class B Shares might
continue to be subject to the higher aggregate distribution and service fees for
an indefinite period.
CLASS C SHARES. Class C Shares redeemed within the first twelve months of
purchase generally will be subject to a contingent deferred sales charge of
1.00% of the dollar amount subject thereto. Class C Shares redeemed thereafter
will not be subject to a contingent deferred sales charge. Class C Shares of the
Fund do not convert to Class A Shares.
WAIVER OF CONTINGENT DEFERRED SALES CHARGE. The contingent deferred sales
charge is waived on redemptions of Class B Shares and Class C Shares (i)
following the death or disability (as defined in the Code) of a shareholder,
(ii) in connection with certain distributions from an IRA or other retirement
plan, (iii) pursuant to the Fund's systematic withdrawal plan but limited to 12%
annually of the initial value of the account, and (iv) effected pursuant to the
right of the Fund to liquidate a shareholder's account as described herein under
"Redemption of Shares." The contingent deferred sales charge is also waived on
redemptions of Class C Shares as it relates to the reinvestment of redemption
proceeds in shares of the same class of the Fund within 120 days after
redemption. See "Shareholder Services" and "Redemption of Shares" for further
discussion of the waiver provisions.
NET ASSET VALUE
The net asset value per share of the Fund will be determined separately for
each class of shares. The net asset value per share of a given class of shares
of the Fund is determined by calculating the total value of the Fund's assets
attributable to such class of shares, deducting its total liabilities
attributable to such class of shares, and dividing the result by the number of
shares of such class outstanding. The net asset value for the Fund is computed
once daily as of 5:00 p.m. Eastern time Monday through Friday, except on
customary business holidays, or except on any day on which no purchase or
redemption orders are received, or there is not a sufficient degree of trading
in the Fund's portfolio securities such that the Fund's net asset value per
share might be materially affected. The Fund reserves the right to calculate the
net asset value and to adjust the public offering price based thereon
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more frequently than once a day if deemed desirable. The net asset value per
share of the different classes of shares are expected to be substantially the
same; from time to time, however, the per share net asset value of the different
classes of shares may differ.
Portfolio securities are valued by using market quotations, prices provided by
market makers or estimates of market values obtained from yield data relating to
instruments or securities with similar characteristics in accordance with
procedures established in good faith by the Board of Trustees of the Trust, of
which the Fund is a series. Securities with remaining maturities of 60 days or
less are valued at amortized cost when amortized cost is determined in good
faith by or under the direction of the Board of Trustees of the Trust to be
representative of the fair value at which it is expected such securities may be
resold. Any securities or other assets for which current market quotations are
not readily available are valued at their fair value as determined in good faith
under procedures established by and under the general supervision of the Board
of Trustees of the Trust.
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SHAREHOLDER SERVICES
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The Fund offers a number of shareholder services designed to facilitate
investment in its shares at little or no extra cost to the investor. Below is a
description of such services. Unless otherwise described below, each of these
services may be modified or terminated by the Fund at any time.
SHAREHOLDER SERVICES APPLICABLE TO ALL CLASSES
INVESTMENT ACCOUNT. ACCESS Investor Services, Inc. ("ACCESS"), transfer agent
for the Fund and a wholly-owned subsidiary of Van Kampen American Capital,
performs bookkeeping, data processing and administration services related to the
maintenance of shareholder accounts. 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 will receive statements at least
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 brokers, dealers or financial intermediaries or by mailing a check
directly to ACCESS.
SHARE CERTIFICATES. Generally, the Fund will not issue share certificates.
However, upon written or telephone request to the Fund, a share certificate will
be issued, representing shares (with the exception of fractional shares) of the
Fund. A shareholder will be required to surrender such certificates upon
redemption thereof.
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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 to obtain a Surety Bond in a
form acceptable to ACCESS. On the date the letter is received ACCESS will
calculate a fee for replacing the lost certificate equal to no more than 2.00%
of the net asset value of the issued shares and bill the party to whom the
replacement certificate was mailed.
REINVESTMENT PLAN. A convenient way for investors to accumulate additional
shares is by accepting dividends and capital gains distributions in shares of
the Fund. Such shares are acquired at net asset value (without sales charge) on
the record date of such dividend or distribution. Unless the shareholder
instructs otherwise, the reinvestment plan is automatic. This instruction may be
made by telephone by calling (800) 421-5666 ((800) 772-8889 for the hearing
impaired) or in writing to ACCESS. The investor may, on the initial application
or prior to any declaration, instruct that dividends be paid in cash and capital
gains distributions be reinvested at net asset value, or that both dividends and
capital gains distributions be paid in cash. For further information, see
"Distributions from the Fund."
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 the Fund. Additional information is
available from the Distributor or authorized brokers, dealers or financial
intermediaries.
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
of shares of the Fund invested into shares of the same class of any other
Participating Fund, Money Market Fund, Tax Free Money Fund or Reserve Fund so
long as a pre-existing account for such class of shares exists for such
shareholder.
If the 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 Fund may be exchanged with shares of another
Participating Fund, the Money Market Fund, the Tax Free Money Fund or the
Reserve Fund, subject to certain limitations herein or in such other fund's
prospectus. Before effecting an exchange, shareholders in the Fund should obtain
and read a current prospectus of the fund into which the exchange is to be made.
SHAREHOLDERS MAY ONLY EXCHANGE INTO SUCH OTHER FUNDS AS ARE LEGALLY AVAILABLE
FOR SALE IN THEIR STATE.
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In general, shares of the Fund must have been registered in the shareholder's
name for at least 15 days prior to an exchange. Shares of the Fund registered in
a shareholder's name for less than 15 days may only be exchanged upon receipt of
prior approval of the Adviser; however, under normal circumstances, it is the
policy of the Adviser not to approve such requests. Upon 60 days after the date
of this prospectus, the Fund will increase the number of days shares must be
registered in a shareholder's name prior to an exchange to 30 days.
Exchanges of Class A Shares of the Fund that have been charged a sales charge
lower than the sales charge applicable to the other fund will have the sales
charge differential imposed upon the exchange into such fund. Similarly,
exchanges of any Class A Shares of other funds that have been charged a sales
charge lower than the sales charge applicable to the Fund will have the sales
charge differential imposed upon exchange into the Fund. Shares of other funds
which have not previously been charged a sales charge (except for shares
purchased via the reinvestment option) will be charged the sales charge
differential applicable to Class A Shares of the Fund upon exchange into the
Fund.
No sales charge is imposed upon the exchange of Class B Shares and Class C
Shares. Upon redemption of Class B Shares and Class C Shares from the Van Kampen
American Capital family of funds, Class B Shares and Class C Shares which have
been exchanged are subject to the contingent deferred sales charge imposed by
the initial Van Kampen American Capital fund purchased by the investor prior to
any exchanges. The holding period requirements for the contingent deferred sales
charge, and the conversion privilege for Class B Shares of the Fund, are
determined by the date of purchase into the initial Van Kampen American Capital
fund purchased by the investor prior to any exchanges.
Exchanges of shares are sales and may result in a gain or loss for federal
income tax purposes. If the shares exchanged have been held for less than 91
days, the sales charge paid on such shares is not included in the tax basis of
the exchanged shares, but is carried over and included in the tax basis of the
shares acquired.
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 ((800) 772-8889 for the hearing impaired). A shareholder automatically
has telephone exchange privileges unless otherwise designated in the application
form accompanied by this Prospectus. The exchange will take place at the
relative net asset values of the shares next determined after receipt of such
request with adjustment for any additional sales charge. Any shares exchanged
begin earning dividends on the next business day after the exchange is affected.
Van Kampen American Capital and its subsidiaries, including ACCESS
(collectively, "VKAC"), and the Fund employ procedures considered by them to be
reasonable to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring certain personal identification information
prior to acting upon telephone instructions, tape recording telephone
communications, and providing written confirmation of instructions communicated
by telephone. If
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reasonable procedures are employed, a shareholder agrees that neither VKAC nor
the Fund will be liable for following telephone instructions which it reasonably
believes to be genuine. VKAC and the Fund may be liable for any losses due to
unauthorized or fraudulent instructions if reasonable procedures are not
followed. 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 options) and broker, dealer or financial intermediary 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 dividend diversification options for the new account, an exchanging
shareholder must file a specific written request. The Fund reserves the right to
reject any order to acquire its shares through exchange. In addition, the Fund
may restrict or terminate the exchange privilege at any time on 60 days' notice
to its shareholders of any termination or material amendment.
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 taxable gain or loss will be
recognized. The plan holder may arrange for monthly, quarterly, semi-annual, or
annual checks in any amount not less than $25.
Holders of Class B Shares and Class C Shares who establish a withdrawal plan
may redeem up to 12% annually of the shareholder's initial account balance
without incurring a contingent deferred sales charge. Initial account balance
means the amount of the shareholder's investment in the Fund at the time the
election to participate in the plan is made. See "Purchase of Shares -- Deferred
Sales Charge Alternatives -- Waiver of Contingent Deferred Sales Charge."
Under the plan, sufficient shares of the Fund are redeemed to provide the
amount of the periodic withdrawal payment. Dividends and capital gains
distributions on shares held under the plan are reinvested in additional shares
at the next determined net asset value. If periodic withdrawals continuously
exceed reinvested dividends and capital gains distributions, the shareholder's
original investment will be correspondingly reduced and ultimately exhausted.
Withdrawals made concurrently with purchases of additional shares ordinarily
will be disadvantageous to the shareholder because of the duplication of sales
charges. The Fund reserves the right to amend or terminate the systematic
withdrawal program on thirty days' notice to its shareholders.
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SHAREHOLDER SERVICES APPLICABLE TO CLASS A SHAREHOLDERS ONLY
CHECK WRITING PRIVILEGE. Holders of Class A Shares of the 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 the agent, a supply of checks drawn on State Street Bank and Trust
Company ("State Street Bank") will be sent to such shareholder. These checks may
be made payable by the holder of Class A Shares 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 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 Class A Shares is a taxable event. See "Redemption of
Shares."
Checks will not be honored for redemption of Class A Shares held less than 15
calendar days, unless such Class A Shares have been paid for by bank wire. Any
Class A Shares for which there are outstanding certificates may not be redeemed
by check. If the amount of the check is greater than the proceeds of all
uncertificated shares held in the shareholder's Class A Share account, the check
will be returned and the shareholder may be subject to additional charges.
Holders of Class A Shares may not liquidate the entire account by means of a
check. The check writing privilege may be terminated or suspended at any time by
the Fund or State Street Bank. Retirement plans and accounts that are subject to
backup withholding are not eligible for the privilege. A "stop payment" system
is not available on these checks.
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.
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REDEMPTION OF SHARES
------------------------------------------------------------------------------
Shareholders may redeem for cash some or all of their shares without charge by
the Fund (other than, with respect to CDSC Shares, the applicable contingent
deferred sales charge) at any time by sending a written request in proper form
directly to ACCESS, P. O. Box 418256, Kansas City, Missouri 64141-9256, by
placing the redemption request through an authorized dealer or by calling the
Fund.
WRITTEN REDEMPTION REQUESTS. In the case of redemption requests sent directly
to ACCESS, the redemption request should indicate the number of shares to be
redeemed, the class designation of such shares, the account number and be signed
exactly as the shares are registered. Signatures must conform exactly to the
account registration. If the proceeds of the redemption would 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. If certificates are held for the shares being redeemed, such
certificates must be endorsed for transfer or accompanied by an endorsed stock
power and sent with the redemption request. In the event the redemption is
requested by a corporation, partnership, trust, fiduciary, executor or
administrator, and the name and title of the individual(s) authorizing such
redemption is not shown in the account registration, a copy of the corporate
resolution or other legal documentation appointing the authorized signer and
certified within the prior 60 days must accompany the redemption request. The
redemption price is the net asset value per share next determined after the
request is received by ACCESS in proper form. Payment for shares redeemed (less
any sales charge, if applicable) will ordinarily be made by check mailed within
three business days after acceptance by ACCESS of the request and any other
necessary documents in proper order. Such payments 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 it confirms that the purchase check has cleared, usually
a period of up to 15 days. Any gain or loss realized on the redemption of shares
is a taxable event.
DEALER REDEMPTION REQUESTS. Shareholders may sell shares through their
securities dealer, who will telephone the request to the Distributor. 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.
Any change in the redemption price due to failure of the Distributor to receive
a sell order prior to such time must be settled between the
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shareholder and dealer. Shareholders must submit a written redemption request in
proper form (as described above under "Written Redemption Requests") to the
dealer within three business days after calling the dealer with the sell order.
Payment for shares redeemed (less any sales charge, if applicable) will
ordinarily be made by check mailed within three business days to the dealer.
TELEPHONE REDEMPTION REQUESTS. The Fund permits redemption of shares by
telephone and for redemption proceeds to be sent to the address of record for
the account or to the bank account of record as described below. To establish
such privilege, a shareholder must complete the appropriate section of the
application form accompanying this Prospectus or call the Fund at (800) 421-5666
((800) 772-8889 for the hearing impaired) to request that a copy of the
Telephone Redemption Authorization form be sent to them for completion. To
redeem shares, contact the telephone transaction line at (800) 421-5684. VKAC
and the Fund employ procedures considered by them to be reasonable to confirm
that instructions communicated by telephone are genuine. Such procedures include
requiring certain personal identification information prior to acting upon
telephone instructions, tape recording telephone communications, and providing
written confirmation of instructions communicated by telephone. If reasonable
procedures are employed, a shareholder agrees that neither VKAC nor the Fund
will be liable for following instructions which it reasonably believes to be
genuine. VKAC and the Fund may be liable for any losses due to unauthorized or
fraudulent instructions if reasonable procedures are not followed. Telephone
redemptions may not be available if the shareholder cannot reach ACCESS by
telephone, whether because all telephone lines are busy or for any other reason;
in such case, a shareholder would have to use the Fund's other redemption
procedures previously described. Requests received by ACCESS prior to 4:00 p.m.,
New York time, on a regular business day will be processed at the net asset
value per share determined that day. These privileges are available for all
accounts other than retirement accounts. The telephone redemption privilege is
not available for shares represented by certificates. If the shares to be
redeemed have been recently purchased by check, ACCESS may delay mailing a
redemption check or wiring redemption proceeds until it confirms that the
purchase check has cleared, usually a period of up to 15 days. 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 sent to the shareholders'
address of record and amounts of at least $1,000 and up to $1 million may be
redeemed daily if the proceeds are to be paid by wire sent to the shareholder's
bank account of record. The proceeds must be payable to the shareholder(s) of
record. Proceeds from redemptions to be paid by check will ordinarily be mailed
within three business days to the shareholder's address of record. Proceeds from
redemptions to be paid by wire will ordinarily be wired on the next business day
to the shareholder's bank account of record. This privilege is not available if
the address of record has been changed within 30 days prior to a telephone
redemption request.
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The Fund reserves the right at any time to terminate, limit or otherwise modify
this telephone redemption privilege.
REDEMPTION UPON DISABILITY. The Fund will waive the contingent deferred sales
charge on redemptions following the disability of holders of Class B Shares and
Class C Shares. An individual will be considered disabled for this purpose if he
or she meets the definition thereof in Section 72(m)(7) of the Code, which in
pertinent part defines a person as disabled if such person "is unable to engage
in any substantial gainful activity by reason of any medically determinable
physical or mental impairment which can be expected to result in death or to be
of long-continued and indefinite duration." While the Fund does not specifically
adopt the balance of the Code's definition which pertains to furnishing the
Secretary of Treasury with such proof as he or she may require, the Distributor
will require satisfactory proof of disability before it determines to waive the
contingent deferred sales charge on Class B Shares and Class C Shares.
In cases of disability, the contingent deferred sales charges on Class B
Shares 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
Shares 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.
GENERAL REDEMPTION INFORMATION. The Fund may redeem any shareholder account
with a net asset value on the date of the notice of redemption less than the
minimum investment as specified by the Trustees. At least 60 days advance
written notice of any such involuntary redemption is required and the
shareholder is given an opportunity to purchase the required value of additional
shares at the next determined net asset value without sales charge. Any
applicable contingent deferred sales charge will be deducted from the proceeds
of this redemption. Any involuntary redemption may only occur if the shareholder
account is less than the minimum investment due to shareholder redemptions.
REINSTATEMENT PRIVILEGE. Holders of Class A Shares or Class B Shares who have
redeemed shares of the Fund may reinstate any portion or all of the net proceeds
of such redemption in Class A Shares of the Fund. Holders of Class C Shares who
have redeemed shares of the Fund may reinstate any portion or all of the net
proceeds of such redemption in Class C Shares of the Fund with credit given for
any contingent deferred sales charge paid upon such redemption. Such
reinstatement is made at the net asset value 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."
Reinstatement at net asset value is also offered to participants in those
eligible retirement plans held or administered by Van Kampen American Capital
Trust Company for repayment of principal (and interest) on their borrowings on
such plans.
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------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
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The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of its shares. The Distribution Plan and the Service Plan provide
that the Fund may spend a portion of the Fund's average daily net assets
attributable to each class of shares in connection with distribution of the
respective class of shares and in connection with the provision of ongoing
services to shareholders of each class. The Distribution Plan and the Service
Plan are being implemented through an agreement with the Distributor and
sub-agreements between the Distributor and brokers, dealers and financial
intermediaries (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance.
CLASS A SHARES. The Fund may spend an aggregate amount up to 0.25% per year of
the average daily net assets attributable to the Class A Shares of the Fund
pursuant to the Distribution Plan and Service Plan. From such amount, the Fund
may spend up to 0.25% per year of the Fund's average daily net assets
attributable to the Class A Shares pursuant to the Service Plan in connection
with the ongoing provision of services to holders of such shares by the
Distributor and by brokers, dealers or financial intermediaries and in
connection with the maintenance of such shareholders' accounts. The Fund pays
the Distributor the lesser of the balance of the 0.25% not paid to such brokers,
dealers or financial intermediaries or the amount of the Distributor's actual
distribution related expense.
CLASS B SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class B Shares of the Fund pursuant to the
Distribution Plan. In addition, the Fund may spend up to 0.25% per year of the
Fund's average daily net assets attributable to the Class B Shares pursuant to
the Service Plan in connection with the ongoing provision of services to holders
of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
CLASS C SHARES. The Fund may spend up to 0.75% per year of the average daily
net assets attributable to the Class C Shares of the Fund pursuant to the
Distribution Plan. From such amount, the Fund, or the Distributor as agent for
the Fund, pays brokers, dealers or financial intermediaries in connection with
the distribution of the Class C Shares up to 0.75% of the Fund's average daily
net assets attributable to Class C Shares maintained in the Fund more than one
year by such broker's, dealer's or financial intermediary's customers. The Fund
pays the Distributor the lesser of the balance of 0.75% not paid to such
brokers, dealers or financial intermediaries or the amount of the Distributor's
actual distribution related expense attributable to the Class C Shares. In
addition, the Fund may spend up to 0.25% per year of the Fund's average daily
net assets attributable to the Class C Shares pursuant to the Service Plan in
connection with the ongoing provision of services to
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holders of such shares by the Distributor and by brokers, dealers or financial
intermediaries and in connection with the maintenance of such shareholders'
accounts.
OTHER INFORMATION. Amounts payable to the Distributor with respect to the
Class A Shares under the Distribution Plan in a given year may not fully
reimburse the Distributor for its actual distribution-related expenses during
such year. In such event, with respect to the Class A Shares, there is no
carryover of such reimbursement obligations to succeeding years.
The Distributor's actual expenses with respect to a class of CDSC Shares (for
purposes of this section, excluding any Class A Shares that may be subject to a
CDSC) for any given year may exceed the amounts payable to the Distributor with
respect to such class of CDSC Shares under the Distribution Plan, the Service
Plan and payments received pursuant to the contingent deferred sales charge. In
such event, with respect to any such class of CDSC Shares, any unreimbursed
expenses will be carried forward and paid by the Fund (up to the amount of the
actual expenses incurred) in future years so long as such Distribution Plan is
in effect. Except as mandated by applicable law, the Fund does not impose any
limit with respect to the number of years into the future that such unreimbursed
expenses may be carried forward (on a Fund level basis). Because such expenses
are accounted on a Fund level basis, in periods of extreme net asset value
fluctuation such amounts with respect to a particular CDSC Share may be greater
or less than the amount of the initial commission (including carrying cost) paid
by the Distributor with respect to such CDSC Share. In such circumstances, a
shareholder of such CDSC Share may be deemed to incur expenses attributable to
other shareholders of such class. The Fund will disclose in its prospectus from
time to time the then current amount of any such unreimbursed expenses with
respect to each class of CDSC Shares expressed as a dollar amount and as a
percent of the Fund's total net assets. As of December 31, 1994, there were
$418,563 and $5,871 of unreimbursed distribution expenses with respect to Class
B Shares and Class C Shares, respectively, representing 0.06% and less than
0.01% of the Fund's total net assets. If the Distribution Plan was terminated or
not continued, the Fund would not be contractually obligated to pay the
Distributor for any expenses not previously reimbursed by the Fund or recovered
through contingent deferred sales charges.
Because the Fund is a series of the Trust, amounts paid to the Distributor as
reimbursement for expenses of one series of the Trust may indirectly benefit the
other funds which are series of the Trust. The Distributor will endeavor to
allocate such expenses among such funds in an equitable manner. The Distributor
will not use the proceeds from the contingent deferred sales charge applicable
to a particular class of CDSC Shares to defray distribution related expenses
attributable to any other class of CDSC Shares. Various federal and state laws
prohibit national banks and some state-chartered commercial banks from
underwriting or dealing in the Fund's shares. In addition, state securities laws
on this issue may differ from the interpretations of federal law, and banks and
financial institutions may be required
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to register as dealers pursuant to state law. In the unlikely event that a court
were to find that these laws prevent such banks from providing such services
described above, the Fund would seek alternate providers and expects that
shareholders would not experience any disadvantage.
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DISTRIBUTIONS FROM THE FUND
------------------------------------------------------------------------------
The Fund's present policy, which may be changed at any time by the Board of
Trustees, is to declare daily and pay monthly distributions of all or
substantially all net investment income of the Fund. Net investment income
consists of all interest income and dividends, less all expenses of the Fund
attributable to the class of shares in question. Net short-term capital gains,
if any, may be distributed throughout the year. Expenses of the Fund are accrued
each day. Net realized long-term capital gains, if any, are expected to be
distributed, to the extent permitted by applicable law, to shareholders at least
annually. Distributions cannot be assured, and the amount of each monthly
distribution may vary.
Distributions with respect to each class of shares will be calculated in the
same manner on the same day and will be in the same amount, except that the
different distribution and service fees and any incremental administrative
expenses relating to each class of shares will be borne exclusively by the
respective class and may cause the distributions relating to the different
classes of shares to differ. Generally, distributions with respect to a class of
shares subject to a higher distribution fee, service fee, or where applicable,
the conversion feature will be lower than distributions with respect to a class
of shares subject to a lower distribution fee, service fee, or not subject to
the conversion feature.
Investors will be entitled to begin receiving dividends on their shares on the
business day after the Fund's transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Fund's transfer
agent receives payment for the shares either through a fed wire or NSCC
settlement. Shares remain entitled to dividends through the day such shares are
processed for payment on redemption.
Distribution checks may be sent to parties other than the shareholder in whose
name the account is registered. Persons wishing to utilize this service should
complete the appropriate section of the account application accompanying this
Prospectus or available from Van Kampen American Capital Funds, c/o ACCESS, P.O.
Box 418256, Kansas City, MO 64141-9256. After ACCESS receives this completed
form, distribution checks will be sent to the bank or other person so designated
by such shareholder.
PURCHASE OF ADDITIONAL SHARES WITH DISTRIBUTIONS. The Fund will automatically
credit monthly distributions and any annual net long-term capital gain
distributions to a shareholder's account in additional shares of the Fund valued
at net asset value, without a sales charge. Unless a shareholder instructs
otherwise, the reinvestment
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plan is automatic. This instruction may be made by telephone by calling
(800) 421-5666 ((800) 772-8889 for the hearing impaired) or in writing to
ACCESS.
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TAX STATUS
------------------------------------------------------------------------------
The following discussion reflects applicable federal income tax law, as of the
date of this Prospectus:
FEDERAL INCOME TAXATION. The Fund has qualified and intends to continue to
qualify as a regulated investment company under Subchapter M of the Code. To
qualify as a regulated investment company, the Fund must comply with certain
requirements of the Code relating to, among other things, the source of its
income and diversification of its assets. If the Fund so qualifies and if it
distributes each year to its shareholders at least 90% of its net investment
income (including tax-exempt interest and other taxable income including net
short-term capital gains, but not net capital gains, which are the excess of net
long-term capital gains over net short-term capital losses), it will not be
required to pay federal income taxes on any income distributed to shareholders.
The Fund intends to distribute at least the minimum amount of net investment
income to satisfy the 90% distribution requirement. The Fund will not be subject
to federal income tax on any net capital gain distributed to its shareholders.
In order to avoid a 4% excise tax the Fund will be required to distribute by
December 31 of each year at least 98% of its ordinary income for such year and
at least 98% of its capital gain net income (the latter of which is generally
computed on the basis of the one-year period ending on October 31 of such year),
plus any required distribution amounts that were not distributed in previous
taxable years. For purposes of the excise tax, any ordinary income or capital
gain net income retained by, and taxed in the hands of, the Fund will be treated
as having been distributed.
If the Fund qualifies as a regulated investment company and satisfies the 90%
distribution requirement, and if, at the close of each quarter of the Fund's
taxable year, at least 50% of the total of the Fund's assets consists of
obligations exempt from federal income tax ("tax-exempt obligations"), the Fund
will be qualified to pay exempt-interest dividends to its shareholders to the
extent of its tax-exempt interest income (less expenses applicable thereto).
Exempt-interest dividends are excludable from a shareholder's gross income for
federal income tax purposes, but may be taxable distributions for state, local
and other tax purposes. Exempt-interest dividends are included, however, in
determining what portion, if any, of a person's social security and railroad
retirement benefits will be includable in gross income subject to federal income
tax. Interest expense with respect to indebtedness incurred or continued by a
shareholder to purchase or carry shares of the Fund is not deductible to the
extent that such interest relates to exempt-interest dividends received from the
Fund.
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Distributions of the Fund's investment company taxable income (which does not
include tax-exempt interest income) are taxable to shareholders as ordinary
income whether received in shares or in cash. Shareholders who receive
distributions in the form of additional shares will have a basis for federal
income tax purposes in each such share equal to the value thereof on the
reinvestment date. Distributions of the Fund's net capital gain ("capital gains
dividends"), if any, are taxable to shareholders at the rates applicable to
long-term capital gains regardless of the length of time shares of the Fund have
been held by such shareholders. Distributions in excess of the Fund's earnings
and profits, such as distributions of principal, will first reduce the adjusted
tax basis of the shares held by the shareholders and, after such adjusted tax
basis is reduced to zero, will constitute capital gains to such shareholders
(assuming such shares are held as a capital asset). The Fund will inform
shareholders of the source and tax status of such distributions promptly after
the close of each calendar year. Distributions from the Fund will not be
eligible for the dividends received deduction for corporations.
Exempt-interest dividends allocable to interest received by the Fund on
certain "private activity" obligations issued after August 7, 1986 will be
treated as interest on such obligations and thus will give rise to an item of
tax preference that will increase a shareholder's alternative minimum taxable
income. Unless otherwise provided in regulations, the portion of the Fund's
interest on such "private activity" obligations allocable to shareholders will
correspond to the portion of the Fund's total net tax-exempt income distributed
to shareholders. In addition, for corporations, alternative minimum taxable
income will be increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amount
otherwise determined to be the alternative minimum taxable income. Accordingly,
investment in the Fund may cause such shareholders to be subject to (or result
in an increased liability under) the alternative minimum tax.
Exempt-interest dividends will not be tax-exempt to the extent made to any
shareholder who is a "substantial user" of the facilities financed by tax-exempt
obligations held by the Fund or "related persons" of such substantial users.
Redemption or resale of shares of the Fund will be a taxable transaction for
federal income tax purposes. Redeeming shareholders will recognize gain or loss
in an amount equal to the difference between their basis in such redeemed shares
of the Fund and the amount received. If such shares are held as a capital asset,
the gain or loss will be a capital gain or loss and will generally be long-term
if such shareholders have held shares for more than one year. Any loss realized
on shares held for six months or less will be disallowed to the extent of any
exempt-interest dividends received with respect to such shares. If such loss is
not entirely disallowed, it will be treated as a long-term capital loss to the
extent of any capital gains dividends received with respect to such shares.
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<PAGE> 214
Some of the Fund's investment practices are subject to special provisions of
the Code that, among other things, may defer the use of certain losses of the
Fund and affect the holding period of the securities held by the Fund and the
character of gains or losses realized by the Fund. These provisions may also
require the Fund to mark-to-market some of the positions in its portfolio (i.e.,
treat them as if they were closed out), which may cause the Fund to recognize
income without receiving cash with which to make distributions in amounts
necessary to satisfy the 90% distribution requirement and the distribution
requirement for avoiding income taxes. The Fund will monitor its transactions
and may make certain tax elections in order to mitigate the effect of these
rules and prevent disqualification of the Fund as a regulated investment
company.
Investments of the Fund in securities issued at a discount or providing for
deferred interest or payment of interest in kind are subject to special tax
rules that will affect the amount, timing and character of distributions to
shareholders. For example, with respect to securities issued at a discount, the
Fund will be required to accrue as income each year a portion of the discount
and to distribute such income each year in order to maintain its qualification
as a regulated investment company and to avoid federal income taxes. In order to
generate sufficient cash to make distributions necessary to satisfy the 90%
distribution requirement and avoid federal income taxes, the Fund may have to
dispose of securities that it would otherwise have continued to hold. A portion
of the discount relating to certain stripped tax-exempt obligations may
constitute taxable income to shareholders.
The Fund's ability to dispose of portfolio securities may be limited by the
requirement for qualification as a regulated investment company that less than
30% of the Fund's gross income be derived from the disposition of securities
held for less than three months.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in such a month and paid in January of the following
year will be treated as having been distributed by the Fund and received by the
shareholders on the December 31 of the year in which the dividend was declared.
In addition, certain other distributions made after the close of a taxable year
of the Fund may be "spilled back" and treated as paid by the Fund (except for
purposes of the 4% excise tax) during such taxable year. In such case,
shareholders will be treated as having received such dividends in the taxable
year in which the distribution is actually made.
The Fund is required in certain circumstances to withhold 31% of taxable
dividends and certain other payments, including redemptions, paid to
shareholders who do not furnish to the Fund their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain required certifications or who are otherwise subject to backup
withholding.
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<PAGE> 215
GENERAL. The federal income tax discussion set forth above is for general
information only. Prospective investors should consult their tax advisers
regarding the specific federal tax consequences of holding and disposing of
shares, as well as the effects of state, local and foreign tax laws.
------------------------------------------------------------------------------
FUND PERFORMANCE
------------------------------------------------------------------------------
From time to time advertisements and other sales materials for the Fund may
include information concerning the historical performance of the Fund. Any such
information will include the average total return of the Fund calculated on a
compounded basis for specified periods of time. Such advertisements and sales
material may also include a yield quotation as of a current period. In each
case, such total return and yield information, if any, will be calculated
pursuant to rules established by the SEC and will be computed separately for
each class of the Fund's shares. In lieu of or in addition to total return and
yield calculations, such information may include performance rankings and
similar information from independent organizations such as Lipper Analytical
Services, Inc., Business Week, Forbes or other industry publications.
From time to time, the Fund may include in its sales literature and
shareholder reports a quotation of the current "distribution rate" for each
class of shares of the Fund. Distribution rate is a measure of the level of
income and short-term capital gain dividends, if any, distributed for a
specified period. Distribution rate is determined by annualizing the
distributions per share for a stated period and dividing the result by the
public offering price for the same period. It differs from yield, which is a
measure of the income actually earned by the Fund's investments, and from total
return, which is a measure of the income actually earned by, plus the effect of
any realized and unrealized appreciation or depreciation of, such investments
during a stated period. Distribution rate is, therefore, not intended to be a
complete measure of the Fund's performance. Distribution rate may sometimes be
greater than yield since, for instance, it may not include the effect of
amortization of bond premiums, and may include non-recurring short-term capital
gains and premiums from futures transactions engaged in by the Fund.
Distribution rates will be computed separately for each class of the Fund's
shares.
From time to time, the Fund may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Fund. Such characteristics may include, but are not limited to, tax
features, guarantees, insurance and the fluctuation of principal and/or return.
In addition, from time to time, the Fund may utilize sales literature that
includes hypotheticals.
Further information about the Fund's performance is contained in the Fund's
Annual Report and the Fund's Statement of Additional Information, each of which
can be obtained without charge by calling (800) 421-5666 ((800) 772-8889 for the
hearing impaired).
48
<PAGE> 216
------------------------------------------------------------------------------
DESCRIPTION OF SHARES OF THE FUND
------------------------------------------------------------------------------
The Fund is a series of the Van Kampen American Capital Tax Free Trust, a
Delaware business trust organized as of May 10, 1995 (the "Trust"). The Fund was
originally organized as a sub-trust of a Massachusetts business trust by a
Declaration of Trust dated August 15, 1985, under the name Van Kampen Merritt
Municipal Income Fund and was reorganized as a series of the Trust on July 31,
1995. Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series.
The authorized capitalization of the Fund consists of an unlimited number of
shares of beneficial interest, without par value, divided into three classes,
designated Class A Shares, Class B Shares and Class C Shares. Each class of
shares represents an interest in the same assets of the Fund and 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 "The
Distribution and Service Plans."
Pursuant to an order of the SEC, the Fund is permitted to issue an unlimited
number of classes of shares. 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 into Class A Shares as described above. In the event of
liquidation, each of the shares of the Fund is entitled to its portion of all of
the Fund's net assets after all debt and expenses of the Fund have been paid.
Since Class B Shares and Class C Shares pay higher distribution expenses, the
liquidation proceeds to holders of Class B Shares and Class C Shares are likely
to be lower than to other shareholders.
The Trust does not contemplate holding regular meetings of shareholders to
elect Trustees or otherwise. However, the holders of 10% or more of the
outstanding shares may by written request require a meeting to consider the
removal of Trustees by a vote of a majority of the shares present and voting at
such meeting. The Trust will assist such holders in communicating with other
shareholders of the Fund to the extent required by the 1940 Act. More detailed
information concerning the Trust is set forth in the Statement of Additional
Information.
------------------------------------------------------------------------------
ADDITIONAL INFORMATION
------------------------------------------------------------------------------
This Prospectus and the Statement of Additional Information do not contain all
the information set forth in the Registration Statement filed by the Fund with
the SEC under the Securities Act of 1933. Copies of the Registration Statement
may be obtained at a reasonable charge from the SEC or may be examined, without
charge, at the office of the SEC in Washington, D.C.
The fiscal year of the Fund ends December 31. The Fund sends to its
shareholders, at least semi-annually, reports showing the Fund's portfolio and
other information. An
49
<PAGE> 217
annual report, containing financial statements audited by the Fund's independent
auditors, is sent to shareholders each year. After the end of each year,
shareholders will receive federal income tax information regarding dividends and
capital gains distributions.
Shareholder inquiries should be directed to Van Kampen American Capital
Municipal Income Fund, One Parkview Plaza, Oakbrook Terrace, Illinois 60181,
Attn: Correspondence.
For Automated Telephone Service which provides 24-hour direct dial access to
Fund facts and shareholder account information, dial (800) 421-5666. For
inquiries through Telecommunications Device for the Deaf (TDD) dial (800)
772-8889.
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<PAGE> 218
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'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) 421-5666.
VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
One Parkview Plaza
Oakbrook Terrace, IL 60181
------------------
Investment Adviser
VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP.
One Parkview Plaza
Oakbrook Terrace, IL 60181
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
Attn: Van Kampen American Capital Funds
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
SKADDEN, ARPS, SLATE,
MEAGHER & FLOM
333 West Wacker Drive
Chicago, IL 60606
Independent Auditors
KPMG PEAT MARWICK LLP
Peat Marwick Plaza
303 East Wacker Drive
Chicago, IL 60601
<PAGE> 219
MUNICIPAL INCOME
FUND
------------------------------------------------------------------------------
P R O S P E C T U S
JULY 31, 1995
------ ------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 220
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
Van Kampen American Capital Municipal Income Fund, formerly known as Van
Kampen Merritt Municipal Income Fund (the "Fund"), seeks to provide high current
income exempt from federal income taxes consistent with preservation of capital.
The Fund attempts to achieve its investment objective by investing at least 80%
of its assets in a diversified portfolio of tax-exempt municipal securities
rated investment grade at the time of investment. There is no assurance that the
Fund will achieve its investment objective. The Fund is a separate series of Van
Kampen American Capital Tax Free Trust, a Delaware business trust (the
"Trust").
This Statement of Additional Information is not a prospectus, but should be
read in conjunction with the Prospectus for the Fund dated July 31, 1995 (the
"Prospectus"). This Statement of Additional Information does not include all
information that a prospective investor should consider before purchasing shares
of the Fund, and investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained without charge, by
calling (800) 421-5666. This Statement of Additional Information incorporates by
reference the entire Prospectus.
The Prospectus and this Statement of Additional Information omit certain of
the information contained in the registration statement filed with the
Securities and Exchange Commission, Washington, D.C. (the "SEC"). These items
may be obtained from the SEC upon payment of the fee prescribed, or inspected at
the SEC's office at no charge.
TABLE OF CONTENTS
<TABLE>
<S> <C>
The Fund and the Trust................................................................ B-2
Investment Policies and Restrictions.................................................. B-2
Additional Investment Considerations.................................................. B-4
Description of Municipal Securities Ratings........................................... B-13
Officers and Trustees................................................................. B-18
Investment Advisory and Other Services................................................ B-23
Portfolio Transactions and Brokerage Allocation....................................... B-25
Tax Status of the Fund................................................................ B-26
The Distributor....................................................................... B-26
Legal Counsel......................................................................... B-27
Performance Information............................................................... B-27
Independent Auditors' Report.......................................................... B-30
Financial Statements.................................................................. B-31
Notes to Financial Statements......................................................... B-44
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED JULY 31, 1995.
B-1
<PAGE> 221
THE FUND AND THE TRUST
The Fund is a separate series of the Trust, an open-end diversified management
investment company. At present, the Fund, Van Kampen American Capital Insured
Tax Free Income Fund, Van Kampen American Capital Tax Free High Income Fund, Van
Kampen American Capital California Insured Tax Free Fund, Van Kampen American
Capital Limited Term Municipal Income Fund, Van Kampen American Capital Florida
Insured Tax Free Income Fund, Van Kampen American Capital New Jersey Tax Free
Income Fund, and Van Kampen American Capital New York Tax Free Income Fund have
been organized as series of the Trust and have commenced investment operations.
Van Kampen American Capital California Tax Free Income Fund, Van Kampen American
Capital Michigan Tax Free Income Fund, Van Kampen American Capital Missouri Tax
Free Income Fund and Van Kampen American Capital Ohio Tax Free Income Fund have
been organized as series of the Trust but have not yet commenced investment
operations. Other series may be organized and offered in the future.
The Trust is an unincorporated business trust established under the laws of
the state of Delaware by an Agreement and Declaration of Trust dated as of May
10, 1995, (the "Declaration of Trust"). The Declaration of Trust permits the
Trustees to create one or more separate investment portfolios and issue a series
of shares for each portfolio. The Trustees can further sub-divide each series of
shares into one or more classes of shares for each portfolio. Each share
represents an equal proportionate interest in the assets of the series with each
other share in such series and no interest in any other series. No series is
subject to the liabilities of any other series. The Declaration of Trust
provides that shareholders are not liable for any liabilities of the Trust or
any of its series, requires inclusion of a clause to that effect in every
agreement entered into by the Trust or any of its series and indemnifies
shareholders against any such liability. The Fund was originally organized as a
sub-trust of a Massachusetts business trust by a Declaration of Trust dated
August 15, 1985, under the name of Van Kampen Merritt Municipal Income Fund and
was reorganized as a series of the Trust on July 31, 1995.
Shares of the Trust entitle their holders to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon by shareholders of only the series involved. Shares do not have cumulative
voting rights, preemptive rights or any conversion or exchange rights. The Trust
does not contemplate holding regular meetings of shareholders to elect Trustees
or otherwise. However, the holders of 10% or more of the outstanding shares may
by written request require a meeting to consider the removal of Trustees by a
vote of a majority of the shares present and voting at such meeting.
The Trustees may amend the Declaration of Trust (including with respect to any
series) in any manner without shareholder approval, except that the Trustees may
not adopt any amendment adversely affecting the rights of shareholders of any
series without approval by a majority of the shares of each affected series
present at a meeting of shareholders (or such higher vote as may be required by
the Investment Company Act of 1940, as amended (the "1940 Act") or other
applicable law) and except that the Trustees cannot amend the Declaration of
Trust to impose any liability on shareholders, make any assessment on shares or
impose liabilities on the Trustees without approval from each affected
shareholder or Trustee, as the case may be.
Statements contained in this Statement of Additional Information as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the Registration Statement of which
this Statement of Additional Information forms a part, each such statement being
qualified in all respects by such reference.
INVESTMENT POLICIES AND RESTRICTIONS
The investment objective of the Fund is set forth in the Prospectus under the
caption "Investment Objective and Policies." There can be no assurance that the
Fund will achieve its investment objective.
Fundamental investment restrictions limiting the investments of the Fund
provide that the Fund may not:
1. With respect to 75% of its total assets, purchase any securities (other
than obligations guaranteed by the United States Government or by its
agencies or instrumentalities), if, as a result, more than 5% of the
Fund's total assets (taken at current market value) would then be invested
in securities of a single
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<PAGE> 222
issuer or, if, as a result, the Fund would hold more than 10% of the
outstanding voting securities of an issuer.
2. Invest more than 25% of its assets in a single industry. (As described in
the Prospectus, the Fund may from time to time invest more than 25% of its
assets in a particular segment of the municipal bond market; however, the
Fund will not invest more than 25% of its assets in industrial development
bonds in a single industry.)
3. Borrow money, except from banks for temporary purposes and then in amounts
not in excess of 5% of the total asset value of the Fund, or mortgage,
pledge, or hypothecate any assets except in connection with a borrowing
and in amounts not in excess of 10% of the total asset value of the Fund.
Borrowings may not be made for investment leverage, but only to enable the
Fund to satisfy redemption requests where liquidation of portfolio
securities is considered disadvantageous or inconvenient. In this
connection, the Fund will not purchase portfolio securities during any
period that such borrowings exceed 5% of the total asset value of the
Fund. Notwithstanding this investment restriction, the Fund may enter into
when issued and delayed delivery transactions as described in the
Prospectus.
4. Make loans of money or property to any person, except to the extent the
securities in which the Fund may invest are considered to be loans and
except that the Fund may lend money or property in connection with
maintenance of the value of, or the Fund's interest with respect to, the
securities owned by the Fund.
5. Buy any securities "on margin." Neither the deposit of initial or
maintenance margin in connection with hedging transactions nor short term
credits as may be necessary for the clearance of transactions is
considered the purchase of a security on margin.
6. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell interest rate or other financial
futures or index contracts or related options, except as hedging or risk
management transactions in accordance with the requirements of the
Securities and Exchange Commission and the Commodity Futures Trading
Commission.
7. Act as an underwriter of securities, except to the extent the Fund may be
deemed to be an underwriter in connection with the sale of securities held
in its portfolio.
8. Make investments for the purpose of exercising control or participation in
management, except to the extent that exercise by the Fund of its rights
under agreements related to securities owned by the Fund would be deemed
to constitute such control or participation.
9. Invest in securities of other investment companies, except as part of a
merger, consolidation or other acquisition and except that the Fund may
invest up to 10% of its assets in tax-exempt investment companies that
invest in securities rated comparably to those the Fund may invest in so
long as the Fund does not own more than 3% of the outstanding voting stock
of any tax-exempt investment company or securities of any tax-exempt
investment company aggregating in value more than 5% of the total assets
of the Fund.
10. Invest in oil, gas or mineral leases or in equity interests in oil, gas,
or other mineral exploration or development programs.
11. Purchase or sell real estate, commodities or commodity contracts, except
to the extent the securities the Fund may invest in are considered to be
interest in real estate, commodities or commodity contracts or to the
extent the Fund exercises its rights under agreements relating to such
securities (in which case the Fund may own, hold, foreclose, liquidate or
otherwise dispose of real estate acquired as a result of a default on a
mortgage), and except to the extent the options and futures and index
contracts in which such Funds may invest for hedging and risk management
purposes are considered to be commodities or commodities contracts.
The Fund may not change any of these investment restrictions as they apply to
the Fund without the approval of the lesser of (i) more than 50% of the Fund's
outstanding shares or (ii) 67% of the Fund's outstanding Shares present at a
meeting at which the holders of more than 50% of the outstanding shares are
B-3
<PAGE> 223
present in person or by proxy. As long as the percentage restrictions described
above are satisfied at the time of the investment or borrowing, the Fund will be
considered to have abided by those restrictions even if, at a later time, a
change in values or net assets causes an increase or decrease in percentage
beyond that allowed.
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as
deemed advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objectives. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Frequency
of portfolio turnover will not be a limiting factor if the Fund considers it
advantageous to purchase or sell securities. Portfolio turnover is calculated by
dividing the lesser of purchases or sales of portfolio securities by the monthly
average value of the securities in the portfolio during the year. Securities,
including options, whose maturity or expiration date at the time of acquisition
were one year or less are excluded from such calculation. The Fund anticipates
that its annual portfolio turnover rate will normally be less than 100%.
ADDITIONAL INVESTMENT CONSIDERATIONS
MUNICIPAL SECURITIES
Municipal securities include long-term obligations, which are often called
municipal bonds, as well as shorter term municipal notes, municipal leases, and
tax-exempt commercial paper. Under normal market conditions, longer term
municipal securities generally provide a higher yield than shorter term
municipal securities, and therefore the Fund generally expects to be invested
primarily in longer term municipal securities. The Fund will, however, invest in
shorter term municipal securities when yields are greater than yields available
on longer term municipal securities, for temporary defensive purposes and when
redemption requests are expected. The two principal classifications of municipal
bonds are "general obligation" and "revenue" or "special obligation" bonds,
which include "industrial revenue bonds." General obligation bonds are secured
by the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue or special obligation bonds 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 tax or other specific revenue
source such as from the user of the facility being financed.
Also included within the general category of municipal securities are
participations in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
of entities used to finance the acquisition of equipment and facilities.
Although lease obligations do not constitute general obligations of the
municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain lease obligations contain "non-appropriation" clauses which provide that
the municipality has no obligation to make lease or installment purchase
payments in future years unless money is appropriated for such purpose on a
yearly basis. In addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations. In evaluating such
lease obligations, the Adviser will consider such factors as it deems
appropriate, which factors may include (a) whether the lease can be cancelled,
(b) the ability of the lease obligee to direct the sale of the underlying
assets, (c) the general creditworthiness of the lease obligor, (d) the
likelihood that the municipality will discontinue appropriating funding for the
leased property in the event such property is no longer considered essential by
the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ability to utilize substitute property or services than
those covered by the lease obligation.
Also included in the term municipal securities are participation certificates
issued by state and local governments or authorities to finance the acquisition
of equipment and facilities. They may represent
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participations in a lease, an installment purchase contract, or a conditional
sales contract. Some municipal leases and participation certificates may not be
readily marketable.
The "issuer" of municipal securities generally is deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
The Fund may purchase floating and variable rate demand notes, which are
municipal securities normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of such notes normally has a corresponding
right, after a given period, to prepay at its discretion upon notice to the
noteholders the outstanding principal amount of the notes plus accrued interest.
The interest rate on a floating rate demand note is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand note is adjusted
automatically at specified intervals. There generally is no secondary market for
these notes, although they are redeemable at face value. Each note purchase by
the Fund will meet the criteria established for the purchase of municipal
securities.
The Fund also may invest up to 15% of its total assets in variable rate
derivative municipal securities such as inverse floaters whose rates vary
inversely with changes in market rates of interest. Such variable rate
derivative municipal securities may pay a rate of interest determined by
applying a multiple to the variable rate. The extent of increases and decreases
in the value of derivative municipal securities whose rates vary inversely with
changes in market rates of interest in response to such changes in market rates
generally will be larger than comparable changes in the value of an equal
principal amount of a fixed rate municipal security having similar credit
quality, redemption provisions and maturity. In addition, the Fund may invest in
derivative municipal securities the terms of which include elements of, or are
similar in effect to, certain Strategic Transactions in which the Fund may
engage. Such municipal securities may by their terms, for example, have economic
characteristics comparable to, among other things, a swap, cap, floor or collar
transaction with respect to such security for a period of time prior to its
stated maturity. See "Additional Investment Considerations -- Strategic
Transactions" in this Statement of Additional Information.
Although the Fund will invest at least 80% of its assets in municipal
securities rated investment grade at the time of investment, municipal
securities, like other debt obligations, are subject to the risk of non-payment.
The ability of issuers of municipal securities to make timely payments of
interest and principal may be adversely impacted in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
federal, state and local governmental units. Such non-payment would result in a
reduction of income to the Fund, and could result in a reduction in the value of
the municipal security experiencing non-payment and a potential decrease in the
net asset value of the Fund. Issuers of municipal securities might seek
protection under the bankruptcy laws. In the event of bankruptcy of such an
issuer, the Fund could experience delays and limitations with respect to the
collection of principal and interest on such municipal securities and the Fund
may not, in all circumstances, be able to collect all principal and interest to
which it is entitled. To enforce its rights in the event of a default in the
payment of interest or repayment of principal, or both, the Fund may take
possession of and manage the assets securing the issuer's obligations on such
securities, which may increase the Fund's operating expenses and adversely
affect the net asset value of the Fund. Any income derived from the Fund's
ownership or operation of such assets may not be tax-exempt. In addition, the
Fund's intention to qualify as a "regulated investment company" under the
Internal Revenue Code of 1986, as amended (the "Code"), may limit the extent to
which the Fund may exercise its rights by taking possession of such assets,
because as a regulated investment company the Fund is subject to certain
limitations on its investments and on the nature of its income.
The Fund may invest up to 15% of its total assets in illiquid securities,
securities the disposition of which is subject to substantial legal or
contractual restrictions on resale and securities that are not readily
marketable. The sale of restricted and illiquid securities often requires more
time and results in higher brokerage charges or dealer discounts and other
selling expenses than does the sale of securities eligible for trading on
national securities exchanges or in the over-the-counter markets. Restricted
securities may sell at a price lower than similar securities that are not
subject to restrictions on resale. Restricted securities salable among qualified
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institutional buyers without restriction pursuant to Rule 144A under the
Securities Act of 1933, as amended, that are determined to be liquid by the
Adviser under guidelines adopted by the Board of Trustees of the Trust (under
which guidelines the Adviser will consider factors such as trading activities
and the availability of price quotations), will not be treated as restricted
securities by the Fund pursuant to such rules. The Fund may, from time to time,
adopt a more restrictive limitation with respect to investment in illiquid and
restricted securities in order to comply with the most restrictive state
securities law, currently 10%. This policy does not include restricted
securities eligible for resale pursuant to Rule 144A under the Securities Act of
1933, as amended, which the Board of Trustees or the Fund's investment adviser
has determined under Board-approved guidelines to be liquid.
HIGH YIELD MUNICIPAL SECURITIES
In normal circumstances, at least 80% of the Fund's total assets will be
invested in investment grade tax-exempt municipal securities and up to 20% of
the Fund's total assets may be invested in lower grade tax-exempt municipal
securities. The amount of available information about the financial condition of
municipal securities issuers is generally less extensive than that for corporate
issuers with publicly traded securities and the market for tax-exempt municipal
securities is considered to be generally less liquid than the market for
corporate debt obligations. Liquidity relates to the ability of a Fund to sell a
security in a timely manner at a price which reflects the value of that
security. As discussed below, the market for lower grade tax-exempt municipal
securities is considered generally to be less liquid than the market for
investment grade tax-exempt municipal securities. Further, municipal securities
in which the Fund may invest include special obligation bonds, lease
obligations, participation certificates and variable rate instruments. The
market for such securities may be particularly less liquid. The relative
illiquidity of some of the Fund's portfolio securities may adversely affect the
ability of the Fund to dispose of such securities in a timely manner and at a
price which reflects the value of such security in the Adviser's judgment.
Although the issuer of some such municipal securities may be obligated to redeem
such securities at face value, such redemption could result in capital losses to
the Fund to the extent that such municipal securities were purchased by the Fund
at a premium to face value. The market for less liquid securities tends to be
more volatile than the market for more liquid securities and market values of
relatively illiquid securities may be more susceptible to change as a result of
adverse publicity and investor perceptions than are the market values of higher
grade, more liquid securities.
The Fund's net asset value will change with changes in the value of its
portfolio securities. Because the Fund will invest primarily in fixed income
municipal securities, the Fund's net asset value can be expected to change as
general levels of interest rates fluctuate. When interest rates decline, the
value of a portfolio invested in fixed income securities can be expected to
rise. Conversely, when interest rates rise, the value of a portfolio invested in
fixed income securities can be expected to decline. Net asset value and market
value may be volatile due to the Fund's investment in lower grade and less
liquid municipal securities. Volatility may be greater during periods of general
economic uncertainty.
The Adviser values the Fund's investments pursuant to guidelines adopted and
periodically reviewed by the Board of Trustees. To the extent that there is no
established retail market for some of the securities in which the Fund may
invest, there may be relatively inactive trading in such securities and the
ability of the Adviser to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for securities held in the Fund's portfolio,
the responsibility of the Adviser to value the Fund's securities becomes more
difficult and the Adviser's judgment may play a greater role in the valuation of
the Fund's securities due to the reduced availability of reliable objective
data. To the extent that the Fund invests in illiquid securities and securities
which are restricted as to resale, the Fund may incur additional risks and
costs. Illiquid and restricted securities are particularly difficult to dispose
of.
Lower grade tax-exempt municipal securities generally involve greater credit
risk than higher grade municipal securities. A general economic downturn or a
significant increase in interest rates could severely disrupt the market for
lower grade tax-exempt municipal securities and adversely affect the market
value of such securities. In addition, in such circumstances, the ability of
issuers of lower grade tax-exempt municipal securities to repay principal and to
pay interest, to meet projected financial goals and to obtain additional
financing may be adversely affected. Such consequences could lead to an
increased incidence of default for
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such securities and adversely affect the value of the lower grade tax-exempt
municipal securities in the Fund's portfolio and thus the Fund's net asset
value. The secondary market prices of lower grade tax-exempt municipal
securities are less sensitive to changes in interest rates than are those for
higher rated tax-exempt municipal securities, but are more sensitive to adverse
economic changes or individual issuer developments. Adverse publicity and
investor perceptions, whether or not based on rational analysis, may also affect
the value and liquidity of lower grade tax-exempt municipal securities.
Yields on the Fund's portfolio securities can be expected to fluctuate over
time. In addition, periods of economic uncertainty and changes in interest rates
can be expected to result in increased volatility of the market prices of the
lower grade tax-exempt municipal securities in the Fund's portfolio and thus in
the net asset value of the Fund. Net asset value and market value may be
volatile due to the Fund's investment in lower grade and less liquid municipal
securities. Volatility may be greater during periods of general economic
uncertainty. The Fund may incur additional expenses to the extent it is required
to seek recovery upon a default in the payment of interest or a repayment of
principal on its portfolio holdings, and the Fund may be unable to obtain full
recovery thereof. In the event that an issuer of securities held by the Fund
experiences difficulties in the timely payment of principal or interest and such
issuer seeks to restructure the terms of its borrowings, the Fund may incur
additional expenses and may determine to invest additional capital with respect
to such issuer or the project or projects to which the Fund's portfolio
securities relate. Recent and proposed legislation may have an adverse impact on
the market for lower grade tax-exempt municipal securities. Recent legislation
requires federally-insured savings and loan associations to divest their
investments in lower grade bonds. Other legislation has been proposed which, if
enacted, could have an adverse impact on the market for lower grade tax-exempt
municipal securities.
The Fund will rely on the Adviser's judgment, analysis and experience in
evaluating the creditworthiness of an issue. In this evaluation, the Adviser
will take into consideration, among other things, the issuer's financial
resources, its sensitivity to economic conditions and trends, its operating
history, the quality of the issuer's management and regulatory matters. The
Adviser also may consider, although it does not rely primarily on, the credit
ratings of S&P and Moody's in evaluating tax-exempt municipal securities. Such
ratings evaluate only the safety of principal and interest payments, not market
value risk. Additionally, because the creditworthiness of an issuer may change
more rapidly than is able to be timely reflected in changes in credit ratings,
the Adviser continuously monitors the issuers of tax-exempt municipal securities
held in the Fund's portfolio. The Fund may, if deemed appropriate by the
Adviser, retain a security whose rating has been downgraded below B- by S&P or
below B3 by Moody's, or whose rating has been withdrawn.
Because issuers of lower grade tax-exempt municipal securities frequently
choose not to seek a rating of their municipal securities, the Adviser will be
required to determine the relative investment quality of many of the municipal
securities in the Fund's portfolio. Further, because the Fund may invest up to
20% of its total assets in these lower grade municipal securities, achievement
by the Fund of its investment objective may be more dependent upon the Adviser's
investment analysis than would be the case if the Fund were investing
exclusively in higher grade municipal securities. The relative lack of financial
information available with respect to issuers of municipal securities may
adversely affect the Adviser's ability to successfully conduct the required
investment analysis.
STRATEGIC TRANSACTIONS
The Fund may, but is not required to, utilize various other investment
strategies as described below to hedge various market risks (such as interest
rates and broad or specific market movements) or to manage the effective
maturity or duration of the Fund's fixed-income securities. Such strategies are
generally accepted by modern portfolio managers and are regularly utilized by
many mutual funds and other institutional investors. Techniques and instruments
may change over time as new instruments and strategies are developed or
regulatory changes occur.
In the course of pursuing these investment strategies, the Fund may purchase
and sell derivative instruments such as exchange-listed and over-the-counter put
and call options on securities, fixed-income indices and other financial
instruments, purchase and sell financial futures contracts and options thereon,
enter into various interest rate transactions such as swaps, caps, floors or
collars (collectively, all the above are called
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"Strategic Transactions"). Strategic Transactions may be used to attempt to
protect against possible changes in the market value of securities held in or to
be purchased for the Fund's portfolio resulting from securities markets
fluctuations, to protect the Fund's unrealized gains in the value of its
portfolio securities, to facilitate the sale of such securities for investment
purposes, to manage the effective maturity or duration of the Fund's portfolio,
or to establish a position in the derivatives markets as a temporary substitute
for purchasing or selling particular securities.
Any or all of these investment techniques may be used at any time and there is
no particular strategy that dictates the use of one technique rather than
another, as use of any Strategic Transaction is a function of numerous variables
including market conditions. The ability of the Fund to utilize these Strategic
Transactions successfully will depend on the Adviser's ability to predict
pertinent market movements, which cannot be assured. The Fund will comply with
applicable regulatory requirements when implementing these strategies,
techniques and instruments. Strategic Transactions involving financial futures
and options thereon will be purchased, sold or entered into only for bona fide
hedging, risk management or portfolio management purposes and not for
speculative purposes.
Strategic Transactions have risks associated with them including possible
default by the other party to the transaction, illiquidity and, to the extent
the Adviser's view as to certain market movements is incorrect, the risk that
the use of such Strategic Transactions could result in losses greater than if
they had not been used. Use of put and call options may result in losses to the
Fund, force the sale or purchase of portfolio securities at inopportune times or
for prices other than current market values, limit the amount of appreciation
the Fund can realize on its investments or cause the Fund to hold a security it
might otherwise sell. The use of options and futures transactions entails
certain other risks. In particular, the variable degree of correlation between
price movements of futures contracts and price movements in the related
portfolio position of the Fund creates the possibility that losses on the
hedging instrument may be greater than gains in the value of the Fund's
position. In addition, futures and options markets may not be liquid in all
circumstances and certain over-the-counter options may have no markets. As a
result, in certain markets, the Fund might not be able to close out a
transaction without incurring substantial losses, if at all. Although the use of
futures and options transactions for hedging should tend to minimize the risk of
loss due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in value of
such position. Finally, the daily variation margin requirements for futures
contracts would create a greater ongoing potential financial risk than would
purchases of options, where the exposure is limited to the cost of the initial
premium. Losses resulting from the use of Strategic Transactions would reduce
net asset value, and possibly income, and such losses can be greater than if the
Strategic Transactions had not been utilized. Income earned or deemed to be
earned, if any, by the Fund from its Strategic Transactions will generally be
taxable income of the Fund. See "Tax Status" in the Prospectus.
GENERAL CHARACTERISTICS OF OPTIONS. Put options and call options typically
have similar structural characteristics and operational mechanics regardless of
the underlying instrument on which they are purchased or sold. Thus, the
following general discussion relates to each of the particular types of options
discussed in greater detail below. In addition, many Strategic Transactions
involving options require segregation of Fund assets in special accounts, as
described below under "Use of Segregated and Other Special Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
commodity, index, or other instrument at the exercise price. For instance, the
Fund's purchase of a put option on a security might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value by giving the Fund the right
to sell such instrument at the option exercise price. A call option, upon
payment of a premium, gives the purchaser of the option the right to buy, and
the seller the obligation to sell, the underlying instrument at the exercise
price. The Fund's purchase of a call option on a security, financial future,
index, or other instrument might be intended to protect the Fund against an
increase in the price of the underlying instrument that it intends to purchase
in the future by fixing the price at which it may purchase such instrument. An
American style put or call option may be exercised at any time during the option
period while a European style put or call option may be exercised only upon
expiration or during a fixed period prior thereto. The Fund is authorized to
purchase and sell exchange listed options and over-the-counter options
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("OTC options"). Exchange listed options are issued by a regulated intermediary
such as the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options. The discussion
below uses the OCC as a paradigm, but is also applicable to other financial
intermediaries.
With certain exceptions, OCC issued and exchange listed options generally
settle by physical delivery of the underlying security or currency, although in
the future cash settlement may become available. Index options and Eurodollar
instruments are cash settled for the net amount, if any, by which the option is
"in-the-money" (i.e., where the value of the underlying instrument exceeds, in
the case of a call option, or is less than, in the case of a put option, the
exercise price of the option) at the time the option is exercised. Frequently,
rather than taking or making delivery of the underlying instrument through the
process of exercising the option, listed options are closed by entering into
offsetting purchase or sale transactions that do not result in ownership of the
new option.
The Fund's ability to close out its position as a purchaser or seller of an
OCC or exchange listed put or call option is dependent, in part, upon the
liquidity of the option market. Among the possible reasons for the absence of a
liquid option market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange; (iii)
trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities including
reaching daily price limits; (iv) interruption of the normal operations of the
OCC or an exchange; (v) inadequacy of the facilities of an exchange or OCC to
handle current trading volume; or (vi) a decision by one or more exchanges to
discontinue the trading of options (or a particular class or series of options),
in which event the relevant market for that option on that exchange would cease
to exist, although outstanding options on that exchange would generally continue
to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that cannot be reflected in the option markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties ("Counterparties") through direct bilateral
agreement with the Counterparty. In contrast to exchange listed options, which
generally have standardized terms and performance mechanics, all the terms of an
OTC option, including such terms as method of settlement, term, exercise price,
premium, guarantees and security, are set by negotiation of the parties. The
Fund will only sell OTC options that are subject to a buy-back provision
permitting the Fund to require the Counterparty to sell the option back to the
Fund at a formula price within seven days. The Fund expects generally to enter
into OTC options that have cash settlement provisions, although it is not
required to do so.
Unless the parties provide for it, there is no central clearing or guaranty
function in an OTC option. As a result, if the Counterparty fails to make or
take delivery of the security, or other instrument underlying an OTC option it
has entered into with the Fund or fails to make a cash settlement payment due in
accordance with the terms of that option, the Fund will lose any premium it paid
for the option as well as any anticipated benefit of the transaction.
Accordingly, the Adviser must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be satisfied.
The Fund will engage in OTC option transactions only with United States
government securities dealers recognized by the Federal Reserve Bank of New York
as "primary dealers", or broker dealers, domestic or foreign banks or other
financial institutions which have received (or the guarantors of the obligation
of which have received) a short-term credit rating of "A-1" from S&P or "P-1"
from Moody's or an equivalent rating from any other nationally recognized
statistical rating organization ("NRSRO"). The staff of the SEC currently takes
the position that, in general, OTC options on securities other than U.S.
Government securities purchased by the Fund, and portfolio securities "covering"
the amount of the Fund's obligation pursuant to an OTC option sold by it (the
cost of the sell-back plus the in-the-money amount, if any) are illiquid, and
are subject to the Fund's limitation on investing no more than 15% of its assets
in illiquid securities.
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If the Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments in its portfolio or will
increase the Fund's income. The sale of put options can also provide income.
The Fund may purchase and sell call options on securities, including U.S.
Treasury and agency securities, municipal obligations, mortgage-backed
securities and Eurodollar instruments that are traded on U.S. and foreign
securities exchanges and in the over-the-counter markets. All calls sold by the
Fund must be "covered" (i.e., the Fund must own the securities or futures
contract subject to the call) or must meet the asset segregation requirements
described below as long as the call is outstanding. Even though the Fund will
receive the option premium to help protect it against loss, a call sold by the
Fund exposes the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
which it might otherwise have sold.
The Fund may purchase and sell put options on securities including U.S.
Treasury and agency securities, mortgage-backed securities, municipal
obligations and Eurodollar instruments (whether or not it holds the above
securities in its portfolio.) The Fund will not sell put options if, as a
result, more than 50% of the Fund's assets would be required to be segregated to
cover its potential obligations under such put options other than those with
respect to futures and options thereon. In selling put options, there is a risk
that the Fund may be required to buy the underlying security at a
disadvantageous price above the market price.
GENERAL CHARACTERISTICS OF FUTURES. The Fund may enter into financial futures
contracts or purchase or sell put and call options on such futures as a hedge
against anticipated interest rate or fixed-income market changes, for duration
management and for risk management purposes. Futures are generally bought and
sold on the commodities exchanges where they are listed with payment of initial
and variation margin as described below. The purchase of a futures contract
creates a firm obligation by the Fund, as purchaser, to take delivery from the
seller the specific type of financial instrument called for in the contract at a
specific future time for a specified price (or, with respect to index futures
and Eurodollar instruments, the net cash amount). The sale of a futures contract
creates a firm obligation by the Fund, as seller, to deliver to the buyer the
specific type of financial instrument called for in the contract at a specific
future time for a specified price (or, with respect to index futures and
Eurodollar instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right in return for the premium paid to assume a
position in a futures contract and obligates the seller to deliver such option.
The Fund's use of financial futures and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into only for bona fide hedging, risk management (including duration management)
or other portfolio management purposes. Typically, maintaining a futures
contract or selling an option thereon requires the Fund to deposit with a
financial intermediary as security for its obligations an amount of cash or
other specified assets (initial margin) which initially is typically 1% to 10%
of the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets (variation margin) may be required to be deposited
thereafter on a daily basis as the mark to market value of the contract
fluctuates. The purchase of options on financial futures involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potential subsequent variation margin) for the
resulting futures position just as it would for any position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction but there can be no assurance that the position can be offset prior
to settlement at an advantageous price nor that delivery will occur.
The Fund will not enter into a futures contract or related option (except for
closing transactions) if, immediately thereafter, the sum of the amount of its
initial margin and premiums on open futures contracts and options thereon would
exceed 5% of the Fund's total assets (taken at current value); however, in the
case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The
segregation requirements with respect to futures contracts and options thereon
are described below.
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OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES. The Fund also may
purchase and sell call and put options on securities indices and other financial
indices and in so doing can achieve many of the same objectives it would achieve
through the sale or purchase of options on individual securities or other
instruments. Options on securities indices and other financial indices are
similar to options on a security or other instrument except that, rather than
settling by physical delivery of the underlying instrument, they settle by cash
settlement, i.e., an option on an index gives the holder the right to receive,
upon exercise of the option, an amount of cash if the closing level of the index
upon which the option is based exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option (except if, in the case
of an OTC option, physical delivery is specified). This amount of cash is equal
to the excess of the closing price of the index over the exercise price of the
option, which also may be multiplied by a formula value. The seller of the
option is obligated, in return for the premium received, to make delivery of
this amount. The gain or loss on an option on an index depends on price
movements in the instruments making up the market, market segment, industry or
other composite on which the underlying index is based, rather than price
movements in individual securities, as is the case with respect to options on
securities.
COMBINED TRANSACTIONS. The Fund may enter into multiple transactions,
including multiple options transactions, multiple futures transactions and
multiple interest rate transactions and any combination of futures, options and
interest rate transactions ("component" transactions), instead of a single
Strategic Transaction, as part of a single or combined strategy when, in the
opinion of the Adviser, it is in the best interests of the Fund to do so. A
combined transaction will usually contain elements of risk that are present in
each of its component transactions. Although combined transactions are normally
entered into based on the Adviser's judgment that the combined strategies will
reduce risk or otherwise more effectively achieve the desired portfolio
management goal, it is possible that the combination will instead increase such
risks or hinder achievement of the portfolio management objective.
SWAPS, CAPS, FLOORS AND COLLARS. Among the Strategic Transactions into which
the Fund may enter are interest rate and index swaps and the purchase or sale of
related caps, floors and collars. The Fund expects to enter into these
transactions primarily to preserve a return or spread on a particular investment
or portion of its portfolio, as a duration management technique or to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date. The Fund intends to use these transactions as hedges and not as
speculative investments and will not sell interest rate caps or floors where it
does not own securities or other instruments providing the income stream the
Fund may be obligated to pay. Interest rate swaps involve the exchange by the
Fund with another party of their respective commitments to pay or receive
interest, e.g., an exchange of floating rate payments for fixed rate payments
with respect to a notional amount of principal. An index swap is an agreement to
swap cash flows on a notional amount based on changes in the values of the
reference indices. The purchase of a cap entitles the purchaser to receive
payments on a notional principal amount from the party selling such cap to the
extent that a specified index exceeds a predetermined interest rate or amount.
The purchase of a floor entitles the purchaser to receive payments on a notional
principal amount from the party selling such floor to the extent that a
specified index falls below a predetermined interest rate or amount. A collar is
a combination of a cap and a floor that preserves a certain return within a
predetermined range of interest rates or values.
The Fund will usually enter into swaps on a net basis, i.e., the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors and collars are entered into for good faith hedging purposes, the Adviser
and the Fund believe such obligations do not constitute senior securities under
the 1940 Act and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund will not enter into any swap, cap, floor or
collar transaction unless, at the time of entering into such transaction, the
unsecured long-term debt of the Counterparty, combined with any credit
enhancements, is rated at least "A" by S&P or Moody's or has an equivalent
equity rating from an NRSRO or is determined to be of equivalent credit quality
by the Adviser. If there is a default by the Counterparty, the Fund may have
contractual remedies pursuant to the agreements related to the transaction. The
swap market has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and agents utilizing
standardized swap documentation. As a result, the swap
B-11
<PAGE> 231
market has become relatively liquid. Caps, floors and collars are more recent
innovations for which standardized documentation has not yet been fully
developed and, accordingly, they are less liquid than swaps.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS. Many Strategic Transactions, in
addition to other requirements, require that the Fund segregate liquid
high-grade assets with its custodian to the extent Fund obligations are not
otherwise "covered" through ownership of the underlying security, financial
instrument or currency. In general, either the full amount of any obligation by
the Fund to pay or deliver securities or assets must be covered at all times by
the securities, instruments or currency required to be delivered, or, subject to
any regulatory restrictions, an amount of cash or liquid high-grade securities
at least equal to the current amount of the obligation must be segregated with
the custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. For example, a call option written by the Fund will require the
Fund to hold the securities subject to the call (or securities convertible into
the needed securities without additional consideration) or to segregate liquid
high-grade securities sufficient to purchase and deliver the securities if the
call is exercised. A call option sold by the Fund on an index will require the
Fund to own portfolio securities which correlate with the index or to segregate
liquid high-grade assets equal to the excess of the index value over the
exercise price on a current basis. A put option written by the Fund requires the
Fund to segregate liquid, high-grade assets equal to the exercise price.
OTC options entered into by the Fund, including those on securities, financial
instruments or indices and OCC issued and exchange listed index options, will
generally provide for cash settlement. As a result, when the Fund sells these
instruments it will only segregate an amount of assets equal to its accrued net
obligations, as there is no requirement for payment or delivery of amounts in
excess of the net amount. These amounts will equal 100% of the exercise price in
the case of a non cash-settled put, the same as an OCC guaranteed listed option
sold by the Fund, or the in-the-money amount plus any sell-back formula amount
in the case of a cash-settled put or call. In addition, when the Fund sells a
call option on an index at a time when the in-the-money amount exceeds the
exercise price, the Fund will segregate, until the option expires or is closed
out, cash or cash equivalents equal in value to such excess. OCC issued and
exchange listed options sold by the Fund other than those above generally settle
with physical delivery, and the Fund will segregate an amount of assets equal to
the full value of the option. OTC options settling with physical delivery, or
with an election of either physical delivery or cash settlement, will be treated
the same as other options settling with physical delivery.
In the case of a futures contract or an option thereon, the Fund must deposit
initial margin and possible daily variation margin in addition to segregating
assets sufficient to meet its obligation to purchase or provide securities or
currencies, or to pay the amount owed at the expiration of an index- based
futures contract. Such assets may consist of cash, cash equivalents, liquid debt
or equity securities or other acceptable assets.
With respect to swaps, the Fund will accrue the net amount of the excess, if
any, of its obligations over its entitlements with respect to each swap on a
daily basis and will segregate an amount of cash or liquid high-grade securities
having a value equal to the accrued excess. Caps, floors and collars require
segregation of assets with a value equal to the Fund's net obligation, if any.
Strategic Transactions may be covered by other means when consistent with
applicable regulatory policies. The Fund may also enter into offsetting
transactions so that its combined position, coupled with any segregated assets,
equals its net outstanding obligation in related options and Strategic
Transactions. For example, the Fund could purchase a put option if the strike
price of that option is the same or higher than the strike price of a put option
sold by the Fund. Moreover, instead of segregating assets if the Fund held a
futures or forward contract, it could purchase a put option on the same futures
or forward contract with a strike price as high or higher than the price of the
contract held. Other Strategic Transactions may also be offset in combinations.
If the offsetting transaction terminates at the time of or after the primary
transaction no segregation is required, but if it terminates prior to such time,
assets equal to any remaining obligation would need to be segregated.
The Fund's activities involving Strategic Transactions may be limited by the
requirements of Subchapter M of the Code for qualification as a regulated
investment company. See "Tax Status" in the Prospectus.
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<PAGE> 232
DESCRIPTION OF MUNICIPAL SECURITIES RATINGS
STANDARD & POOR'S RATINGS GROUP--A brief description of the applicable
Standard & Poor's Ratings Group (S&P) rating symbols and their meanings (as
published by S&P) follows:
1. DEBT
A Standard & Poor's corporate or 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 it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occasion, rely
on unaudited financial information. The ratings may be changed, suspended,
or withdrawn as a result of changes in, or unavailability of, such
information, or based on other circumstances.
The ratings are based, in varying degrees, on the following
considerations:
1. Likelihood of 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;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under
the laws of bankruptcy and other laws affecting creditors' rights.
<TABLE>
<S> <C>
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 higher 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 in higher rated categories.
BB Debt rated 'BB', 'B', 'CCC', 'CC' and 'C' is regarded, on balance, as
B predominantly speculative with respect to capacity to pay interest and repay
CCC principal. 'BB' indicates the least degree of speculation and 'C' the highest.
CC While such debt will likely have some quality and protective characteristics,
C these are outweighed by large uncertainties or large exposures to adverse
conditions.
BB Debt rated 'BB' has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The 'BB'
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied 'BBB-' rating.
</TABLE>
B-13
<PAGE> 233
<TABLE>
<S> <C>
B Debt rated 'B' has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness to
pay interest and repay principal. The 'B' rating category is also used for debt
subordinated to senior debt that is assigned an actual or implied 'BB' or 'BB-'
rating.
CCC Debt rated 'CCC' has a currently identifiable vulnerability to default, and is
dependent upon favorable business, financial, and economic conditions to meet
timely payment of interest and repayment of principal. In the event of adverse
business, financial, or economic conditions, it is not likely to have the
capacity to pay interest and repay principal. The 'CCC' rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
'B' or 'B-' rating.
CC The rating 'CC' typically is applied to debt subordinated to senior debt that
is assigned an actual or implied 'CCC' rating.
C The rating 'C' typically is applied to debt subordinated to senior debt which
is assigned an actual or implied 'CCC-' debt rating. The 'C' rating may be used
to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI The rating 'CI' is reserved for income bonds on which no interest is being
paid.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The 'D' rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) or MINUS (-): The ratings from 'AA' to 'CCC' may be modified
by the addition of a plus or minus sign to show relative standing
within the major categories.
C The letter "c" indicates that the holder's option to tender the security for
purchase may be canceled under certain prestated conditions enumerated in the
tender option documents.
I The letter "i" indicates the rating is implied. Such ratings are assigned only
on request to entities that do not have specific debt issues to be rated. In
addition, implied ratings are assigned to governments that have not requested
explicit ratings for specific debt issues. Implied ratings on governments
represent the sovereign ceiling or upper limit for ratings on specific debt
issues of entities domiciled in the country.
L The letter "L" indicates that the rating pertains to the principal amount of
those bonds to the extent that the underlying deposit collateral is federally
insured and interest is adequately collateralized. In the case of certificates
of deposit, the letter "L" indicates that the deposit, combined with other
deposits being held in the same right and capacity, will be honored for
principal and accrued pre-default interest up to the federal insurance limits
within 30 days after closing of the insured institution or, in the event that
the deposit is assumed by a successor insured institution, upon maturity.
P The letter "p" indicates that the rating is provisional. A provisional rating
assumes the successful completion of the project being financed by the debt
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
judgement with respect to such likelihood and risk.
*Continuance of the rating is contingent upon S&P's receipt of an executed copy
of the escrow agreement or closing documentation confirming investments and
cash flows.
</TABLE>
B-14
<PAGE> 234
<TABLE>
<S> <C>
NR Indicates that no public rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
DEBT OBLIGATIONS OF ISSUERS OUTSIDE THE UNITED STATES AND ITS TERRITORIES are
rated on the same basis as domestic corporate and municipal issues. The ratings
measure the creditworthiness of the obligor but do not take into account
currency exchange and related uncertainties.
</TABLE>
BOND INVESTMENT QUALITY STANDARDS: Under present commercial bank regulations
issued by the Comptroller of the Currency, bonds rated in the top four
categories ("AAA", "AA", "A", "BBB", commonly known as "investment grade"
ratings) are generally regarded as eligible for bank investment. In addition,
the laws of various states governing legal investments impose certain rating or
other standards for obligations eligible for investment by savings banks, trust
companies, insurance companies, and fiduciaries generally.
2. MUNICIPAL NOTES
A S&P note rating reflects the liquidity factors and market-access
risks unique to notes. Notes maturing in 3 years or less will likely
receive a note rating. Notes maturing beyond 3 years will most likely
receive a long-term debt rating. The following criteria will be used in
making that assessment:
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely the issue is to be treated as a
note).
-- Source of payment (the more the issue depends on the market for its
refinancing, the more likely it is to be treated as a note).
The note rating symbols and definitions are as follows:
<TABLE>
<S> <C>
SP-1 Strong capacity to pay principal and interest. Issues determined to possess
very strong characteristics are a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest, with some vulnerability to
adverse financial and economic changes over the term of the notes.
SP-3 Speculative capacity to pay principal and interest.
</TABLE>
3. COMMERCIAL PAPER
A S&P commercial paper rating is a current assessment of the
likelihood of timely payment of debt considered short-term in the relevant
market. Ratings are graded into several categories, ranging from 'A-1' for
the highest-quality obligations to 'D' for the lowest. These categories are
as follows:
<TABLE>
<S> <C>
A-1 This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
'A-1'.
A-3 Issues carrying this designation have adequate capacity for timely payment.
They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B Issues rated 'B' are regarded as having only speculative capacity for timely
payment.
C This rating is assigned to short-term debt obligations with a doubtful capacity
for payment.
D Debt rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
</TABLE>
B-15
<PAGE> 235
A 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 or obtained by S&P from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of, such information.
4. TAX-EXEMPT DUAL RATINGS
S&P assigns "dual" ratings to all debt issues that have a put option
or demand feature as part of their structure. The first rating addresses
the likelihood of repayment of principal and interest as due, and the
second rating addresses only the demand feature. The long-term debt rating
symbols are used for bonds to denote the long-term maturity and the
commercial paper rating symbols for the put option (for example,
'AAA/A-1+'). With short-term demand debt, S&P's note rating symbols are
used with the commercial paper rating symbols (for example, 'SP-1+/A-1+').
MOODY'S INVESTORS SERVICE--A brief description of the applicable Moody's
Investors Service ("Moody's") rating symbols and their meanings (as published by
Moody's) follows:
1. LONG-TERM MUNICIPAL BONDS
<TABLE>
<S> <C>
AAA Bonds which are rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
AA Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A Bonds which are rated A possess many favorable investment attributes and are to
be considered as upper-medium-grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA Bonds which are rated Baa are considered as medium-grade obligations, (i.e.,
they are neither highly protected nor poorly secured). Interest 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.
</TABLE>
B-16
<PAGE> 236
<TABLE>
<S> <C>
CON (..) Bonds for which the security depends upon the completion of some act or the
fulfillment of some condition are rated conditionally and designated with the
prefix "Con" followed by the rating in parentheses. These are bonds secured by:
(a) earnings of projects under construction, (b) earnings of projects
unseasoned in operating experience, (c) rentals that begin when facilities are
completed, or (d) payments to which some other limiting condition attaches the
parenthetical rating denotes the probable credit stature upon completion of
construction or elimination of the basis of the condition.
NOTE: Moody's applies numerical modifiers, 1, 2 and 3 in each generic rating
classification from AA to B. The modifier 1 indicates that the company ranks in
the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the company ranks in the
lower end of its generic rating category.
</TABLE>
2. SHORT-TERM EXEMPT NOTES
Moody's ratings for state and municipal short-term obligations will be
designated Moody's Investment Grade or (MIG). Such ratings recognize the
differences between short-term credit risk and long-term risk. Factors
affecting the liquidity of the borrower and short-term cyclical elements
are critical in short-term ratings, while other factors of major importance
in bond risk, long-term secular trends for example, may be less important
over the short run. A short-term rating may also be assigned on an issue
having a demand feature-variable rate demand obligation. Such ratings will
be designated as VMIG, SG or, if the demand feature is not rated, as NR.
Moody's short-term ratings are designated Moody's Investment Grade as
MIG 1 or VMIG 1 through MIG 4 or VMIG 4. As the name implies, when Moody's
assigns a MIG or VMIG rating, all categories define an investment grade
situation.
MIG 1/VMIG 1. This designation denotes best quality. There is present
strong protection by established cash flows, superior liquidity support or
demonstrated broad-based access to the market for refinancing.
MIG 2/VMIG 2. This designation denotes high quality. Margins of
protection are ample although not so large as in the preceding group.
MIG 3/VMIG 3. This designation denotes favorable quality. All security
elements are accounted for but there is lacking the undeniable strength of
the preceding grades. Liquidity and cash flow protection may be narrow and
market access for refinancing is likely to be less well established.
MIG 4/VMIG 4. This designation denotes adequate quality. Protection
commonly regarded as required of an investment security is present and
although not distinctly or predominantly speculative, there is specific
risk.
SG. This designation denotes speculative quality. Debt instruments in
this category lack margins of protection.
3. TAX-EXEMPT COMMERCIAL PAPER
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Obligations relying upon support mechanisms such as
letters-of-credit and bond of Indemnity are excluded unless explicitly
rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated
issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations.
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<PAGE> 237
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term debt obligations.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
OFFICERS AND TRUSTEES
The tables below list the trustees and officers of the Trust (of which the
Fund is a separate series) and their principal occupations for the last five
years and their affiliations, if any, with Van Kampen American Capital
Investment Advisory Corp. (the "VK Adviser" or "Adviser"), Van Kampen American
Capital Asset Management, Inc., (the "AC Adviser"), Van Kampen American Capital
Management, Inc., McCarthy, Crisanti & Maffei, Inc., MCM Asia Pacific Company,
Limited, Van Kampen American Capital Distributors, Inc. (the "Distributor"), Van
Kampen American Capital, Inc. ("Van Kampen American Capital") or VK/AC Holding,
Inc. For purposes hereof, the term "Van Kampen American Capital Funds" includes
each of the open-end investment companies advised by the VK Adviser (excluding
the Van Kampen Merritt Series Trust) and each of the open-end investment
companies advised by the AC Adviser.
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 63 equipment. Trustee of each of the Van Kampen American
Capital Funds.
Richard E. Caruso.................. Founder, Chairman and Chief Executive Officer, Integra
Two Randor 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.
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.
Philadelphia, PA 19114 Trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. Trustee of each of the Van
Lyme, CT 06371 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. Trustee of
each of the Van Kampen American Capital Funds.
</TABLE>
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<PAGE> 238
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
Dennis J. McDonnell*............... President, Chief Operating Officer and a Director of the
One Parkview Plaza VK Adviser, the AC Adviser and Van Kampen American
Oakbrook Terrace, IL 60181 Capital Management, Inc. Director of VK/AC Holding, Inc,
Age: 53 Van Kampen American Capital, and McCarthy, Crisanti &
Maffei, Inc. Chairman and a Director of MCM Asia Pacific
Company, Ltd. President, Chief Executive Officer and
Trustee of each of the funds advised by the VK Adviser.
Prior to December, 1991, Senior Vice President of Van
Kampen Merritt Inc.
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. Trustee of each of the Van Kampen American
Capital Funds and Chairman of the Board of each of the
open-end funds (except the Van Kampen Merritt Series
Trust) advised by the VK Adviser.
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. (SIPC). 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.
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of the
Age: 55 Distributor, the VK Adviser, the AC Adviser and Van
Kampen American Capital Management, Inc. Director,
President and Chief Executive Officer of Van Kampen
American Capital Advisers, Inc. and Van Kampen American
Capital Exchange Corp. Director and Executive Vice
President of Advantage Capital Corporation, ACCESS
Investor Services, Inc., Van Kampen American Capital
Services, Inc. and Van Kampen American Capital Trust
Company. Director of McCarthy, Crisanti & Maffei, Inc.
President and Director, Trustee or Managing General
Partner of each of the funds advised by the AC Adviser
and Trustee of each of the funds advised by the VK
Adviser. He is also Chairman of the Board of the Van
Kampen Merritt Series Trust and closed-end investment
companies advised by the VK Adviser.
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., a closed-end investment company
Age: 71 unaffiliated with Van Kampen American Capital, a director
and the second vice president of International Institute
of Los Angeles. 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. Trustee of each
of the Van Kampen American Capital Funds.
</TABLE>
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<PAGE> 239
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
----------------------------------- ---------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
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 funds advised by the AC Adviser. Director, FPA Capital
Los Angeles, CA 90067 Fund, Inc.; FPA New Income Fund, Inc.; FPA Perennial
Age: 63 Fund, Inc.; Source Capital, Inc.; and TCW Convertible
Security Fund, Inc. Trustee of each of the Van Kampen
American Capital Funds.
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. Trustee of each of the Van Kampen American
Age: 70 Capital Funds and Chairman of the Board of each of the
open-end funds advised by the AC Adviser.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to funds advised by the VK Adviser.
Chicago, IL 60606 Trustee of each of the Van Kampen American Capital Funds.
Age: 55 He also is a Trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK 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. Trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
OFFICERS
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 39 Manager of the Adviser. Executive Vice
President of the AC Adviser. Vice President
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser.
</TABLE>
B-20
<PAGE> 240
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
--------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Ronald A. Nyberg..... Vice President and Executive Vice President, General Counsel and
Age: 41 Secretary Secretary of Van Kampen American Capital.
Executive Vice President and a Director of
the VK Adviser and the Distributor. Executive
Vice President of the AC Adviser. Vice
President and Secretary of each of the Van
Kampen American Capital Funds and closed-end
funds advised by the VK Adviser. Director of
ICI Mutual Insurance Co., a provider of
insurance to members of the Investment
Company Institute. Prior to March 1990,
Secretary of Van Kampen Merritt Inc., the VK
Adviser and McCarthy, Crisanti & Maffei, Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the VK Adviser. Vice
Age: 39 and Chief Financial President, Treasurer and Chief Financial
Officer Officer of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Nicholas Dalmaso..... Assistant Secretary Assistant Vice President and Attorney of Van
Age: 30 Kampen American Capital. Assistant Secretary
of each of the Van Kampen American Capital
Funds and closed-end funds advised by the VK
Adviser. Prior to May 1992, attorney for
Cantwell & Cantwell, a Chicago law firm.
Scott E. Martin...... Assistant Secretary Senior Vice President, Deputy General Counsel
Age: 38 and Assistant Secretary of Van Kampen
American Capital. Senior Vice President,
Deputy General Counsel and Secretary of the
VK Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 39 Capital, the VK Adviser and the Distributor.
Assistant Secretary of McCarthy, Crisanti &
Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end funds advised by the VK Adviser.
John L. Sullivan..... Controller First Vice President of the VK Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end funds advised by
the VK Adviser.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the VK Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end funds
advised by the VK Adviser.
</TABLE>
---------------
* Such Trustees are "interested persons" (within the meaning of Section 2(a)(19)
of the 1940 Act). Messrs. Powell and McDonnell are interested persons of the
VK Adviser and the Fund by reason of their positions with the VK Adviser. Mr.
Sheehan is an interested person of the VK Adviser and the Fund by reason of
his firm having acted as legal counsel to the VK Adviser. Mr. Whalen is an
interested person of the Fund by reason of his firm acting as legal counsel
for the Fund.
B-21
<PAGE> 241
Messrs. Powell and McDonnell own, or have the opportunity to purchase, an
equity interest in VK/AC Holding, Inc., the parent company of Van Kampen
American Capital, and have entered into employment contracts (for a term of five
years) with Van Kampen American Capital.
The Fund will pay trustees who are not affiliated persons of the VK Adviser,
the Distributor or Van Kampen American Capital an annual retainer of $2,500 per
year and $125 per regular quarterly meeting of the Fund, plus expenses. No
additional fees are proposed at the present time to be paid for special
meetings, committee meetings or to the chairman of the board. The trustees have
approved an aggregate annual compensation cap from the combined fund complex of
$84,000 per trustee (excluding any retirement benefits) until December 31, 1996,
based upon the current net assets and the current number of Van Kampen American
Capital funds (except that Mr. Whalen, who is also a trustee of the closed-end
funds advised by the VK Adviser would receive additional compensation for
serving as a trustee of such funds). In addition, the VK Adviser has agreed to
reimburse the Fund through December 31, 1996, for any increase in the aggregate
trustees' compensation over the aggregate compensation paid by the Fund in its
1994 fiscal year.
COMPENSATION TABLE(1)
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
RETIREMENT FROM REGISTRANT
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL AND FUND
COMPENSATION AS PART OF BENEFITS UPON COMPLEX PAID TO
NAME FROM REGISTRANT(2) FUND EXPENSES(3) RETIREMENT(4) TRUSTEE(5)
------------------------------- -------------------- ------------------ ---------------- ---------------
<S> <C> <C> <C> <C>
R. Craig Kennedy............... $ 21,968 $ 45 $2,500 $62,362
Philip G. Gaughan.............. 21,928 824 2,500 63,250
Donald C. Miller............... 23,768 1,131 2,500 62,178
Jack A. Nelson................. 23,858 428 2,500 62,362
Jerome L. Robinson............. 23,801 827 2,500 58,475
Wayne W. Whalen................ 17,553 278 2,500 49,875
</TABLE>
---------------
(1) Messrs. McDonnell and Powell, trustees of the Trust, are affiliated persons
of the VK Adviser and are not eligible for compensation or retirement
benefits from the Trust. Messrs. Branagan, Caruso, Hilsman, Rees, Sheehan,
Sisto and Woodside were elected as trustees of the Trust at a shareholders
meeting held July 21, 1995 and thus received no compensation or retirement
benefits from the Trust during its 1994 fiscal year.
(2) The Registrant is Van Kampen American Capital Tax Free Trust (the "Trust")
which currently is comprised of 8 operating series, including the Fund. The
amounts shown in this column are accumulated from the Aggregate Compensation
of each of these 8 series during such series' fiscal year ended December 31,
1994. Beginning in October 1994 each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation. The total
combined amount of deferred compensation (including interest) accrued with
respect to each trustee from the Fund Complex (as defined herein) as of
December 31, 1994 is as follows: Mr. Kennedy $14,737; Mr. Miller $14,553;
Mr. Nelson $14,737 and Mr. Robinson $13,725.
(3) The Retirement Plan commenced as of August 1, 1994 for the Fund. The amounts
in this column are the retirement benefits accrued during the Fund's fiscal
year ended December 31, 1994.
(4) This is the estimated annual benefits payable per year for the 10-year
period commencing in the year of such Trustee's retirement by a Fund
assuming: the Trustee has 10 or more years of service on the Board of the
Fund and retires at or after attaining the age of 60. Trustees retiring
prior to the age of 60 or with fewer than 10 years of service for the Fund
may receive reduced retirement benefits from such Fund.
(5) As of December 31, 1994, the Fund Complex consisted of 20 mutual funds
advised by the VK Adviser which had the same members on each funds' Board of
Trustees as of December 31, 1994. The amounts shown in this column are
accumulated from the Aggregate Compensation of each of these 20 mutual funds
in the Fund Complex during the calendar year ended December 31, 1994. The VK
Adviser also serves as investment adviser for other investment companies;
however, with the exception of Messrs. Powell, McDonnell and Whalen, such
investment companies do not have the same trustees as the Fund Complex.
B-22
<PAGE> 242
Combining the Fund Complex with other investment companies advised by the VK
Adviser, Mr. Whalen received Total Compensation of $161,850.
As of July 17, 1995, the trustees and officers as a group own less than 1% of
the shares of the Fund.
No officer or trustee of the Fund owns or would be able to acquire 5% or more
of the common stock of VK/AC Holding, Inc.
To the knowledge of the Fund, as of July 17, 1995, no person owned of record
or beneficially 5% or more of the Fund's Class A Shares or Class B Shares.
As of July 17, 1995, the following persons owned of record or beneficially 5%
or more of the Fund's Class C Shares: Dain Bosworth Inc. FBO, Richard I. Nannini
and Eleanor L. Nannini, 2925 Juliann Way, Reno, NV 89509-5198, 6%; and Edward D.
Jones and Co. F/A/O, Frieda K. Bowker, TTEE, U/A DTD 1/16/81 for EDJ
#149-03045-1-4, P.O. Box 2500, Maryland Heights, MO 63043-8500, 5%.
INVESTMENT ADVISORY AND OTHER SERVICES
INVESTMENT ADVISORY AGREEMENT
Van Kampen American Capital Investment Advisory Corp. (the "VK Adviser" or
"Adviser") is the Fund's investment adviser. The Adviser was incorporated as a
Delaware corporation in 1982 (and through December 31, 1987 transacted business
under the name of American Portfolio Advisory Service Inc.). The Adviser's
principal office is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181.
The Adviser is a wholly-owned subsidiary of Van Kampen American Capital, Inc.,
which in turn 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, Inc.
own, in the aggregate, not more than 7% of the common stock of VK/AC Holding,
Inc. and have the right to acquire, upon the exercise of options, approximately
an additional 11% of the common stock of VK/AC Holding, Inc. Presently, and
after giving effect to the exercise of such options, no officer or trustee of
the Fund owns or would own 5% or more of the common stock of VK/AC Holding, Inc.
The investment advisory agreement provides that the Adviser will supply
investment research and portfolio management, including the selection of
securities for the Fund to purchase. The Adviser also administers the business
affairs of the Fund, furnishes offices, necessary facilities and equipment,
provides administrative services, and permits its officers and employees to
serve without compensation as officers of the Fund and trustees of the Trust if
duly elected to such positions.
The agreement provides that the Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in connection with the
matters to which the agreement relates, except a loss resulting from willful
misfeasance, bad faith, or gross negligence on the part of the Adviser in the
performance of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under the agreement.
The Adviser's activities are subject to the review and supervision of the
Board of Trustees of the Trust, of which the Fund is a series, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement for the Fund will continue in effect from
year to year if specifically approved by the Trustees of the Trust, of which the
Fund is a separate series (or by the Fund's shareholders), and by the
disinterested trustees in compliance with the requirements of the 1940 Act. The
agreement may be terminated without penalty upon 60 days' written notice by
either party thereto and will automatically terminate in the event of
assignment.
B-23
<PAGE> 243
The investment advisory agreement specifies that the Adviser will reimburse
the Fund for annual expenses of the Fund which exceed the most stringent limit
prescribed by any state in which the Fund's shares are offered for sale.
Currently, the most stringent limit in any state would require such
reimbursement to the extent that aggregate operating expenses of the Fund
(excluding interest, taxes and other expenses which may be excludable under
applicable state law) exceed in any fiscal year 2 1/2% of the average annual net
assets of the Fund up to $30 million, 2% of the average annual net assets of the
Fund of the next $70 million, and 1 1/2% of the remaining average annual net
assets of the Fund. In addition to making any required reimbursements, the
Adviser may in its discretion, but is not obligated to, waive all or any portion
of its fee or assume all or any portion of the expenses of the Fund.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
advisory expenses of $3,475,616, $2,578,871 and $1,315,431, respectively.
OTHER AGREEMENTS
SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor which terminated as of July 10, 1995 concurrent with the Fund's
change in transfer agent, the Fund received support services for shareholders,
including the handling of all written and telephonic communications, except
initial order entry and other distribution related communications. Payment by
the Fund for such services was made on cost basis for the employment of the
personnel and the equipment necessary to render the support services. At such
time, the Fund, and the other Van Kampen American Capital mutual funds
distributed by the Distributor, shared such costs proportionately among
themselves based upon their respective net asset values.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $334,800, $275,030 and $158,860, respectively,
representing the Distributor's cost of providing certain support services.
ACCOUNTING SERVICES AGREEMENT. The Fund has entered into an accounting
services agreement pursuant to which the VK Adviser provides accounting services
supplementary to those provided by the Custodian. Such services are expected to
enable the Fund to more closely monitor and maintain its accounts and records.
The Fund shares together with the other Van Kampen American Capital mutual funds
advised by the VK Adviser and distributed by the Distributor in the cost of
providing such services, with 25% of such costs shared proportionately based on
the number of outstanding classes of securities per fund and with the remaining
75 percent of such cost being paid by the Fund and such other Van Kampen
American Capital funds based proportionally on their respective net assets.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $18,250, $16,306 and $7,960, respectively,
representing the VK Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund and each of the other Van Kampen American
Capital funds advised by the VK Adviser and distributed by the Distributor have
entered into Legal Services Agreements pursuant to which Van Kampen American
Capital provides legal services, including without limitation: accurate
maintenance of the funds' minute books and records, preparation and oversight of
the funds' regulatory reports, and other information provided to shareholders,
as well as responding to day-to-day legal issues on behalf of the funds. Payment
by the Fund for such services is made on a cost basis for the salary and salary
related benefits, including but not limited to bonuses, group insurances and
other regular wages for the employment of personnel, as well as overhead and the
expenses related to the office space and the equipment necessary to render the
legal services. Other funds distributed by the Distributor also receive legal
services from Van Kampen American Capital. Of the total costs for legal services
provided to funds distributed by the Distributor, one half of such costs are
allocated equally to each fund and the remaining one half of such costs are
allocated to specific funds based on monthly time records.
For the years ended December 31, 1994, 1993 and 1992, the Fund recognized
expenses of approximately $21,950, $21,500 and $7,200, respectively,
representing Van Kampen American Capital's cost of providing legal services.
B-24
<PAGE> 244
CUSTODIAN AND INDEPENDENT AUDITORS
State Street Bank and Trust Company, 225 Franklin Street, P.O. Box 1713,
Boston, MA 02105-1713, is the custodian of the Fund and has custody of all
securities and cash of the Fund. The custodian, among other things, attends to
the collection of principal and income, and payment for and collection of
proceeds of securities bought and sold by the Fund.
The independent auditors for the Fund are KPMG Peat Marwick LLP, Chicago,
Illinois. The selection of independent auditors will be subject to ratification
by the shareholders of the Fund at any annual meeting of shareholders.
PORTFOLIO TRANSACTIONS AND BROKERAGE ALLOCATION
The Adviser will place orders for portfolio transactions for the Fund with
broker-dealer firms giving consideration to the quality, quantity and nature of
each firm's professional services. These services include execution, clearance
procedures, wire service quotations and statistical and other research
information provided to the Fund, or the Adviser, including quotations necessary
to determine the value of the Fund's net assets. Any research benefits derived
are available for all clients of the Adviser. Since statistical and other
research information is only supplementary to the research efforts of the
Adviser to the Fund and still must be analyzed and reviewed by its staff, the
receipt of research information is not expected to materially reduce its
expenses.
If it is believed to be in the best interests of the Fund, the Adviser may
place portfolio transactions with brokers who provide the types of research
described above, even if it means the Fund will have to pay a higher commission
(or, if the broker's profit is part of the cost of the security, will have to
pay a higher price for the security), than would be the case if no weight were
given to the broker's furnishing of those research services. This will be done,
however, only if, in the opinion of the Fund's Adviser, the amount of additional
commission or increased cost is reasonable in relation to the value of such
services.
In selecting among the firms believed to meet the criteria for handling a
particular transaction, the Adviser may take into consideration that certain
firms (i) provide market, statistical or other research information such as that
set forth above to the Fund or the Adviser, (ii) have sold or are selling shares
of the Fund and (iii) may select firms that are affiliated with the Fund, the
Adviser, or its distributor and other principal underwriters.
If purchases or sales of securities of the Fund and of one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities will be allocated among the
several investment companies and clients in a manner deemed equitable to all by
the Adviser, taking into account the respective sizes of the Fund and other
investment companies and clients and the amount of securities to be purchased or
sold. Although it is possible that in some cases this procedure could have a
detrimental effect on the price or volume of the security as far as the Fund is
concerned, it is also possible that the ability to participate in volume
transactions and to negotiate lower brokerage commissions will be beneficial to
the Fund.
While the Adviser will be primarily responsible for the placement of the
Fund's business, the policies and practices in this regard must be consistent
with the foregoing and will at all times be subject to review by the trustees of
the Trust, of which the Fund is a separate series.
The trustees have adopted certain policies incorporating the standards of Rule
17e-1 issued by the SEC under the 1940 Act which requires that the commissions
paid to the Distributor and other affiliates of the Fund must be reasonable and
fair compared to the commissions, fees or other remuneration received or to be
received by other brokers in connection with comparable transactions involving
similar securities during a comparable period of time. The rule and procedures
also contain review requirements and require the Adviser to furnish reports to
the trustees and to maintain records in connection with such reviews. After
consideration of all factors deemed relevant, the trustees will consider from
time to time whether the advisory fee for the Fund will be reduced by all or a
portion of the brokerage commission given to affiliated brokers.
B-25
<PAGE> 245
State securities laws 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.
TAX STATUS OF THE FUND
The Trust and each of its series, including the Fund, will be treated as
separate corporations for income tax purposes. The Fund may be subject to tax if
it fails to distribute net capital gains, or if its annual distributions, as a
percentage of its income, are less than the distributions required by tax laws.
THE DISTRIBUTOR
The Distributor 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. Van Kampen American Capital's roots in money management
extend back to 1926. Today, Van Kampen American Capital manages or supervises
more than $50 billion in mutual funds, closed-end funds and unit investment
trusts -- assets which have been entrusted to Van Kampen American Capital in
more than 2 million investor accounts. Van Kampen American Capital has one of
the largest research teams (outside of the rating agencies) in the country, with
86 analysts devoted to various specializations.
Shares of the Fund are offered on a continuous basis through the Distributor,
One Parkview Plaza, Oakbrook Terrace, IL 60181. The Distributor is a wholly
owned subsidiary of Van Kampen American Capital, Inc., which is a subsidiary of
VK/AC Holding, Inc., a Delaware corporation that is controlled through an
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. In addition, certain officers, directors and
employees of Van Kampen American Capital, Inc., and its subsidiaries own, in the
aggregate not more than 7% 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. C & D L.P. is managed by Clayton,
Dubilier & Rice, Inc. Clayton & Dubilier Associates IV Limited Partnership ("C &
D Associates L.P.") is the general partner of C & D L.P. Pursuant to a
distribution agreement, the Distributor will purchase shares of the Fund for
resale to the public, either directly or through securities dealers, and is
obligated to purchase only those shares for which it has received purchase
orders. A discussion of how to purchase and redeem the Fund's shares and how the
Fund's shares are priced is contained in the Prospectus.
The Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the 1940 Act.
The Fund also has adopted a service plan (the "Service Plan") with respect to
each class of shares. The Distribution Plan and Service Plan sometimes are
referred to herein collectively as the "Plans". The Plans provide that the Fund
may spend a portion of the Fund's average daily net assets attributable to each
class of shares in connection with distribution of the respective class of
shares and in connection with the provision of ongoing services to shareholders
of such class, respectively. The Plans are being implemented through an
agreement (the "Distribution and Service Agreement") with the Distributor,
distributor of each class of the Fund's shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers and
NASD members or eligible non-members who are acting as brokers or agents and
similar agreements between the Fund and financial intermediaries who are acting
as brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance, which may include, but not
be limited to, processing purchase and redemption transactions, establishing and
maintaining shareholder accounts regarding the Fund, and such other services as
may be agreed to from time to time and as may be permitted by applicable
statute, rule or regulation. Brokers, dealers and financial intermediaries that
have entered into sub-agreements with the Distributor and sell shares of the
Fund are referred to herein as "financial intermediaries."
Under the Distribution and Service Agreement and the Selling Agreements,
financial intermediaries that sold shares prior to July 1, 1987, or prior to the
beginning of the calendar quarter in which the Selling Agreement between the
Fund and such financial intermediary was approved by the Fund's Board of
Trustees (an "Implementation Date") are not eligible to receive compensation
pursuant to such Distribution and Service Agreement and/or Selling Agreement. To
the extent that there remain outstanding shares of the Fund
B-26
<PAGE> 246
that were purchased prior to all Implementation Dates, the percentage of the
total average daily net asset value of a class of shares that may be utilized
pursuant to the Distribution and Service Agreement will be less than the maximum
percentage amount permissible with respect to such class of shares under the
Distribution and Service Agreement.
The Distributor must submit quarterly reports to the Board of Trustees of the
Trust, of which the Fund is a series, setting forth separately by class of
shares all amounts paid under the Plans and the purposes for which such
expenditures were made, together with such other information as from time to
time is reasonably requested by the Trustees. The Plans provide that they will
continue in full force and effect from year to year so long as such continuance
is specifically approved by a vote of the Trustees, and also by a vote of the
disinterested Trustees, cast in person at a meeting called for the purpose of
voting on the Plans. Each of the Plans may not be amended to increase materially
the amount to be spent for the services described therein with respect to either
class of shares without approval by a vote of a majority of the outstanding
voting shares of such class, and all material amendments to either of the Plans
must be approved by the Trustees and also by the disinterested Trustees. Each of
the Plans may be terminated with respect to either class of shares at any time
by a vote of a majority of the disinterested Trustees or by a vote of a majority
of the outstanding voting shares of such class.
For the year ended December 31, 1994, the Fund has recognized expenses under
the Plans of $1,626,311, $1,662,702 and $41,554 for the Class A Shares, Class B
Shares and Class C Shares, respectively, of which $1,357,846 and $408,661
represent payments to financial intermediaries under the Selling Agreements for
Class A Shares and Class B Shares, respectively. For the year ended December 31,
1994, the Fund has reimbursed the Distributor $212,577 and $55,751 for
advertising expenses, and $40,262 and $26,873 for compensation of the
Distributor's sales personnel for the Class A Shares and Class B Shares,
respectively.
LEGAL COUNSEL
Counsel to the Fund is Skadden, Arps, Slate, Meagher & Flom, Chicago,
Illinois.
PERFORMANCE INFORMATION
The Fund's yield quotation is determined on a monthly basis with respect to
the immediately preceding 30 day period, and yield is computed by dividing the
Fund's net investment income per share of a given class earned during such
period by the Fund's maximum offering price (including, with respect to the
Class A Shares, the maximum initial sales charge) per share of such class on the
last day of such period. The Fund's net investment income per share is
determined by taking the interest attributable to a given class of shares earned
by the Fund during the period, subtracting the expenses attributable to a given
class of shares accrued for the period (net of any reimbursements), and dividing
the result by the average daily number of the shares of each class outstanding
during the period that were entitled to receive dividends. The yield calculation
formula assumes net investment income is earned and reinvested at a constant
rate and annualized at the end of a six month period. Yield will be computed
separately for each class of shares. Class B Shares redeemed during the first
six years after their issuance and Class C Shares redeemed during the first year
after their issuance may be subject to a contingent deferred sales charge in a
maximum amount equal to 4% and 1%, respectively, of the lesser of the then
current net asset value of the shares redeemed or their initial purchase price
from the Fund. Yield quotations do not reflect the imposition of a contingent
deferred sales charge, and if any such contingent deferred sales charge imposed
at the time of redemption were reflected, it would reduce the performance
quoted.
Tax-equivalent yield demonstrates the taxable yield required to produce an
after-tax yield equivalent to that of the Fund's yield. The Fund's
tax-equivalent yield quotation for a 30 day period as described above is
computed by dividing that portion of the yield of the Fund (as computed above)
which is tax-exempt by a percentage equal to 100% minus a stated percentage
income tax rate and adding the result to that portion of the Fund's yield, if
any, that is not tax-exempt.
The Fund calculates average compounded total return by determining the
redemption value (less any applicable contingent deferred sales charge) at the
end of specified periods (after adding back all dividends
B-27
<PAGE> 247
and other distributions made during the period) of a $1,000 investment in a
given class of shares of the Fund (less the maximum sales charge, if any) at the
beginning of the period, annualizing the increase or decrease over the specified
period with respect to such initial investment and expressing the result as a
percentage. Average compounded total return will be computed separately for each
class of shares.
Total return figures utilized by the Fund are based on historical performance
and are not intended to indicate future performance. Total return and net asset
value per share of a given class can be expected to fluctuate over time, and
accordingly upon redemption a shareholder's shares may be worth more or less
than their original cost.
The Fund may, in supplemental sales literature, advertise non-standardized
total return figures representing the cumulative, non-annualized total return of
each class of shares of the Fund from a given date to a subsequent given date.
Cumulative total return is calculated by measuring the value of an initial
investment in a given class of shares of the Fund at a given time, including or
excluding any applicable sales charge as indicated, determining the value of all
subsequent reinvested distributions, and dividing the net change in the value of
the investment as of the end of the period by the amount of the initial
investment and expressing the result as a percentage. Non-standardized total
return will be calculated separately for each class of shares. Non-standardized
total return calculations do not reflect the imposition of a contingent deferred
sales charge, and if any such contingent deferred sales charge with respect to
the CDSC imposed at the time of redemption were reflected, it would reduce the
performance quoted.
CLASS A SHARES
The average total return, including payment of maximum sales charge, with
respect to the Class A Shares for (i) the one year period ended December 31,
1994 was (10.73%); (ii) the approximately four year, five month period from
August 1, 1990 (the commencement of investment operations of the Fund) through
December 31, 1994 was 5.83%.
The Fund's yield with respect to the Class A Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.95%. The tax-equivalent yield with
respect to Class A Shares for the 30 day period ending December 30, 1994
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 9.30%. The Fund's current
distribution rate with respect to the Class A Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.90%.
The Fund's cumulative non-standardized total return, including payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 28.41%.
The Fund's cumulative non-standardized total return, excluding payment of the
maximum sales charge, with respect to the Class A Shares from its inception to
the end of the current period was 34.71%.
CLASS B SHARES
The average total return, including payment of the CDSC, with respect to the
Class B Shares for (i) the one year period ended December 31, 1994 was (10.50%)
and (ii) the approximately two year, five month period of August 24, 1992
(commencement of distribution) through December 31, 1994 was 0.96%.
The Fund's yield with respect to the Class B Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.52%. The tax-equivalent yield with
respect to Class B Shares for the 30 day period ending December 30, 1994
(Calculated in the manner described in The Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 8.63%. The Fund's current
distribution rate with respect to the Class B Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.39%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 2.32%.
B-28
<PAGE> 248
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class B Shares from its inception to the end of the
current period was 5.55%.
CLASS C SHARES
The average total return, including payment of the CDSC, with respect to the
Class C Shares for (i) the one year period ended December 31, 1994 was (7.86%)
and (ii) the approximately one year, five month period of August 13, 1994
(commencement of distribution) through December 31, 1994 was (2.99%).
The Fund's yield with respect to the Class C Shares for the 30 day period
ending December 30, 1994 (calculated in the manner described in the Prospectus
under the heading "Fund Performance") was 5.47%. The tax-equivalent yield with
respect to Class C Shares for the 30 day period ending December 30, 1994
(calculated in the manner described in the Prospectus under the heading "Fund
Performance" and assuming a 36% tax rate) was 8.55%. The Fund's current
distribution rate with respect to the Class C Shares for the month ending
December 31, 1994 (calculated in the manner described in the Prospectus under
the heading "Fund Performance") was 5.39%.
The Fund's cumulative non-standardized total return, including payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.22%).
The Fund's cumulative non-standardized total return, excluding payment of the
CDSC, with respect to the Class C Shares from its inception to the end of the
current period was (4.22%).
B-29
<PAGE> 249
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Independent Auditors' Report
--------------------------------------------------------------------------------
The Board of Trustees and Shareholders of
Van Kampen Merritt Municipal Income Fund:
We have audited the accompanying statement of assets and liabilities of
Van Kampen Merritt Municipal Income Fund (the "Fund"), including the
portfolio of investments, as of December 31, 1994, and the related statement
of operations for the year then ended, the statement of changes in
net assets for each of the two years in the period then ended, and the
financial highlights for each of the periods presented. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial state-
ments and financial highlights are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1994, by correspondence with
the custodian. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of Van
Kampen Merritt Municipal Income Fund as of December 31, 1994, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the periods presented, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Chicago, Illinois
February 14, 1995
B-30
<PAGE> 250
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Municipal Bonds
Alabama 2.7%
$ 2,805 Alabama Higher Edl Ln Corp ..................................... AAA Aaa 6.000% 9/01/07 $ 2,722,477
2,100 Alabama St Indl Dev Auth Rev Var Rate Cpn ..................... NR NR 7.500 9/15/11 2,100,000
3,000 Alabama Wtr Pollutn Ctl Auth Ser A (AMBAC Insd) ............... AAA Aaa 6.750 8/15/17 3,038,220
5,055 Bay Minette, AL Indl Dev Brd Indl Dev Rev Coltec Inds Inc Rfdg . NR NR 6.500 2/15/09 4,489,851
1,225 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.000 9/15/01 1,346,765
1,750 IDB of the City of Bessemer, AL Rohn Inc Ser 91A Var Rate Cpn .. NR NR 9.500 9/15/11 2,087,400
1,500 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.000 8/01/13 1,241,550
1,070 Marshall Cnty, AL Gas Dist Gas Rev (MBIA Insd) ................. AAA Aaa 5.250 8/01/18 880,738
------------
17,907,001
------------
Alaska 1.6%
5,690 Kasaan, AK Lease Rev ........................................... A- Baa1 8.000 8/15/16 5,979,507
8,000 North Slope Borough, AK Cap Appreciation Ser B
(Cap Gar Insd) ................................................. AAA Aa * 6/30/04 4,389,840
------------
10,369,347
------------
Arizona 2.2%
1,000 Maricopa Cnty, AZ Indl Dev Auth Indl Dev Rev Borden Inc Proj ... NR Ba1 * 10/01/12 964,750
5,220 Pinal Cnty, AZ Sch Dist No 8 Mammoth Ser A
(Prerefunded @ 07/01/00) ...................................... BB NR 9.500 7/01/10 6,119,458
7,000 Tucson, AZ Arpt Auth Inc Spl Fac Rev Lockheed Aermod Cent Inc . A- Baa1 8.700 9/01/19 7,697,480
------------
14,781,688
------------
Arkansas 1.0%
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser A <F3> ................................... NR NR 9.750 7/01/12 3,440,630
5,470 Dogwood Addition PRD Muni Ppty Owners Multi Purp Impt
Dist No 8 AR Impt Ser B <F3> ................................... NR NR 9.750 7/01/12 3,440,630
------------
6,881,260
------------
California 9.3%
6,880 California Edl Fac Auth Rev College Of Osteopathic Med Pacific NR NR 7.500 6/01/18 6,745,633
4,980 California Hlth Fac Fin Auth Rev Kaiser Permanente Med ........ AA Aa2 5.450 10/01/13 4,207,652
10,000 California St Pub Wks Brd Lease Rev Dept of Corrections CA
St Prison Susanville Ser D (Cap Guar Insd) .................... AAA Aaa 5.250 6/01/15 8,301,800
2,000 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 4.875 12/01/10 1,597,420
2,300 California Statewide Cmntys Dev Auth Rev Ctfs Partn
Sisters Charity ............................................... NR Aa 5.000 12/01/23 1,704,461
4,325 Delano, CA Ctfs Partn Ser A ................................... NR NR 9.250 1/01/22 4,649,375
1,000 Fairfield, CA Hsg Auth Mtg Rev Creekside Estates Proj Rfdg ..... NR NR 7.875 2/01/15 1,000,000
</TABLE>
See Notes to Financial Statements
B-31
<PAGE> 251
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
California (Continued)
$10,000 Los Angeles Cnty, CA Pub Wks Fin Auth Lease Rev Multi
Cap Fac Proj IV (MBIA Insd) ..................................... AAA Aaa 5.000% 12/01/08 $ 8,467,900
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.850 12/01/26 834,180
1,000 Los Angeles, CA Cmnty Redev Agy Cmnty Redev Fin Auth
Rev Grand Cent Sq Ser A ........................................ A A 5.900 12/01/26 836,100
1,100 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/05 570,680
900 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/10 323,415
800 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/11 268,584
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/12 219,156
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/13 204,295
700 Monterey, CA Regl Wastewater Fin Auth Wastewater Contract Rev
(FSA Insd) ...................................................... AAA Aaa * 6/01/14 190,358
3,200 Orange Cnty, CA Cmnty Fac Dist Spl Tax No 88-1 Aliso Viejo
Ser A (Prerefunded @ 08/15/02) .................................. AAA NR 7.350 8/15/18 3,568,448
7,000 Sacramento, CA City Fin Auth Lease Rev Ser A Rfdg (AMBAC Insd) .. AAA Aaa 5.400 11/01/20 5,799,500
1,000 San Jose, CA Fin Auth Rev Reassmt Ser C Rfdg .................... NR NR 7.000 9/02/15 957,830
2,000 Shasta, CA Jt Pwrs Fin Auth Lease Rev Justice Cent Proj Ser A Rfdg NR Baa1 5.900 9/01/14 1,726,600
10,000 University of CA Rev Multi Purp Proj Ser C Rfdg (AMBAC Insd) .... AAA Aaa 5.250 9/01/12 8,482,700
5,000 Yorba Linda, CA Redev Agy Tax Alloc Rev Yorba Linda Redev Proj
Ser A (MBIA Insd) ............................................... AAA Aaa * 9/01/19 951,650
------------
61,607,737
------------
Colorado 7.2%
3,985 Adams Cnty, CO Single Family Mtg Rev Ser A ........................ AAA Aaa 8.875 8/01/12 4,900,673
2,840 Adams Cnty, CO Single Family Mtg Rev Ser A
(Prerefunded @ 08/01/10) ......................................... AAA Aaa 8.875 8/01/11 3,434,668
3,900 Colorado Hlth Fac Auth Rev Hosp North CO Med Cent (MBIA Insd) ..... AAA Aaa 6.000 5/15/20 3,599,856
2,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 7.000 11/15/99 1,981,400
8,550 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.500 11/15/23 8,636,184
5,000 Denver, CO City & Cnty Arpt Rev Ser A ............................ BB Baa 8.000 11/15/25 4,898,450
9,750 Denver, CO City & Cnty Sch Dist No 1 Ser A Rfdg ................... A+ A * 12/01/06 4,565,145
3,690 Jefferson Cnty, CO Residential Mtg Rev ............................ AAA Aaa 11.500 9/01/12 5,553,856
</TABLE>
See Notes to Financial Statements
B-32
<PAGE> 252
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Colorado (Continued)
$ 5,000 Meridian Metro Dist CO Peninsular & Oriental Steam
Navig Co Rfdg .................................................. NR A3 7.500% 12/01/11 $ 5,121,750
5,000 University of CO Hosp Auth Hosp Rev Ser A (AMBAC Insd) ......... AAA Aaa 6.400 11/15/22 4,891,450
------------
47,583,432
------------
Connecticut 1.0%
5,005 Connecticut St Hlth & Edl Fac Auth Rev Nursing Home
Pgm AHF/Hartford ................................................ AA- A1 7.125 11/01/14 5,046,091
2,030 Connecticut St Ser A ............................................. AA- Aa 5.500 3/15/10 1,839,160
------------
6,885,251
------------
District of Columbia 0.6%
4,000 District of Columbia Ctfs Partn .................................. BBB NR 7.300 1/01/13 3,808,240
------------
Florida 3.4%
3,000 Emerald Coast, FL Hsg Corp Hsg Rev Ser A 1991 .................... NR NR 9.500 1/01/22 3,000,000
5,000 Florida St Div Bond Fin Dept Genl Svcs Rev Environmental
Preservation 2000 Ser A .......................................... AAA Aaa 4.750 7/01/10 4,114,850
335 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/02 310,421
900 Largo, FL Sun Coast Hlth Sys Rev Hosp Rfdg ...................... BBB- NR 5.750 3/01/05 796,527
2,875 Martin Cnty, FL Indl Dev Auth Indl Dev Rev Indiantown Cogeneration
Proj A Rfdg (AMBAC Insd) ......................................... BBB- Baa3 7.875 12/15/25 2,920,425
855 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A ............................................ BBB- NR 8.500 3/01/20 857,095
5,040 Pinellas Cnty, FL Hlth Fac Auth Sun Coast Hlth Sys Rev
Sun Coast Hosp Ser A (Prerefunded @ 03/01/00) .................... AAA NR 8.500 3/01/20 5,755,982
4,300 Sarasota Cnty, FL Hlth Fac Auth Rev Hlthcare
Kobernick/Meadow Park ............................................ NR NR 10.000 7/01/22 4,420,486
------------
22,175,786
------------
Georgia 0.4%
2,813 Cobb Cnty, GA Dev Auth Rev Grantor Tr Ctfs Franklin Forest Ser A . NR NR 8.000 6/01/22 2,925,000
------------
Hawaii 3.6%
4,055 Hawaii St Arpts Sys Rev Ser 1993 (MBIA Insd) ................... AAA Aaa 6.350 7/01/07 4,092,063
14,100 Hawaii St Dept Budget & Fin Spl Purp Rev Hawaiian Elec Co
(MBIA Insd) ..................................................... AAA Aaa 6.550 12/01/22 13,575,480
245 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.600 6/01/08 253,867
2,350 Hawaii St Dept Tran Spl Fac Rev Continental Airls Inc .......... NR NR 9.700 6/01/20 2,438,595
1,475 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.350 7/01/07 1,488,481
1,560 Hawaii St Harbor Cap Impt Rev (FGIC Insd) ....................... AAA Aaa 6.400 7/01/08 1,568,268
------------
23,416,754
------------
</TABLE>
See Notes to Financial Statements
B-33
<PAGE> 253
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Illinois 13.4%
$ 4,500 Bedford Park, IL Tax Increment Rev Sr Lien Bedford City Sq Proj.. NR NR 9.250% 2/01/12 $ 4,725,000
7,000 Broadview, IL Tax Increment Rev Sr Lien ........................ NR NR 8.250 7/01/13 6,895,000
3,000 Chicago, IL O'Hare Intl Arpt Rev Ser C1 (MBIA Insd) ............ AAA Aaa 5.750 1/01/09 2,782,170
5,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev Intl Terminal ......... AAA Aaa 6.750 1/01/18 4,902,800
4,000 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc ..... BB Baa3 8.500 5/01/18 4,134,360
410 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser A.. BB Baa2 8.400 5/01/18 421,603
5,110 Chicago, IL O'Hare Intl Arpt Spl Fac Rev United Airls Inc Ser B.. BB Baa2 8.950 5/01/18 5,436,274
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/08 687,701
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/09 637,925
1,665 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/10 578,787
1,690 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/11 548,844
1,700 Cook Cnty, IL Cmnty High Sch Dist No 233 Homewood &
Flossmor Ser B (FGIC Insd) .................................... AAA Aaa * 12/01/12 514,794
4,800 Hodgkins, IL Tax Increment ..................................... NR NR 9.500 12/01/09 5,184,000
4,100 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj A ........ NR NR 9.500 10/01/22 4,281,548
2,000 Illinois Hlth Fac Auth Rev Fairview Oblig Group Proj B ........ NR NR 9.000 10/01/22 2,003,340
560 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D ............ BBB Baa1 9.500 11/15/15 631,002
425 Illinois Hlth Fac Auth Rev Glenoaks Med Cent Ser D
(Prerefunded @ 11/15/00) ...................................... AAA NR 9.500 11/15/15 512,512
1,150 Illinois Hlth Fac Auth Rev Holy Cross Hosp Proj ................ NR Baa1 6.700 3/01/14 1,040,888
4,000 Illinois Hlth Fac Auth Rev Mt Sinai Hosp Med Cent Chicago Ser A.. BB- Ba 10.250 2/01/13 4,017,480
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.250 8/15/15 8,454,420
9,000 Illinois Hlth Fac Auth Rev Servantcor Proj Ser A (Cap Guar Insd). AAA Aaa 6.375 8/15/21 8,468,370
2,600 Illinois Hlth Fac Auth Rev United Med Cent
(Prerefunded @ 07/01/01) ....................................... NR NR 8.375 7/01/12 3,027,310
6,585 Illinois Hsg Dev Auth Residential Mtg Rev (Inverse Fltg) ...... A+ Aa 9.086 2/01/18 5,984,119
4,310 Illinois St Dedicated Tax Rev Civic Cent Ser B (AMBAC Insd) .... AAA Aaa * 12/15/19 789,161
2,800 Regional Tran Auth IL Ser A (AMBAC Insd) ....................... AAA Aaa 8.000 6/01/17 3,222,632
7,000 Robbins, IL Res Recovery Rev Robbins Res Recovery
Partners Ser A ................................................. NR NR 9.250 10/15/14 7,216,230
1,490 Southern IL Univ Rev Hsg & Aux Fac Sys Ser A (MBIA Insd) ....... AAA Aaa 5.800 4/01/10 1,381,692
------------
88,479,962
------------
</TABLE>
See Notes to Financial Statements
B-34
<PAGE> 254
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Indiana 0.9%
$ 2,750 Elkhart Cnty, IN Hosp Auth Rev Elkhart Genl Hosp Inc ........... NR A1 7.000% 7/01/12 $ 2,770,818
3,000 Indianapolis, IN Arpt Auth Rev Spl Fac Federal Express
Corp Proj ...................................................... BBB Baa2 7.100 1/15/17 2,874,510
------------
5,645,328
------------
Iowa 0.3%
25,000 Iowa Hsg Fin Auth Single Family Hsg Rev 1984 Ser A .............. AA Aaa * 9/01/16 2,214,250
------------
Kentucky 1.7%
1,000 Bowling Green, KY Indl Dev Rev Coltec Inds Inc Rfdg ............. NR NR 6.550 3/01/09 938,510
2,800 Elizabethtown, KY Indl Dev Rev Coltec Inds Inc ................... B+ Ba2 9.875 10/01/10 2,842,532
4,000 Jefferson Cnty, KY Hosp Rev Alliant Hlth Sys Proj
(Inverse Fltg) (MBIA Insd) ....................................... AAA Aaa 7.380 10/01/08 3,920,000
1,250 Kentucky Econ Dev Fin Auth Med Cent Rev Ashland Hosp Corp
Ser A Rfdg & Impt (Cap Guar Insd) ................................ AAA Aaa 6.125 2/01/12 1,204,463
2,145 Kentucky Hsg Corp Hsg Rev Ser D (FHA/VA Collateralized) .......... AAA Aaa 7.450 1/01/23 2,190,924
------------
11,096,429
------------
Louisiana 0.8%
2,600 Lafayette, LA Econ Dev Auth Indl Dev Rev Advanced Polymer
Proj Ser 1985 .................................................... NR NR 10.000 12/31/00 2,672,644
10,000 Orleans Parish, LA Sch Brd Rfdg (FGIC Insd) ..................... AAA Aaa * 2/01/15 2,407,600
------------
5,080,244
------------
Maine 0.5%
1,500 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.450 11/01/99 1,465,050
2,000 Maine Edl Ln Marketing Corp Student Ln Rev Ser A4 ................ NR Aaa 5.600 11/01/00 1,955,140
------------
3,420,190
------------
Maryland 1.3%
1,500 Baltimore Cnty, MD Pollutn Ctl Rev Bethlehem Steel Corp Proj
Ser A Rfdg ....................................................... NR NR 7.550 6/01/17 1,454,250
3,500 Maryland St Hlth & Higher Edl Fac Auth Rev Kernan Hosp Issue
(Connie Lee Insd) ................................................ AAA NR 6.100 7/01/24 3,177,475
3,000 Northeast MD Waste Disp Auth Solid Waste Rev Montgomery Cnty
Res Recovery Proj Ser A .......................................... NR A 6.200 7/01/10 2,706,960
1,165 Rockville, MD Mtg Rev Summit Apts Proj Ser A Rfdg (MBIA Insd) .... AAA Aaa 5.625 7/01/19 989,353
------------
8,328,038
------------
Massachusetts 1.7%
1,665 Massachusetts Edl Ln Auth Edl Ln Rev Issue E Ser A
(AMBAC Insd) ..................................................... AAA Aaa 7.000 1/01/10 1,687,128
4,200 Massachusetts St Hlth & Edl Fac Auth Rev New England Med Cent
Hosp Ser G (Embedded Swap) (MBIA Insd) ........................... AAA Aaa 5.000 7/01/13 3,398,262
</TABLE>
See Notes to Financial Statements
B-35
<PAGE> 255
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Massachusetts (Continued)
$ 6,000 Massachusetts St Hlth & Edl Fac Auth Rev Saint Mem Med Cent
Ser A .......................................................... NR B 5.750% 10/01/06 $ 4,272,000
2,000 Plymouth Cnty, MA Ctfs Partn Ser A ............................. A- NR 7.000 4/01/22 2,005,280
------------
11,362,670
------------
Michigan 1.4%
2,000 Grand Traverse Cnty, MI Hosp Fin Auth Hosp Rev Munson Hlthcare
Ser A Rfdg (AMBAC Insd) .......................................... AAA Aaa 6.250 7/01/12 1,925,960
2,470 Michigan St Hosp Fin Auth Rev Garden City Hosp ................... BBB- Ba 8.300 9/01/02 2,477,410
5,600 Michigan St Hsg Dev Auth Rental Hsg Rev Ser B
(Embedded Swap) (AMBAC Insd) ..................................... AAA Aaa 2.870 4/01/04 4,532,416
2,390 Romulus, MI Cmnty Sch Rfdg (FGIC Insd) ........................... AAA Aaa * 5/01/19 465,190
------------
9,400,976
------------
Minnesota 0.2%
8,160 Southern MN Muni Pwr Agy Pwr Supply Sys Rev Ser A
(MBIA Insd) ...................................................... AAA Aaa * 1/01/22 1,351,949
------------
Mississippi 0.7%
5,000 Lowndes Cnty, MS Solid Waste Disp & Pollutn Ctl Rev Var
Weyerhaeuser Co Rfdg (Inverse Fltg) .............................. A A2 6.560 4/01/22 4,706,600
------------
Missouri 2.6%
2,000 Lees Summit, MO Indl Dev Auth Hlth Fac Rev John Knox Vlg
Proj Rfdg & Impt ................................................. NR NR 7.125 8/15/12 2,001,660
1,890 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/04 2,014,570
3,920 Missouri St Econ Dev Export & Infrastructure Brd Med Office
Fac Rev (MBIA Insd) .............................................. AAA Aaa 7.250 6/01/14 4,224,427
4,000 Missouri St Hlth & Edl Fac Auth Hlth Fac Rev Hlth Midwest Ser B
(MBIA Insd) ...................................................... AAA Aaa 6.250 2/15/22 3,790,200
3,000 Missouri St Hlth & Edl Fac Rev Freeman Hosp Proj Ser A ........... AAA Aaa 5.375 2/15/14 2,586,240
2,165 Saint Louis Cnty, MO Indl Dev Auth Nursing Home Rev
Mary Queen & Mother Proj Rfdg .................................... NR Aaa 7.125 3/20/23 2,213,258
------------
16,830,355
------------
Montana 0.8%
6,000 Montana St Brd Invt Res Recovery Rev Yellowstone Energy L P Proj . NR NR 7.000 12/31/19 5,373,240
------------
Nebraska 1.2%
5,200 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.963 9/15/23 4,998,500
850 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 9.293 9/15/24 749,062
1,800 Nebraska Invt Fin Auth Single Family Mtg Rev (Inverse Fltg) ..... AAA Aaa 10.542 9/10/30 1,892,250
------------
7,639,812
------------
Nevada 2.7%
4,000 Clark Cnty, NV Indl Dev Rev NV Pwr Co Proj Ser A (FGIC Insd) ..... AAA Aaa 6.700 6/01/22 3,882,640
6,500 Clark Cnty, NV Indl Dev Rev Southwest Gas Corp Ser A ............. BBB- Baa3 6.500 12/01/33 5,403,970
</TABLE>
See Notes to Financial Statements
B-36
<PAGE> 256
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Nevada (Continued)
$ 2,500 Henderson, NV Loc Impt Dist No T-4 Ser A ..................... NR NR 8.500% 11/01/12 $ 2,531,100
2,575 Humboldt Genl Hosp Dist NV ................................... NR Baa 6.125 6/01/13 2,371,008
4,020 Reno, NV Redev Agy Tax Alloc Downtown Redev Proj Ser E Rfdg .. NR Baa 5.750 9/01/17 3,448,517
------------
17,637,235
------------
New Jersey 2.9%
6,130 Middlesex Cnty, NJ Util Auth Swr Rev Ser A Rfdg (Inverse Fltg)
(MBIA Insd) .................................................... AAA Aaa 8.448 8/15/10 5,839,009
4,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) <F2> ............................................... AAA Aaa 5.800 7/01/07 3,885,840
2,000 New Jersey Econ Dev Auth Mkt Transition Fac Rev Ser A
(MBIA Insd) .................................................... AAA Aaa 5.800 7/01/08 1,918,720
7,000 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj B Rfdg (MBIA Insd) .......................... AAA Aaa 6.250 6/01/31 6,553,960
1,250 Salem Cnty, NJ Indl Pollutn Ctl Fin Auth Rev Pub Svc
Elec & Gas Co Proj C Rfdg (MBIA Insd) ......................... AAA Aaa 6.200 8/01/30 1,165,562
------------
19,363,091
------------
New Mexico 0.4%
2,500 New Mexico St Hosp Equip Ln Council Hosp Rev San Juan Regl
Med Cent Inc Proj .............................................. NR A 7.900 6/01/11 2,654,150
------------
New York 16.0%
4,945 Battery Park City Auth NY Rev Sr Ser A Rfdg ................... AA A1 5.000 11/01/08 4,138,817
3,715 Clifton Springs, NY Hosp & Clinic Hosp Rev .................... NR NR 8.000 1/01/20 3,583,155
2,500 Herkimer Cnty, NY Indl Dev Agy Indl Dev Rev Burrows Paper
Corp Recycling ................................................ NR NR 8.000 1/01/09 2,536,450
2,500 Metropolitan Tran Auth NY Commuter Fac Rev Ser A (MBIA Insd) . AAA Aaa 6.100 7/01/08 2,452,750
5,000 Metropolitan Tran Auth NY Svcs Contract Tran Fac Ser 5 Rfdg ... BBB Baa1 7.000 7/01/12 5,025,350
5,000 New York City Indl Dev Agy Spl Fac Rev Terminal One
Group Assn Proj ............................................... A A 6.000 1/01/19 4,355,000
4,000 New York City Muni Wtr Fin Auth ............................... A- A 5.625 6/15/11 3,520,600
20,000 New York City Muni Wtr Fin Auth Wtr & Swr Sys Rev (MBIA Insd) . AAA Aaa 5.350 6/15/12 17,209,000
2,500 New York City Ser B ........................................... A- Baa1 7.500 2/01/07 2,606,625
5,000 New York City Ser C Rfdg ...................................... A- Baa1 6.500 8/01/04 4,938,050
7,500 New York City Ser C Subser C-1 ................................ A- Baa1 7.500 8/01/20 7,692,225
5,000 New York City Ser H ........................................... A- Baa1 7.000 2/01/16 4,931,850
2,580 New York City Ser H Subser H-1 ................................ A- Baa1 4.900 8/01/97 2,505,232
14,600 New York St Dorm Auth Rev City Univ 3rd Genl Resources
Ser E (MBIA Insd) ............................................. AAA Aaa 6.750 7/01/24 14,634,602
2,500 New York St Energy Resh & Dev Auth Gas Fac Rev (Inverse Fltg) . A A1 8.041 4/01/20 1,990,625
</TABLE>
See Notes to Financial Statements
B-37
<PAGE> 257
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments (Continued)
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
New York (Continued)
$ 2,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev Niagara
Mohawk Pwr Corp Ser A Rfdg (FGIC Insd) ........................ AAA Aaa 7.200% 7/01/29 $ 2,072,800
7,000 New York St Energy Resh & Dev Auth Pollutn Ctl Rev NY St
Elec & Gas Corp Ser A Rfdg (MBIA Insd) ........................ AAA Aaa 6.050 4/01/34 6,371,120
490 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A ................................................... BBB+ Baa1 7.750 8/15/11 521,144
1,320 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Impt Ser A (Prerefunded @ 02/15/01) ........................... AAA Aaa 7.750 8/15/11 1,479,020
495 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs
Fac Ser C ..................................................... BBB+ Baa1 7.300 2/15/21 499,658
1,505 New York St Med Care Fac Fin Agy Rev Mental Hlth Svcs Fac
Ser C (Prerefunded @ 08/15/01) ................................ AAA Aaa 7.300 2/15/21 1,663,085
5,000 New York St Urban Dev Corp Rev Correctional Cap Fac
Ser A Rfdg (FSA Insd) ......................................... AAA Aaa 6.500 1/01/11 5,039,600
2,000 New York St Urban Dev Corp Rev St Fac ......................... BBB Baa1 7.500 4/01/20 2,050,240
3,000 Onondaga Cnty, NY Res Recovery Agy Rev Proj Res Recovery Fac .. NR Baa 6.875 5/01/06 2,920,380
1,000 Troy, NY Indl Dev Auth Lease Rev City of Troy Proj ............ NR NR 8.000 3/15/22 1,021,980
-------------
105,759,358
-------------
North Dakota 0.3%
2,000 Ward Cnty, ND Hlthcare Fac Rev Saint Joseph's Hosp Corp Proj ... BBB- NR 8.875 11/15/24 2,022,540
-------------
Ohio 2.3%
4,660 Franklin Cnty, OH Hosp Rev Holy Cross Hlth Sys Ser B Rfdg ....... AA- A1 5.250 6/01/08 4,135,750
8,600 Ohio Hsg Fin Agy Single Family Mtg Rev Ser B (Inverse Fltg) .... AAA Aaa 9.213 3/31/31 8,148,500
1,000 Ohio St Air Quality Dev Auth Rev JMG Fdg Ltd Partnership Proj Rfdg
(AMBAC Insd) .................................................... AAA Aaa 6.375 4/01/29 948,750
2,000 Ohio St Wtr Dev Auth Pollutn Ctl Fac Rev College Cleveland Elec
Ser A Rfdg ...................................................... BB Ba2 8.000 10/01/23 1,962,140
-------------
15,195,140
-------------
Oklahoma 0.5%
2,810 Oklahoma Hsg Fin Agy Single Family Rev Mtg Class B
(Inverse Fltg) .................................................. AAA NR 7.997 8/01/18 3,034,800
-------------
Pennsylvania 1.7%
3,000 Allentown, PA Area Hosp Auth Rev Sacred Heart Hosp Ser A Rfdg ... BBB NR 6.750 11/15/14 2,613,420
2,000 Delaware Cnty, PA Auth Hosp Rev Cmnty Hosp Crozer-Chester
Mem Cent ........................................................ BBB+ A 6.000 12/15/20 1,587,840
1,500 McKean Cnty, PA Hosp Auth Hosp Rev Bradford Hosp Proj
(Crossover Rfdg @ 10/01/00) ..................................... BBB- NR 8.875 10/01/20 1,734,660
3,000 Montgomery Cnty, PA Higher Edl & Hlth Auth Hosp Rev
(Embedded Swap) (AMBAC Insd) .................................... AAA Aaa 5.660 6/01/12 2,588,940
</TABLE>
See Notes to Financial Statements
B-38
<PAGE> 258
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pennsylvania (Continued)
$2,000 Philadelphia, PA Hosp & Higher Edl Fac Auth Hosp Rev
Temple Univ Hosp Ser A ......................................... BBB+ Baa1 6.500% 11/15/08 $ 1,873,220
995 Philadelphia, PA Muni Auth Rev Lease Ser B Rfdg ................ BB Ba 6.400 11/15/16 870,416
------------
11,268,496
------------
Rhode Island 1.4%
2,000 Providence, RI Redev Agy Ctfs Partn Ser A ..................... NR NR 8.000 9/01/24 1,959,700
1,500 Rhode Island Depositors Econ Protn Corp Spl Oblig Ser A
(Prerefunded @ 08/01/02) ...................................... AAA Aaa 6.950 8/01/22 1,630,755
2,345 Rhode Island Hsg & Mtg Fin Corp Rental Hsg Pgm Ser B .......... A NR 7.950 10/01/30 2,424,707
2,450 West Warwick, RI Ser A ......................................... NR Ba 6.800 7/15/98 2,507,501
600 West Warwick, RI Ser A ......................................... NR Ba 7.300 7/15/08 604,374
------------
9,127,037
------------
Tennessee 0.5%
1,500 Maury Cnty, TN Indl Dev Brd Pollutn Ctl Rev Multi Modal
Saturn Corp Proj Rfdg .......................................... BBB+ Baa1 6.500 9/01/24 1,384,710
1,500 Memphis-Shelby Cnty, TN Arpt Auth Spl Fac & Proj Rev
Federal Express Corp Rfdg ...................................... BBB Baa2 7.875 9/01/09 1,592,235
------------
2,976,945
------------
Texas 3.6%
2,500 Garland, TX Econ Dev Auth Indl Dev Rev Yellow Freight
Sys Inc Proj .................................................. A- NR 8.000 12/01/16 2,605,475
3,995 Leander, TX Indpt Sch Dist Cap Apprec Rfdg .................... NR Aaa * 8/15/16 853,652
3,500 North Cent, TX Hlth Fac Dev Corp Rev Ser C Presbyterian
Hlthcare Sys (Inverse Fltg) (MBIA Insd) ....................... AAA Aaa 10.655 6/22/21 3,364,375
13,000 Texas Muni Pwr Agy Rev (MBIA Insd) ............................ AAA Aaa * 9/01/13 3,785,340
5,250 Texas St Dept Hsg & Cmnty Affairs Home Mtg Rev Coll
Ser C Rfdg (Inverse Fltg) ..................................... AAA NR 9.207 7/02/24 4,790,625
4,025 Texas St Higher Edl Coordinating Brd College Student Ln <F4> .. NR A 0/7.850 10/01/25 2,391,494
3,954 Texas St ..................................................... NR NR 6.350 12/01/13 3,888,447
2,250 West Side Calhoun Cnty, TX Navig Dist Solid Waste Disp
Union Carbide Chem & Plastics ................................ BBB Baa2 8.200 3/15/21 2,365,897
------------
24,045,305
------------
Utah 2.1%
3,215 Bountiful, UT Hosp Rev South Davis Cmnty Hosp Proj ............ NR NR 9.500 12/15/18 3,271,070
11,000 Salt Lake City, UT Hosp Rev IHC Hosp Inc Rfdg (Inverse Fltg) ... AA Aa 6.150 2/15/12 9,668,560
1,000 Utah St Hsg Fin Agy Single Family Mtg Ser F2 ................. AAA Aaa 7.000 7/01/27 1,001,560
------------
13,941,190
------------
Virginia 1.8%
1,000 Augusta Cnty, VA Indl Dev Auth Hosp Rev (AMBAC Insd) ......... AAA Aaa 5.500 9/01/15 864,660
3,500 Fredericksburg, VA Indl Dev Auth Hosp Fac Rev (Inverse Fltg)
(FGIC Insd) ................................................... AAA Aaa 6.600 8/15/23 3,403,330
</TABLE>
See Notes to Financial Statements
B-39
<PAGE> 259
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Portfolio of Investments
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Par
Amount S & P Moody's
(000) Description Rating Rating Coupon Maturity Market Value
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Virginia (Continued)
$ 2,080 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ..................... AAA Aaa 6.800% 3/01/14 $ 2,102,423
1,000 Loudoun Cnty, VA Ctfs Partn (FSA Insd) ..................... AAA Aaa 6.900 3/01/19 1,011,500
3,535 Norfolk, VA Wtr Rev ....................................... AAA Aaa 5.250 11/01/13 3,038,014
1,250 Southeastern Pub Svc Auth VA Rev Sr Regl Solid Waste Sys ... A- A 6.000 7/01/17 1,100,425
------------
11,520,352
------------
West Virginia 1.4%
2,500 Harrison Cnty, WV Cnty Comm Solid Waste Disp Rev
Monongahela Pwr Co ........................................... A A1 6.875 4/15/22 2,449,900
6,750 South Charleston, WV Indl Dev Rev Union Carbide
Chem & Plastics Ser A ........................................ BBB Baa2 8.000 8/01/20 7,020,810
------------
9,470,710
------------
Wisconsin 0.5%
3,200 Wisconsin Hsg & Econ Dev Auth Home Ownership Rev Rfdg
(Inverse Fltg) ............................................... A+ Aa 9.580 10/25/22 3,008,000
------------
Wyoming 0.3%
2,000 Sweetwater Cnty, WY Solid Waste Disp Rev FMC Corp Proj Ser B . BBB Baa3 6.900 9/01/24 1,842,220
------------
Total Long-Term Investments 98.9%
(Cost $667,323,342) ............................................................................. 652,138,108
Other Assets in Excess of Liabilities 1.1% ..................................................... 7,216,006
--------------
Net Assets 100% ................................................................................ $ 659,354,114
--------------
*Zero coupon bond
<FN>
<F1>At December 31, 1994, for federal income tax purposes cost is
$667,518,084; the aggregate gross unrealized appreciation is $30,921,003 and
the aggregate gross unrealized depreciation is $44,250,963, resulting in net
unrealized depreciation including futures transactions of $13,329,960.
<F2>Assets segregated as collateral for open futures transactions.
<F3>Non-income producing security.
<F4>Currently is a zero coupon bond which will convert to a coupon paying bond
at a predetermined date.
</FN>
</TABLE>
See Notes to Financial Statements
B-40
<PAGE> 260
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Statement of Assets and Liabilities
December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets:
<S> <C>
Investments, at Market Value (Cost $667,323,342) <F1>....................................... $ 652,138,108
Receivables:
Interest.................................................................................... 12,305,247
Fund Shares Sold............................................................................ 799,516
Investments Sold............................................................................ 535,000
Unamortized Organizational Expenses and Initial Registration Costs <F1>..................... 17,688
Other....................................................................................... 2,841
--------------
Total Assets................................................................................ 665,798,400
--------------
Liabilities:
Payables:
Fund Shares Repurchased..................................................................... 2,429,138
Income Distributions ....................................................................... 1,627,340
Custodian Bank.............................................................................. 879,971
Margin on Futures <F5>...................................................................... 352,445
Investment Advisory Fee <F2>................................................................ 273,528
Accrued Expenses............................................................................ 881,864
--------------
Total Liabilities........................................................................... 6,444,286
--------------
Net Assets.................................................................................. $ 659,354,114
--------------
Net Assets Consist of:
Paid in Surplus <F3> ....................................................................... $ 698,739,659
Accumulated Distributions in Excess of Net Investment Income <F1>........................... (228,298)
Net Unrealized Depreciation on Investments.................................................. (13,135,218)
Accumulated Net Realized Loss on Investments ............................................... (26,022,029)
--------------
Net Assets.................................................................................. $ 659,354,114
--------------
Maximum Offering Price Per Share:
Class A Shares:
Net asset value and redemption price per share (Based on net assets of $495,814,695 and
34,768,092 shares of beneficial interest issued and outstanding) <F3>....................... $ 14.26
Maximum sales charge (4.65%* of offering price)............................................. .70
--------------
Maximum offering price to public ........................................................... $ 14.96
--------------
Class B Shares:
Net asset value and offering price per share (Based on net assets of $158,705,886 and
11,128,652 shares of beneficial interest issued and outstanding) <F3>....................... $ 14.26
--------------
Class C Shares:
Net asset value and offering price per share (Based on net assets of $3,850,918 and
270,017 shares of beneficial interest issued and outstanding) <F3>.......................... $ 14.26
--------------
Class D Shares:
Net asset value and offering price per share (Based on net assets of $982,615 and
68,899 shares of beneficial interest issued and outstanding) <F3>........................... $ 14.26
--------------
</TABLE>
*On sales of $100,000 or more, the sales charge will be reduced. Effective
January 16, 1995, the maximum sales charge was changed to 4.75%.
See Notes to Financial Statements
B-41
<PAGE> 261
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Statement of Operations
For the Year Ended December 31, 1994
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Investment Income:
<S> <C>
Interest............................................................................................. $ 49,936,822
Amortization of Discount (Premium) - Net............................................................. (354,986)
---------------
Total Income......................................................................................... 49,581,836
---------------
Expenses:
Investment Advisory Fee <F2> ........................................................................ 3,475,616
Distribution (12b-1) and Service Fees (Allocated to Classes A, B, C and D of $1,626,311, $1,662,702,
$41,554 and $2,828, respectively) <F6> .............................................................. 3,333,395
Shareholder Services ................................................................................ 829,610
Legal <F2>........................................................................................... 186,400
Amortization of Organizational Expenses and Initial Registration Costs <F1> ......................... 30,470
Trustees Fees and Expenses <F2>...................................................................... 26,240
Other................................................................................................ 411,534
---------------
Total Expenses....................................................................................... 8,293,265
---------------
Net Investment Income................................................................................ $ 41,288,571
---------------
Realized and Unrealized Gain/Loss on Investments:
Realized Gain/Loss on Investments:
Proceeds from Sales.................................................................................. $ 692,840,108
Cost of Securities Sold (Including reorganization and restructuring costs of $144,803)............... (708,359,483)
---------------
Net Realized Loss on Investments (Including realized loss on closed and
expired option transactions and futures transactions of $1,411,955 and $788,622, respectively)....... (15,519,375)
---------------
Unrealized Appreciation/Depreciation on Investments:
Beginning of the Period.............................................................................. 63,265,059
End of the Period (Including unrealized appreciation on open futures transactions of $2,050,016)..... (13,135,218)
---------------
Net Unrealized Depreciation on Investments During the Period......................................... (76,400,277)
---------------
Net Realized and Unrealized Loss on Investments...................................................... $ (91,919,652)
---------------
Net Decrease in Net Assets from Operations........................................................... $ (50,631,081)
---------------
</TABLE>
See Notes to Financial Statements
B-42
<PAGE> 262
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Statement of Changes in Net Assets
For the Years Ended December 31, 1994 and 1993
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, 1994 December 31, 1993
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
From Investment Activities:
Operations:
Net Investment Income....................................................... $ 41,288,571 $ 39,506,461
Net Realized Loss on Investments............................................ (15,519,375) (10,384,633)
Net Unrealized Appreciation/Depreciation on Investments During the Period... (76,400,277) 45,121,848
---------------- ----------------
Change in Net Assets from Operations ....................................... (50,631,081) 74,243,676
---------------- ----------------
Distributions from Net Investment Income*................................... (41,020,921) (39,506,461)
Distributions in Excess of Net Investment Income* <F1>...................... -0- (495,948)
---------------- ----------------
Distributions from and in Excess of Net Investment Income*.................. (41,020,921) (40,002,409)
Distributions in Excess of Net Realized Gain on Investments* <F1>........... -0- (38,069)
---------------- ----------------
Total Distributions......................................................... (41,020,921) (40,040,478)
---------------- ----------------
Net Change in Net Assets from Investment Activities......................... (91,652,002) 34,203,198
---------------- ----------------
From Capital Transactions <F3>:
Proceeds from Shares Sold................................................... 76,732,460 265,150,384
Net Asset Value of Shares Issued Through Dividend Reinvestment.............. 21,110,678 19,988,555
Cost of Shares Repurchased.................................................. (116,770,207) (61,493,977)
---------------- ----------------
Net Change in Net Assets from Capital Transactions ......................... (18,927,069) 223,644,962
---------------- ----------------
Total Increase/Decrease in Net Assets....................................... (110,579,071) 257,848,160
Net Assets:
Beginning of the Period..................................................... 769,933,185 512,085,025
---------------- ----------------
End of the Period (Including undistributed net investment income
of $(228,298) and $(495,948), respectively) ................................ $ 659,354,114 $ 769,933,185
---------------------------------------------------------------------------- ---------------- ----------------
</TABLE>
<TABLE>
<CAPTION>
Year Ended Year Ended
*Distributions by Class December 31, 1994 December 31, 1993
-----------------------------------------------------------------------------------------------
<S> <C> <C>
Distributions from and in Excess of Net Investment Income:
Class A Shares.............................................. $ (32,205,506) $ (33,630,614)
Class B Shares.............................................. (8,547,628) (6,329,274)
Class C Shares.............................................. (212,571) (42,521)
Class D Shares.............................................. (55,216) -0-
--------------- ---------------
$ (41,020,921) $ (40,002,409)
--------------- ---------------
Distributions in Excess of Net Realized Gain on Investments:
Class A Shares.............................................. $ -0- $ (13,619)
Class B Shares.............................................. -0- (24,450)
Class C Shares.............................................. -0- -0-
Class D Shares.............................................. -0- -0-
--------------- ---------------
$ -0- $ (38,069)
--------------- ---------------
</TABLE>
See Notes to Financial Statements
B-43
<PAGE> 263
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Notes to Financial Statements
December 31, 1994
--------------------------------------------------------------------------------
1. Significant Accounting Policies
Van Kampen Merritt Municipal Income Fund (the "Fund") was organized as a
sub-trust of the Van Kampen Merritt Tax Free Fund, a Massachusetts business
trust, and is registered as a diversified open-end management investment company
under the Investment Company Act of 1940, as amended. The Fund commenced
investment operations on August 1, 1990. On August 24, 1992, the Fund commenced
the distribution of its Class B shares. The distribution of the Fund's Class C
shares, which were initially introduced as Class D shares and subsequently
renamed Class C shares on March 7, 1994, commenced on August 13, 1993. The
distribution of the Fund's fourth class of shares, Class D shares, commenced on
March 14, 1994.
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements.
A. Security Valuation-Investments are stated at value using market quotations
or, if such valuations are not available, estimates obtained from yield data
relating to instruments or securities with similar characteristics in accordance
with procedures established in good faith by the Board of Trustees. Short-term
securities with remaining maturities of less than 60 days are valued at
amortized cost.
B. Security Transactions-Security transactions are recorded on a trade date
basis. Realized gains and losses are determined on an identified cost basis. The
Fund may purchase and sell securities on a "when issued" and "delayed delivery"
basis, with settlement to occur at a later date. The value of the security so
purchased is subject to market fluctuations during this period. The Fund will
maintain in a segregated account with its custodian assets having an aggregate
value at least equal to the amount of the when issued or delayed delivery
purchase commitments until payment is made. At December 31, 1994, there were no
when issued or delayed delivery purchase commitments.
C. Investment Income-Interest income is recorded on an accrual basis. Bond
premium and original issue discount are amortized over the expected life of
each applicable security.
D. Organizational Expenses and Initial Registration Costs-The Fund has
reimbursed Van Kampen American Capital Distributors, Inc. or its affiliates
("VKAC") for costs incurred in connection with the Fund's organization and
initial registration in the amount of $152,425. These costs are being amortized
on a straight line basis over the 60 month period ending July 31, 1995. Van
Kampen American Capital Investment Advisory Corp. (the "Adviser") has agreed
that in the event any of the initial shares of the Fund originally purchased
by VKAC are redeemed during the amortization period, the Fund will be
reimbursed for any unamortized organizational expenses and initial
registration costs in the same proportion as the number of shares redeemed
bears to the number of initial shares held at the time of redemption.
E. Federal Income Taxes-It is the Fund's policy to comply with the requirements
of the Internal Revenue Code applicable to regulated investment companies and
to distribute substantially all of its taxable income to its shareholders.
Therefore, no provision for federal income taxes is required.
The Fund intends to utilize provisions of the federal income tax laws which
allow it to carry a realized capital loss forward for eight years following the
year of the loss and offset such losses against any future realized capital
gains. At December 31, 1994, the Fund had an accumulated capital loss
carryforward for tax purposes of $18,151,198. Of this amount, $10,452,715 and
$7,698,483 will expire on December 31, 2001 and 2002, respectively. Net realized
gains or losses may differ for financial and tax reporting purposes primarily as
a result of the deferral of post October 31 losses and the capitalization of
reorganization and restructuring costs for tax purposes.
F. Distribution of Income and Gains-The Fund declares daily and pays monthly
dividends from net investment income. Net realized gains, if any, are
distributed annually. Distributions from net realized gains for book purposes
may include short-term capital gains, which are included as ordinary income for
tax purposes. Due to inherent differences in the recognition of interest income
under generally accepted accounting principles and federal income tax purposes,
for those securities which the Fund has placed on non-accrual status, the amount
of distributable net investment income may differ between book and federal
income tax purposes for a particular period. These differences are temporary in
B-44
<PAGE> 264
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
--------------------------------------------------------------------------------
nature, but may result in book basis distribution in excess of net investment
income for certain periods.
2. Investment Advisory Agreement and Other Transactions with Affiliates
Under the terms of the Fund's Investment Advisory Agreement, the Adviser will
provide investment advice and facilities to the Fund for an annual fee payable
monthly as follows:
<TABLE>
<CAPTION>
Average Net Assets % Per Annum
----------------------------------
<S> <C>
First $500 million... .50 of 1%
Over $500 million.... .45 of 1%
</TABLE>
Certain legal expenses are paid to Skadden, Arps, Slate, Meagher & Flom, counsel
to the Fund, of which a trustee of the Fund is an affiliated person.
For the year ended December 31, 1994, the Fund recognized expenses of
approximately $375,000 representing VKAC's cost of providing accounting, legal
and certain shareholder services to the Fund.
Certain officers and trustees of the Fund are also officers and directors of
VKAC. The Fund does not compensate its officers or trustees who are officers of
VKAC.
The Fund has implemented deferred compensation and retirement plans for its
Trustees. Under the deferred compensation plan, Trustees may elect to defer all
or a portion of their compensation to a later date. The retirement plan covers
those Trustees who are not officers of VKAC.
At December 31, 1994, VKAC owned 387, 105, 100 and 100 shares of Classes A, B,
C and D, respectively.
3. Capital Transactions
The Fund has outstanding four classes of common shares, Classes A, B, C and D.
There are an unlimited number of shares of each class without par value
authorized.
At December 31, 1994, paid in surplus aggregated $518,901,563, $174,384,111,
$4,365,588 and $1,088,397 for Classes A, B, C and D, respectively. For the year
ended December 31, 1994, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
----------------------------------------------------------------
<S> <C> <C>
Sales:
Class A........................ 2,891,335 $ 43,601,705
Class B........................ 1,909,204 28,989,319
Class C........................ 141,638 2,139,693
Class D........................ 133,104 2,001,743
----------- ----------------
Total Sales.................... 5,075,281 $ 76,732,460
----------- ----------------
Dividend Reinvestment:
Class A........................ 1,085,808 $ 16,133,995
Class B........................ 325,032 4,818,852
Class C........................ 9,020 133,759
Class D........................ 1,671 24,072
----------- ----------------
Total Dividend Reinvestment ... 1,421,531 $ 21,110,678
----------- ----------------
Repurchases:
Class A........................ (6,182,355) $ (91,457,676)
Class B........................ (1,527,736) (22,372,124)
Class C........................ (134,564) (2,002,989)
Class D........................ (65,876) (937,418)
----------- ----------------
Total Repurchases.............. (7,910,531) $ (116,770,207)
</TABLE>
B-45
<PAGE> 265
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
--------------------------------------------------------------------------------
At December 31, 1993, paid in surplus aggregated $550,623,539, $162,948,064 and
$4,095,125 for Classes A, B and C, respectively. For the year ended December
31, 1993, transactions were as follows:
<TABLE>
<CAPTION>
Shares Value
--------------------------------------------------------------
<S> <C> <C>
Sales:
Class A ...................... 8,915,080 $ 140,550,519
Class B ...................... 7,505,483 118,273,049
Class C....................... 394,838 6,326,816
----------- ---------------
Total Sales................... 16,815,401 $ 265,150,384
----------- ---------------
Dividend Reinvestment:
Class A ...................... 1,031,763 $ 16,387,904
Class B ...................... 224,461 3,569,933
Class C....................... 1,914 30,718
----------- ---------------
Total Dividend Reinvestment... 1,258,138 $ 19,988,555
----------- ---------------
Repurchases:
Class A ...................... (3,256,771) $ (51,726,961)
Class B ...................... (471,941) (7,504,607)
Class C....................... (142,829) (2,262,409)
----------- ---------------
Total Repurchases............. (3,871,541) $ (61,493,977)
----------- ---------------
</TABLE>
Class B, C and D shares are offered without a front end sales charge, but are
subject to a contingent deferred sales charge (CDSC). The CDSC will be imposed
on most redemptions made within six years of the purchase for Class B and one
year of the purchase for Classes C and D as detailed in the following schedule.
The Class B, C and D shares bear the expense of their respective deferred sales
arrangements, including higher distribution and service fees and incremental
transfer agency costs.
<TABLE>
<CAPTION>
Contingent Deferred
Sales Charge
Year of Redemption Class B Class C Class D
---------------------------------------------------
<S> <C> <C> <C>
First ................. 4.00% 1.00% 0.75%
Second ................. 3.75% None None
Third .................. 3.50% None None
Fourth ................. 2.50% None None
Fifth ................. 1.50% None None
Sixth .................. 1.00% None None
Seventh and Thereafter . None None None
</TABLE>
For the year ended December 31, 1994, VKAC, as Distributor for the Fund,
received net commissions on sales of the Fund's Class A shares of approximately
$209,000 and CDSC on the redeemed shares of Classes B, C and D of approximately
$516,000. Sales charges do not represent expenses of the Fund.
4. Investment Transactions
Aggregate purchases and sales of investment securities, excluding short-term
notes and reorganization and restructuring costs, for the year ended December
31, 1994, were $541,728,813 and $708,214,680, respectively.
5. Derivative Financial Instruments
A derivative financial instrument in very general terms refers to a security
whose value is "derived" from the value of an underlying asset, reference rate
or index.
The Fund has a variety of reasons to use derivative instruments, such as to
attempt to protect the Fund against possible changes in the market value of its
portfolio and to manage the portfolio's effective yield, maturity and duration.
All of the Fund's portfolio holdings, including derivative instruments, are
marked to market each day with the change in value reflected in the unrealized
appreciation/depreciation on investments. Upon disposition, a realized gain or
loss is recognized accordingly, except for exercised option contracts where
the recognition of gain or loss is postponed until the disposal of the security
underlying the option contract.
Summarized below are the specific types of derivative financial instruments
used by the Fund.
A. Option Contracts-An option contract gives the buyer the right, but not the
obligation to buy (call) or sell (put) an underlying item at a fixed exercise
price during a specified period. These contracts are generally used by the Fund
to manage the portfolio's effective maturity and duration.
B-46
<PAGE> 266
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
December 31, 1994
--------------------------------------------------------------------------------
Transactions in options for the year ended December 31, 1994, were
as follows:
<TABLE>
<CAPTION>
Contracts Premium
-------------------------------------------------------------
<S> <C> <C>
Outstanding at December 31, 1993... 850 $ 429,134
Options Written and
Purchased (Net).................... 13,078 (2,715,877)
Options Terminated in Closing
Transactions (Net)................. (6,870) (166,364)
Options Expired ................... (6,458) 2,554,550
Options Exercised.................. (600) (101,443)
------ ----------
Outstanding at December 31, 1994... -0- $ -0-
------ ----------
</TABLE>
B. Futures Contracts-A futures contract is an agreement involving the delivery
of a particular asset on a specified future date at an agreed upon price. The
Fund generally invests in futures on U.S. Treasury Bonds and the Municipal Bond
index and typically closes the contract prior to the delivery date. These
contracts are generally used to manage the portfolio's effective maturity and
duration.
The fluctuation in market value of the contracts is settled daily through a cash
margin account. Realized gains and losses are recognized when the contracts are
closed or expire.
Transactions in futures contracts for the year ended December 31, 1994, were as
follows:
<TABLE>
<CAPTION>
Contracts
----------------------------------------------
<S> <C>
Outstanding at December 31, 1993... 2,551
Futures Opened..................... 86,779
Futures Closed .................... (70,246)
--------
Outstanding at December 31, 1994... 19,084
--------
</TABLE>
The futures contracts outstanding at December 31, 1994, and the descriptions and
unrealized appreciation/depreciation are as follows:
<TABLE>
<CAPTION>
Unrealized
Appreciation/
Contracts Depreciation
----------------------------------------------------------------
<S> <C> <C>
U.S. Treasury Bond Futures
Mar 1995 - Sells to Open 2,483 $ 903,312
Mar 1995 - Buys to Open ........... 4,216 4,185,872
June 1995 - Sells to Open .......... 1,061 (837,479)
Two-year U.S. Treasury Note Futures
Mar 1995 - Buys to Open ........... 750 (72,470)
Five-year U.S. Treasury Note Futures
Mar 1995 - Sells to Open ........... 1,000 1,443,831
Municipal Bond Futures
Mar 1995 - Buys to Open ............ 726 (22)
Eurodollar Note Futures
Mar 1995 - Sells to Open ........... 4,424 8,328,486
June 1995 - Buys to Open............ 4,424 (11,901,514)
--------- --------------
19,084 $ 2,050,016
--------- --------------
</TABLE>
C. Indexed Securities-These instruments are identified in the portfolio of
investments. The price of these securities may be more volatile than the price
of a comparable fixed rate security.
An Inverse Floating security is one where the coupon is inversely indexed to a
short-term floating interest rate multiplied by a specified factor. As the
floating rate rises, the coupon is reduced. Conversely, as the floating rate
declines, the coupon is increased. These instruments are typically used by the
Fund to enhance the yield of the portfolio.
An Embedded Swap security includes a swap component such that the fixed coupon
component of the underlying bond is adjusted by the difference between the
securities fixed swap rate and the floating swap index. As the floating rate
rises, the coupon is reduced. Conversely, as the floating rate declines, the
coupon is increased. These instruments are typically used by the Fund to
enhance the yield of the portfolio.
B-47
<PAGE> 267
Van Kampen Merritt Municipal Income Fund
--------------------------------------------------------------------------------
Notes to Financial Statements (Continued)
--------------------------------------------------------------------------------
December 31, 1994
6. Distribution and Service Plans
The Fund and its shareholders have adopted a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940 and a service plan (the "Service Plan," collectively the "Plans"). The
Plans govern payments for the distribution of the Fund's shares, ongoing
shareholder services and maintenance of shareholder accounts.
Annual fees under the Plans of up to .30% each for Class A and Class D shares
and 1.00% each for Class B and Class C shares are accrued daily. Included in
these fees for the year ended December 31, 1994, are payments to VKAC of
approximately $1,540,000.
B-48
<PAGE> 268
PART C: OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
List all financial statements and exhibits as part of the Registration
Statement.
(A) FINANCIAL STATEMENTS:
For each of Van Kampen American Capital Insured Tax Free Income Fund, Van
Kampen American Capital California Insured Tax Free Fund and Van Kampen American
Capital Municipal Income Fund:
Included in Part A of such Registration Statement:
Financial Highlights
Included in Part B of such Registration Statement:
Independent Auditors' Report
Financial Statements
Notes to Financial Statements
For each of Van Kampen American Capital Tax Free High Income Fund, Van
Kampen American Capital Limited Term Municipal Income Fund, Van Kampen American
Capital Florida Insured Tax Free Income Fund, Van Kampen American Capital New
Jersey Tax Free Income Fund and Van Kampen American Capital New York Tax Free
Income Fund included in Post-Effective Amendment No. 35 to the Registration
Statement of the Registrant.
For each of Van Kampen American Capital California Tax Free Income Fund,
Van Kampen American Capital Michigan Tax Free Income Fund, Van Kampen American
Capital Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax
Free Income Fund are not included herein because each is a new registrant.
(B) EXHIBITS:
<TABLE>
<S> <C>
(1)(a) Form of Agreement and Declaration of Trust+
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund++
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund++
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund++
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund++
(viii) Van Kampen American Capital New York Tax Free Income Fund++
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(2) Form of By-Laws+
(4) Form of Specimen certificate of share of beneficial interest in
(i) Van Kampen American Capital Insured Tax Free Income Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
(ii) Van Kampen American Capital Tax Free High Income Fund
1. Class A Shares(23)
2. Class B Shares(23)
3. Class C Shares(26)
(iii) Van Kampen American Capital California Insured Tax Free Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
</TABLE>
C-1
<PAGE> 269
<TABLE>
<S> <C>
(iv) Van Kampen American Capital Municipal Income Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
(v) Van Kampen American Capital Limited Term Municipal Income Fund
1. Class A Shares(19)
2. Class B Shares(19)
3. Class C Shares(27)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
(viii) Van Kampen American Capital New York Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
(ix) Van Kampen American Capital California Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(5) Form of Investment Advisory Agreement for
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund(20)
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund(19)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(29)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(29)
(viii) Van Kampen American Capital New York Tax Free Income Fund(29)
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(6)(a) Form of Distribution and Service Agreement+
(b) Form of Dealer Agreement+
(c) Form of Broker Agreement+
(d) Form of Bank Agreement+
</TABLE>
C-2
<PAGE> 270
<TABLE>
<S> <C>
(8) (a) Form of Custodian Agreement for
(i) Van Kampen American Capital Insured Tax Free Income Fund(6)
(ii) Van Kampen American Capital Tax Free High Income Fund(6)
(iii) Van Kampen American Capital California Insured Tax Free Fund(2)
(iv) Van Kampen American Capital Municipal Income Fund(10) and (6)
(v) Van Kampen American Capital Limited Term Municipal Income Fund(19) and
(6)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(23) and
(6)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(29) and (6)
(viii) Van Kampen American Capital New York Tax Free Income Fund(29) and (6)
(ix) Van Kampen American Capital California Tax Free Income Fund(31) and (6)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31) and (6)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31) and (6)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31) and (6)
(b) Form of Transfer Agency Agreement+
(9) (a) Form of Fund Accounting Agreement+
(b) Form of Legal Services Agreement+
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund++
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund++
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund++
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund++
(viii) Van Kampen American Capital New York Tax Free Income Fund++
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(11) Consents of KPMG Peat Marwick LLP
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund(35)
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund(35)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(35)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(35)
(viii) Van Kampen American Capital New York Tax Free Income Fund(35)
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(13) Letter of understanding relating to initial capital(1)
(15) (a) Form of Distribution Plan Pursuant to Rule 12b-1+
(b) Form of Shareholder Assistance Agreement+
(c) Form of Administrative Services Agreement+
(d) Form of Service Plan+
(16) (a) Computation of Performance Quotations for
(i) Van Kampen American Capital Insured Tax Free Income Fund(35)
(ii) Van Kampen American Capital Tax Free High Income Fund(35)
(iii) Van Kampen American Capital California Insured Tax Free Fund(35)
(iv) Van Kampen American Capital Municipal Income Fund(35)
(v) Van Kampen American Capital Limited Term Municipal Income Fund(35)
</TABLE>
C-3
<PAGE> 271
<TABLE>
<S> <C>
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(35)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(35)
(viii) Van Kampen American Capital New York Tax Free Income Fund(35)
(17) (a) List of certain investment companies in response to Item 29(a)*
(b) List of officers and directors of Van Kampen American Capital Distributors, Inc.
in response to Item 29(b)*
(24) Power of Attorney+
(27) Financial Data Schedules+
</TABLE>
---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(2) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 9, 1986.
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
(10) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(19) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
February 12, 1993.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
March 1, 1993.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
April 30, 1993.
(26) Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed December 30, 1993.
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on February 25, 1994.
(29) Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 5, 1994.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 24, 1995.
+ Filed herewith.
++ To be filed by amendment.
* Incorporated herein by reference from Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A of Van Kampen American Capital Utilities
Income Fund, File Number 33-68452, filed July 14, 1995.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of July 17, 1995:
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
<S> <C>
Shares of Beneficial Interest, without par value:
(i) Van Kampen American Capital Insured Tax Free Income Fund*
Class A Shares.................................................... 48,898
Class B Shares.................................................... 861
Class C Shares.................................................... 48
</TABLE>
C-4
<PAGE> 272
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
<C> <S> <C>
(ii) Van Kampen American Capital Tax Free High Income Fund*
Class A Shares.................................................... 22,175
Class B Shares.................................................... 3,459
Class C Shares.................................................... 156
(iii) Van Kampen American Capital California Insured Tax Free Fund*
Class A Shares.................................................... 3,647
Class B Shares.................................................... 584
Class C Shares.................................................... 26
(iv) Van Kampen American Capital Municipal Income Fund*
Class A Shares.................................................... 17,192
Class B Shares.................................................... 5,345
Class C Shares.................................................... 65
(v) Van Kampen American Capital Limited Term Municipal Income Fund*
Class A Shares.................................................... 600
Class B Shares.................................................... 530
Class C Shares.................................................... 47
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
Class A Shares.................................................... 322
Class B Shares.................................................... 318
Class C Shares.................................................... 6
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
Class A Shares.................................................... 171
Class B Shares.................................................... 245
Class C Shares.................................................... 9
(viii) Van Kampen American Capital New York Tax Free Income Fund
Class A Shares.................................................... 198
Class B Shares.................................................... 310
Class C Shares.................................................... 12
(ix) Van Kampen American Capital California Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(x) Van Kampen American Capital Michigan Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(xi) Van Kampen American Capital Missouri Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(xii) Van Kampen American Capital Ohio Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
</TABLE>
---------------
* Prior to May 1, 1995, the Fund offered Class D Shares.
ITEM 27. INDEMNIFICATION.
Reference is made to Article 8, Section 8.4 of the Registrant's Agreement
and Declaration of Trust.
Article 8, Section 8.4 of the Agreement and Declaration of Trust provides
that each officer and trustee of the Registrant shall be indemnified by the
Registrant against all liabilities incurred in connection with the defense or
disposition of any action, suit or other proceeding, whether civil or criminal,
in which the officer or trustee may be or may have been involved by reason of
being or having been an officer or trustee, except that such indemnity shall not
protect any such person against a liability to the Registrant or any shareholder
thereof to which such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross
C-5
<PAGE> 273
negligence or reckless disregard of the duties involved in the conduct of his or
her office. Absent a court determination that an officer or trustee seeking
indemnification was not liable on the merits or guilty of willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office, the decision by the Registrant to indemnify such
person must be based upon the reasonable determination of independent counsel or
non-party independent trustees, after review of the facts, that such officer or
trustee is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
The Registrant has purchased insurance on behalf of its officers and
trustees protecting such persons from liability arising from their activities as
officers or trustees of the Registrant. The insurance does not protect or
purport to protect such persons from liability to the Registrant or to its
shareholders to which such officers or trustee would otherwise be subject by
reason of willful misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of their office.
Conditional advancing of indemnification monies may be made if the trustee
or officer undertakes to repay the advance unless it is ultimately determined
that he or she is entitled to the indemnification and only if the following
conditions are met: (1) the trustee or officer provides security for the
undertaking; (2) the Registrant is insured against losses arising from lawful
advances; or (3) a majority of a quorum of the Registrant's disinterested,
non-party trustees, or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts, that a recipient of
the advance ultimately will be found entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to trustees, officers and controlling
persons of the Registrant pursuant to the foregoing provisions or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by the trustee, officer, or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such trustee, officer or controlling person in connection with the
shares being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "Investment Advisory Services" in the Prospectus and "Investment
Advisory and Other Services" and "Officers and Trustees" in the Statement of
Additional Information for information regarding the business of the Adviser.
For information as to the business, profession, vocation and employment of a
substantial nature of directors and officers of the Adviser reference is made to
the Adviser's current Form ADV (File No. 801-18161) filed under the Investment
Advisers Act of 1940, as amended, incorporated herein by reference.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) The sole principal underwriter is Van Kampen American Capital
Distributors, Inc., which acts as principal underwriter for certain investment
companies and unit investment trusts set forth in Exhibit 17(a) incorporated by
reference herein.
(b) Van Kampen American Capital Distributors, Inc., which is an affiliated
person of an affiliated person of Registrant, is the sole principal underwriter
for Registrant. The name, principal business address and positions and offices
with Van Kampen American Capital Distributors, Inc. of each of the directors and
officers thereof are set forth in Exhibit 17(b). Except as disclosed under the
heading "Officers and Trustees" in Part B of this Registration Statement, none
of such persons has any position or office with Registrant.
(c) Not applicable.
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<PAGE> 274
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Registrant by Section 31(a) of the Investment Company Act of 1940 and the Rules
thereunder will be maintained at the offices of the Registrant, located at One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Access Investors Services,
Inc., 7501 Tiffany Springs Parkway, Kansas City, Missouri 64153, or at State
Street Bank and Trust Company, 1776 Heritage Drive, North Quincy, Massachusetts
02171. All such accounts, books and other documents required to be maintained by
the principal underwriter will be maintained at One Parkview Plaza, Oakbrook
Terrace, Illinois 60181.
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment to the
Registration Statement to add financial statements, which need not be certified,
within four to six months from the effective date of this Registration Statement
for each of the Van Kampen American Capital California Tax Free Income Fund, Van
Kampen American Capital Michigan Tax Free Income, Van Kampen American Capital
Missouri Tax Free Income Fund and Van Kampen American Capital Ohio Tax Free
Income Fund.
(c) The Registrant provides the information required by Item 5A in the
respective annual reports to shareholders of Registrant's series and hereby
undertakes to furnish without charge to each person to whom a prospectus is
delivered for a particular series with a copy of the latest annual report to
shareholders of such series.
C-7
<PAGE> 275
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN AMERICAN CAPITAL TAX
FREE TRUST, CERTIFIES THAT IT MEETS ALL OF THE REQUIREMENTS FOR EFFECTIVENESS OF
THIS REGISTRATION STATEMENT PURSUANT TO RULE 485(B) UNDER THE SECURITIES ACT OF
1933 AND HAS DULY CAUSED THIS AMENDMENT TO THIS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY OF
OAKBROOK TERRACE, AND THE STATE OF ILLINOIS, ON THE 25TH DAY OF JULY, 1995.
VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST
By: /s/ RONALD A. NYBERG
--------------------------------------
Ronald A. Nyberg
Vice President and Secretary
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THIS REGISTRATION STATEMENT HAS BEEN SIGNED ON JULY 25, 1995 BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED:
<TABLE>
<CAPTION>
SIGNATURES TITLE
--------------------------------------------- -----
<S> <C>
/s/ DONALD C. MILLER * Chairman of the Board and Trustee
---------------------------------------------
Donald C. Miller
Chief Executive Officer:
/s/ DENNIS J. McDONNELL* President and Trustee
---------------------------------------------
Dennis J. McDonnell
Chief Financial and Accounting Officer:
/s/ EDWARD C. WOOD, III * Vice President and Treasurer
---------------------------------------------
Edward C. Wood, III
Trustees:
Trustee
---------------------------------------------
J. Miles Branagan
/s/ RICHARD E. CARUSO * Trustee
---------------------------------------------
Richard E. Caruso
/s/ PHILIP P. GAUGHAN * Trustee
---------------------------------------------
Philip P. Gaughan
/s/ ROGER HILSMAN * Trustee
---------------------------------------------
Roger Hilsman
Trustee
---------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON * Trustee
---------------------------------------------
Jack E. Nelson
Trustee
---------------------------------------------
Don G. Powell
</TABLE>
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<PAGE> 276
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------------------------------------------
<C> <S> <C>
/s/ DAVID REES * Trustee
---------------------------------------------
David Rees
/s/ JEROME L. ROBINSON * Trustee
---------------------------------------------
Jerome L. Robinson
/s/ LAWRENCE J. SHEEHAN * Trustee
---------------------------------------------
Lawrence J. Sheehan
Trustee
---------------------------------------------
Fernando Sisto
/s/ WAYNE W. WHALEN * Trustee
---------------------------------------------
Wayne W. Whalen
Trustee
---------------------------------------------
William S. Woodside
---------------
*Signed by Ronald A. Nyberg pursuant to a power of attorney.
/s/ RONALD A. NYBERG July 25, 1995
---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
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<PAGE> 277
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 37 TO FORM N-1A
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON AUGUST 1, 1995
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ------
<S> <C> <C>
(1)(a) Form of Agreement and Declaration of Trust+
(b) Form of Certificate of Designation for:
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund++
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund++
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund++
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund++
(viii) Van Kampen American Capital New York Tax Free Income Fund++
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(2) Form of By-Laws+
(4) Form of Specimen certificate of share of beneficial interest in
(i) Van Kampen American Capital Insured Tax Free Income Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
(ii) Van Kampen American Capital Tax Free High Income Fund
1. Class A Shares(23)
2. Class B Shares(23)
3. Class C Shares(26)
(iii) Van Kampen American Capital California Insured Tax Free Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
(iv) Van Kampen American Capital Municipal Income Fund
1. Class A Shares+
2. Class B Shares+
3. Class C Shares+
(v) Van Kampen American Capital Limited Term Municipal Income Fund
1. Class A Shares(19)
2. Class B Shares(19)
3. Class C Shares(27)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
</TABLE>
C-10
<PAGE> 278
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ------
<S> <C> <C>
(viii) Van Kampen American Capital New York Tax Free Income Fund
1. Class A Shares(29)
2. Class B Shares(29)
3. Class C Shares(29)
(ix) Van Kampen American Capital California Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund
1. Class A Shares(31)
2. Class B Shares(31)
3. Class C Shares(31)
(5) Form of Investment Advisory Agreement for
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund(20)
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund(19)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(29)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(29)
(viii) Van Kampen American Capital New York Tax Free Income Fund(29)
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(6) (a) Form of Distribution and Service Agreement+
(b) Form of Dealer Agreement+
(c) Form of Broker Agreement+
(d) Form of Bank Agreement+
(8) (a) Form of Custodian Agreement for
(i) Van Kampen American Capital Insured Tax Free Income Fund(6)
(ii) Van Kampen American Capital Tax Free High Income Fund(6)
(iii) Van Kampen American Capital California Insured Tax Free Fund(2)
(iv) Van Kampen American Capital Municipal Income Fund(10) and (6)
(v) Van Kampen American Capital Limited Term Municipal Income Fund(19) and
(6)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(23)
and (6)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(29) and
(6)
(viii) Van Kampen American Capital New York Tax Free Income Fund(29) and (6)
(ix) Van Kampen American Capital California Tax Free Income Fund(31) and
(6)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31) and (6)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31) and (6)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31) and (6)
(b) Form of Transfer Agency Agreement+
</TABLE>
C-11
<PAGE> 279
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ------
<S> <C> <C>
(9)(a) Form of Fund Accounting Agreement+
(b) Form of Legal Services Agreement+
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund++
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund++
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund++
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund++
(viii) Van Kampen American Capital New York Tax Free Income Fund++
(ix) Van Kampen American Capital California Tax Free Income Fund++
(x) Van Kampen American Capital Michigan Tax Free Income Fund++
(xi) Van Kampen American Capital Missouri Tax Free Income Fund++
(xii) Van Kampen American Capital Ohio Tax Free Income Fund++
(11) Consents of KPMG Peat Marwick LLP
(i) Van Kampen American Capital Insured Tax Free Income Fund+
(ii) Van Kampen American Capital Tax Free High Income Fund(35)
(iii) Van Kampen American Capital California Insured Tax Free Fund+
(iv) Van Kampen American Capital Municipal Income Fund+
(v) Van Kampen American Capital Limited Term Municipal Income Fund(35)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(35)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(35)
(viii) Van Kampen American Capital New York Tax Free Income Fund(35)
(ix) Van Kampen American Capital California Tax Free Income Fund(31)
(x) Van Kampen American Capital Michigan Tax Free Income Fund(31)
(xi) Van Kampen American Capital Missouri Tax Free Income Fund(31)
(xii) Van Kampen American Capital Ohio Tax Free Income Fund(31)
(13) Letter of understanding relating to initial capital(1)
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1+
(b) Form of Shareholder Assistance Agreement+
(c) Form of Administrative Services Agreement+
(d) Form of Service Plan+
(16)(a) Computation of Performance Quotations for
(i) Van Kampen American Capital Insured Tax Free Income Fund(35)
(ii) Van Kampen American Capital Tax Free High Income Fund(35)
(iii) Van Kampen American Capital California Insured Tax Free Fund(35)
(iv) Van Kampen American Capital Municipal Income Fund(35)
(v) Van Kampen American Capital Limited Term Municipal Income Fund(35)
(vi) Van Kampen American Capital Florida Insured Tax Free Income Fund(35)
(vii) Van Kampen American Capital New Jersey Tax Free Income Fund(35)
(viii) Van Kampen American Capital New York Tax Free Income Fund(35)
(17)(a) List of certain investment companies in response to Item 29(a)*
(b) List of officers and directors of Van Kampen American Capital Distributors, Inc.
in respose to Item 29(b)*
(24) Power of Attorney+
(27) Financial Data Schedules+
</TABLE>
---------------
(1) Incorporated herein by reference to Registrant's Registration Statement on
Form N-1A, File Number 2-99715, filed August 15, 1985.
(2) Incorporated herein by reference to Post-Effective Amendment No. 2 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 9, 1986.
C-12
<PAGE> 280
(6) Incorporated herein by reference to Post-Effective Amendment No. 6 to
Registrant's Registration
on Form N-1A, File Number 2-99715, filed February 22, 1988.
(10) Incorporated herein by reference to Post-Effective Amendment No. 10 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 25, 1990.
(19) Incorporated herein by reference to Post-Effective Amendment No. 19 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
February 12, 1993.
(20) Incorporated herein by reference to Post-Effective Amendment No. 20 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
March 1, 1993.
(23) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
April 30, 1993.
(26) Incorporated herein by reference to Post-Effective Amendment No. 26 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed December 30, 1993.
(27) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on February 25, 1994.
(29) Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 5, 1994.
(31) Incorporated herein by reference to Post-Effective Amendment No. 31 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on September 30, 1994.
(35) Incorporated herein by reference to Post-Effective Amendment No. 35 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on April 24, 1995.
+ Filed herewith.
++ To be filed by amendment.
* Incorporated herein by reference from Post-Effective Amendment No. 3 to the
Registration Statement on Form N-1A of Van Kampen American Capital Utilities
Income Fund, File Number 33-68452, filed July 14, 1995.
C-13
<PAGE> 1
EXHIBIT 1(a)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
AGREEMENT AND DECLARATION OF TRUST
May 10, 1995
<PAGE> 2
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
AGREEMENT AND DECLARATION OF TRUST
Index
RECITALS 1
ARTICLE I THE TRUST 2
SECTION 1.1 Name 2
SECTION 1.2. Location 2
SECTION 1.3. Nature of Trust 2
SECTION 1.4. Definitions 2
SECTION 1.5. Real Property to be Converted into Personal Property 5
ARTICLE 2 PURPOSE OF THE TRUST 5
ARTICLE 3 POWERS OF THE TRUSTEES 6
SECTION 3.1. Powers in General 6
(a) Investments 6
(b) Disposition of Assets 7
(c) Ownership Powers 7
(d) Form of Holding 7
(e) Reorganization, etc. 7
(f) Voting Trusts, etc. 7
<PAGE> 3
(g) Contracts, etc. 7
(h) Guarantees, etc. 7
(i) Partnerships, etc. 8
(j) Insurance 8
(k) Pensions, etc 8
(I) Power of Collection and Litigation 8
(m) Issuance and Repurchase of Shares 8
(n) Offices 8
(o) Expenses 8
(p) Agents, etc. 9
(q) Accounts 9
(r) Valuation 9
(s) Indemnification 9
(t) General 9
SECTION 3.2. Borrowings; Financings; Issuance of Securities 9
i
<PAGE> 4
SECTION 3.3. Deposits 9
SECTION 3.4. Allocations 10
SECTION 3.5. Further Powers; Limitations 10
ARTICLE 4 TRUSTEES AND OFFICERS 10
SECTION 4.1. Number, Designation, Election, Term, etc 10
(a) Initial Trustee 10
(b) Number 10
(c) Election and Term 11
(d) Resignation and Retirement 11
(e) Removal 11
(f) Vacancies 11
(g) Acceptance of Trusts 11
(h) Effect of Death, Resignation, etc. 12
(i) Conveyance 12
(j) No Accounting 12
SECTION 4.2. Trustees' Meetings; Participation by Telephone, etc. 12
SECTION 4.3. Committees; Delegation 12
SECTION 4.4. Officers 13
SECTION 4.5. Compensation of Trustees and Officers 13
SECTION 4.6. Ownership of Shares and Securities of the Trust 13
<PAGE> 5
SECTION 4.7. Right of Trustees and Officers to Own Property or
to Engage in Business; Authority of Trustees to Permit
Others to Do Likewise 13
SECTION 4.8. Reliance on Experts 13
SECTION 4.9. Surety Bonds 14
SECTION 4.10. Apparent Authority of Trustees and Officers 14
SECTION 4.11. Other Relationships Not Prohibited 14
SECTION 4.12. Payment of Trust Expenses 14
SECTION 4.13. 0wnership of the Trust Property 15
ii
<PAGE> 6
SECTION 4.14. By-Laws 15
ARTICLE 5 DELEGATION OF MANAGERIAL RESPONSIBILITIES 15
SECTION 5.1. Appointment; Action by Less than All Trustees 15
SECTION 5.2. Certain Contracts 15
(a) Advisory 16
(b) Administration 16
(c) Underwriting 16
(d) Custodian 16
(e) Transfer and Dividend Disbursing Agent 17
(f) Shareholder Servicing 17
(g) Accounting 17
Section 5.3. Distribution Arrangements 17
Section 5.4. Service Arrangements 17
ARTICLE 6 SERIES AND SHARES 17
SECTION 6.1. Description of Series and Shares 17
(a) General 17
(b) Establishment, etc. of Series; Authorization of Shares 18
(c) Character of Separate Series and Shares Thereof 18
(d) Consideration for Shares 18
(e) Assets Belonging to Series 19
(f) Liabilities of Series 19
(g) Dividends 19
(h) Liquidation 20
(i) Voting 20
<PAGE> 7
(j) Redemption by Shareholder 20
(k) Redemption at the Option of the Trust 21
(I) Net Asset Value 21
(m) Transfer 21
(n) Equality 21
(o) Rights of Fractional Shares 22
(p) Conversion Rights 22
SECTION 6.2. Ownership of Shares 22
SECTION 6.3. Investments in the Trust 23
SECTION 6.4. No Pre-emptive Rights 23
iii
<PAGE> 8
SECTION 6.5. Status of Shares 23
ARTICLE 7 SHAREHOLDERS' VOTING POWERS AND MEETINGS 23
SECTION 7.1. Voting Powers 23
SECTION 7.2. Number of Votes and Manner of Voting; Proxies 24
SECTION 7.3. Meetings 24
SECTION 7.4. Record Dates 24
SECTION 7.5. Quorum and Required Vote 25
SECTION 7.6. Action by Written Consent 25
SECTION 7.7. Inspection of Records 25
SECTION 7.8. Additional Provisions 25
ARTICLE 8 LIMITATION OF LIABILITY; INDEMNIFICATION 25
SECTION 8.1. Trustees, Shareholders, etc. Not Personally
Liable; Notice 25
SECTION 8.2. Trustees' Good Faith Action; Expert Advice; No
Bond or Surety 26
SECTION 8.3. Indemnification of Shareholders 26
SECTION 8.4. Indemnification of Trustees, Officers, etc. 27
<PAGE> 9
SECTION 8.5. Compromise Payment 27
SECTION 8.6. Indemnification Not Exclusive, etc. 28
SECTION 8.7. Liability of Third Persons Dealing with Trustees 28
ARTICLE 9 DURATION; REORGANIZATION; INCORPORATION;
AMENDMENTS 28
SECTION 9.1. Duration of Trust 28
SECTION 9.2. Termination of Trust 28
SECTION 9.3. Reorganization 29
SECTION 9.4. Incorporation 29
iv
<PAGE> 10
SECTION 9.5. Amendments; etc. 29
SECTION 9.6. Filing of Copies of Declaration and Amendments 30
ARTICLE 10 MISCELLANEOUS 30
SECTION 10.1. Notices 30
SECTION 10.2. Governing Law 30
SECTION 10.3. Counterparts 30
SECTION 10.4. Reliance by Third Parties 30
SECTION 10.5. References; Headings 31
SECTION 10.6. Provisions in Conflict With Law or Regulation 31
SECTION 10.7. Use of the Name "Van Kampen American Capital" 31
Signature 32
Acknowledgments 33
<PAGE> 11
AGREEMENT AND DECLARATION OF TRUST
OF
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
This AGREEMENT AND DECLARATION OF TRUST, made at this 10th
day of May, 1995, by and between Ronald A. Nyberg, an
individual residing in Naperville, Illinois (the
"Settlor"), and the Trustee whose signature is set forth below
(the "Initial Trustee"),
W I T N E S S E T H T H A T:
WHEREAS, the Settlor proposes to deliver to the Initial
Trustee the sum of one hundred dollars ($100.00) lawful money of
the United States of America in trust hereunder and to authorize
the Initial Trustee and all other individuals acting as Trustees
hereunder to employ such funds, and any other funds coming into
their hands or the hands of their successor or successors as
such Trustees, to carry on the business of an investment company
and as such of buying, selling, investing or otherwise dealing
in and with stocks, bonds, debentures, warrants and other
securities and interests therein, financial futures contracts,
or options with respect to securities or financial futures
contracts, and such other and further investment media and other
property as the Trustees may deem advisable, which are not
prohibited by law or the terms of this Declaration; and
WHEREAS, the Initial Trustee is willing to accept such
sum, together with any and all additions thereto and the income
or increments thereof, upon the terms, conditions and trusts
hereinafter set forth; and
WHEREAS, the beneficial interest in the assets held by the
Trustees shall be divided into transferable Shares, all in
accordance with the provisions hereinafter set forth; and
WHEREAS, it is desired that the trust established hereby
be managed and operated as a trust with transferable shares
under the laws of Delaware with respect to Delaware business
trusts in accordance with the provisions hereinafter set forth;
1
<PAGE> 12
NOW, THEREFORE, the Initial Trustee, for himself and his
successors as Trustees, hereby declares and agrees with the
Settlor, for himself and for all Persons who shall hereafter
become holders of Shares that the Trustees will hold the sum
delivered to them upon the execution hereof, and all other and
further cash, securities and other property of every type and
description which they may in any way acquire in their capacity
as such Trustees, together with the income therefrom and the
proceeds thereof, IN TRUST NEVERTHELESS, to manage and dispose
of the same for the benefit of the holders from time to time of
the Shares being issued and to be issued hereunder and in the
manner and subject to the provisions hereof, to wit:
<PAGE> 13
ARTICLE I
THE TRUST
SECTION 1.1 Name. The name of the Trust shall be
"VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST"
and so far as may be practicable, the Trustees shall conduct the
Trust's activities, execute all documents and sue or be sued
under that name, which name (and the word "Trust" wherever used
in this Agreement and Declaration of Trust, except where the
context otherwise requires) shall refer to the Trustees in their
capacity as Trustees, and not individually or personally, and
shall not refer to the officers, agents or employees of the
Trust or of such Trustees, or to the holders of the Shares of
Beneficial Interest of the Trust or any Series. If the Trustees
determine that the use of such name is not practicable, legal or
convenient at any time or in any jurisdiction, or if the Trust
is required to discontinue the use of such name pursuant to
Section 10.7 hereof, then subject to that Section, the Trustees
may use such other designation, or they may adopt such other
name for the Trust as they deem proper, and the Trust may hold
property and conduct its activities under such designation or
name.
SECTION 1.2. Location. The Trust shall maintain a
registered office in the State of Delaware and may have such
other offices or places of business as the Trustees may from
time to time determine to be necessary or expedient.
SECTION 1.3. Nature of Trust. The Trust shall be a trust
with transferable shares under the laws of The State of
Delaware, of the type defined in Title 12, Chapter 38, Section
3801 of the Delaware Code as a business trust. The Trust is not
intended to be, shall not be deemed to be, and shall not be
treated as, a general partnership, limited partnership, joint
venture, corporation or joint stock company. The Shareholders
shall be beneficiaries and their relationship to the Trustees
shall be solely in that capacity in accordance with the rights
conferred upon them hereunder.
SECTION 1.4. Definitions. As used in this Agreement and
Declaration of Trust, the following terms shall have the
meanings set forth below unless the context thereof otherwise
requires:
<PAGE> 14
"Accounting Agent" shall have the meaning designated in
Section 5.2(g) hereof.
"Administrator" shall have the meaning designated in
Section 5.2(b) hereof.
"Affiliated Person" shall have the meaning assigned to it
in the 1940 Act.
"By-Laws" shall mean the By-Laws of the Trust, as amended
from time to time.
"Certificate of Designation" shall have the meaning
designated in Section 6.1 hereof.
"Certificate of Termination" shall have the meaning
designated in Section 6.1 hereof.
"Class" or "Classes" shall mean, with respect to any
Series, any unissued Shares of such Series in respect of which
the Trustees shall from time to time fix and determine any
special provisions relating to sales charges, any rights of
redemption and the price, terms and manner of redemption,
special and relative rights as to dividends and other
distributions and on liquidation, sinking or purchase fund
provisions, conversion rights, and conditions under which the
Shareholders of such Class shall have separate voting rights or
no voting rights.
"Commission" shall have the same meaning as in the 1940
Act.
"Contracting Party" shall have the meaning designated in
the preamble to Section 5.2 hereof.
"Conversion Date" shall mean with respect to Shares of any
Class that are convertible automatically into Shares of any
other Class of a Series the date fixed by the Trustees for such
conversion.
"Covered Person" shall have the meaning designated in
Section 8.4 hereof.
<PAGE> 15
"Custodian" shall have the meaning designated in Section
5.2(d) hereof.
"Declaration" and "Declaration of Trust" shall mean this
Agreement and Declaration of Trust and all amendments or
modifications thereof as from time to time in effect. This
Agreement and Declaration of Trust is the "governing instrument"
of the Trust within the meaning of the laws of the State of
Delaware with respect to Delaware business trusts. References
in this Agreement and Declaration of Trust to "hereof", "herein"
and "hereunder" shall be deemed to refer to the Declaration of
Trust generally, and shall not be limited to the particular
text, Article or Section in which such words appear.
"Disabling Conduct" shall have the meaning designated in
Section 8.4 hereof.
"Distributor" shall have the meaning designated in Section
5.2(c) hereof.
"Dividend Disbursing Agent" shall have the meaning designated
in Section 5.2(e) hereof.
"General Items" shall have the meaning defined in Section
6.2(a) hereof.
"Initial Trustee" shall have the meaning defined in the
preamble hereto.
"Investment Advisor" shall have the meaning defined in Section
5.2(a) hereof.
"Majority of the Trustees" shall mean a majority of the
Trustees in office at the time in question. At any time at which
there shall be only one (1) Trustee in office, such term shall
mean such Trustee.
"Majority Shareholder Vote," as used with respect to (a)
the election of any Trustee at a meeting of Shareholders, shall
mean the vote for the election of such Trustee of a plurality of
all outstanding Shares of the Trust, without regard to Series,
represented in person or by proxy and entitled to vote thereon,
provided that a quorum (as determined in accordance with the
<PAGE> 16
By-Laws) is present, (b) any other action required or permitted
to be taken by Shareholders, shall mean the vote for such action
of the holders of that majority of all outstanding Shares (or,
where a separate vote of Shares of any particular Series is to
be taken, the affirmative vote of that majority of the
outstanding Shares of that Series) of the Trust which consists
of: (i) a majority of all Shares (or of Shares of the particular
Series) represented in person or by proxy and entitled to vote
on such action at the meeting of Shareholders at which such
action is to be taken, provided that a quorum (as determined in
accordance with the By-Laws) is present; or (ii) if such action
is to be taken by written consent of Shareholders, a majority of
all Shares (or of Shares of the particular Series) issued and
outstanding and entitled to vote on such action; provided that
(iii) as used with respect to any action requiring the
affirmative vote of "a majority of the outstanding voting
securities," as the quoted phrase is defined in the 1940 Act, of
the Trust or of any Series, "Majority Shareholder Vote" means
the vote for such action at a meeting of Shareholders of the
smallest majority of all outstanding Shares of the Trust (or of
Shares of the particular Series) entitled to vote on such action
which satisfies such 1940 Act voting requirement.
"1940 Act" shall mean the provisions of the Investment Company
Act of 1940 and the rules and regulations thereunder, both as
amended from time to time, and any order or orders thereunder
which may from time to time be applicable to the Trust.
"Person" shall mean and include individuals, as well as
corporations, limited partnerships, general partnerships, joint
stock companies, joint ventures, associations, banks, trust
companies, land trusts, business trusts or other organizations
established under the laws of any jurisdiction, whether or not
considered to be legal entities, and governments and agencies
and political subdivisions thereof.
"Principal Underwriter" shall have the meaning designated
in Section 5.2(c) hereof.
"Prospectus," as used with respect to the Trust (or the
Shares of a particular Series), shall mean the prospectus
relating to the Trust (or such Series) which constitutes part of
the currently effective Registration Statement of the Trust
under the Securities Act of 1933, as such prospectus may be
amended or supplemented from time to time.
"Securities" shall have the same meaning ascribed to that term
in the Securities Act of 1993.
"Series" shall mean one or more of the series of Shares
authorized by the Trustees to represent the beneficial interest
<PAGE> 17
in one or more separate components of the assets of the Trust
which are now or hereafter established and designated under or
in accordance with the provisions of Article 6 hereof.
"Settlor" shall have the meaning defined in the preamble
hereto.
"Shareholder" shall mean as of any particular time any
Person shown of record at such time on the books of the Trust as
a holder of outstanding Shares of any Series, and shall include
a pledgee into whose name any such Shares are transferred in
pledge.
"Shareholder Servicing Agent" shall have the meaning
designated in Section 5.2(f) hereof.
"Shares" shall mean the transferable units into which the
beneficial interest in the Trust and each Series of the Trust
(as the context may require) shall be divided from time to time,
and includes fractions of Shares as well as whole Shares. All
references herein to "Shares" which are not accompanied by a
reference to any particular Series or Class shall be deemed to
apply to outstanding Shares without regard to Series or Class.
"Single Class Voting," as used with respect to any matter
to be acted upon at a meeting or by written consent of
Shareholders, shall mean a style of voting in which each holder
of one or more Shares shall be entitled to one vote on the
matter in question for each Share standing in his name on the
records of the Trust, irrespective of Series or Class of a
Series, and all outstanding Shares of all Series vote as a
single class.
"Statement of Additional Information," as used with
respect to the Trust (or any Series), shall mean the statement
of additional information relating to the Trust (or such Series)
which constitutes part of the currently effective Registration
Statement of the Trust under the Securities Act of 1933, as such
statement of additional information may be amended or
supplemented from time to time.
"Transfer Agent" shall have the meaning defined in Section
5.2(e) hereof.
"Trust" shall mean the trust named in Section 1.1 hereof.
<PAGE> 18
"Trust Property" shall mean, as of any particular time,
any and all property which shall have been transferred, conveyed
or paid to the Trust or the Trustees, and all interest,
dividends, income, earnings, profits and gains therefrom, and
proceeds thereof, including any proceeds derived from the sale,
exchange or liquidation thereof, and any funds or payments
derived from any reinvestment of such proceeds in whatever form
the same may be, and which at such time is owned or held by, or
for the account of, the Trust or the Trustees, without regard to
the Series to which such property is allocated.
"Trustees" shall mean, collectively, the Initial Trustee,
so long as he shall continue in office, and all other
individuals who at the time in question have been duly elected
or appointed as Trustees of the Trust in accordance with the
provisions hereof and who have qualified and are then in office.
At any time at which there shall be only one (I) Trustee in
office, such term shall mean such single Trustee.
SECTION 1.5. Real Property to be Converted into Personal
Property. Notwithstanding any other provision hereof, any real
property at any time forming part of the Trust Property shall be
held in trust for sale and conversion into personal property at
such time or times and in such manner and upon such terms as the
Trustees shall approve, but the Trustees shall have power until
the termination of this Trust to postpone such conversion as
long as they in their uncontrolled discretion shall think fit,
and for the purpose of determining the nature of the interest of
the Shareholders therein, all such real property shall at all
times be considered as personal property.
ARTICLE 2
PURPOSE OF THE TRUST
The purpose of the Trust shall be to (a) manage, conduct,
operate and carry on the business of an investment company; (b)
subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange,
distribute or otherwise deal in or dispose of any and all sorts
of property, tangible or intangible, including but not limited
to Securities of any type whatsoever, whether equity or
nonequity, of any issuer, evidences of indebtedness of any
person and any other rights, interest, instruments or property
of any sort to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all
such investment of every kind and description, including without
limitation, the right to consent and otherwise act with respect
thereto, with power to designate one or more Persons to exercise
any of said rights, powers and privileges in respect of any of
said investments. The Trustees shall not be limited by any law
<PAGE> 19
limiting the investments which may be made by fiduciaries.
ARTICLE 3
POWERS OF THE TRUSTEES
SECTION 3.1. Powers in General. The Trustees shall have,
without other or further authorization, full, entire, exclusive
and absolute power, control and authority over, and management
of, the business of the Trust and over the Trust Property, to
the same extent as if the Trustees were the sole owners of the
business and property of the Trust in their own right, and with
such powers of delegation as may be permitted by this
Declaration, subject only to such limitations as may be
expressly imposed by this Declaration of Trust or by applicable
law. The enumeration of any specific power or authority herein
shall not be construed as limiting the aforesaid power or
authority or any specific power or authority. Without limiting
the foregoing; they may select, and from time to time change,
the fiscal year of the Trust; they may adopt and use a seal for
the Trust, provided that unless otherwise required by the
Trustees, it shall not be necessary to place the seal upon, and
its absence shall not impair the validity of, any document,
instrument or other paper executed and delivered by or on behalf
of the Trust; they may from time to time in accordance with the
provisions of Section 6.1 hereof establish one or more Series to
which they may allocate such of the Trust Property, subject to
such liabilities, as they shall deem appropriate, each such
Series to be operated by the Trustees as a separate and distinct
investment medium and with separately defined investment
objectives and policies and distinct investment purposes, all as
established by the Trustees, or from time to time changed by
them; they may as they consider appropriate elect and remove
officers and appoint and terminate agents and consultants and
hire and terminate employees, any one or more of the foregoing
of whom may be a Trustee; they may appoint from their own
number, and terminate, any one or more committees consisting of
one or more Trustees, including without implied limitation an
Executive Committee, which may, when the Trustees are not in
session and subject to the 1940 Act, exercise some or all of the
power and authority of the Trustees as the Trustees may
determine; in accordance with Section 5.2 they may employ one or
more Investment Advisers, Administrators and Custodians and may
authorize any such service provider to employ one or more other
service providers and to deposit all or any part of such assets
in a system or systems for the central handling of Securities,
retain Transfer, Dividend Disbursing, Accounting or Shareholder
<PAGE> 20
Servicing Agents or any of the foregoing, provide for the
distribution of Shares by the Trust through one or more
Distributors, Principal Underwriters or otherwise, set record
dates or times for the determination of Shareholders entitled to
participate in, benefit from or act with respect to various
matters; and in general they may delegate to any officer of the
Trust, to any Committee of the Trustees and to any employee,
Investment Adviser, Administrator, Distributor, Custodian,
Transfer Agent, Dividend Disbursing Agent, or any other agent or
consultant of the Trust, such authority, powers, functions and
duties as they consider desirable or appropriate for the conduct
of the business and affairs of the Trust, including without
implied limitation the power and authority to act in the name of
the Trust and of the Trustees, to sign documents and to act as
attorney-in-fact for the Trustees. Without limiting the
foregoing and to the extent not inconsistent with the 1940 Act
or other applicable law, the Trustees shall have power and
authority:
(a) Investments. To subscribe for, invest in, reinvest
in, purchase or otherwise acquire, hold, pledge, sell, assign,
transfer, exchange, distribute or otherwise deal in or dispose
of any and all sorts of property, tangible or intangible,
including but not limited to Securities of any type whatsoever,
whether equity or nonequity, of any issuer, evidences of
indebtedness of any person and any other rights, interest,
instruments or property of any sort, to exercise any and all
rights, powers and privileges of ownership or interest in
respect of any and all such investments of every kind and
description, including without limitation the right to consent
and otherwise act with respect thereto, with power to designate
one or more Persons to exercise any of said rights, powers and
privileges in respect of any of said investments, in every case
without being limited by any law limiting the investments which
may be made by fiduciaries;
(b) Disposition of Assets. Upon such terms and conditions
as they deem best, to lend, sell, exchange, mortgage, pledge,
hypothecate, grant security interests in, encumber, negotiate,
convey, transfer or otherwise dispose of, and to trade in, any
and all of the Trust Property, free and clear of all trusts, for
cash or on terms, with or without advertisement, and on such
terms as to payment, security or otherwise, all as they shall
deem necessary or expedient;
(c) Ownership Powers. To vote or give assent, or exercise
any and all other rights, powers and privileges of ownership
with respect to, and to perform any and all duties and
obligations as owners of, any Securities or other property
forming part of the Trust Property, the same as any individual
might do; to exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of
Securities, and to receive powers of attorney from, and to
execute and deliver proxies or powers of attorney to, such
Person or Persons as the Trustees shall deem proper, receiving
from or granting to such Person or Persons such power and
discretion with relation to Securities or other property of the
<PAGE> 21
Trust, all as the Trustees shall deem proper;
(d) Form of Holding. To hold any Security or other
property in a form not indicating any trust, whether in bearer,
unregistered or other negotiable form, or in the name of the
Trustees or of the Trust, or of the Series to which such
Securities or property belong, or in the name of a Custodian,
subcustodian or other nominee or nominees, or otherwise, upon
such terms, in such manner or with such powers, as the Trustees
may determine, and with or without indicating any trust or the
interest of the Trustees therein;
(e) Reorganizations etc. To consent to or participate in
any plan for the reorganization, consolidation or merger of any
corporation or issuer, any Security of which is or was held in
the Trust or any Series; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or
issuer, and to pay calls or subscriptions with respect to any
Security forming part of the Trust Property;
(f) Voting Trusts, etc. To join with other holders of any
Securities in acting through a committee, depository, voting
trustee or otherwise, and in that connection to deposit any
Security with, or transfer any Security to, any such committee,
depository or trustee, and to delegate to them such power and
authority with relation to any Security (whether or not so
deposited or transferred) as the Trustees shall deem proper, and
to agree to pay, and to pay, such portion of the expenses and
compensation of such committee, depository or trustee as the
Trustees shall deem proper;
(g) Contracts. etc. To enter into, make and perform all
such obligations, contracts, agreements and undertakings of
every kind and description, with any Person or Persons, as the
Trustees shall in their discretion deem expedient in the conduct
of the business of the Trust, for such terms as they shall see
fit, whether or not extending beyond the term of office of the
Trustees, or beyond the possible expiration of the Trust; to
amend, extend, release or cancel any such obligations,
contracts, agreements or understandings; and to execute,
acknowledge, deliver and record all written instruments which
they may deem necessary or expedient in the exercise of their
powers;
(h) Guarantees. etc. To endorse or guarantee the payment
of any notes or other obligations of any Person; to make
contracts of guaranty or suretyship, or otherwise assume
liability for payment thereof; and to mortgage and pledge the
Trust Property or any part thereof to secure any of or all such
obligations;
<PAGE> 22
(i) Partnerships, etc. To enter into joint ventures,
general or limited partnerships and any other combinations or
association;
(j) Insurance. To purchase and pay for entirely out of
Trust Property such insurance as they may deem necessary or
appropriate for the conduct of the business, including, without
limitation, insurance policies insuring the assets of the Trust
and payment of distributions and principal on its portfolio
investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, consultants, Investment
Advisers, managers, Administrators, Distributors, Principal
Underwriters, or other independent contractors, or any thereof
(or any Person connected therewith), of the Trust, individually,
against all claims and liabilities of every nature arising by
reason of holding, being or having held any such office or
position, or by reason of any action alleged to have been taken
or omitted by any such Person in any such capacity, whether or
not the Trust would have the power to indemnify such Person
against such liability;
(k) Pensions, etc. To pay pensions for faithful service,
as deemed appropriate by the Trustees, and to adopt, establish
and carry out pension, profit sharing, share bonus, share
purchase, savings, thrift, deferred compensation and other
retirement, incentive and benefit plans, trusts and provisions,
including the purchasing of life insurance and annuity contracts
as a means of providing such retirement and other benefits, for
any or all of the Trustees, officers, employees and agents of
the Trust;
(I) Power of Collection and Litigation. To collect, sue
for and receive all sums of money coming due to the Trust, to
employ counsel, and to commence, engage in, prosecute, intervene
in, join, defend, compound, compromise, adjust or abandon, in
the name of the Trust, any and all actions, suits, proceedings,
disputes, claims, controversies, demands or other litigation or
legal proceedings relating to the Trust, the business of the
Trust, the Trust Property, or the Trustees, officers, employees,
agents and other independent contractors of the Trust, in their
capacity as such, at law or in equity, or before any other
bodies or tribunals, and to compromise, arbitrate or otherwise
adjust any dispute to which the Trust may be a party, whether or
not any suit is commenced or any claim shall have been made or
asserted. Except to the extent required for a Delaware business
trust, the Shareholders shall have no power to vote as to
whether or not a court action, legal proceeding or claim should
or should not be brought or maintained derivatively or as a
class action on behalf of the Trust or the Shareholders.
(m) Issuance and Repurchase of Shares. To authorize,
issue, sell, repurchase, redeem, retire, cancel, acquire, hold,
resell, reissue, dispose of, transfer, and otherwise deal in
Shares of any Series, and, subject to Article 6 hereof, to apply
to any such repurchase, redemption, retirement, cancellation or
<PAGE> 23
acquisition of Shares of any Series, any of the assets belonging
to the Series to which such Shares relate, whether constituting
capital or surplus or otherwise, to the full extent now or
hereafter permitted by applicable law; provided that any Shares
belonging to the Trust shall not be voted, directly or
indirectly;
(n) Offices. To have one or more offices, and to carry on
all or any of the operations and business of the Trust, in any
of the States, Districts or Territories of the United States,
and in any and all foreign countries, subject to the laws of
such State, District, Territory or country;
(o) Expenses. To incur and pay any and all such expenses
and charges as they may deem advisable (including without
limitation appropriate fees to themselves as Trustees), and to
pay all such sums of money for which they may be held liable by
way of damages, penalty, fine or otherwise;
(p) Agents, etc. To retain and employ any and all such
servants, agents, employees, attorneys, brokers, Investment
Advisers, accountants, architects, engineers, builders, escrow
agents, depositories, consultants, ancillary trustees,
custodians, agents for collection, insurers, banks and officers,
as they think best for the business of the Trust or any Series,
to supervise and direct the acts of any of the same, and to fix
and pay their compensation and define their duties;
(q) Accounts. To determine, and from time to time change,
the method or form in which the accounts of the Trust or any
Series shall be kept;
(r) Valuation. Subject to the requirements of the 1940
Act, to determine from time to time the value of all or any part
of the Trust Property and of any services, Securities, property
or other consideration to be furnished to or acquired by the
Trust, and from time to time to revalue all or any part of the
Trust Property in accordance with such appraisals or other
information as is, in the Trustees' sole judgment, necessary and
satisfactory;
(s) Indemnification. In addition to the mandatory
indemnification provided for in Article 8 hereof and to the
extent permitted by law, to indemnify or enter into agreements
with respect to indemnification with any Person with whom this
Trust has dealings, including, without limitation, any
independent contractor, to such extent as the Trustees shall
determine; and
<PAGE> 24
(t) General. Subject to the fundamental policies in effect
from time to time with respect to the Trust, to do all such
other acts and things and to conduct, operate, carry on and
engage in such other lawful businesses or business activities as
they shall in their sole and absolute discretion consider to be
incidental to the business of the Trust or any Series as an
investment company, and to exercise all powers which they shall
in their discretion consider necessary, useful or appropriate to
carry on the business of the Trust or any Series, to promote any
of the purposes for which the Trust is formed, whether or not
such things are specifically mentioned herein, in order to
protect or promote the interests of the Trust or any Series, or
otherwise to carry out the provisions of this Declaration.
SECTION 3.2. Borrowings; Financings: Issuance of
Securities. The Trustees have power, subject to the fundamental
policies in effect from time to time with respect to the Trust,
to borrow or in any other manner raise such sum or sums of
money, and to incur such other indebtedness for goods or
services, or for or in connection with the purchase or other
acquisition of property, as they shall deem advisable for the
purposes of the Trust, in any manner and on any terms, and to
evidence the same by negotiable or nonnegotiable Securities
which may mature at any time or times, even beyond the possible
date of termination of the Trust; to issue Securities of any
type for such cash, property, services or other considerations,
and at such time or times and upon such terms, as they may deem
advisable; and to reacquire any such Securities. Any such
Securities of the Trust may, at the discretion of the Trustees,
be made convertible into Shares of any Series, or may evidence
the right to purchase, subscribe for or otherwise acquire Shares
of any Series, at such times and on such terms as the Trustees
may prescribe.
SECTION 3.3. Deposits. Subject to the requirements of the
1940 Act, the Trustees shall have power to deposit any moneys or
Securities included in the Trust Property with any one or more
banks, trust companies or other banking institutions, whether or
not such deposits will draw interest. Such deposits are to be
subject to withdrawal in such manner as the Trustees may
determine, and the Trustees shall have no responsibility for any
loss which may occur by reason of the failure of the bank, trust
company or other banking institution with which any such moneys
or Securities have been deposited, except as provided in Section
8.2 hereof.
SECTION 3.4. Allocations. The Trustees shall have power to
determine whether moneys or other assets received by the Trust
shall be charged or credited to income or capital, or allocated
between income and capital, including the power to amortize or
fail to amortize any part or all of any premium or discount, to
treat any part or all of the profit resulting from the maturity
or sale of any asset, whether purchased at a premium or at a
discount, as income or capital, or to apportion the same between
income and capital, to apportion the sale price of any asset
between income and capital, and to determine in what manner any
expenses or disbursements are to be borne as between income and
<PAGE> 25
capital, whether or not in the absence of the power and
authority conferred by this Section 3.4 such assets would be
regarded as income or as capital or such expense or disbursement
would be charged to income or to capital; to treat any dividend
or other distribution on any investment as income or capital, or
to apportion the same between income and capital; to provide or
fail to provide reserves, including reserves for depreciation,
amortization or obsolescence in respect of any Trust Property in
such amounts and by such methods as they shall determine; to
allocate less than all of the consideration paid for Shares of
any Series to surplus with respect to the Series to which such
Shares relate and to allocate the balance thereof to paid-in
capital of that Series, and to reallocate such amounts from time
to time; all as the Trustees may reasonably deem proper.
SECTION 3.5. Further Powers: Limitations. The Trustees
shall have power to do all such other matters and things, and to
execute all such instruments, as they deem necessary, proper or
desirable in order to carry out, promote or advance the
interests of the Trust, although such matters or things are not
herein specifically mentioned. Any determination as to what is
in the interests of the Trust made by the Trustees in good faith
shall be conclusive. In construing the provisions of this
Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees. The Trustees shall not be
required to obtain any court order to deal with the Trust
Property. The Trustees may limit their right to exercise any of
their powers through express restrictive provisions in the
instruments evidencing or providing the terms for any Securities
of the Trust or in other contractual instruments adopted on
behalf of the Trust.
ARTICLE 4
TRUSTEES AND OFFICERS
SECTION 4.1. Number. Designation, Election. Term, etc.
(a) Initial Trustee. Upon his execution of this
Declaration of Trust or a counterpart hereof or some other
writing in which he accepts such Trusteeship and agrees to the
provisions hereof, the individual whose signature is affixed
hereto as Initial Trustee shall become the Initial Trustee
hereof.
(b) Number. The Trustees serving as such, whether named
above or hereafter becoming Trustees, may increase (to not more
than twenty (20)) or decrease the number of Trustees to a number
other than the number theretofore determined by a written
<PAGE> 26
instrument signed by a Majority of the Trustees (or by an
officer of the Trust pursuant to the vote of a Majority of the
Trustees). No decrease in the number of Trustees shall have the
effect of removing any Trustee from office prior to the
expiration of his term, but the number of Trustees may be
decreased in conjunction with the removal of a Trustee pursuant
to subsection (e) of this Section 4.1.
(c) Election and Term. The Trustees shall be elected by
the Shareholders of the Trust at the first meeting of
Shareholders immediately prior to the initial public offering of
Shares of the Trust, and the term of office of any Trustees in
office before such election shall terminate at the time of such
election. Subject to Section 16(a) of the 1940 Act and to the
preceding sentence of this subsection (c), the Trustees shall
have the power to set and alter the terms of office of the
Trustees, and at any time to lengthen or shorten their own terms
or make their terms of unlimited duration, to elect their own
successors and, pursuant to subsection (f) of this Section 4.1,
to appoint Trustees to fill vacancies; provided that Trustees
shall be elected by a Majority Shareholder Vote at any such time
or times as the Trustees shall determine that such action is
required under Section 16(a) of the 1940 Act or, if not so
required, that such action is advisable; and further provided
that, after the initial election of Trustees by the
Shareholders, the term of office of any incumbent Trustee shall
continue until the termination of this Trust or his earlier
death, resignation, retirement, bankruptcy, adjudicated
incompetency or other incapacity or removal, or if not so
terminated, until the election of such Trustee's successor in
office has become effective in accordance with this subsection
(c).
(d) Resignation and Retirement. Any Trustee may resign his
trust or retire as a Trustee, by a written instrument signed by
him and delivered to the other Trustees or to any officer of the
Trust, and such resignation or retirement shall take effect upon
such delivery or upon such later date as is specified in such
instrument.
(e) Removal. Any Trustee may be removed with or without
cause at any time: (i) by written instrument, signed by at least
two thirds (2/3) of the number of Trustees prior to such
removal, specifying the date upon which such removal shall
become effective; or (ii) by vote of Shareholders holding not
less than two thirds (2/3) of the Shares of each Series then
outstanding, cast in person or by proxy at any meeting called
for the purpose; or (iii) by a written declaration signed by
Shareholders holding not less than two thirds (2/3) of the
Shares of each Series then outstanding. Upon incapacity or
death of any Trustee, his legal representative shall execute and
deliver on his behalf such documents as the remaining Trustees
shall require in order to effect the purpose of this Paragraph.
(f) Vacancies. Any vacancy or anticipated vacancy
<PAGE> 27
resulting from any reason, including an increase in the number
of Trustees, may (but need not unless required by the 1940 Act)
be filled by a Majority of the Trustees, subject to the
provisions of Section 16(a) of the 1940 Act, through the
appointment in writing of such other individual as such
remaining Trustees in their discretion shall determine; provided
that if there shall be no Trustees in office, such vacancy or
vacancies shall be filled by Majority Shareholders Vote. Any
such appointment or election shall be effective upon such
individual's written acceptance of his appointment as a Trustee
and his agreement to be bound by the provisions of this
Declaration of Trust, except that any such appointment in
anticipation of a vacancy to occur by reason of retirement,
resignation or increase in the number of Trustees to be
effective at a later date shall become effective only at or
after the effective date of said retirement, resignation or
increase in the number of Trustees.
(g) Acceptance of Trusts. Whenever any conditions to the
appointment or election of any individual as a Trustee hereunder
who was not, immediately prior to such appointment or election,
acting as a Trustee shall have been satisfied, such individual
shall become a Trustee and the Trust estate shall vest in the
new Trustee, together with the continuing Trustees, without any
further act or conveyance. Such new Trustee shall accept such
appointment or election in writing and agree in such writing to
be bound by the provisions hereof, but the execution of such
writing shall not be requisite to the effectiveness of the
appointment or election of a new Trustee.
(h) Effect of Death. Resignation, etc. No vacancy, whether
resulting from the death, resignation, retirement, bankruptcy,
adjudicated incompetency, incapacity, or removal of any Trustee,
an increase in the number of Trustees or otherwise, shall
operate to annul or terminate the Trust hereunder or to revoke
or terminate any existing agency or contract created or entered
into pursuant to the terms of this Declaration of Trust. Until
such vacancy is filled as provided in this Section 4.1, the
Trustees in office (if any), regardless of their number, shall
have all the powers granted to the Trustees and shall discharge
all the duties imposed upon the Trustees by this Declaration.
(i) Convevance. In the event of the resignation or
removal of a Trustee or his otherwise ceasing to be a Trustee,
such former Trustee or his legal representative shall, upon
request of the continuing Trustees, execute and deliver such
documents as may be required for the purpose of consummating or
evidencing the conveyance to the Trust or the remaining Trustees
of any Trust Property held in such former Trustee's name, but
the execution and delivery of such documents shall not be
requisite to the vesting of title to the Trust Property in the
remaining Trustees, as provided in subsection (g) of this
Section 4.1 and in Section 4.13 hereof.
(j) No Accounting. Except to the extent required by the
<PAGE> 28
1940 Act or under circumstances which would justify his removal
for cause, no Person ceasing to be a Trustee (nor the estate of
any such Person) shall be required to make an accounting to the
Shareholders or remaining Trustees upon such cessation.
SECTION 4.2. Trustees' Meetings: Participation by
Telephone. etc. Annual and special meetings may be held from
time to time, in each case, upon the call of such officers as
may be thereunto authorized by the By-Laws or vote of the
Trustees, or by any three (3) Trustees, or pursuant to a vote of
the Trustees adopted at a duly constituted meeting of the
Trustees, and upon such notice as shall be provided in the
By-Laws. Any such meeting may be held within or without the
state of Delaware. The Trustees may act with or without a
meeting, and a written consent to any matter, signed by a
Majority of the Trustees, shall be equivalent to action duly
taken at a meeting of the Trustees, duly called and held. Except
as otherwise provided by the 1940 Act or other applicable law,
or by this Declaration of Trust or the By-Laws, any action to be
taken by the Trustees may be taken by a majority of the Trustees
present at a meeting of Trustees (a quorum, consisting of at
least a Majority of the Trustees, being present), within or
without Delaware. If authorized by the By-Laws, all or any one
or more Trustees may participate in a meeting of the Trustees or
any Committee thereof by means of conference telephone or
similar means of communication by means of which all Persons
participating in the meeting can hear each other, and
participation in a meeting pursuant to such means of
communication shall constitute presence in person at such
meeting. The minutes of any meeting thus held shall be prepared
in the same manner as a meeting at which all participants were
present in person.
SECTION 4.3. Committees; Delegation. The Trustees shall
have power, consistent with their ultimate responsibility to
supervise the affairs of the Trust, to delegate from time to
time to one or more other Committees, or to any single Trustee,
the doing of such things and the execution of such deeds or
other instruments, either in the name of the Trust or the names
of the Trustees or as their attorney or attorneys in fact, or
otherwise as the Trustees may from time to time deem expedient,
and any agreement, deed, mortgage, lease or other instrument or
writing executed by the Trustee or Trustees or other Person to
whom such delegation was made shall be valid and binding upon
the Trustees and upon the Trust.
SECTION 4.4. Officers. The Trustees shall annually elect
such officers or agents, who shall have such powers, duties and
responsibilities as the Trustees may deem to be advisable, and
as they shall specify by resolution or in the By-Laws. Except as
may be provided in the By-Laws, any officer elected by the
Trustees may be removed at any time with or without cause. Any
two (2) or more offices may be held by the same individual.
SECTION 4.5. Compensation of Trustees and Officers. The
<PAGE> 29
Trustees shall fix the compensation of all officers and
Trustees. Without limiting the generality of any of the
provisions hereof, the Trustees shall be entitled to receive
reasonable compensation for their general services as such, and
to fix the amount of such compensation, and to pay themselves or
any one or more of themselves such compensation for special
services, including legal, accounting, or other professional
services, as they in good faith may deem reasonable. No Trustee
or officer resigning (except where a right to receive
compensation for a definite future period shall be expressly
provided in a written agreement with the Trust, duly approved by
the Trustees) and no Trustee or officer removed shall have any
right to any compensation as such Trustee or officer for any
period following his resignation or removal, or any right to
damages on account of his removal, whether his compensation be
by the month, or the year or otherwise.
SECTION 4.6. Ownership of Shares and Securities of the
Trust. Any Trustee, and any officer, employee or agent of the
Trust, and any organization in which any such Person is
interested, may acquire, own, hold and dispose of Shares of any
Series and other Securities of the Trust for his or its
individual account, and may exercise all rights of a holder of
such Shares or Securities to the same extent and in the same
manner as if such Person were not such a Trustee, officer,
employee or agent of the Trust; subject, in the case of Trustees
and officers, to the same limitations as directors or officers
(as the case may be) of a Delaware business corporation; and the
Trust may issue and sell or cause to be issued and sold and may
purchase any such Shares or other Securities from any such
Person or any such organization, subject only to the general
limitations, restrictions or other provisions applicable to the
sale or purchase of Shares of such Series or other Securities of
the Trust generally.
SECTION 4.7. Right of Trustees and Officers to Own
Property or to Engage in Business; Authority of Trustees to
Permit Others to Do Likewise. The Trustees, in their capacity as
Trustees, and (unless otherwise specifically directed by vote of
the Trustees) the officers of the Trust in their capacity as
such, shall not be required to devote their entire time to the
business and affairs of the Trust. Except as otherwise
specifically provided by vote of the Trustees, or by agreement
in any particular case, any Trustee or officer of the Trust may
acquire, own, hold and dispose of, for his own individual
account, any property, and acquire, own, hold, carry on and
dispose of, for his own individual account, any business entity
or business activity, whether similar or dissimilar to any
property or business entity or business activity invested in or
carried on by the Trust, and without first offering the same as
an investment opportunity to the Trust, and may exercise all
rights in respect thereof as if he were not a Trustee or officer
of the Trust. The Trustees shall also have power, generally or
in specific cases, to permit employees or agents of the Trust to
have the same rights (or lesser rights) to acquire, hold, own
and dispose of property and businesses, to carry on businesses,
and to accept investment opportunities without offering them to
the Trust, as the Trustees have by virtue of this Section 4.7.
<PAGE> 30
SECTION 4.8. Reliance on Experts. The Trustees and
officers may consult with counsel, engineers, brokers,
appraisers, auctioneers, accountants, investment bankers,
securities analysts or other Persons (any of which may be a firm
in which one or more of the Trustees or officers is or are
members or otherwise interested) whose profession gives
authority to a statement made by them on the subject in
question, and who are reasonably deemed by the Trustees or
officers in question to be competent, and the advice or opinion
of such Persons shall be full and complete personal protection
to all of the Trustees and officers in respect of any action
taken or suffered by them in good faith and in reliance on or in
accordance with such advice or opinion. In discharging their
duties, Trustees and officers, when acting in good faith, may
rely upon financial statements of the Trust represented to them
to be correct by any officer of the Trust having charge of its
books of account, or stated in a written report by an
independent certified public accountant fairly to present the
financial position of the Trust. The Trustees and officers may
rely, and shall be personally protected in acting, upon any
instrument or other document believed by them to be genuine.
SECTION 4.9. Surety Bonds. No Trustee, officer, employee
or agent of the Trust shall, as such, be obligated to give any
bond or surety or other security for the performance of any of
his duties, unless required by applicable law or regulation, or
unless the Trustees shall otherwise determine in any particular
case.
SECTION 4.10. Apparent Authority of Trustees and Officers.
No purchaser, lender, transfer agent or other Person dealing
with the Trustees or any officer of the Trust shall be bound to
make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by such officer, or to
make inquiry concerning or be liable for the application of
money or property paid, loaned or delivered to or on the order
of the Trustees or of such officer.
SECTION 4.11. Other Relationships Not Prohibited. The fact
that:
(i) any of the Shareholders, Trustees or officers of the
Trust is a shareholder, director, officer, partner, trustee,
employee, manager, adviser, principal underwriter or distributor
or agent of or for any Contracting Party (as defined in Section
5.2 hereof), or of or for any parent or affiliate of any
Contracting Party, or that the Contracting Party or any parent
or affiliate thereof is a Shareholder or has an interest in the
Trust or any Series, or that
(ii) any Contracting Party may have a contract providing
for the rendering of any similar services to one or more other
<PAGE> 31
corporations, trusts, associations, partnerships, limited
partnerships or other organizations, or have other business or
interests, shall not affect the validity of any contract for the
performance and assumption of services, duties and
responsibilities to, for or of the Trust and/or the Trustees or
disqualify any Shareholder, Trustee or officer of the Trust from
voting upon or executing the same or create any liability or
accountability to the Trust or to the holders of Shares of any
Series; provided that, in the case of any relationship or
interest referred to in the preceding clause (i) on the part of
any Trustee or officer of the Trust, either (x) the material
facts as to such relationship or interest have been disclosed to
or are known by the Trustees not having any such relationship or
interest and the contract involved is approved in good faith by
a majority of such Trustees not having any such relationship or
interest (even though such unrelated or disinterested Trustees
are less than a quorum of all of the Trustees), (y) the material
facts as to such relationship or interest and as to the contract
have been disclosed to or are known by the Shareholders entitled
to vote thereon and the contract involved is specifically
approved in good faith by vote of the Shareholders, or (z) the
specific contract involved is fair to the Trust as of the time
it is authorized, approved or ratified by the Trustees or by the
Shareholders.
SECTION 4.12. Payment of Trust Expenses. The Trustees are
authorized to pay or to cause to be paid out of the principal or
income of the Trust, or partly out of principal and partly out
of income, and according to any allocation to a particular
Series and Class made by them pursuant to Section 6.1(f) hereof,
all expenses, fees, charges, taxes and liabilities incurred or
arising in connection with the business and affairs of the Trust
or in connection with the management thereof, including, but not
limited to, the Trustees' compensation and such expenses and
charges for the services of the Trust's officers, employees,
Investment Adviser, Administrator, Distributor, Principal
Underwriter, auditor, counsel, Custodian, Transfer Agent,
Dividend Disbursing Agent, Accounting Agent, Shareholder
Servicing Agent, and such other agents, consultants, and
independent contractors and such other expenses and charges as
the Trustees may deem necessary or proper to incur.
SECTION 4.13. Ownership of the Trust Property. Legal title
to all the Trust Property shall be vested in the Trustees as
joint tenants, except that the Trustees shall have power to
cause legal title to any Trust Property to be held by or in the
name of one or more of the Trustees, or in the name of the
Trust, or of any particular Series, or in the name of any other
Person as nominee, on such terms as the Trustees may determine;
provided that the interest of the Trust and of the respective
Series therein is appropriately protected. The right, title and
interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee.
Upon the termination of the term of office of a Trustee as
provided in Section 4.1(c), (d) or (e) hereof, such Trustee
shall automatically cease to have any right, title or interest
in any of the Trust Property, and the right, title and interest
of such Trustee in the Trust Property shall vest automatically
in the remaining Trustees. Such vesting and cessation of title
<PAGE> 32
shall be effective whether or not conveyancing documents have
been executed and delivered pursuant to Section 4.1(i) hereof.
SECTION 4.14. By-Laws. The Trustees may adopt and from
time to time amend or repeal By-Laws for the conduct of the
business of the Trust.
ARTICLE 5
DELEGATION OF MANAGERIAL RESPONSIBILITIES
SECTION 5.1. Appointment; Action by Less than All
Trustees. The Trustees shall be responsible for the general
operating policy of the Trust and for the general supervision of
the business of the Trust conducted by officers, agents,
employees or advisers of the Trust or by independent
contractors, but the Trustees shall not be required personally
to conduct all the business of the Trust and, consistent with
their ultimate responsibility as stated herein, the Trustees may
appoint, employ or contract with one or more officers, employees
and agents to conduct, manage and/or supervise the operations of
the Trust, and may grant or delegate such authority to such
officers, employees and/or agents as the Trustees may, in their
sole discretion, deem to be necessary or desirable, without
regard to whether such authority is normally granted or
delegated by trustees. With respect to those matters of the
operation and business of the Trust which they shall elect to
conduct themselves, except as otherwise provided by this
Declaration or the By-Laws, if any, the Trustees may authorize
any single Trustee or defined group of Trustees, or any
committee consisting of a number of Trustees less than the whole
number of Trustees then in office without specification of the
particular Trustees required to be included therein, to act for
and to bind the Trust, to the same extent as the whole number of
Trustees could do, either with respect to one or more particular
matters or classes of matters, or generally.
SECTION 5.2. Certain Contracts. Subject to compliance with
the provisions of the 1940 Act, but notwithstanding any
limitations of present and future law or custom in regard to
delegation of powers by trustees generally, the Trustees may, at
any time and from time to time in their discretion and without
limiting the generality of their powers and authority otherwise
set forth herein, enter into one or more contracts with any one
or more corporations, trusts, associations, partnerships,
limited partnerships or other types of organizations, or
individuals ("Contracting Party"), to provide for the
performance and assumption of some or all of the following
services, duties and responsibilities to, for or on behalf of
the Trust and/or any Series, and/or the Trustees, and to provide
for the performance and assumption of such other services,
<PAGE> 33
duties and responsibilities in addition to those set forth
below, as the Trustees may deem appropriate:
(a) Advisory. An investment advisory or management
agreement whereby the agent shall undertake to furnish each
Series of the Trust such management, investment advisory or
supervisory, statistical and research facilities and services,
and such other facilities and services, if any, as the Trustees
shall from time to time consider desirable, all upon such terms
and conditions as the Trustees may in their discretion determine
to be not inconsistent with this Declaration, the applicable
provisions of the 1940 Act or any applicable provisions of the
By-Laws (any such agent being herein referred to as an
"Investment Adviser"). To the extent required by the 1940 Act,
any such advisory or management agreement and any amendment
thereto shall be subject to approval by a Majority Shareholder
Vote at a meeting of the Shareholders of the applicable Series
of the Trust. Notwithstanding any provisions of this
Declaration, the Trustees may authorize the Investment Adviser
(subject to such general or specific instructions as the
Trustees may from time to time adopt) to effect purchases,
sales, loans or exchanges of securities of the Trust on behalf
of the Trustees or may authorize any officer or employee of the
Trust or any Trustee to effect such purchases, sales, loans or
exchanges pursuant to recommendations of the Investment Adviser
(and all without further action by the Trustees). Any such
purchases, sales, loans and exchanges shall be deemed to have
been authorized by all of the Trustees. The Trustees may, in
their sole discretion, call a meeting of Shareholders in order
to submit to a vote of Shareholders of the applicable Series of
Trust at such meeting the approval of continuance of any such
investment advisory or management agreement.
(b) Administration. An agreement whereby the agent,
subject to the general supervision of the Trustees and in
conformity with any policies of the Trustees with respect to the
operations of the Trust and each Series, will supervise all or
any part of the operations of the Trust and each Series, and
will provide all or any part of the administrative and clerical
personnel, office space and office equipment and services
appropriate for the efficient administration and operations of
the Trust and each Series (any such agent being herein referred
to as an "Administrator").
(c) Underwriting. An agreement providing for the sale of
Shares of any one or more Series to net the Trust not less than
the net asset value per Share (as described in Section 6.2(l)
hereof) and pursuant to which the Trust may appoint the other
party to such agreement as its principal underwriter or sales
agent for the distribution of such Shares. The agreement shall
contain such terms and conditions as the Trustees may in their
discretion determine to be not inconsistent with this
Declaration, the applicable provisions of the 1940 Act and any
applicable provisions of the By-Laws (any such agent being
herein referred to as a "Distributor" or a "Principal
Underwriter," as the case may be).
<PAGE> 34
(d) Custodian. The appointment of an agent meeting the
requirements for a custodian for the assets of Investment
Companies contained in the 1940 Act as custodian of the
Securities and cash of the Trust and of each Series and of the
accounting records in connection therewith (any such agent being
herein referred to as a "Custodian").
(e) Transfer and Dividend Disbursing Agent. An agreement
with an agent to maintain records of the ownership of
outstanding Shares, the issuance and redemption and the transfer
thereof (any such agent being herein referred to as a "Transfer
Agent"), and to disburse any dividends declared by the Trustees
and in accordance with the policies of the Trustees and/or the
instructions of any particular Shareholder to reinvest any such
dividends (any such agent being herein referred to as a
"Dividend Disbursing Agent").
(f) Shareholder Servicing. An agreement with an agent to
provide service with respect to the relationship of the Trust
and its Shareholders, records with respect to Shareholders and
their Shares, and similar matters (any such agent being herein
referred to as a "Shareholder Servicing Agent").
(g) Accounting. An agreement with an agent to handle all
or any part of the accounting responsibilities, whether with
respect to the Trust's properties, Shareholders or otherwise
(any such agent being herein referred to as an "Accounting
Agent").
In addition, the Trustees may from time to time cause the Trust
or any Series thereof to enter into agreements with respect to
such other services and upon such other terms and conditions as
they may deem necessary, appropriate or desirable. The same
Person may be the Contracting Party for some or all of the
services, duties and responsibilities to, for and of the Trust
and/or the Trustees, and the contracts with respect thereto may
contain such terms interpretive of or in addition to the
delineation of the services, duties and responsibilities
provided for, including provisions that are not inconsistent
with the 1940 Act relating to the standard of duty of and the
rights to indemnification of the Contracting Party and others,
as the Trustees may determine. Nothing herein shall preclude,
prevent or limit the Trust or a Contracting Party from entering
into subcontractual arrangements relative to any of the matters
referred to in subsections (a) through (g) of this Section 5.2.
Section 5.3. Distribution Arrangements. Subject to
compliance with the 1940 Act, the Trustees may adopt and amend
or repeal from time to time and implement one or more plans of
distribution pursuant to Rule 12b-1 of the 1940 Act which
plan(s) will provide for the payment of specified marketing,
distribution and shareholder relations expenses of the Trust and
<PAGE> 35
any or all Series and their agents and the agents of such agents.
Section 5.4. Service Arrangements. Subject to
compliance with the 1940 Act, the Trustees may adopt and amend
or repeal from time to time and implement one or more service
plans which plans will provide for the payment of ongoing
services to holders of the shares of such Trust or any Series
thereof and in connection with the maintanence of such
shareholders' accounts.
ARTICLE 6
SERIES AND SHARES
SECTION 6.1. Description of Series and Shares.
(a) General. The beneficial interest in the Trust shall be
divided into Shares (either full or fractional) having $ 0.01
par value per Share, of which an unlimited number may be issued.
The Trustees shall have the authority from time to time to
establish and designate one or more separate, distinct and
independent Series of Shares (each of which Series, including
without limitation each Series authorized in Section 6.2 hereof,
shall represent interests only in the asset attributed by the
Trustees to such Series), and to authorize separate Classes of
Shares of any such Series, as they deem necessary or desirable.
All Shares shall be of one class, provided that the Trustees
shall have the power to classify or reclassify any unissued
Shares of any Series into any number of additional Classes of
such Series as set forth in Section 6.2.
(b) Establishment. etc. of Series; Authorization of
Shares. The establishment and designation of any Series and the
authorization of the Shares thereof shall be effective upon the
execution by a Majority of the Trustees (or by an officer of the
Trust pursuant to the vote of a Majority of the Trustees) of an
instrument setting forth such establishment and designation and
the relative rights and preferences of the Shares of such Series
and the manner in which the same may be amended (a "Certificate
of Designation"), and may provide that the number of Shares of
such Series which may be issued is unlimited, or may limit the
number issuable. At any time that there are no Shares
outstanding of any particular Series previously established and
designated, the Trustees may by an instrument executed by a
Majority of the Trustees (or by an officer of the Trust pursuant
to the vote of a Majority of the Trustees) terminate such Series
and the establishment and designation thereof and the
authorization of its Shares (a "Certificate of Termination").
Each Certificate of Designation, Certificate of Termination and
<PAGE> 36
any instrument amending a Certificate of Designation shall have
the status of an amendment to this Declaration of Trust.
(c) Character of Separate Series and Shares Thereof. Each
Series established hereunder shall represent beneficial
interests in a separate component of the assets of the Trust.
Holders of Shares of a Series shall be considered Shareholders
of such Series, but such Shareholders shall also be considered
Shareholders of the Trust for purposes of receiving reports and
notices and, except as otherwise provided herein or in the
Certificate of Designation of a particular Series, or as
required by the 1940 Act or other applicable law, the right to
vote, all without distinction by Series. The Trustees shall have
exclusive power without the requirement of Shareholder approval
to establish and designate such separate and distinct Series,
and to fix and determine the relative rights and preferences as
between the shares of the respective Series, and as between the
Classes of any Series, as to rights of redemption and the price,
terms and manner of redemption, special and relative rights as
to dividends and other distributions and on liquidation, sinking
or purchase fund provisions, conversion rights, and conditions
under which the Shareholders of the several Series or the
several Classes of any Series of Shares shall have separate
voting rights or no voting rights. Except as otherwise provided
as to a particular Series herein, or in the Certificate of
Designation therefor, the Trustees shall have all the rights and
powers, and be subject to all the duties and obligations, with
respect to each such Series and the assets and affairs thereof
as they have under this Declaration with respect to the Trust
and the Trust Property in general. Separate and distinct
records shall be maintained for each Series of Shares and the
assets and liabilities attributable thereto.
(d) Consideration for Shares. The Trustees may issue
Shares of any Series for such consideration (which may include
property subject to, or acquired in connection with the
assumption of, liabilities) and on such terms as they may
determine (or for no consideration if pursuant to a Share
dividend or split-up), all without action or approval of the
Shareholders. All Shares when so issued on the terms determined
by the Trustees shall be fully paid and nonassessable (but may
be subject to mandatory contribution back to the Trust as
provided in Section 6.1(l) hereof. The Trustees may classify or
reclassify any unissued Shares, or any Shares of any Series
previously issued and reacquired by the Trust, into Shares of
one or more other Series that may be established and designated
from time to time.
(e) Assets Belonging to Series. Any portion of the Trust
Property allocated to a particular Series, and all consideration
received by the Trust for the issue or sale of Shares of such
Series, together with all assets in which such consideration is
invested or reinvested, all interest, dividends, income,
earnings, profits and gains therefrom, and proceeds thereof,
including any proceeds derived from the sale, exchange or
liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same
<PAGE> 37
may be, shall be held by the Trustees in trust for the benefit
of the holders of Shares of that Series and shall irrevocably
belong to that Series for all purposes, and shall be so recorded
upon the books of account of the Trust, and the Shareholders of
such Series shall not have, and shall be conclusively deemed to
have waived, any claims to the assets of any Series of which
they are not Shareholders. Such consideration, assets, interest,
dividends, income, earnings, profits, gains and proceeds,
together with any General Items allocated to that Series as
provided in the following sentence, are herein referred to
collectively as assets "belonging to" that Series. In the event
that there are any assets, income, earnings, profits, and
proceeds thereof, funds, or payments which are not readily
identifiable as belonging to any particular Series
(collectively, "General Items"), the Trustees shall allocate
such General Items to and among any one or more of the Series
established and designated from time to time in such manner and
on such basis as they, in their sole discretion, deem fair and
equitable; and any General Items so allocated to a particular
Series shall belong to and be part of the assets belonging to
that Series. Each such allocation by the Trustees shall be
conclusive and binding upon the Shareholders of all Series for
all purposes.
(f) Liabilities of Series. The assets belonging to each
particular Series shall be charged with the liabilities in
respect of that Series and all expenses, costs, charges and
reserves attributable to that Series, and any general
liabilities, expenses, costs, charges or reserves of the Trust
which are not readily identifiable as pertaining to any
particular Series shall be allocated and charged by the Trustees
to and among any one or more of the Series established and
designated from time to time in such manner and on such basis as
the Trustees in their sole discretion deem fair and equitable.
The indebtedness, expenses, costs, charges and reserves
allocated and so charged to a particular Series are herein
referred to as "liabilities of" that Series. Each allocation of
liabilities, expenses, costs, charges and reserves by the
Trustees shall be conclusive and binding upon the Shareholders
of all Series for all purposes. Any creditor of any Series may
look only to the assets belonging to that Series to satisfy such
creditor's debt.
(g) Dividends. Dividends and distributions on Shares of a
particular Series may be paid with such frequency as the
Trustees may determine, which may be daily or otherwise pursuant
to a standing resolution or resolutions adopted only once or
with such frequency as the Trustees may determine, to the
Shareholders of that Series, from such of the income, accrued or
realized, and capital gains, realized or unrealized, and out of
the assets belonging to that Series, as the Trustees may
determine, after providing for actual and accrued liabilities of
that Series. All dividends and distributions on Shares of a
particular Series shall be distributed pro rata to the
Shareholders of that Series in proportion to the number of such
Shares held by such holders at the date and time of record
established for the payment of such dividends or distributions,
except that the dividends and distributions of investment income
and capital gains with respect to each Class of Shares of a
<PAGE> 38
particular Series shall be in such amount as may be declared
from time to time by the Trustees, and such dividends and
distributions may vary as between such Classes to reflect
differing allocations of the expenses of the Series between the
Shareholders of such several Classes and any resultant
differences between the net asset value of such several Classes
to such extent and for such purposes as the Trustees may deem
appropriate and further except that, in connection with any
dividend or distribution program or procedure, the Trustees may
determine that no dividend or distribution shall be payable on
Shares as to which the Shareholder's purchase order and/or
payment have not been received by the time or times established
by the Trustees under such program or procedure, or that
dividends or distributions shall be payable on Shares which have
been tendered by the holder thereof for redemption or
repurchase, but the redemption or repurchase proceeds of which
have not yet been paid to such Shareholder. Such dividends and
distributions may be made in cash, property or Shares of any
Class of that Series or a combination thereof as determined by
the Trustees, or pursuant to any program that the Trustees may
have in effect at the time for the election by each Shareholder
of the mode of the making of such dividend or distribution to
that Shareholder. Any such dividend or distribution paid in
Shares will be paid at the net asset value thereof as determined
in accordance with subsection (l) of this Section 6.1.
(h) Liquidation. In the event of the liquidation or
dissolution of the Trust, the Shareholders of each Series of
which Shares are outstanding shall be entitled to receive, when
and as declared by the Trustees, the excess of the assets
belonging to that Series over the liabilities of such Series.
The assets so distributable to the Shareholders of any
particular Series shall be distributed among such Shareholders
in proportion to the number of Shares of that Series held by
them and recorded on the books of the Trust. The liquidation of
any particular Series may be authorized by vote of a Majority of
the Trustees, subject to the affirmative vote of "a majority of
the outstanding voting securities" of that Series, as the quoted
phrase is defined in the 1940 Act, determined in accordance with
clause (iii) of the definition of "Majority Shareholder Vote" in
Section 1.4 hereof.
(i) Voting. The Shareholders shall have the voting rights
set forth in or determined under Article 7 hereof.
(j) Redemption by Shareholder. Each holder of Shares of a
particular Series shall have the right at such times as may be
permitted by the Trust, but no less frequently than required by
the 1940 Act, to require the Series to redeem all or any part of
his Shares of that Series at a redemption price equal to the net
asset value per Share of that Series next determined in
accordance with subsection (l) of this Section 6.1 after the
Shares are properly tendered for redemption; provided, that the
Trustees may from time to time, in their discretion, determine
and impose a fee for such redemption and that the proceeds of
the redemption of Shares (including a fractional Share) of any
Class of a particular Series shall be reduced by the amount of
<PAGE> 39
any applicable contingent deferred sales charge or other sales
charge, if any, payable on such redemption to the distributor of
Shares of such Class pursuant to the terms of the initial
issuance of the Shares of such Class (to the extent consistent
with the 1940 Act or regulations or exemptions thereunder) and
the Trust shall promptly pay to such distributor the amount of
such deferred sales charge. Payment of the redemption price
shall be in cash; provided, however, that if the Trustees
determine, which determination shall be conclusive, that
conditions exist which make payment wholly in cash unwise or
undesirable, the Trust may make payment wholly or partly in
Securities or other assets belonging to such Series at the value
of such Securities or assets used in such determination of net
asset value. Notwithstanding the foregoing, the Trust may
postpone payment of the redemption price and may suspend the
right of the holders of Shares of any Series to require the
Trust to redeem Shares of that Series during any period or at
any time when and to the extent permissible under the 1940 Act.
(k) Redemption at the Option of the Trust. The Trustees
shall have the power to redeem Shares of any Series at a
redemption price determined in accordance with Section 6.1(j),
if at any time (i) the total investment in such account does not
have a value of at least such minimum amount as may be specified
in the Prospectus for such Series from time to time (ii) the
number of Shares held in such account is equal to or in excess
of a specified percentage of Shares of the Trust or any Series
as set forth from time to time in the applicable Prospectus. In
the event the Trustees determine to exercise their power to
redeem Shares provided in this Section 6.1(k), the Shareholder
shall be notified that the value of his account is less than the
applicable minimum amount and shall be allowed 30 days to make
an appropriate investment before redemption is processed.
(I) Net Asset Value. The net asset value per Share of any
Series at any time shall be the quotient obtained by dividing
the value of the net assets of such Series at such time (being
the current value of the assets belonging to such Series, less
its then existing liabilities) by the total number of Shares of
that Series then outstanding, all determined in accordance with
the methods and procedures, including without limitation those
with respect to rounding, established by the Trustees from time
to time in accordance with the requirements of the 1940 Act. The
net asset value of the several Classes of a particular Series
shall be separately computed, and may vary from one another. The
Trustees shall establish procedures for the allocation of
investment income or capital gains and expenses and liabilities
of a particular Series between the several Classes of such
Series. The Trustees may determine to maintain the net asset
value per Share of any Series at a designated constant dollar
amount and in connection therewith may adopt procedures not
inconsistent with the 1940 Act for the continuing declaration of
income attributable to that Series as dividends payable in
additional Shares of that Series at the designated constant
dollar amount and for the handling of any losses attributable to
that Series. Such procedures may provide that in the event of
any loss each Shareholder shall be deemed to have contributed to
the shares of beneficial interest account of that Series his pro
rata portion of the total number of Shares required to be
<PAGE> 40
canceled in order to permit the net asset value per Share of
that Series to be maintained, after reflecting such loss, at the
designated constant dollar amount. Each Shareholder of the Trust
shall be deemed to have expressly agreed, by his investment in
any Series with respect to which the Trustees shall have adopted
any such procedure, to make the contribution referred to in the
preceding sentence in the event of any such loss.
(m) Transfer. All Shares of each particular Series shall
be transferable, but transfers of Shares of a particular Series
will be recorded on the Share transfer records of the Trust
applicable to that Series only at such times as Shareholders
shall have the right to require the Trust to redeem Shares of
that Series and at such other times as may be permitted by the
Trustees.
(n) Equality. All Shares of each particular Series shall
represent an equal proportionate interest in the assets
belonging to that Series (subject to the liabilities of that
Series), and each Share of any particular Series shall be equal
to each other Share thereof; but the provisions of this sentence
shall not restrict any distinctions between the several Classes
of a Series permissible under this Section 6.1 or under Section
7.1 hereof nor any distinctions permissible under subsection
(g) of this Section 6.1 that may exist with respect to dividends
and distributions on Shares of the same Series. The Trustees may
from time to time divide or combine the Shares of any class of
particular Series into a greater or lesser number of Shares of
that class of a Series without thereby changing the
proportionate beneficial interest in the assets belonging to
that Series or in any way affecting the rights of the holders of
Shares of any other Series.
(o) Rights of Fractional Shares. Any fractional Share of
any Series shall carry proportionately all the rights and
obligations of a whole Share of that Series, including rights
and obligations with respect to voting, receipt of dividends and
distributions, redemption of Shares, and liquidation of the
Trust or of the Series to which they pertain.
(p) Conversion Rights. (i) Subject to compliance with the
requirements of the 1940 Act, the Trustees shall have the
authority to provide that holders of Shares of any Series shall
have the right to convert said Shares into Shares of one or more
other Series, that holders of any Class of a Series of Shares
shall have the right to convert said Shares of such Class into
Shares of one or more other Classes of such Series, and that
Shares of any Class of a Series shall be automatically converted
into Shares of another Class of such Series, in each case in
accordance with such requirements and procedures as the Trustees
may establish.
(ii) The number of Shares of into which a convertible Share
<PAGE> 41
shall convert shall equal the number (including for this purpose
fractions of a Share) obtained by dividing the net asset value
per Share for purposes of sales and redemptions of the
converting Share on the Conversion Date by the net asset value
per Share for purposes of sales and redemptions of the Class of
Shares into which it is converting on the Conversion Date.
(iii) On the Conversion Date, the Share converting into
another share will cease to accrue dividends and will no longer
be deemed outstanding and the rights of the holders thereof
(except the right to receive the number of target Shares into
which the converting Shares have been converted and declared but
unpaid dividends to the Conversion Date) will cease.
Certificates representing Shares resulting from the conversion
need not be issued until certificates representing Shares
converted, if issued, have been received by the Trust or its
agent duly endorsed for transfer.
(vi) The Trust will appropriately reflect the conversion
of Shares of one Class of a Series into Shares of another Class
of such Series on the first periodic statements of account sent
to Shareholders of record affected which provide account
information with respect to a reporting period which includes
the date such conversion occured.
SECTION 6.2. Ownership of Shares. The ownership of
Shares shall be recorded on the books of the Trust or of a
Transfer Agent or similar agent for the Trust, which books shall
be maintained separately for the Shares of each Series that has
been authorized. Certificates evidencing the ownership of Shares
need not be issued except as the Trustees may otherwise
determine from time to time, and the Trustees shall have power
to call outstanding Share certificates and to replace them with
book entries. The Trustees may make such rules as they consider
appropriate for the issuance of Share certificates, the use of
facsimile signatures, the transfer of Shares and similar
matters. The record books of the Trust as kept by the Trust or
any Transfer Agent or similar agent, as the case may be, shall
be conclusive as to who are the Shareholders and as to the
number of Shares of each Series held from time to time by each
such Shareholder.
The holders of Shares of each Series shall upon demand
disclose to the Trustees in writing such information with
respect to their direct and indirect ownership of Shares of such
Series as the Trustees deem necessary to comply with the
provisions of the Internal Revenue Code, or to comply with the
requirements of any other authority.
SECTION 6.3. Investments in the Trust. The Trustees may
accept investments in any Series of the Trust from such Persons
and on such terms and for such consideration, not inconsistent
with the provisions of the 1940 Act, as they from time to time
<PAGE> 42
authorize. The Trustees may authorize any Distributor, Principal
Underwriter, Custodian, Transfer Agent or other Person to accept
orders for the purchase of Shares that conform to such
authorized terms and to reject any purchase orders for Shares,
whether or not conforming to such authorized terms.
SECTION 6.4. No Preemptive Rights. No Shareholder, by
virtue of holding Shares of any Series, shall have any
preemptive or other right to subscribe to any additional Shares
of that Series, or to any shares of any other Series, or any
other Securities issued by the Trust.
SECTION 6.5. Status of Shares. Every Shareholder, by
virtue of having become a Shareholder, shall be held to have
expressly assented and agreed to the terms hereof and to have
become a party hereto. Shares shall be deemed to be personal
property, giving only the rights provided herein. Ownership of
Shares shall not entitle the Shareholder to any title in or to
the whole or any part of the Trust Property or right to call for
a partition or division of the same or for an accounting, nor
shall the ownership of Shares constitute the Shareholders
partners. The death of a Shareholder during the continuance of
the Trust shall not operate to terminate the Trust or any
Series, nor entitle the representative of any deceased
Shareholder to an accounting or to take any action in court or
elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Declaration of Trust.
ARTICLE 7
SHAREHOLDERS' VOTING POWERS AND MEETINGS
SECTION 7.1. Voting Powers. The Shareholders shall have
power to vote only (i) for the election or removal of Trustees
as provided in Sections 4.1(c) and (e) hereof, (ii) with respect
to the approval or termination in accordance with the 1940 Act
of any contract with a Contracting Party as provided in Section
5.2 hereof as to which Shareholder approval is required by the
1940 Act, (iii) with respect to any termination or
reorganization of the Trust or any Series to the extent and as
provided in Sections 9.2, 9.3 and 9.4 hereof, (iv) with respect
to any amendment of this Declaration of Trust to the extent and
as provided in Section 9.5 hereof, (v) to the same extent as the
stockholders of a Delaware business corporation as to whether or
not a court action, proceeding or claim should or should not be
brought or maintained derivatively or as a class action on
behalf of the Trust or any Series, or the Shareholders of any of
them (provided. however, that a Shareholder of a particular
Series shall not in any event be entitled to maintain a
derivative or class action on behalf of any other Series or the
Shareholders thereof), and (vi) with respect to such additional
<PAGE> 43
matters relating to the Trust as may be required by the 1940
Act, this Declaration of Trust, the By-Laws or any registration
of the Trust with the Commission (or any successor agency) or
any State, or as the Trustees may consider necessary or
desirable. If and to the extent that the Trustees shall
determine that such action is required by law or by this
Declaration, they shall cause each matter required or permitted
to be voted upon at a meeting or by written consent of
Shareholders to be submitted to a separate vote of the
outstanding Shares of each Series entitled to vote thereon;
provided, that (i) when expressly required by the 1940 Act or by
other law, actions of Shareholders shall be taken by Single
Class Voting of all outstanding Shares whose holders are
entitled to vote thereon; and (ii) when the Trustees determine
that any matter to be submitted to a vote of Shareholders
affects only the rights or interests of Shareholders of one or
more but not all Series or of one or more but not all Classes of
a single Series (including without limitation any distribution
plan pursuant to Rule 12b-1 of the 1940 Act applicable to such
Class), then only the Shareholders of the Series or Classes so
affected shall be entitled to vote thereon. Any matter required
to be submitted to shareholders and affecting one or more Series
shall require separate approval by the required vote of
Shareholders of each affected Series; provided, however, that to
the extent required by the 1940 Act, there shall be no separate
Series votes on the election or removal of Trustees, the
selection of auditors for the Trust and its Series or approval
of any agreement or contract entered into by the Trust or any
Series. Shareholders of a particular Series shall not be
entitled to vote on any matter that affects only one or more
other Series.
SECTION 7.2. Number of Votes and Manner of Voting:
Proxies. On each matter submitted to a vote of the Shareholders,
each holder of Shares of any Series shall be entitled to a
number of votes equal to the number of Shares of such Series
standing in his name on the books of the Trust. There shall be
no cumulative voting in the election or removal of Trustees.
Shares may be voted in person or by proxy. A proxy with respect
to Shares held in the name of two (2) or more Persons shall be
valid if executed by any one of them unless at or prior to
exercise of the proxy the Trust receives a specific written
notice to the contrary from any one of them. A proxy purporting
to be executed by or on behalf of a Shareholder shall be deemed
valid unless challenged at or prior to its exercise and the
burden of proving invalidity shall rest on the challenger. Until
Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this
Declaration of Trust or the By-Laws to be taken by Shareholders.
SECTION 7.3. Meetings. Meetings of Shareholders may be
called by the Trustees from time to time for the purpose of
taking action upon any matter requiring the vote or authority of
the Shareholders as herein provided, or upon any other matter
deemed by the Trustees to be necessary or desirable. Written
notice of any meeting of Shareholders shall be given or caused
to be given by the Trustees by mailing such notice at least
seven (7) days before such meeting, postage prepaid, stating the
time, place and purpose of the meeting, to each Shareholder at
<PAGE> 44
the Shareholder's address as it appears on the records of the
Trust. The Trustees shall promptly call and give notice of a
meeting of Shareholders for the purpose of voting upon removal
of any Trustee of the Trust when requested to do so in writing
by Shareholders holding not less than ten percent (10%) of the
Shares then outstanding. If the Trustees shall fail to call or
give notice of any meeting of Shareholders for a period of
thirty (30) days after written application by Shareholders
holding at least ten percent (10%) of the Shares then
outstanding requesting that a meeting be called for any other
purpose requiring action by the Shareholders as provided herein
or in the By-Laws, then Shareholders holding at least ten
percent (10%) of the Shares then outstanding may call and give
notice of such meeting, and thereupon the meeting shall be held
in the manner provided for herein in case of call thereof by the
Trustees. Any meetings may be held within or without The State
of Delaware. Shareholders may only act with respect to matters
set forth in the notice to Shareholders.
SECTION 7.4. Record Dates. For the purpose of
determining the Shareholders who are entitled to vote or act at
any meeting or any adjournment thereof, or who are entitled to
participate in any dividend or distribution, or for the purpose
of any other action, the Trustees may from time to time close
the transfer books for such period, not exceeding thirty (30)
days (except at or in connection with the termination of the
Trust), as the Trustees may determine; or without closing the
transfer books the Trustees may fix a date and time not more
than ninety (90) days prior to the date of any meeting of
Shareholders or other action as the date and time of record for
the determination of Shareholders entitled to vote at such
meeting or any adjournment thereof or to be treated as
Shareholders of record for purposes of such other action, and
any Shareholder who was a Shareholder at the date and time so
fixed shall be entitled to vote at such meeting or any
adjournment thereof or to be treated as a Shareholder of record
for purposes of such other action, even though he has since that
date and time disposed of his Shares, and no Shareholder
becoming such after that date and time shall be so entitled to
vote at such meeting or any adjournment thereof or to be treated
as a Shareholder of record for purposes of such other action.
SECTION 7.5. Quorum and Required Vote. A majority of the
Shares entitled to vote shall be a quorum for the transaction of
business at a Shareholders' meeting, but any lesser number shall
be sufficient for adjournments. Any adjourned session or
sessions may be held within a reasonable time after the date set
for the original meeting without the necessity of further
notice. A Majority Shareholder Vote at a meeting of which a
quorum is present shall decide any question, except when a
different vote is required or permitted by any provision of the
1940 Act or other applicable law or by this Declaration of Trust
or the By-Laws, or when the Trustees shall in their discretion
require a larger vote or the vote of a majority or larger
fraction of the Shares of one or more particular Series.
SECTION 7.6. Action By Written Consent. Subject to the
<PAGE> 45
provisions of the 1940 Act and other applicable law, any action
taken by Shareholders may be taken without a meeting if a
majority of Shareholders entitled to vote on the matter (or such
larger proportion thereof or of the Shares of any particular
Series as shall be required by the 1940 Act or by any express
provision of this Declaration of Trust or the By-Laws or as
shall be permitted by the Trustees) consent to the action in
writing and if the writings in which such consent is given are
filed with the records of the meetings of Shareholders, to the
same extent and for the same period as proxies given in
connection with a Shareholders' meeting. Such consent shall be
treated for all purposes as a vote taken at a meeting of
Shareholders.
SECTION 7.7. Inspection of Records. The records of the
Trust shall be open to inspection by Shareholders to the same
extent as is permitted stockholders of a Delaware business
corporation under the Delaware business corporation law.
SECTION 7.8. Additional Provisions. The By-Laws may
include further provisions for Shareholders' votes and meetings
and related matters not inconsistent with the provisions hereof.
ARTICLE 8
LIMITATION OF LIABILITY: INDEMNIFICATION
SECTION 8.1. Trustees. Shareholders. etc. Not Personally
Liable; Notice. The Trustees, officers, employees and agents of
the Trust, in incurring any debts, liabilities or obligations,
or in limiting or omitting any other actions for or in
connection with the Trust, are or shall be deemed to be acting
as Trustees, officers, employees or agents of the Trust and not
in their own capacities. No Shareholder shall be subject to any
personal liability whatsoever in tort, contract or otherwise to
any other Person or Persons in connection with the assets or the
affairs of the Trust or of any Series, and subject to Section
8.4 hereof, no Trustee, officer, employee or agent of the Trust
shall be subject to any personal liability whatsoever in tort,
contract, or otherwise, to any other Person or Persons in
connection with the assets or affairs of the Trust or of any
Series, save only that arising from his own willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office or the discharge of his
functions. The Trust (or if the matter relates only to a
particular Series, that Series) shall be solely liable for any
and all debts, claims, demands, judgments, decrees, liabilities
or obligations of any and every kind, against or with respect to
the Trust or such Series in tort, contract or otherwise in
connection with the assets or the affairs of the Trust or such
Series, and all Persons dealing with the Trust or any Series
<PAGE> 46
shall be deemed to have agreed that resort shall be had solely
to the Trust Property of the Trust or the Series Assets of such
Series, as the case may be, for the payment or performance
thereof.
The Trustees shall use their best efforts to ensure that
every note, bond, contract, instrument, certificate or
undertaking made or issued by the Trustees or by any officers or
officer shall give notice that a Certificate of Trust, referring
to the Declaration of Trust, is on file with the Secretary of
the state of Delaware and shall recite to the effect that the
same was executed or made by or on behalf of the Trust or by
them as Trustees or Trustee or as officers or officer, and not
individually, and that the obligations of such instrument are
not binding upon any of them or the Shareholders individually
but are binding only upon the assets and property of the Trust,
or the particular Series in question, as the case may be, but
the omission thereof shall not operate to bind any Trustees or
Trustee or officers or officer or Shareholders or Shareholder
individually, or to subject the Series Assets of any Series to
the obligations of any other Series.
SECTION 8.2. Trustees' Good Faith Action; Expert Advice:
No Bond or Surety. The exercise by the Trustees of their powers
and discretions hereunder shall be binding upon everyone
interested. Subject to Section 8.4 hereof, a Trustee shall be
liable for his own willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and for nothing else, and
shall not be liable for errors of judgment or mistakes of fact
or law. Subject to the foregoing, (i) the Trustees shall not be
responsible or liable in any event for any neglect or wrongdoing
of any officer, agent, employee, consultant, Investment Adviser,
Administrator, Distributor or Principal Underwriter, Custodian
or Transfer Agent, Dividend Disbursing Agent, Shareholder
Servicing Agent or Accounting Agent of the Trust, nor shall any
Trustee be responsible for the act or omission of any other
Trustee; (ii) the Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this
Declaration of Trust and their duties as Trustees, and shall be
under no liability for any act or omission in accordance with
such advice or for failing to follow such advice; and (iii) in
discharging their duties, the Trustees, when acting in good
faith, shall be entitled to rely upon the books of account of
the Trust and upon written reports made to the Trustees by any
officer appointed by them, any independent public accountant,
and (with respect to the subject matter of the contract
involved) any officer, partner or responsible employee of a
Contracting Party appointed by the Trustees pursuant to Section
5.2 hereof. The Trustees as such shall not be required to give
any bond or surety or any other security for the performance of
their duties.
SECTION 8.3. Indemnification of Shareholders. If any
Shareholder (or former Shareholder) of the Trust shall be
charged or held to be personally liable for any obligation or
liability of the Trust solely by reason of being or having been
<PAGE> 47
a Shareholder and not because of such Shareholder's acts or
omissions or for some other reason, the Trust (upon proper and
timely request by the Shareholder) may assume the defense
against such charge and satisfy any judgment thereon or may
reimburse the Shareholders for expenses, and the Shareholder or
former Shareholder (or the heirs, executors, administrators or
other legal representatives thereof, or in the case of a
corporation or other entity, its corporate or other general
successor) shall be entitled (but solely out of the assets of
the Series of which such Shareholder or former Shareholder is or
was the holder of Shares) to be held harmless from and
indemnified against all loss and expense arising from such
liability.
SECTION 8.4. Indemnification of Trustees. Officers, etc.
Subject to the limitations, if applicable, hereinafter set forth
in this Section 8.4, the Trust shall indemnify (from the assets
of the Series or Series to which the conduct in question
relates) each of its Trustees, officers, employees and agents
(including Persons who serve at the Trust's request as
directors, officers or trustees of another organization in which
the Trust has any interest as a shareholder, creditor or
otherwise (hereinafter, together with such Person's heirs,
executors, administrators or personal representative, referred
to as a "Covered Person")) against all liabilities, including
but not limited to amounts paid in satisfaction of judgments, in
compromise or as fines and penalties, and expenses, including
reasonable accountants' and counsel fees, incurred by any
Covered Person in connection with the defense or disposition of
any action, suit or other proceeding, whether civil or criminal,
before any court or administrative or legislative body, in which
such Covered Person may be or may have been involved as a party
or otherwise or with which such Covered Person may be or may
have been threatened, while in office or thereafter, by reason
of being or having been such a Trustee or officer, director or
trustee, except with respect to any matter as to which it has
been determined that such Covered Person (i) did not act in good
faith in the reasonable belief that such Covered Person's action
was in or not opposed to the best interests of the Trust; (ii)
had acted with willful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of
such Covered Person's office (iii) for a criminal proceeding,
had reasonable cause to believe that his conduct was unlawful
(the conduct described in (i), (ii) and (iii) being referred to
hereafter as "Disabling Conduct"). A determination that the
Covered Person is entitled to indemnification may be made by (i)
a final decision on the merits by a court or other body before
whom the proceeding was brought that the Covered Person to be
indemnified was not liable by reason of Disabling Conduct, (ii)
dismissal of a court action or an administrative proceeding
against a Covered Person for insufficiency of evidence of
Disabling Conduct, or (iii) a reasonable determination, based
upon a review of the facts, that the indemnitee was not liable
by reason of Disabling Conduct by (a) a vote of a majority of a
quorum of Trustees who are neither "interested persons" of the
Trust as defined in Section 2(a)(19) of the 1940 Act nor parties
to the proceeding (the "Disinterested Trustees"), or (b) an
independent legal counsel in a written opinion. Expenses,
including accountants' and counsel fees so incurred by any such
Covered Person (but excluding amounts paid in satisfaction of
judgments, in compromise or as fines or penalties), may be paid
<PAGE> 48
from time to time by one or more Series to which the conduct in
question related in advance of the final disposition of any such
action, suit or proceeding; provided that the Covered Person
shall have undertaken to repay the amounts so paid to such
Series if it is ultimately determined that indemnification of
such expenses is not authorized under this Article 8 and (i) the
Covered Person shall have provided security for such
undertaking, (ii) the Trust shall be insured against losses
arising by reason of any lawful advances, or (iii) a majority of
a quorum of the disinterested Trustees, or an independent legal
counsel in a written opinion, shall have determined, based on a
review of readily available facts (as opposed to a full trial
type inquiry), that there is reason to believe that the Covered
Person ultimately will be found entitled to indemnification.
SECTION 8.5. Compromise Payment. As to any matter disposed
of by a compromise payment by any such Covered Person referred
to in Section 8.4 hereof, pursuant to a consent decree or
otherwise, no such indemnification either for said payment or
for any other expenses shall be provided unless such
indemnification shall be approved (i) by a majority of a quorum
of the disinterested Trustees or (ii) by an independent legal
counsel in a written opinion. Approval by the Trustees pursuant
to clause (i) or by independent legal counsel pursuant to clause
(ii) shall not prevent the recovery from any Covered Person of
any amount paid to such Covered Person in accordance with either
of such clauses as indemnification if such Covered Person is
subsequently adjudicated by a court of competent jurisdiction
not to have acted in good faith in the reasonable belief that
such Covered Person's action was in or not opposed to the best
interests of the Trust or to have been liable to the Trust or
its Shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in
the conduct of the Covered Person's office.
SECTION 8.6. Indemnification Not Exclusive, etc. The right
of indemnification provided by this Article 8 shall not be
exclusive of or affect any other rights to which any such
Covered Person or shareholder may be entitled. As used in this
Article 8, a "disinterested" Person is one against whom none of
the actions, suits or other proceedings in question, and no
other action, suit or other proceeding on the same or similar
grounds is then or has been pending or threatened. Nothing
contained in this Article 8 shall affect any rights to
indemnification to which personnel of the Trust, other than
Trustees and officers, and other Persons may be entitled by
contract or otherwise under law, nor the power of the Trust to
purchase and maintain liability insurance on behalf of any such
Person.
SECTION 8.7. Liability of Third Persons Dealing with
Trustees. No person dealing with the Trustees shall be bound to
make any inquiry concerning the validity of any transaction made
or to be made by the Trustees or to see to the application of
any payments made or property transferred to the Trust or upon
its order.
<PAGE> 49
ARTICLE 9
DURATION: REORGANIZATION: INCORPORATION; AMENDMENTS
SECTION 9.1. Duration of Trust. Unless terminated as
provided herein, the Trust shall have perpetual existence.
SECTION 9.2. Termination of Trust. The Trust may be
terminated at any time by a Majority of the Trustees, subject to
the favorable vote of the holders of not less than a majority of
the Shares outstanding and entitled to vote of each Series of
the Trust, or by an instrument or instruments in writing without
a meeting, consented to by the holders of not less than a
majority of such Shares, or by such greater or different vote of
Shareholders of any Series as may be established by the
Certificate of Designation by which such Series was authorized.
Upon termination, after paying or otherwise providing for all
charges, taxes, expenses and liabilities, whether due or accrued
or anticipated as may be determined by the Trustees, the Trust
shall in accordance with such procedures as the Trustees
consider appropriate reduce the remaining assets to
distributable form in cash, Securities or other property, or any
combination thereof, and distribute the proceeds to the
Shareholders, in conformity with the provisions of Section
6.1(h) hereof. After termination of the Trust or any Series and
distribution to the Shareholders as herein provided, a majority
of the Trustees shall execute and lodge among the records of the
Trust an instrument in writing setting forth the fact of such
termination. Upon termination of the Trust, the Trustees shall
thereupon, be discharged from all further liabilities and duties
hereunder, and the rights and interests of all Shareholders
shall thereupon cease. Upon termination of any Series, the
Trustees shall thereupon be discharged from all further
liabilities and duties with respect to such Series, and the
rights and interests of all Shareholders of such Series shall
thereupon cease.
SECTION 9.3. Reorganization. The Trustees may sell,
convey and transfer all or substantially all of the assets of
the Trust, or the assets belonging to any one or more Series, to
another trust, partnership, association, corporation or other
entity organized under the laws of any state of the United
States, or may transfer such assets to another Series of the
Trust, in exchange for cash, Shares or other Securities
(including, in the case of a transfer to another Series of the
Trust, Shares of such other Series), or to the extent permitted
by law then in effect may merge or consolidate the Trust or any
Series with any other Trust or any corporation, partnership, or
association organized under the laws of any state of the United
States, all upon such terms and conditions and for such
consideration when and as authorized by vote or written consent
of a Majority of the Trustees and approved by the affirmative
<PAGE> 50
vote of the holders of not less than a majority of the Shares
outstanding and entitled to vote of each Series whose assets are
affected by such transaction, or by an instrument or instruments
in writing without a meeting, consented to by the holders of not
less than a majority of such Shares, and/or by such other vote
of any Series as may be established by the Certificate of
Designation with respect to such Series. Following such
transfer, the Trustees shall distribute the cash, Shares or
other Securities or other consideration received in such
transaction (giving due effect to the assets belonging to and
indebtedness of, and any other differences among, the various
Series of which the assets have so been transferred) among the
Shareholders of the Series of which the assets have been so
transferred; and if all of the assets of the Trust have been so
transferred, the Trust shall be terminated. Nothing in this
Section 9.3 shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in
organizing one or more corporations, trusts, partnerships,
associations or other organizations, and to sell, convey or
transfer less than substantially all of the Trust Property or
the assets belonging to any Series to such organizations or
entities.
SECTION 9.4. Incorporation. Upon approval by Majority
Shareholder Vote, the Trustees may cause to be organized or
assist in organizing a corporation or corporations under the
laws of any jurisdiction or any other trust, partnership,
association or other organization to take over all of the Trust
Property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey
and transfer the Trust Property to any such corporation, trust,
association or organization, in exchange for the shares or
securities thereof, or otherwise, and to lend money to,
subscribe for the shares of securities of, and enter into any
contracts with any such corporation, trust, partnership,
association or organization in which the Trust holds or is about
to acquire shares or any other interests. The Trustees may also
cause a merger or consolidation between the Trust or any
successor thereto and any such corporation, trust, partnership,
association or other organization if and to the extent permitted
by law, as provided under the law then in effect. Nothing
contained herein shall be construed as requiring approval of
Shareholders for the Trustees to organize or assist in
organizing one or more corporation, trusts, partnerships,
associations or other organizations and selling, conveying or
transferring a portion of the Trust Property to such
organizations or entities.
SECTION 9.5. Amendments; etc. All rights granted to the
Shareholders under this Declaration of Trust are granted subject
to the reservation of the right to amend this Declaration of
Trust as herein provided, except that no amendment shall repeal
the limitations on personal liability of any Shareholder or
Trustee or the prohibition of assessment upon the Shareholders
(otherwise than as permitted under Section 6.1(l)) without the
express consent of each Shareholder or Trustee involved. Subject
to the foregoing, the provisions of this Declaration of Trust
(whether or not related to the rights of Shareholders) may be
amended at any time, so long as such amendment does not
<PAGE> 51
adversely affect the rights of any Shareholder with respect to
which such amendment is or purports to be applicable and so long
as such amendment is not in contravention of applicable law,
including the 1940 Act, by an instrument in writing signed by a
Majority of the Trustees (or by an officer of the Trust pursuant
to the vote of a Majority of the Trustees). Any amendment to
this Declaration of Trust that adversely affects the rights of
all Shareholders may be adopted at any time by an instrument in
writing signed by a Majority of the Trustees (or by an officer
of the Trust pursuant to a vote of a Majority of the Trustees)
when authorized to do so by the vote in accordance with Section
7.1 hereof of Shareholders holding a majority of all the Shares
outstanding and entitled to vote, without regard to Series, or
if said amendment adversely affects the rights of the
Shareholders of less than all of the Series, by the vote of the
holders of a majority of all the Shares entitled to vote of each
Series so affected.
SECTION 9.6. Filing of Copies of Declaration and
Amendments. The original or a copy of this Declaration and of
each amendment hereto (including each Certificate of Designation
and Certificate of Termination) shall be kept at the office of
the Trust where it may be inspected by any Shareholder. A
restated Declaration, integrating into a single instrument all
of the provisions of this Declaration which are then in effect
and operative, may be executed from time to time by a Majority
of the Trustees and shall, upon execution, be conclusive
evidence of all amendments contained therein and may thereafter
be referred to in lieu of the original Declaration and the
various amendments thereto. A Certificate of Trust shall be
filed in the office of the Secretary of State of the State of
Delaware.
ARTICLE 10
MISCELLANEOUS
SECTION 10.1. Notices. Any and all notices to which any
Shareholder hereunder may be entitled and any and all
communications shall be deemed duly served or given if mailed,
postage prepaid, addressed to any Shareholder of record at his
last known address as recorded on the applicable register of the
Trust.
SECTION 10.2. Governing Law. This Declaration of Trust is,
with reference to the laws thereof, and the rights of all
parties and the construction and effect of every provision
hereof shall be, subject to and construed according to the laws
of said The State of Delaware.
<PAGE> 52
SECTION 10.3. Counterparts. This Declaration of Trust and
any amendment thereto may be simultaneously executed in several
counterparts, each of which so executed shall be deemed to be an
original, and such counterparts, together, shall constitute but
one and the same instrument, which shall be sufficiently
evidenced by any such original counterpart.
SECTION 10.4. Reliance by Third Parties. Any certificate
executed by an individual who, according to the records of the
Trust is a Trustee hereunder, certifying to: (a) the number or
identity of Trustees or Shareholders, (b) the due authorization
of the execution of any instrument or writing, (c) the form of
any vote passed at a meeting of Trustees or Shareholders, (d)
the fact that the number of Trustees or Shareholders present at
any meeting or executing any written instrument satisfies the
requirements of this Declaration of Trust, (e) the form of any
By-Law adopted, or the identity of any officers elected, by the
Trustees, (f) the existence or nonexistence of any fact or facts
which in any manner relate to the affairs of the Trust, or (g)
the name of the Trust or the establishment of a Series shall be
conclusive evidence as to the matters so certified in favor of
any Person dealing with the Trustees, or any of them, and the
successors of such Person.
SECTION 10.5. References; Headings. The masculine gender
shall include the feminine and neuter genders. Headings are
placed herein for convenience of reference only and shall not be
taken as a part of this Declaration or control or affect the
meaning, construction or effect hereof.
SECTION 10.6. Provisions in Conflict With Law or
Regulation. (a) The provisions of this Declaration are
severable, and if the Trustees shall determine, with the advice
of counsel, that any of such provisions is in conflict with the
1940 Act, the regulated investment company provisions of the
Internal Revenue Code of 1986 or with other applicable laws and
regulations, the conflicting provision shall be deemed never to
have constituted a part of this Declaration; provided, however,
that such determination shall not affect any of the remaining
provisions of this Declaration or render invalid or improper any
action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision
in any other jurisdiction or any other provision of this
Declaration in any jurisdiction.
SECTION 10.7. Use of the Name "Van Kampen American
Capital". Van Kampen American Capital, Inc. ("Van Kampen
American Capital") has consented to the use by the Trust and by
each Series and each Series thereof to the identifying words
<PAGE> 53
"Van Kampen" or "Van Kampen Merritt" or any combination thereof
in the name of the Trust and of each Series and Series thereof.
Such consent is conditioned upon the Trust's employment of Van
Kampen American Capital, its successors or a subsidiary or
affiliate thereof as investment adviser to the Trust and to each
Series and each Series thereof. As between Van Kampen American
Capital and the Trust, Van Kampen American Capital shall control
the use of such name insofar as such name contains the
identifying words "Van Kampen" or "Van Kampen Merritt". Van
Kampen American Capital may from time to time use the
identifying words "American Capital," "Van Kampen" or "Van
Kampen Merritt" in other connections and for other purposes,
including without limitation in the names of other investment
companies, corporations or businesses that it may manage,
advise, sponsor or own or in which it may have a financial
interest. Van Kampen American Capital may require the Trust or
any Series or Series thereof to cease using the identifying
words "Van Kampen" or "Van Kampen Merritt" in the name of the
Trust or any Series or any Series thereof if the Trust or any
Series or Series thereof ceases to employ Van Kampen American
Capital, its successors or a subsidiary or affiliate thereof as
investment adviser.
<PAGE> 54
IN WITNESS WHEREOF, the undersigned, being the initial
Trustee, has set his hand and seal, for himself and his assigns,
unto this Declaration of Trust of Van Kampen American Capital
Tax Free Trust, all as of the day and year first above written.
------------------------
Initial Trustee
<PAGE> 55
A C K N O W L E D G M E N T
STATE OF ILLINOIS)
) ss
COUNTY OF DUPAGE)
______________________
May 10, 1995
Then personally appeared the above named Ronald A. Nyberg and
acknowledged the foregoing instrument to be his free act and
deed.
Before me,
_______________________________
(Notary Public)
My commission expires:___________
<PAGE> 1
EXHIBIT 1(b)(i)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
Van Kampen American Capital Insured Tax Free Income Fund
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust the Van Kampen American Capital Insured Tax Free Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class
1
<PAGE> 2
at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
----------------------
Ronald A. Nyberg,
Secretary
2
<PAGE> 1
EXHIBIT 1(b)(iii)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust Van Kampen American California Insured Tax Free Income Fund (the
"Fund") with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class
1
<PAGE> 2
at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
-------------------------
Ronald A. Nyberg
Secretary
2
<PAGE> 1
EXHIBIT 1(b)(iv)
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
Certificate of Designation
of
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
The undersigned, being the Secretary of Van Kampen American Capital Tax Free
Trust, a Delaware business trust (the "Trust"), pursuant to the authority
conferred upon the Trustees of the Trust by Section 6.1 of the Trust's
Agreement and Declaration of Trust ("Declaration"), and by the affirmative vote
of a Majority of the Trustees does hereby establish and designate as a Series
of the Trust Van Kampen American Capital Municipal Income Fund (the "Fund")
with following the rights, preferences and characteristics:
1. Shares. The beneficial interest in the Fund shall be divided into Shares
having a nominal or par value of $0.01 per Share, of which an unlimited number
may be issued, which Shares shall represent interests only in the Fund. The
Trustees shall have the authority from time to time to authorize separate
Series of Shares for the Trust as they deem necessary or desirable.
2. Classes of Shares. The Shares of the Fund shall be initially divided into
three classes--Class A, Class B and Class C. The Trustees shall have the
authority from time to time to authorize additional Classes of Shares of the
Fund
3. Sales Charges. Each Class A, Class B and Class C Share shall be subject to
such sales charges, if any, as may be established from time to time by the
Trustees in accordance with the Investment Company Act of 1940 (the "1940 Act")
and applicable rules and regulations of the National Association of Securities
Dealers, Inc., all as set forth in the Fund's prospectus.
4. Conversion. Each Class B Share of the Fund shall be converted
automatically, and without any action or choice on the part of the Shareholder
thereof, into Class A Shares of the Fund at such times and pursuant to such
terms, conditions and restrictions as may be established by the Trustees and as
set forth in the Fund's Prospectus.
5. Allocation of Expenses Among Classes. Expenses related solely to a
particular Class (including, without limitation, distribution expenses under an
administrative or service agreement, plan or other arrangement, however
designated) shall be borne by that Class and shall be appropriately reflected
(in a manner determined by the Trustees) in the net asset value, dividends,
distribution and liquidation rights of the Shares of that Class.
6. Special Meetings. A special meeting of Shareholders of a Class of the Fund
may be called with respect to the Rule 12b-1 distribution plan applicable to
such Class or with respect to any other proper purpose affecting only holders
of shares of such Class
1
<PAGE> 2
at any time by a Majority of the Trustees.
7. Other Rights Governed by Declaration. All other rights, preferences,
qualifications, limitations and restrictions with respect to Shares of any
Series of the Trust or with respect to any Class of Shares set forth in the
Declaration shall apply to Shares of the Fund unless otherwise specified in
this Certificate of Designation, in which case this Certificate of Designation
shall govern.
8. Amendments, etc. Subject to the provisions and limitations of Section 9.5
of the Declaration and applicable law, this Certificate of Designation may be
amended by an instrument signed in writing by a Majority of the Trustees (or by
and officer of the Trust pursuant to the vote of a Majority of the Trustees) or
when authorized to do so by the vote in accordance with the Declaration of the
holders of a majority of all the Shares of the Fund outstanding and entitled to
vote or, if such amendment affects the Shares of one or more but not all of the
Classes of the Fund, the holders of a majority of all the Shares of the
affected Classes outstanding and entitled to vote.
9. Incorporation of Defined Terms. All capitalized terms which are not
defined herein shall have the same meaning as ascribed to those terms in the
Declaration.
May 10, 1995
-------------------------
Ronald A. Nyberg
Secretary
2
<PAGE> 1
EXHIBIT 2
FORM OF VAN KAMPEN FUNDS DELAWARE TRUST BYLAWS
VAN KAMPEN AMERICAN CAPITAL
[TRUST]
BYLAWS
<PAGE> 2
[TRUST]
Bylaws
Index
ARTICLE 1 SHAREHOLDERS AND SHAREHOLDERS' MEETINGS 1
Section 1.1. Meetings 1
Section 1.2. Presiding Officer; Secretary 1
Section 1.3. Authority of Chairman of Meeting to Interpret
Declaration and Bylaws 1
Section 1.4. Voting; Quorum 1
Section 1.5. Inspectors 2
Section 1.6 Records at Shareholder Meetings 2
Section 1.7. Shareholders Action in Writing 2
ARTICLE 2 TRUSTEES AND TRUSTEES' MEETINGS 2
Section 2.1. Number of Trustees 2
Section 2.2. Regular Meetings of Trustees 2
Section 2.3. Special Meetings of Trustees 2
Section 2.4. Notice of Meetings 3
<PAGE> 3
Section 2.5. Quorum; Presiding Trustee 3
Section 2.6. Participation by Telephone 3
Section 2.7. Location of Meetings 3
Section 2.8. Actions by Trustees 3
Section 2.9. Rulings of Presiding Trustee 3
Section 2.10. Trustees' Action in Writing 3
Section 2.11. Resignations 4
Section 2.12. Tenure of Trustees 4
<PAGE> 4
ARTICLE 3 OFFICERS 4
Section 3.1. Officers of the Trust 4
Section 3.2. Time and Terms of Election 4
Section 3.3. Resignation and Removal 4
Section 3.4. Fidelity Bond 4
Section 3.5. President 4
Section 3.6. Vice Presidents 4
Section 3.7. Treasurer and Assistant Treasurers 5
Section 3.8. Controller and Assistant Controllers 5
Section 3.9. Secretary and Assistant Secretaries 5
Section 3.10. Substitutions 5
Section 3.11. Execution of Deeds, etc. 6
Section 3.12. Power to Vote Securities 6
ARTICLE 4 COMMITTEES 6
Section 4.1. Power of Trustees to Designate Committees 6
Section 4.2. Rules for Conduct of Committee Affairs 6
Section 4.3. Trustees May Alter, Abolish, etc., Committees 6
<PAGE> 5
Section 4.4. Minutes; Review by Trustees 6
ARTICLE 5 SEAL 7
ARTICLE 6 SHARES .......................................... 7
Section 6.1. Issuance of Shares 7
Section 6.2. Uncertificated Shares 7
Section 6.3. Share Certificates 7
Section 6.4. Lost, Stolen, etc., Certificates 7
<PAGE> 6
ARTICLE 7 STOCK TRANSFERS 8
Section 7.1. Transfer Agents, Registrars, etc. 8
Section 7.2. Transfer of Shares 8
Section 7.3. Registered Shareholders 8
ARTICLE 8 AMENDMENTS 8
Section 8.1. Bylaws Subject to Amendment 8
Section 8.2. Notice of Proposal to Amend Bylaws Required 8
<PAGE> 7
[TRUST]
BYLAWS
These are the Bylaws of [TRUST], a trust with transferable
shares established under the laws of The State of Delaware (the
"Trust"), pursuant to an Agreement and Declaration of Trust of
the Trust (the "Declaration") made the 10th day of May, 1995,
and a Certificate of Trust filed in the office of the Secretary
of State pursuant to Section 3810 of The Delaware Business Trust
Act, Title 12, Chapter 38 of the Delaware Code. These Bylaws
have been adopted by the Trustees pursuant to the authority
granted by Section 4.14 of the Declaration.
All words and terms capitalized in these Bylaws, unless
otherwise defined herein, shall have the same meanings as they
have in the Declaration.
ARTICLE 1
SHAREHOLDERS AND SHAREHOLDERS' MEETINGS
SECTION 1.1. Meetings. A meeting of the Shareholders of the
Trust shall be held whenever called by the Chairman, the
President or a majority of the Trustees and whenever election of
a Trustee or Trustees by Shareholders is required by the
provisions of the 1940 Act. Meetings of Shareholders shall also
be called by the Trustees when requested in writing by
Shareholders holding at least ten percent (10%) of the Shares
then outstanding for the purpose of voting upon removal of any
Trustee, or if the Trustees shall fail to call or give notice of
any such meeting of Shareholders for a period of thirty (30)
days after such application, then Shareholders holding at least
ten percent (10%) of the Shares then outstanding may call and
give notice of such meeting. Notice of Shareholders' meetings
shall be given as provided in the Declaration.
SECTION 1.2. Presiding Officer; Secretary. The President
shall preside at each Shareholders' meeting as chairman of the
meeting, or in the absence of the President, the Trustees
present at the meeting shall elect one of their number as
chairman of the meeting. Unless otherwise provided for by the
Trustees, the Secretary of the Trust shall be the secretary of
all meetings of Shareholders and shall record the minutes
<PAGE> 8
thereof.
SECTION 1.3. Authority of Chairman of Meeting to
Interpret_Declaration and Bylaws. At any Shareholders' meeting
the chairman of the meeting shall be empowered to determine the
construction or interpretation of the Declaration or these
Bylaws, or any part thereof or hereof, and his ruling shall be
final.
SECTION 1.4. Voting; Quorum. At each meeting of Shareholders,
except as otherwise provided by the Declaration, every holder of
record of Shares entitled to vote shall be entitled to a number
of votes equal to the number of Shares standing in his name on
the Share register of the Trust on the record date of the
meeting. Shareholders may vote by proxy and the form of any
such proxy may be prescribed from time to time by the Trustees.
A quorum shall exist if the holders of a majority of the
outstanding Shares of the Trust entitled to vote are present in
person or by proxy, but any lesser number shall be
sufficient for adjournments. At all meetings of the
Shareholders, votes shall be taken by ballot for all matters
which may be binding upon the Trustees pursuant to Section 7.1
of the Declaration. On other matters, votes of Shareholders
need not be taken by ballot unless otherwise provided for by the
Declaration or by vote of the Trustees, or as required by the
1940 Act, but the chairman of the meeting may in his discretion
authorize any matter to be voted upon by ballot.
SECTION 1.5. Inspectors. At any meeting of Shareholders, the
chairman of the meeting may appoint one or more Inspectors of
Election or Balloting to supervise the voting at such meeting or
any adjournment thereof. If Inspectors are not so appointed,
the chairman of the meeting may, and on the request of any
Shareholder present or represented and entitled to vote shall,
appoint one or more Inspectors for such purpose. Each
Inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of
Inspector of Election or Balloting, as the case may be, at
such meeting with strict impartiality and according to the
best of his ability. If appointed, Inspectors shall take
charge of the polls and, when the vote is completed, shall make
a certificate of the result of the vote taken and of such other
facts as may be required by law.
SECTION 1.6. Records at Shareholder Meetings. At each
meeting of the Shareholders there shall be open for inspection
the minutes of the last previous Meeting of Shareholders of the
Trust and a list of the Shareholders of the Trust, certified to
be true and correct by the Secretary or other proper agent of
the Trust, as of the record date of the meeting or the date of
closing of transfer books, as the case may be. Such list of
Shareholders shall contain the name of each Shareholder.
Shareholders shall have such other rights and procedures of
inspection of the books and records of the Trust as are granted
to shareholders of a Delaware corporation.
<PAGE> 9
SECTION 1.7. Shareholders' Action in Writing. Nothing in this
Article 1 shall limit the power of the Shareholders to take any
action by means of written instruments without a meeting, as
permitted by Section 7.6 of the Declaration.
ARTICLE 2
TRUSTEES AND TRUSTEES' MEETINGS
SECTION 2.1. Number of Trustees. There shall initially be one
(1) Trustee, and the number of Trustees shall thereafter be such
number, authorized by the Declaration, as from time to time
shall be fixed by a vote adopted by a Majority of the Trustees.
SECTION 2.2. Regular Meetings of Trustees. Regular meetings
of the Trustees may be held without call or notice at such
places and at such times as the Trustees may from time to time
determine; provided, that notice of such determination, and of
the time and place of the first regular meeting thereafter,
shall be given to each absent Trustee in accordance with Section
2.4 hereof.
SECTION 2.3. Special Meetings of Trustees. Special meetings
of the Trustees may be held at any time and at any place when
called by the President or the Treasurer or by three (3) or
more Trustees, or if there shall be less than three (3)
Trustees, by any Trustee; provided, that notice of the time and
place thereof is given to each Trustee in accordance with
Section 2.4 hereof by the Secretary or an Assistant Secretary or
by the officer or the Trustees calling the meeting.
SECTION 2.4. Notice of Meetings. Notice of any regular or
special meeting of the Trustees shall be sufficient if given in
writing to each Trustee, and if sent by mail at least five (5)
days, by a nationally recognized overnigh delivery service at
least two (2) days or by facsimile at least twenty-four (24)
hours, before the meeting, addressed to his usual or last known
business or residence address, or if delivered to him in person
at least twenty-four (24) hours before the meeting. Notice of a
special meeting need not be given to any Trustee who was present
at an earlier meeting, not more than thirty-one (31) days prior
to the subsequent meeting, at which the subsequent meeting was
called. Unless statute, these bylaws or a resolution of the
Trustees might otherwise dictate, notice need not state the
business to be transacted at or the purpose of any meeting of
the Board of Trustees. Notice of a meeting may be waived by any
Trustee by written waiver of notice, executed by him before or
after the meeting, and such waiver shall be filed with the
records of the meeting. Attendance by a Trustee at a meeting
shall constitute a waiver of notice, except where a Trustee
attends a meeting for the purpose of protesting prior thereto or
at its commencement the lack of notice. No notice need be given
<PAGE> 10
of action proposed to be taken by unanimous written consent.
SECTION 2.5. Quorum: Presiding Trustee. At any meeting of the
Trustees, a Majority of the Trustees shall constitute a quorum.
Any meeting may be adjourned from time to time by a majority of
the votes cast upon the question, whether or not a quorum is
present, and the meeting may be held as adjourned without
further notice. Unless the Trustees shall otherwise elect,
generally or in a particular case, the Chairman shall be the
presiding Trustee at each meeting of the Trustees or in the
absence of the Chairman, the President shall preside over the
meeting. In the absence of both the Chairman and the President,
the Trustees present at the meeting shall elect one of their
number as presiding Trustee of the meeting.
SECTION 2.6. Participation by Telephone. One or more of the
Trustees may participate in a meeting thereof or of any
Committee of the Trustees by means of a conference telephone or
similar communications equipment allowing all persons
participating in the meeting to hear each other at the same
time. Participation by such means shall constitute presence in
person at a meeting.
SECTION 2.7. Location of Meetings. Trustees' meetings may be
held at any place, within or without the State of Delaware.
SECTION 2.8. Actions by Trustees. Unless statute, the
charter or bylaws requires a greater proportion, action of a
majority of the Trustees present at a meeting at which a quorum
is present is action of the Board of Trustees. Voting at
Trustees' meetings may be conducted orally, by show of hands,
or, if requested by any Trustee, by written ballot. The
results of all voting shall be recorded by the Secretary in the
minute book.
SECTION 2.9. Rulings of Presiding Trustee. All other rules of
conduct adopted and used at any Trustees' meeting shall be
determined by the presiding Trustee of such meeting, whose
ruling on all procedural matters shall be final.
SECTION 2.10. Trustees' Action in Writing. Nothing in this
Article 2 shall limit the power of the Trustees to take action
by means of a written instrument without a meeting, as provided
in Section 4.2 of the Declaration.
SECTION 2.11. Resignations. Any Trustee may resign at any
time by written instrument signed by him and delivered to the
Chairman, the President or the Secretary or to a meeting of the
Trustees. Such resignation shall be effective upon receipt
unless specified to be effective at some other time.
<PAGE> 11
SECTION 2.12. Chairman of the Board. The Trustees may from
time to time elect on of the Trustees to serve as Chairman of
the Board of Trustees.
ARTICLE 3
OFFICERS
SECTION 3.1. Officers of the Trust. The officers of the Trust
shall consist of a President, a Treasurer and a Secretary, and
may include one or more Vice Presidents, Assistant Treasurers
and Assistant Secretaries, and such other officers as the
Trustees may designate. Any person may hold more than one
office.
SECTION 3.2. Time and Terms of Election. The President, the
Treasurer and the Secretary shall be elected by the Trustees at
their first meeting and thereafter at the annual meeting of the
Trustees, as provided in Section 4.2 of the Declaration. Such
officers shall hold office until the next annual meeting of the
Trustees and until their successors shall have been duly elected
and qualified, and may be removed at any meeting by the
affirmative vote of a Majority of the Trustees. All other
officers of the Trust may be elected or appointed at any meeting
of the Trustees. Such officers shall hold office for any term,
or indefinitely, as determined by the Trustees, and shall be
subject to removal, with or without cause, at any time by the
Trustees.
SECTION 3.3. Resignation and Removal. Any officer may resign
at any time by giving written notice to the Trustees. Such
resignation shall take effect at the time specified therein,
and, unless otherwise specified therein, the acceptance of
such resignation shall not be necessary to make it effective.
If the office of any officer or agent becomes vacant by reason
of death, resignation, retirement, disqualification, removal
from office or otherwise, the Trustees may choose a successor,
who shall hold office for the unexpired term in respect of which
such vacancy occurred. Except to the extent expressly provided
in a written agreement with the Trust, no officer resigning or
removed shall have any right to any compensation for any period
following such resignation or removal, or any right to damage on
account of such removal.
SECTION 3.4. Fidelity Bond. The Trustees may, in their
discretion, direct any officer appointed by them to furnish at
the expense of the Trust a fidelity bond approved by the
Trustees, in such amount as the Trustees may prescribe.
<PAGE> 12
SECTION 3.5. President. The President shall be the chief
executive officer of the Trust and, subject to the supervision
of the Trustees, shall have general charge and supervision of
the business, property and affairs of the Trust and such other
powers and duties as the Trustees may prescribe.
SECTION 3.6. Vice Presidents. In the absence or disability of
the President, the Vice President or, if there shall be more
than one, the Vice Presidents in the order of their seniority or
as otherwise designated by the Trustees, shall exercise all of
the powers and duties of the President. The Vice Presidents
shall have the power to execute bonds, notes, mortgages and
other contracts, agreements and instruments in the name of the
Trust, and shall do and perform such other duties as the
Trustees or the President shall direct.
SECTION 3.7. Treasurer and Assistant Treasurers. The
Treasurer shall be the chief financial officer of the Trust, and
shall have the custody of the Trust's funds and Securities, and
shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Trust and shall deposit
all moneys, and other valuable effects in the name and to the
credit of the Trust, in such depositories as may be designated
by the Trustees, taking proper vouchers for such disbursements,
shall have such other duties and powers as may be prescribed
from time to time by the Trustees, and shall render to the
Trustees, whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the
Trust. If no Controller is elected, the Treasurer shall also
have the duties and powers of the Controller, as provided in
these Bylaws. Any Assistant Treasurer shall have such duties
and powers as shall be prescribed from time to time by the
Trustees or the Treasurer, and shall be responsible to and shall
report to the Treasurer. In the absence or disability of the
Treasurer, the Assistant Treasurer or, if there shall be more
than one, the Assistant Treasurers in the order of their
seniority or as otherwise designated by the Trustees or the
Chairman, shall have the powers and duties of the Treasurer.
SECTION 3.8. Controller and Assistant Controllers. If a
Controller is elected, he shall be the chief accounting officer
of the Trust and shall be in charge of its books of account and
accounting records and of its accounting procedures, and shall
have such duties and powers as are commonly incident to the
office of a controller, and such other duties and powers as may
be prescribed from time to time by the Trustees. The
Controller shall be responsible to and shall report to the
Trustees, but in the ordinary conduct of the Trust's business,
shall be under the supervision of the Treasurer. Any Assistant
Controller shall have such duties and powers as shall be
prescribed from time to time by the Trustees or the Controller,
and shall be responsible to and shall report to the Controller.
In the absence or disability of the Controller, the Assistant
Controller or, if there shall be more than one, the Assistant
Controllers in the order of their seniority or as otherwise
designated by the Trustees, shall have the powers and duties of
the Controller.
<PAGE> 13
SECTION 3.9. Secretary and Assistant Secretaries. The
Secretary shall, if and to the extent requested by the Trustees,
attend all meetings of the Trustees, any Committee of the
Trustees and/or the Shareholders and record all votes and the
minutes of proceedings in a book to be kept for that purpose,
shall give or cause to be given notice of all meetings of the
Trustees, any Committee of the Trustees, and of the
Shareholders and shall perform such other duties as may be
prescribed by the Trustees. The Secretary, or in his absence any
Assistant Secretary, shall affix the Trust's seal to any
instrument requiring it, and when so affixed, it shall be
attested by the signature of the Secretary or an Assistant
Secretary. The Secretary shall be the custodian of the Share
records and all other books, records and papers of the Trust
(other than financial) and shall see that all books, reports,
statements, certificates and other documents and records
required by law are properly kept and filed. In the absence or
disability of the Secretary, the Assistant Secretary or, if
there shall be more than one, the Assistant Secretaries in the
order of their seniority or as otherwise designated by the
Trustees, shall have the powers and duties of the Secretary.
SECTION 3.10. Substitutions. In case of the absence or
disability of any officer of the Trust, or for any other reason
that the Trustees may deem sufficient, the Trustees may
delegate, for the time being, the powers or duties, or any of
them, of such officer to any other officer, or to any Trustee.
SECTION 3.11. Execution of Deeds, etc. Except as the
Trustees may generally or in particular cases otherwise
authorize or direct, all deeds, leases, transfers, contracts,
proposals, bonds, notes, checks, drafts and other obligations
made, accepted or endorsed by the Trust shall be signed or
endorsed on behalf of the Trust by its properly authorized
officers or agents as provided in the Declaration.
SECTION 3.12. Power to Vote Securities. Unless otherwise
ordered by the Trustees, the Treasurer shall have full power and
authority on behalf of the Trust to give proxies for, and/or to
attend and to act and to vote at, any meeting of stockholders of
any corporation in which the Trust may hold stock, and at any
such meeting the Treasurer or his proxy shall possess and may
exercise any and all rights and powers incident to the ownership
of such stock which, as the owner thereof, the Trust might have
possessed and exercised if present. The Trustees, by resolution
from time to time, or, in the absence thereof, the Treasurer,
may confer like powers upon any other person or persons as
attorneys and proxies of the Trust.
ARTICLE 4
COMMITTEES
<PAGE> 14
SECTION 4.1. Power of Trustees to Designate Committees. The
Trustees, by vote of a Majority of the Trustees, may elect from
their number an Executive Committee and any other Committees and
may delegate thereto some or all of their powers except those
which by law, by the Declaration or by these Bylaws may
not be delegated; provided, that an Executive Committee shall
not be empowered to elect the President, the Treasurer or the
Secretary, to amend the Bylaws, to exercise the powers of the
Trustees under this Section 4.1 or under Section 4.3 hereof, or
to perform any act for which the action of a Majority of the
Trustees is required by law, by the Declaration or by these
Bylaws. The members of any such Committee shall serve at the
pleasure of the Trustees.
SECTION 4.2. Rules for Conduct of Committee Affairs. Except
as otherwise provided by the Trustees, each Committee elected or
appointed pursuant to this Article 4 may adopt such standing
rules and regulations for the conduct of its affairs as it may
deem desirable, subject to review and approval of such
rules and regulations by the Trustees at the next succeeding
meeting of the Trustees, but in the absence of any such action
or any contrary provisions by the Trustees, the business of each
Committee shall be conducted, so far as practicable, in the same
manner as provided herein and in the Declaration for the
Trustees.
SECTION 4.3. Trustees May Alter, Abolish, etc., Committees
Trustees may at any time alter or abolish any Committee, change
membership of any Committee, or revoke, rescind, waive or
modify action of any Committee or the authority of any Committee
with respect to any matter or class of matters; provided, that
no such action shall impair the rights of any third parties.
SECTION 4.4. Minutes: Review by Trustees. Any Committee to
which the Trustees delegate any of their powers or duties shall
keep records of its meetings and shall report its actions to the
Trustees.
<PAGE> 15
ARTICLE 5
SEAL
The seal of the Trust, if any, may be affixed to any
instrument, and the seal and its attestation may be
lithographed, engraved or otherwise printed on any document with
the same force and effect as if had been imprinted and affixed
manually in the same manner and with the same force and effect
as if done by a Delaware corporation. Unless otherwise
required by the Trustees, the seal shall not be necessary to be
placed on, and its absence shall not impair the validity of, any
document, instrument or other paper executed and delivered by or
on behalf of the Trust.
ARTICLE 6
SHARES
SECTION 6.1. Issuance of Shares. The Trustees may issue an
unlimited number of Classes of Shares of any or all Series
either in certificated or uncertificated form, they may issue
certificates to the holders of a Class of Shares of a Series
which was originally issued in uncertificated form, and if they
have issued Shares of any Series in certificated form, they may
at any time discontinue the issuance of Share certificates for
such Series and may, by written notice to such Shareholders of
such Series require the surrender of their Share certificates to
the Trust for cancellation, which surrender and cancellation
shall not affect the ownership of Shares for such Series.
SECTION 6.2. Uncertificated Shares. For any Class of Shares
for which the Trustees issue Shares without certificates, the
Trust or the Transfer Agent may either issue receipts therefor
or may keep accounts upon the books of the Trust for the record
holders of such Shares, who shall in either case be deemed, for
all purposes hereunder, to be the holders of such Shares as if
they had received certificates therefor and shall be held to
have expressly assented and agreed to the terms hereof and of
the Declaration.
SECTION 6.3. Share Certificates. For any Class of Shares for
which the Trustees shall issue Share certificates, each
Shareholder of such Class shall be entitled to a certificate
stating the number of Shares owned by him in such form as shall
be prescribed from time to time by the Trustees. Such
<PAGE> 16
certificate shall be signed by the President or a Vice
President, and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Trust. Such
signatures may be facsimiles if the certificate is
countersigned by a Transfer Agent, or by a Registrar,
other than a Trustee, officer or employee of the Trust. In case
any officer who has signed or whose facsimile signature has been
placed on such certificate shall cease to be such officer before
such certificate is issued, it may be issued by the Trust with
the same effect as if he were such officer at the time of its
issue.
SECTION 6.4. Lost, Stolen, etc., Certificates. If any
certificate for certificated Shares shall be lost,
stolen, destroyed or mutilated, the Trustees may authorize the
issuance of a new certificate of the same tenor and for the same
number of Shares in lieu thereof. The Trustees shall require
the surrender of any mutilated certificate in respect of which a
new certificate is issued, and may, in their discretion, before
the issuance of a new certificate, require the owner of a lost,
stolen or destroyed certificate, or the owner's legal
representative, to make an affidavit or affirmation setting
forth such facts as to the loss, theft or destruction as they
deem necessary, and to give the Trust a bond in such reasonable
sum as the Trustees direct, in order to indemnify the Trust.
ARTICLE 7
TRANSFER OF SHARES
SECTION 7.1. Transfer Agents, Registrars, etc. As approved in
Section 5.2(e) of the Declaration, the Trustees shall have the
authority to employ and compensate such transfer agents and
registrars with respect to the Shares of the Trust as the
Trustees shall deem necessary or desirable. In addition, the
Trustees shall have the power to employ and compensate such
dividend dispersing agents, warrant agents and agents for
reinvestment of dividends as they shall deem necessary or
desirable. Any of such agents shall have such power and
authority as is delegated to any of them by the Trustees.
SECTION 7.2 Transfer of Shares. The Shares of the Trust shall
be transferable on the books of the Trust only upon delivery to
the Trustees or a transfer agent of the Trust of proper
documentation as provided in Section 6.1(m) of the Declaration.
The Trust, or its transfer agents, shall be authorized to refuse
any transfer unless and until presentation of such evidence as
may be reasonably required to show that the requested transfer
is proper.
SECTION 7.3 Registered Shareholders. The Trust may deem and
treat the holder of record of any Shares the absolute owner
<PAGE> 17
thereof for all purposes and shall not be required to take any
notice of any right or claim of right of any other person.
ARTICLE 8
AMENDMENTS
SECTION 8.1. Bylaws Subject to Amendment. These Bylaws may be
altered, amended or repealed, in whole or in part, at any time
by vote of the holders of a majority of the Shares issued,
outstanding and entitled to vote. The Trustees, by vote of a
Majority of the Trustees, may alter, amend or repeal these
Bylaws, in whole or in part, including Bylaws adopted by the
Shareholders, except with respect to any provision hereof which
by law, the Declaration or these Bylaws requires action by the
Shareholders. Bylaws adopted by the Trustees may be altered,
amended or repealed by the Shareholders.
SECTION 8.2. Notice of Proposal to Amend Bylaws Required. No
proposal to amend or repeal these Bylaws or to adopt new Bylaws
shall be acted upon at a meeting unless either (i) such proposal
is stated in the notice or in the waiver of notice, as the case
may be, of the meeting of the Trustees or Shareholders at which
such action is taken, or (ii) all of the Trustees or
Shareholders, as the case may be, are present at such meeting
and all agree to consider such proposal without protesting the
lack of notice.
<PAGE> 1
EXHIBIT 4(i)1
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(i)2
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(i)3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Insured Tax Free Income
Fund, transferable on the books of the Fund by the holder thereof in person or
by duly authorized attorney upon surrender of this certificate properly
endorsed. This certificate is not valid unless countersigned by the Transfer
Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iii)1
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital California Insured Tax
Free Fund, transferable on the books of the Fund by the holder thereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned by the
Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iii)2
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital California Insured Tax
Free Fund, transferable on the books of the Fund by the holder thereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned by the
Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iii)3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital California Insured Tax
Free Fund, transferable on the books of the Fund by the holder thereof in
person or by duly authorized attorney upon surrender of this certificate
properly endorsed. This certificate is not valid unless countersigned by the
Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)1
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS A
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Municipal Income Fund,
transferable on the books of the Fund by the holder thereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)2
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS B
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Municipal Income Fund,
transferable on the books of the Fund by the holder thereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 4(iv)3
NUMBER SHARES
__________ __________
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a series of
VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST
CLASS C
ORGANIZED AND EXISTING UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFIES that is the owner of
*SEE REVERSE FOR CERTAIN DEFINITIONS
_________________
CUSIP
_________________
fully paid and nonassessable shares of beneficial interest of the par
value of $0.01 per share of Van Kampen American Capital Municipal Income Fund,
transferable on the books of the Fund by the holder thereof in person or by
duly authorized attorney upon surrender of this certificate properly endorsed.
This certificate is not valid unless countersigned by the Transfer Agent.
WITNESS THE FACSIMILE SEAL OF THE FUND AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
Dated
[VAN KAMPEN AMERICAN CAPITAL
MUNICIPAL INCOME FUND
DELAWARE SEAL]
RONALD A. NYBERG DENNIS J. MCDONNELL
SECRETARY PRESIDENT
KC 002717
--------------------------------------------------------------------------------
COUNTERSIGNED by ACCESS INVESTOR SERVICES, INC.
P.O. BOX 418256, KANSAS CITY, MO 64141-9256
TRANSFER AGENT
By
----------------------------------------------------
AUTHORIZED OFFICER
--------------------------------------------------------------------------------
PLEASE DETACH AND DISCARD UNLESS CHANGES ARE REQUIRED
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND
NUMBER CLASS A SHARES
KC
ACCOUNT NO. ALPHA CODE DEALER NO. CONFIRM NO.
TRADE DATE CONFIRM DATE BATCH I.D. NO.
CHANGE NOTICE: IF THE ABOVE INFORMATION
IS INCORRECT OR MISSING, PLEASE PRINT
THE CORRECT INFORMATION BELOW, AND RETURN
TO:
ACCESS
P.O. BOX 418256
KANSAS CITY, MISSOURI 64141-9256
----------------------------------------
----------------------------------------
----------------------------------------
<PAGE> 2
--------------------------------------------------------------------------------
REQUIREMENTS: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE
NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR WITHOUT
ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER.
THE 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.
--------------------------------------------------------------------------------
For value received, hereby sell, assign and transfer unto
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE)
________________________________________________________________________________
_________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
_______________________________________________________________________ Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated, _________________________________________ 19 ______
__________________________________________________________________
Owner
__________________________________________________________________
Signature of Co-Owner, if any
IMPORTANT { BEFORE SIGNING, READ AND COMPLY CAREFULLY
{ WITH REQUIREMENTS PRINTED ABOVE.
SIGNATURE(S) guaranteed by:
________________________________________________________________________________
--------------------------------------------------------------------------------
*The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants UNIF GIFT MIN. ACT - ________ Custodian _________
in common (Cust) (Minor)
under Uniform Gifts to
TEN ENT - as tenants by Minors Act
the entireties
____________________________
JT TEN - as joint tenants (State)
with right of sur-
vivorship and not
as tenants in common
Additional abbreviations may also be used though not in the above list
--------------------------------------------------------------------------------
________________________________________________________________________________
THIS SPACE MUST NOT BE COVERED IN ANY WAY
<PAGE> 1
EXHIBIT 5(i)
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of _________, 199_, by and
between VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND (the "Fund"), a
series of VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a Delaware business trust
(the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP. (the
"Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs
the Adviser to act as the investment adviser for and to manage
the investment and reinvestment of the assets of the Fund in
accordance with the Fund's investment objective and policies and
limitations, and to administer its affairs to the extent
requested by, and subject to the review and supervision of, the
Board of Trustees of the Fund for the period and upon the terms
herein set forth. The investment of funds shall be subject to
all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as may from time to time be
in force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts
such employment and agrees during such period to render such
services, to supply investment research and portfolio management
(including without limitation the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed, in
accordance with the policies adopted by the Fund and its Board
of Trustees), to administer the business affairs of the Fund, to
furnish offices and necessary facilities and equipment to the
Fund, to provide administrative services for the Fund, to render
periodic reports to the Board of Trustees of the Fund, and to
permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to
such positions.
(c) Independent Contractor. The Adviser shall be deemed
to be an independent contractor under this Agreement and, unless
otherwise expressly provided or authorized, shall have no
authority to act for or represent the Fund in any way or
otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to
the Fund under this Agreement are not to be deemed exclusive,
and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are
not impaired thereby.
1
<PAGE> 2
2. (a) Fee. For the services and facilities described in
Section 1, the Fund will accrue daily and pay to the Adviser at
the end of each calendar month an investment management fee
equal to a percentage of the average daily net assets of the
Fund as follows:
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
____________________ ____________________
____________________ ____________________
(b) Expense Limitation. The Adviser's compensation for any
fiscal year of the Fund shall be reduced by the amount, if any,
by which the Fund's expense for such fiscal year exceeds the
most restrictive applicable expense jurisdiction in which the
Fund's shares are qualified for offer and sale, as such
limitations set forth in the most recent notice thereof
furnished by the Adviser to the Fund. For purposes of this
paragraph there shall be excluded from computation of the Fund's
expenses any amount borne directly or indirectly by the Fund
which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any
month expenses of the Fund properly included in such calculation
exceed 1/12 of the amount permitted annually by the most
restrictive applicable expense limitation, the payment to the
Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the
total net expense for the month will not exceed 1/12 of such
amount. As of the end of the Fund's fiscal year, however, the
computations and payments shall be readjusted so that the
aggregate compensation payable to the Adviser for the year is
equal to the fee set forth in subsection (a) of this Section 2,
diminished to the extent necessary so that the expenses for the
year do not exceed those permitted by the applicable expense
limitation.
(c) Determination of Net Asset Value. The net asset value of
the Fund shall be calculated as of the close of the New York
Stock Exchange on each day the Exchange is open for trading or
such other time or times as the trustees may determine in
accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as from time to time in
force. For the purpose of the foregoing computations, on each
such day when net asset value is not calculated, the net asset
value of a share of beneficial interest of the Fund shall be
deemed to be the net asset value of such share as of the close
of business of the last day on which such calculation was made.
2
<PAGE> 3
(d) Proration. For the month and year in which this Agreement
becomes effective or terminates, there shall be an appropriate
proration of the Adviser's fee on the basis of the number of
days that the Agreement is in effect during such month and year,
respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund
shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Fund's securities or other
property, for keeping its books of account, for any other
charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be
required to pay, and the Fund shall assume and pay, the charges
and expenses of its operations, including compensation of the
trustees (other than those who are interested persons of the
Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and
expenses of independent accountants, of legal counsel and of any
transfer or dividend disbursing agent, costs of acquiring and
disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on
obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to
shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes
and fees to federal, state or other governmental agencies on
account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not
pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from
the Adviser without first obtaining the written approval of the
Adviser. The Adviser shall arrange, if desired by the Fund, for
officers or employees of the Adviser to serve, without
compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and
subject to their individual consent and to any limitations
imposed by law.
4. Interested Persons. Subject to applicable statutes and
regulations, it is understood that trustees, officers,
shareholders and agents of the Fund are or may be interested in
the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and
agents of the Adviser may be interest in the Fund as trustees,
officers, shareholders, agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance
of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the
date hereof and shall remain in full force until the second
anniversary of the date hereof unless sooner terminated as
hereinafter provided. This Agreement shall continue in force
3
<PAGE> 4
from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the
manner required by the Investment Company Act of 1940, as
amended.
(b) Termination. This Agreement shall automatically
terminate in the event of its assignment. This Agreement may be
terminated at any time without the payment of any penalty by the
Fund or by the Adviser on sixty (60) days written notice to the
other party. The Fund may effect termination by action of the
Board of Trustees or by vote of a majority of the outstanding
shares of stock of the Fund, accompanied by appropriate notice.
This Agreement may be terminated at any time without the payment
of any penalty and without advance notice by the Board of
Trustees or by vote of a majority of the outstanding shares of
the Fund in the event that it shall have been established by a
court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in
a breach of the covenants of the Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement
shall not affect the right of the Adviser to receive payment on
any unpaid balance of the compensation described in Section 2
earned prior to such termination.
7. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder shall not thereby affected.
8. Notices. Any notice under this Agreement shall be in
writing, addressed and delivered or mailed, postage prepaid, to
the other party at such address as such other party may
designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as
provided by Article 8, Section 8.1 of the Agreement and Declaration of Trust of
the Trust, the shareholders, trustees, officers, employees and other agents of
the Trust and the Fund shall not personally be bound by or liable hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.
10. Governing Law. All questions concerning the validity,
meaning and effect of this Agreement shall be determined in
accordance with the laws (without giving effect to the
conflict-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.
4
<PAGE> 5
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By:_____________________________________________
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME
FUND, a series of VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST
By:_____________________________________________
Dennis J. McDonnell, President
5
<PAGE> 1
EXHIBIT 5(iii)
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of _________, 199_, by and
between VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND (the
"Fund"), a series of VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a Delaware
business trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT
ADVISORY CORP. (the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs
the Adviser to act as the investment adviser for and to manage
the investment and reinvestment of the assets of the Fund in
accordance with the Fund's investment objective and policies and
limitations, and to administer its affairs to the extent
requested by, and subject to the review and supervision of, the
Board of Trustees of the Fund for the period and upon the terms
herein set forth. The investment of funds shall be subject to
all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as may from time to time be
in force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts
such employment and agrees during such period to render such
services, to supply investment research and portfolio management
(including without limitation the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed, in
accordance with the policies adopted by the Fund and its Board
of Trustees), to administer the business affairs of the Fund, to
furnish offices and necessary facilities and equipment to the
Fund, to provide administrative services for the Fund, to render
periodic reports to the Board of Trustees of the Fund, and to
permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to
such positions.
(c) Independent Contractor. The Adviser shall be deemed
to be an independent contractor under this Agreement and, unless
otherwise expressly provided or authorized, shall have no
authority to act for or represent the Fund in any way or
otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to
the Fund under this Agreement are not to be deemed exclusive,
and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are
not impaired thereby.
1
<PAGE> 2
2. (a) Fee. For the services and facilities described in
Section 1, the Fund will accrue daily and pay to the Adviser at
the end of each calendar month an investment management fee
equal to a percentage of the average daily net assets of the
Fund as follows:
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
____________________ ____________________
____________________ ____________________
(b) Expense Limitation. The Adviser's compensation for any
fiscal year of the Fund shall be reduced by the amount, if any,
by which the Fund's expense for such fiscal year exceeds the
most restrictive applicable expense jurisdiction in which the
Fund's shares are qualified for offer and sale, as such
limitations set forth in the most recent notice thereof
furnished by the Adviser to the Fund. For purposes of this
paragraph there shall be excluded from computation of the Fund's
expenses any amount borne directly or indirectly by the Fund
which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any
month expenses of the Fund properly included in such calculation
exceed 1/12 of the amount permitted annually by the most
restrictive applicable expense limitation, the payment to the
Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the
total net expense for the month will not exceed 1/12 of such
amount. As of the end of the Fund's fiscal year, however, the
computations and payments shall be readjusted so that the
aggregate compensation payable to the Adviser for the year is
equal to the fee set forth in subsection (a) of this Section 2,
diminished to the extent necessary so that the expenses for the
year do not exceed those permitted by the applicable expense
limitation.
(c) Determination of Net Asset Value. The net asset value of
the Fund shall be calculated as of the close of the New York
Stock Exchange on each day the Exchange is open for trading or
such other time or times as the trustees may determine in
accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as from time to time in
force. For the purpose of the foregoing computations, on each
such day when net asset value is not calculated, the net asset
value of a share of beneficial interest of the Fund shall be
deemed to be the net asset value of such share as of the close
of business of the last day on which such calculation was made.
2
<PAGE> 3
(d) Proration. For the month and year in which this Agreement
becomes effective or terminates, there shall be an appropriate
proration of the Adviser's fee on the basis of the number of
days that the Agreement is in effect during such month and year,
respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund
shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Fund's securities or other
property, for keeping its books of account, for any other
charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be
required to pay, and the Fund shall assume and pay, the charges
and expenses of its operations, including compensation of the
trustees (other than those who are interested persons of the
Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and
expenses of independent accountants, of legal counsel and of any
transfer or dividend disbursing agent, costs of acquiring and
disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on
obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to
shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes
and fees to federal, state or other governmental agencies on
account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not
pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from
the Adviser without first obtaining the written approval of the
Adviser. The Adviser shall arrange, if desired by the Fund, for
officers or employees of the Adviser to serve, without
compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and
subject to their individual consent and to any limitations
imposed by law.
4. Interested Persons. Subject to applicable statutes and
regulations, it is understood that trustees, officers,
shareholders and agents of the Fund are or may be interested in
the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and
agents of the Adviser may be interest in the Fund as trustees,
officers, shareholders, agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance
of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the
date hereof and shall remain in full force until the second
anniversary of the date hereof unless sooner terminated as
hereinafter provided. This Agreement shall continue in force
3
<PAGE> 4
from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the
manner required by the Investment Company Act of 1940, as
amended.
(b) Termination. This Agreement shall automatically
terminate in the event of its assignment. This Agreement may be
terminated at any time without the payment of any penalty by the
Fund or by the Adviser on sixty (60) days written notice to the
other party. The Fund may effect termination by action of the
Board of Trustees or by vote of a majority of the outstanding
shares of stock of the Fund, accompanied by appropriate notice.
This Agreement may be terminated at any time without the payment
of any penalty and without advance notice by the Board of
Trustees or by vote of a majority of the outstanding shares of
the Fund in the event that it shall have been established by a
court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in
a breach of the covenants of the Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement
shall not affect the right of the Adviser to receive payment on
any unpaid balance of the compensation described in Section 2
earned prior to such termination.
7. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder shall not thereby affected.
8. Notices. Any notice under this Agreement shall be in
writing, addressed and delivered or mailed, postage prepaid, to
the other party at such address as such other party may
designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as
provided by Article 8, Section 8.1 of the Agreement and Declaration of Trust of
the Trust, the shareholders, trustees, officers, employees and other agents of
the Trust and the Fund shall not personally be bound by or liable hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.
10. Governing Law. All questions concerning the validity,
meaning and effect of this Agreement shall be determined in
accordance with the laws (without giving effect to the
conflict-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.
4
<PAGE> 5
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By:_____________________________________________
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE
FUND, a series of VAN KAMPEN AMERICAN CAPITAL TAX FREE
TRUST
By:_____________________________________________
Dennis J. McDonnell, President
5
<PAGE> 1
EXHIBIT 5(iv)
FORM OF
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT dated as of _________, 199_, by and
between VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND (the "Fund"), a
series of VAN KAMPEN AMERICAN CAPITAL TAX FREE TRUST, a Delaware business
trust (the "Trust"), and VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
(the "Adviser"), a Delaware corporation.
1. (a) Retention of Adviser by Fund. The Fund hereby employs
the Adviser to act as the investment adviser for and to manage
the investment and reinvestment of the assets of the Fund in
accordance with the Fund's investment objective and policies and
limitations, and to administer its affairs to the extent
requested by, and subject to the review and supervision of, the
Board of Trustees of the Fund for the period and upon the terms
herein set forth. The investment of funds shall be subject to
all applicable restrictions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as may from time to time be
in force and delivered or made available to the Adviser.
(b) Adviser's Acceptance of Employment. The Adviser accepts
such employment and agrees during such period to render such
services, to supply investment research and portfolio management
(including without limitation the selection of securities for
the Fund to purchase, hold or sell and the selection of brokers
through whom the Fund's portfolio transactions are executed, in
accordance with the policies adopted by the Fund and its Board
of Trustees), to administer the business affairs of the Fund, to
furnish offices and necessary facilities and equipment to the
Fund, to provide administrative services for the Fund, to render
periodic reports to the Board of Trustees of the Fund, and to
permit any of its officers or employees to serve without
compensation as trustees or officers of the Fund if elected to
such positions.
(c) Independent Contractor. The Adviser shall be deemed
to be an independent contractor under this Agreement and, unless
otherwise expressly provided or authorized, shall have no
authority to act for or represent the Fund in any way or
otherwise be deemed as agent of the Fund.
(d) Non-Exclusive Agreement. The services of the Adviser to
the Fund under this Agreement are not to be deemed exclusive,
and the Adviser shall be free to render similar services or
other services to others so long as its services hereunder are
not impaired thereby.
1
<PAGE> 2
2. (a) Fee. For the services and facilities described in
Section 1, the Fund will accrue daily and pay to the Adviser at
the end of each calendar month an investment management fee
equal to a percentage of the average daily net assets of the
Fund as follows:
FEE PERCENT OF
AVERAGE DAILY AVERAGE DAILY
NET ASSETS NET ASSETS
____________________ ____________________
____________________ ____________________
(b) Expense Limitation. The Adviser's compensation for any
fiscal year of the Fund shall be reduced by the amount, if any,
by which the Fund's expense for such fiscal year exceeds the
most restrictive applicable expense jurisdiction in which the
Fund's shares are qualified for offer and sale, as such
limitations set forth in the most recent notice thereof
furnished by the Adviser to the Fund. For purposes of this
paragraph there shall be excluded from computation of the Fund's
expenses any amount borne directly or indirectly by the Fund
which is permitted to be excluded from the computation of such
limitation by such statute or regulatory authority. If for any
month expenses of the Fund properly included in such calculation
exceed 1/12 of the amount permitted annually by the most
restrictive applicable expense limitation, the payment to the
Adviser for that month shall be reduced, and, if necessary, the
Adviser shall make a refund payment to the Fund, so that the
total net expense for the month will not exceed 1/12 of such
amount. As of the end of the Fund's fiscal year, however, the
computations and payments shall be readjusted so that the
aggregate compensation payable to the Adviser for the year is
equal to the fee set forth in subsection (a) of this Section 2,
diminished to the extent necessary so that the expenses for the
year do not exceed those permitted by the applicable expense
limitation.
(c) Determination of Net Asset Value. The net asset value of
the Fund shall be calculated as of the close of the New York
Stock Exchange on each day the Exchange is open for trading or
such other time or times as the trustees may determine in
accordance with the provisions of applicable law and of the
Declaration of Trust and By-Laws of the Trust, and resolutions
of the Board of Trustees of the Fund as from time to time in
force. For the purpose of the foregoing computations, on each
such day when net asset value is not calculated, the net asset
value of a share of beneficial interest of the Fund shall be
deemed to be the net asset value of such share as of the close
of business of the last day on which such calculation was made.
2
<PAGE> 3
(d) Proration. For the month and year in which this Agreement
becomes effective or terminates, there shall be an appropriate
proration of the Adviser's fee on the basis of the number of
days that the Agreement is in effect during such month and year,
respectively.
3. Expenses. In addition to the fee of the Adviser, the Fund
shall assume and pay any expenses for services rendered by a
custodian for the safekeeping of the Fund's securities or other
property, for keeping its books of account, for any other
charges of the custodian and for calculating the net asset value
of the Fund as provided above. The Adviser shall not be
required to pay, and the Fund shall assume and pay, the charges
and expenses of its operations, including compensation of the
trustees (other than those who are interested persons of the
Adviser and other than those who are interested persons of the
distributor of the Fund but not of the Adviser, if the
distributor has agreed to pay such compensation), charges and
expenses of independent accountants, of legal counsel and of any
transfer or dividend disbursing agent, costs of acquiring and
disposing of portfolio securities, cost of listing shares of the
New York Stock Exchange or other exchange interest (if any) on
obligations incurred by the Fund, costs of share certificates,
membership dues in the Investment Company Institute or any
similar organization, costs of reports and notices to
shareholders, costs of registering shares of the Fund under the
federal securities laws, miscellaneous expenses and all taxes
and fees to federal, state or other governmental agencies on
account of the registration of securities issued by the Fund,
filing of corporate documents or otherwise. The Fund shall not
pay or incur any obligation for any management or administrative
expenses for which the Fund intends to seek reimbursement from
the Adviser without first obtaining the written approval of the
Adviser. The Adviser shall arrange, if desired by the Fund, for
officers or employees of the Adviser to serve, without
compensation from the Fund, as trustees, officers or agents of
the Fund if duly elected or appointed to such positions and
subject to their individual consent and to any limitations
imposed by law.
4. Interested Persons. Subject to applicable statutes and
regulations, it is understood that trustees, officers,
shareholders and agents of the Fund are or may be interested in
the Adviser as directors, officers, shareholders, agents or
otherwise and that the directors, officers, shareholders and
agents of the Adviser may be interest in the Fund as trustees,
officers, shareholders, agents or otherwise.
5. Liability. The Adviser shall not be liable for any error of
judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which this Agreement relates,
except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of the Adviser in the performance
of its obligations and duties, or by reason of its reckless
disregard of its obligations and duties under this Agreement.
6. (a) Term. This Agreement shall become effective on the
date hereof and shall remain in full force until the second
anniversary of the date hereof unless sooner terminated as
hereinafter provided. This Agreement shall continue in force
3
<PAGE> 4
from year to year thereafter, but only as long as such
continuance is specifically approved as least annually in the
manner required by the Investment Company Act of 1940, as
amended.
(b) Termination. This Agreement shall automatically
terminate in the event of its assignment. This Agreement may be
terminated at any time without the payment of any penalty by the
Fund or by the Adviser on sixty (60) days written notice to the
other party. The Fund may effect termination by action of the
Board of Trustees or by vote of a majority of the outstanding
shares of stock of the Fund, accompanied by appropriate notice.
This Agreement may be terminated at any time without the payment
of any penalty and without advance notice by the Board of
Trustees or by vote of a majority of the outstanding shares of
the Fund in the event that it shall have been established by a
court of competent jurisdiction that the Adviser or any officer
or director of the Adviser has taken any action which results in
a breach of the covenants of the Adviser set forth herein.
(c) Payment upon Termination. Termination of this Agreement
shall not affect the right of the Adviser to receive payment on
any unpaid balance of the compensation described in Section 2
earned prior to such termination.
7. Severability. If any provision of this Agreement shall be
held or made invalid by a court decision, statute, rule or
otherwise, the remainder shall not thereby affected.
8. Notices. Any notice under this Agreement shall be in
writing, addressed and delivered or mailed, postage prepaid, to
the other party at such address as such other party may
designate for the receipt of such notice.
9. Disclaimer. The Adviser acknowledges and agrees that, as
provided by Article 8, Section 8.1 of the Agreement and Declaration of Trust of
the Trust, the shareholders, trustees, officers, employees and other agents of
the Trust and the Fund shall not personally be bound by or liable hereunder,
nor shall resort be had to their private property for the satisfaction of any
obligation or claim hereunder.
10. Governing Law. All questions concerning the validity,
meaning and effect of this Agreement shall be determined in
accordance with the laws (without giving effect to the
conflict-of-law principles thereof) of the State of Delaware
applicable to contracts made and to be performed in that state.
4
<PAGE> 5
IN WITNESS WHEREOF, the Fund and the Adviser have caused this
Agreement to be executed on the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By:_____________________________________________
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL MUNICIPAL INCOME FUND, a
series of VAN KAMPEN AMERICAN CAPTIAL TAX FREE TRUST
By:_____________________________________________
Dennis J. McDonnell, President
5
<PAGE> 1
EXHIBIT 6(a)
FORM OF
DISTRIBUTION AND SERVICE AGREEMENT
THIS DISTRIBUTION AND SERVICE AGREEMENT
dated as of
, 199_ (the "Agreement") by and between
VAN KAMPEN AMERICAN CAPITAL__________ TRUST, a Delaware
business trust (the "Trust"), on behalf of its series VAN
KAMPEN AMERICAN CAPITAL__________________ FUND (the "Fund"), and VAN
KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC., a Delaware
corporation (the "Distributor").
1. Appointment of Distributor. The Fund appoints the
Distributor as a principal underwriter and exclusive distributor
of each class of its shares of beneficial interest (the
"Shares") offered for sale from time to time pursuant to the
then current prospectus of the Fund, subject to different
combinations of front-end sales charges, distribution fees,
service fees and contingent deferred sales charges. Classes of
shares, if any, subject to a front-end sales charge and a
distribution and/or service fee are referred to herein as "FESC
Classes" and the Shares of such classes are referred to herein
as "FESC Shares." Classes of shares, if any, subject to a
contingent-deferred sales charge and a distribution and/or a
service fee are referred to herein as "CDSC Classes" and Shares
of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge,
a contingent-deferred sales charge and a distribution and/or
service fee are referred to herein as "Combination Classes" and
Shares of such class are referred to herein as "Combination
Shares." The Fund reserves the right to refuse at any time or
times to sell Shares hereunder for any reason deemed adequate by
the Board of Trustees of the Fund.
The Distributor will use its best efforts to sell, through its
organization and through other dealers and agents, the Shares
which the Distributor has the right to purchase under Section 2
hereof, but the Distributor does not undertake to sell any
specific number of Shares.
The Distributor agrees that it will not take any long or short
positions in the Shares, except for long positions in those
Shares purchased by the Distributor in accordance with any
systematic sales plan described in the then current Prospectus
of the Fund and except as permitted by Section 2 hereof, and
that so far as it can control the situation, it will prevent any
of its trustees, officers or shareholders from taking any long
or short positions in the Shares, except for legitimate
investment purposes.
1
<PAGE> 2
2. Sale of Shares to Distributor. The Fund hereby grants to
the Distributor the exclusive right, except as herein otherwise
provided, to purchase Shares directly from the Fund upon the
terms herein set forth. Such exclusive right hereby granted
shall not apply to Shares issued or transferred or sold at net
asset value: (a) in connection with the merger or consolidation
of the Fund with any other investment company or the acquisition
by the Fund of all or substantially all of the assets of or the
outstanding Shares of any investment company; (b) in connection
with a pro rata distribution directly to the holders of Fund
Shares in the nature of a stock dividend or stock split or in
connection with any other recapitalization approved by the Board
of Trustees; (c) upon the exercise of purchase or subscription
rights granted to the holders of Shares on a pro rata basis; (d)
in connection with the automatic reinvestment of dividends and
distributions from the Fund; or (e) in connection with the issue
and sale of Shares to trustees, officers and employees of the
Fund; to directors, officers and employees of the investment
adviser of the Fund or any principal underwriter (including the
Distributor) of the Fund; to retirees of the Distributor that
purchased shares of any mutual fund distributed by the
Distributor prior to retirement; to directors, officers and
employees of Van Kampen American Capital, Inc. (formerly The Van
Kampen Merritt Companies, Inc.) (the parent of the Distributor),
VK/AC Holding, Inc. (formerly VKM Holdings, Inc.)(the parent of
The Van Kampen Merritt Companies, Inc.) and to the subsidiaries
of VK/AC Holding, Inc.; and to any trust, pension,
profit-sharing or other benefit plan for any of the aforesaid
persons as permitted by Rule 22d-1 under the Investment Company
Act of 1940 (the "1940 Act").
The Distributor shall have the right to buy from the Fund the
Shares needed, but not more than the Shares needed (except for
reasonable allowances for clerical errors, delays and errors of
transmission and cancellation of orders) to fill unconditional
orders for Shares received by the Distributor from dealers,
agents and investors during each period when particular net
asset values and public offering prices are in effect as
provided in Section 3 hereof; and the price which the
Distributor shall pay for the Shares so purchased shall be the
respective net asset value used in determining the public
offering price on which such orders were based. The Distributor
shall notify the Fund at the end of each such period, or as soon
thereafter on that business day as the orders received in such
period have been compiled, of the number of Shares of each class
that the Distributor elects to purchase hereunder.
3. Public Offering Price. The public offering price per Share
shall be determined in accordance with the then current
Prospectus of the Fund. In no event shall the public offering
price exceed the net asset value per Share, plus, with respect
to the FESC Shares, a front-end sales charge not in excess of
the applicable maximum sales charge permitted under the Rules of
Fair Practice of the National Association of Securities Dealers,
Inc., as in effect from time to time. The net asset value per
share for each class of Shares, respectively, shall be
determined in the manner provided in the Declaration of Trust
and By-Laws of the Trust as then amended, the Designation of
Sub-trust with respect to the Fund, as amended, and in
accordance with the then current Prospectus of the Fund
consistent with the terms and conditions of the exemptive order
with respect to the Fund (Release No. IC- ) issued
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<PAGE> 3
by the Securities and Exchange Commission on
, 1993, as it may be amended from time to time or
succeeded by other exemptive orders or rules promulgated by the
Securities and Exchange Commission under the 1940 Act. The Fund
will cause immediate notice to be given to the Distributor of
each change in net asset value as soon as it is determined.
Discounts to dealers purchasing FESC Shares from the Distributor
for resale and to brokers and other eligible agents making sales
of FESC Shares to investors and compensation payable from the
Distributor to dealers, brokers and other eligible agents making
sales of CDSC Shares and Combination Shares shall be set forth
in the selling agreements between the Distributor and such
dealers or agents, respectively, as from time to time amended,
and, if such discounts and compensation are described in the
then current Prospectus for the Fund, shall be as so set forth.
4. Compliance with NASD Rules, SEC Orders, etc. In selling
Fund Shares, the Distributor will in all respects duly comply
with all state and federal laws relating to the sale of such
securities and with all applicable rules and regulations of all
regulatory bodies, including without limitation the Rules of
Fair Practice of the National Association of Securities Dealers,
Inc., and all applicable rules and regulations of the Securities
and Exchange Commission under the 1940 Act, and will indemnify
and save the Fund harmless from any damage or expense on account
of any unlawful act by the Distributor or its agents or
employees. The Distributor is not, however, to be responsible
for the acts of other dealers or agents, except to the extent
that they shall be acting for the Distributor or under its
direction or authority. None of the Distributor, any dealer,
any agent or any other person is authorized by the Fund to give
any information or to make any representations, other than those
contained in the Registration Statement or Prospectus heretofore
or hereafter filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "1933 Act")
(as any such Registration Statement and Prospectus may have been
or may be amended from time to time), covering the Shares, and
in any supplemental information to any such Prospectus approved
by the Fund in connection with the offer or sale of Shares.
None of the Distributor, any dealer, any broker or any other
person is authorized to act as agent for the Fund in connection
with the offering or sale of Shares to the public or otherwise.
All such sales shall be made by the Distributor as principal for
its own account.
In selling Shares to investors, the Distributor will adopt and
comply with certain standards, as set forth in Exhibit III
attached hereto as to when each respective class of Shares may
appropriately be sold to particular investors. The Distributor
will require every broker, dealer and other eligible agent
participating in the offering of the Shares to agree to adopt
and comply with such standards as a condition precedent to their
participation in the offering.
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<PAGE> 4
5. Expenses.
(a) The Fund will pay or cause to be paid:
(i) all expenses in connection with the registration of
Shares under the federal securities laws, and the Fund will exercise
its best efforts to obtain said registration and qualification;
(ii) all expenses in connection with the printing of any
notices of shareholders' meetings, proxy and proxy statements
and enclosures therewith, as well as any other notice or
communication sent to shareholders in connection with any
meeting of the shareholders or otherwise, any annual, semiannual
or other reports or communications sent to the shareholders, and
the expenses of sending prospectuses relating to the Shares to
existing shareholders;
(iii) all expenses of any federal or state original-issue tax
or transfer tax payable upon the issuance, transfer or delivery
of Shares from the Fund to the Distributor; and
(iv) the cost of preparing and issuing any Share certificates
which may be issued to represent Shares.
(b) The Distributor will pay the costs and expenses of
qualifying and maintaining qualification of the Shares for sale
under the securities laws of the various states. The
Distributor will also permit its officers and employees to serve
without compensation as trustees and officers of the Fund if
duly elected to such positions.
(c) The Fund shall reimburse the Distributor for
out-of-pocket costs and expenses actually incurred by it in
connection with distribution of each class of Shares
respectively in accordance with the terms of a plan (the "12b-1
Plan") adopted by the Fund pursuant to Rule 12b-1 under the 1940
Act as such 12b-1 Plan may be in effect from time to time;
provided, however, that no payments shall be due or paid to the
Distributor hereunder with respect to a class of Shares unless
and until this Agreement shall have been approved for each such
class by a majority of the Board of Trustees of the Fund and by
a majority of the "Disinterested Trustees" (as such term is
defined in such 12b-1 Plan) by vote cast in person at a meeting
called for the purpose of voting on this Agreement. A copy of
such 12b-1 Plan as in effect on the date of this Agreement is
attached as Exhibit I hereto. The Fund reserves the right to
terminate such 12b-1 Plan with respect to a class of Shares at
any time, as specified in the Plan. The persons authorized to
direct the payment of funds pursuant to this Agreement and the
12b-1 Plan shall provide to the Fund's Board of Trustees, and
the Trustees shall review, at least quarterly, a written report
with respect to each of the classes of Shares of the amounts so
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<PAGE> 5
paid and the purposes for which such expenditures were made for
each such class of Shares.
(d) The Fund shall compensate the Distributor for providing
services to, and the maintenance of, shareholder accounts in the
Fund (including prepaying service fees to eligible brokers,
dealers and financial intermediaries and expenses incurred in
connection therewith) and the Distributor may pay as agent for
and on behalf of the Fund a service fee with respect to each
class of Shares to brokers, dealers and financial intermediaries
for the provision of shareholder services and the maintenance of
shareholder accounts in the Fund in the amount with respect to
each class of Shares set forth from time to time in the Fund's
prospectus. The Fund shall compensate the Distributor for such
expenses in accordance with the terms of a service plan (the
"Service Plan"), as such Service Plan may be in effect from time
to time; provided, however, that no service fee payments shall
be due or paid to the Distributor hereunder with respect to a
class of Shares unless and until this Agreement shall have been
approved for each such class by a majority of the Board of
Trustees of the Fund and by a majority of the Disinterested
Trustees by vote cast in person at a meeting called for the
purpose of voting on this Agreement. A copy of such Service
Plan as in effect on the date of this Agreement is attached as
Exhibit II hereto. The Fund reserves the right to terminate
such Service Plan with respect to a class of Shares at any time,
as specified in the Plan. The persons authorized to direct the
payment of funds pursuant to this Agreement and the Service Plan
shall provide to the Fund's Board of Trustees, and the Trustees
shall review, at least quarterly, a written report with respect
to each of the classes of Shares of the amounts paid as service
fees for each such class of Shares.
6. Redemption of Shares. In connection with the Fund's
redemption of its Shares, the Fund hereby authorizes the
Distributor to repurchase, upon the terms and conditions
hereinafter set forth, as the Fund's agent and for the Fund's
account, such Shares as may be offered for sale to the Fund from
time to time by holders of such Shares or their agents.
(a) Subject to and in conformity with all applicable federal
and state legislation, any applicable rules of the National
Association of Securities Dealers, Inc., and any applicable
rules and regulations of the Securities and Exchange Commission
under the 1940 Act, the Distributor may accept offers of holders
of Shares to resell such Shares to the Fund on such terms and
conditions and at such prices as described and provided for in
the then current Prospectus of the Fund.
(b) The Distributor agrees to notify the Fund at such times
as the Fund may specify of the number of each class of Shares,
respectively, repurchased for the Fund's account and the time or
times of such repurchases, and the Fund shall notify the
Distributor of the prices and, in the case of a class of CDSC
Shares or Combination Shares, of the deferred sales charge as
described below, if any, applicable to repurchases of Shares of
such class.
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<PAGE> 6
(c) The Fund shall have the right to suspend or revoke the
foregoing authorization at any time; unless otherwise stated,
any such suspension or revocation shall be effective forthwith
upon receipt of notice thereof by telegraph or by written
instrument from any of the Fund's officers. In the event that
the Distributor's authorization is, by the terms of such notice,
suspended for more than twenty-four hours or until further
notice, the authorization given by this Section 6 shall not be
revived except by vote of the Board of Trustees of the Fund.
(d) The Distributor agrees that all repurchases of Shares
made by the Distributor shall be made only as agent for the
Fund's account and pursuant to the terms and conditions herein
set forth.
(e) The Fund agrees to authorize and direct its Custodian to
pay, for the Fund's account, the repurchase price (together with
any applicable contingent deferred sales charge) of any Shares
so repurchased for the Fund against the authorized transfer of
book shares from an open account and against delivery of any
other documentation required by the Board of Trustees of the
Fund or, in the case of certificated Shares, against delivery of
the certificates representing such Shares in proper form for
transfer to the Fund.
(f) The Distributor shall receive no commissions or other
compensation in respect of any repurchases of FESC Shares for
the Fund under the foregoing authorization and appointment as
agent. With respect to any repurchase of CDSC Shares or
Combination Shares, the Distributor shall receive the deferred
sales charge, if any, applicable to the respective class of
Shares that have been held for less than a specified period of
time with respect to such class as set forth from time to time
in the Fund's Prospectus. The Distributor shall receive no
other commission or other compensation in respect of any
repurchases of CDSC Shares or Combination Shares for the Fund
under the foregoing authorization and appointment as agent.
(g) If any FESC Shares sold to the Distributor under the
terms of this Agreement are redeemed or repurchased by the Fund
or by the Distributor as agent or are tendered for redemption
within seven business days after the date of the Distributor's
confirmation of the original purchase by the Distributor, the
Distributor shall forfeit the amount above the net asset value
received by it in respect of such Shares, provided that the
portion, if any, of such amount re-allowed by the Distributor to
dealers or agents shall be repayable to the Fund only to the
extent recovered by the Distributor from the dealer or agent
concerned. The Distributor shall include in agreements with
such dealers and agents a corresponding provision for the
forfeiture by them of their concession with respect to FESC
Shares purchased by them or their principals and redeemed or
repurchased by the Fund or by the Distributor as agent within
seven business days after the date of the Distributor's
confirmation of such initial purchases.
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<PAGE> 7
7. Indemnification. The Fund agrees to indemnify and hold
harmless the Distributor and each of its trustees and officers
and each person, if any, who controls the Distributor within the
meaning of Section 15 of the 1933 Act against any loss,
liability, claim, damage or expense (including the reasonable
cost of investigating or defending any alleged loss, liability,
claim, damage, or expense and reasonable counsel fees incurred
in connection therewith), arising by reason of any person
acquiring any Shares, based upon the ground that the
registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or
omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading
under the 1933 Act or any other statute or the common law.
However, the Fund does not agree to indemnify the Distributor or
hold it harmless to the extent that the statement or omission
was made in reliance upon, and in conformity with, information
furnished to the Fund by or on behalf of the Distributor. In no
case (i) is the indemnity of the Fund in favor of the
Distributor or any person indemnified to be deemed to protect
the Distributor or any person against any liability to the Fund
or its securityholders to which the Distributor or such person
would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations and duties
under this Agreement, or (ii) is the Fund to be liable under its
indemnity agreement contained in this Section with respect to
any claim made against the Distributor or any person indemnified
unless the Distributor or any such person shall have notified
the Fund in writing of the claim within a reasonable time after
the summons or other first written notification giving
information of the nature of the claim shall have been served
upon the Distributor or any such person (or after the
Distributor or the person shall have received notice of service
on any designated agent). However, failure to notify the Fund
of any claim shall not relieve the Fund from any liability which
it may have to the Distributor or any person against whom such
action is brought otherwise than on account of its indemnity
agreement contained in this paragraph. The Fund shall be
entitled to participate at its own expense in the defense, or,
if it so elects, to assume the defense, of any suit brought to
enforce any claims, but if the Fund elects to assume the
defense, the defense shall be conducted by counsel chosen by it
and satisfactory to the Distributor or person or persons,
defendant or defendants in the suit. In the event the Fund
elects to assume the defense of any suit and retain counsel, the
Distributor, officers or trustees or controlling person or
persons, defendant or defendants in the suit, shall bear the
fees and expenses of any additional counsel retained by them.
If the Fund does not elect to assume the defense of any suit, it
will reimburse the Distributor, officers or trustees or
controlling person or persons, defendant or defendants in the
suit for the reasonable fees and expenses of any counsel
retained by them. The Fund agrees to notify the Distributor
promptly of the commencement of any litigation or proceedings
against it or any of its officers or directors in connection
with the issuance or sale of any of the Shares.
The Distributor also covenants and agrees that it will
indemnify and hold harmless the Fund and each of its trustees
7
<PAGE> 8
and officers and each person, if any, who controls the Fund
within the meaning of Section 15 of the 1933 Act against any
loss, liability, damage, claim or expense (including the
reasonable cost of investigating or defending any alleged loss,
liability, damage, claim or expense and reasonable counsel fees
incurred in connection therewith) arising by reason of any
person acquiring any Shares, based upon the 1933 Act or any
other statute or common law, alleging any wrongful act of the
Distributor or any of its employees or alleging that the
registration statement, Prospectus, shareholder reports or other
information filed or made public by the Fund (as from time to
time amended) included an untrue statement of a material fact or
omitted to state a material fact required to be stated or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading,
insofar as the statement or omission was made in reliance upon,
and in conformity with, information furnished to the Fund by or
on behalf of the Distributor. In no case (i) is the indemnity
of the Distributor in favor of the Fund or any person
indemnified to be deemed to protect the Fund or any such person
against any liability to which the Fund or such person would
otherwise be subject by reason of willful misfeasance, bad faith
or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligation and duties
under this Amended Agreement, or (ii) is the Distributor to be
liable under its indemnity agreement contained in this paragraph
with respect to any claim made against the Fund or any person
indemnified unless the Fund or person, as the case may be, shall
have notified the Distributor in writing of the claim within a
reasonable time after the summons or other first written
notification giving information of the nature of the claim shall
have been served upon the Fund or person (or after the Fund or
such person shall have received notice of service on any
designated agent). However, failure to notify the Distributor
of any claim shall not relieve the Distributor from any
liability which it may have to the Fund or any person against
whom the action is brought otherwise than on account of its
indemnity agreement contained in this paragraph. In the case of
any notice to the Distributor, it shall be entitled to
participate, at its own expense, in the defense, or, if it so
elects, to assume the defense, of any suit brought to enforce
the claim, but if the Distributor elects to assume the defense,
the defense shall be conducted by counsel chosen by it and
satisfactory to the Fund, to its officers and trustees and to
any controlling person or persons, defendant or defendants in
the suit. In the event that the Distributor elects to assume
the defense of any suit and retain counsel, the Fund or
controlling persons, defendants in the suit, shall bear the fees
and expenses of any additional counsel retained by them. If the
Distributor does not elect to assume the defense of any suit, it
will reimburse the Fund, officers and trustees or controlling
person or persons, defendant or defendants in the suit, for the
reasonable fees and expenses of any counsel retained by them.
The Distributor agrees to notify the Fund promptly of the
commencement of any litigation or proceedings against it in
connection with the issue and sale of any of the Shares.
8. Continuation, Amendment or Termination of This Agreement.
This Agreement shall become effective on the Effective Date and
thereafter shall continue in full force and effect year to year
with respect to each class of Shares so long as such continuance
is approved at least annually (i) by the Board of Trustees of
the Fund or by a vote of a majority of the outstanding voting
securities of the respective class of Shares of the Fund, and
8
<PAGE> 9
(ii) by vote of a majority of the Trustees who are not parties
to this Agreement or interested persons in any such party (the
"Independent Trustee") cast in person at a meeting called for
the purpose of voting on such approval, provided, however, that
(a) this Agreement may at any time be terminated with respect to
either class of Shares of the Fund without the payment of any
penalty either by vote of a majority of the Disinterested
Trustees, or by vote of a majority of the outstanding voting
securities of the respective class of Shares of the Fund, on
written notice to the Distributor; (b) this Agreement shall
immediately terminate in the event of its assignment; and (c)
this Agreement may be terminated by the Distributor on ninety
(90) days' written notice to the Fund. Upon termination of this
Agreement with respect to either class of Shares of the Fund,
the obligations of the parties hereunder shall cease and
terminate with respect to such class of Shares as of the date of
such termination, except for any obligation to respond for a
breach of this Agreement committed prior to such termination.
This Agreement may be amended with respect to either class of
Shares at any time by mutual consent of the parties, provided
that such consent on the part of the Fund shall have been
approved (i) by the Board of Trustees of the Fund, or by a vote
of the majority of the outstanding voting securities of the
respective class of Shares of the Fund, and (ii) by vote of a
majority of the Independent Trustees cast in person at a meeting
called for the purpose of voting on such amendment.
For the purpose of this section, the terms "vote of a majority
of the outstanding voting securities", "interested persons" and
"assignment" shall have the meanings defined in the 1940 Act, as
amended.
9. Limited Liability of Shareholder. Notwithstanding anything
to the contrary contained in this Agreement, you acknowledge and
agree that, as provided by Article 8, Section 8.1 of the Agreement and
Declaration of Trust of the Trust, this Agreement is executed by
the Trustees of the Trust and/or Officers of the Fund by them
not individually but as such Trustees and/or Officers, and the
obligations of the Fund hereunder are not binding upon any of
the Trustees, Officers or Shareholders individually, but bind
only the trust estate.
10. Notice. Any notice under this Agreement shall be given in
writing, addressed and delivered, or mailed postpaid, to the
other party at any office of such party or at such other address
as such party shall have designated in writing.
11. GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES
HERETO SHALL BE GOVERNED BY, THE LAW OF THE STATE OF ILLINOIS
WITHOUT REFERENCE TO PRINCIPLES OF CONFLICT OF LAWS.
IN WITNESS WHEREOF, the parties hereto have caused this
9
<PAGE> 10
Agreement to be executed by their officers designated below on
the day and year first above written.
VAN KAMPEN AMERICAN CAPITAL ____________ TRUST, on
behalf of its series, VAN KAMPEN AMERICAN CAPITAL __________________ FUND
By:
Name:
Title:
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
By:
Name:
Title:
10
<PAGE> 1
EXHIBIT 6(b)
DEALER AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
Ladies and Gentlemen:
As dealer for our own account, we offer to sell to you shares
of any of the Van Kampen American Capital open-end investment companies
(the "Open-End Funds" or, individually, an "Open-End Fund") and
Van Kampen American Capital closed-end investment companies (the
"Closed-End Funds" or, individually, a "Closed-End Fund")
distributed by Van Kampen American Capital Distributors, Inc.
("VKAC") pursuant to the terms and conditions contained herein.
Collectively, the Open-End Funds and Closed-End Funds sometimes
are referred to herein as the "Funds" or, individually, as a
"Fund".
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for
each Fund with respect to its offering of one or more classes of
shares as described in each Fund's Prospectus. Pursuant to this
Agreement, VKAC offers to sell to you shares of each Open-End
Fund and each Closed-End Fund prior to the Effective Date (as
defined herein) of each Fund's Registration Statement (as
defined herein) (the "Initial Offering Period") and after the
Effective Date of each Fund's Registration Statement (the
"Continuous Offering Period") (if any) as described in each
respective Fund's Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of
Additional Information included in the registration statement
for the fund on the effective date and as from time to time
thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any
preliminary prospectus and any preliminary Statement of
Additional Information included at any time as a part of the
registration statement for any Fund prior to the effective date
and which is authorized by VKAC for use in connection with the
offering of shares.
In consideration of the mutual obligations contained herein,
1
<PAGE> 2
the sufficiency of which is hereby acknowledged by you, the
terms of the Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a broker-dealer registered with the
Securities and Exchange Commission (the "SEC") and a member in
good standing of the National Association of Securities Dealers,
Inc. (the "NASD") or, in the alternative, that you are a foreign
dealer or bank, not required to be registered as a broker-dealer
with the SEC and not required or eligible for membership in the
NASD. If you are such an NASD member, you agree that in making
sales of shares of the one or more classes of shares of each
Fund you will comply with all applicable rules of the NASD,
including without limitation rules pertaining to the opening,
approval, supervision and monitoring of customer accounts, the
NASD's Interpretation with Respect to Free-Riding and
Withholding and Sections 8, 24 and 36 of Article III of the
NASD's Rules of Fair Practice. If you are such an unregistered
foreign dealer or bank, you agree not to offer or sell, or to
agree to offer or sell, directly or indirectly, except through
VKAC, any shares to any party to whom such shares may not be
sold unless you are so registered and a member of the NASD, and
in making sales of such shares you agree to comply with the
NASD's Interpretation with Respect to Free-Riding and
Withholding and Sections 8, 24 and 36 of Article III of the
NASD's Rules of Fair Practice as though you were a member in
good standing of the NASD and to comply with Section 25 of such
Article III as it applies to a nonmember broker or dealer in a
foreign country. You and we agree to abide by all other Rules
and Regulations of the NASD, including Section 26 of its Rules
of Fair Practice, and all applicable state and Federal laws,
rules and regulations. Your acceptance also constitutes a
representation that you have been duly authorized by proper
corporate or partnership action to enter into this Agreement and
to perform your obligations hereunder. You will not accept any
orders from any broker, dealer or financial institution who is
purchasing from you with a view toward distribution unless you
have obtained such person's or entity's written consent to be
bound by the terms of this Agreement.
2. In all sales of shares of the Funds to the public you
shall act as dealer for your own account, and you shall have no
authority in any transaction to act as agent for the Fund or for
VKAC.
3. Each Fund has filed with the SEC and the securities
commissions of one or more states a Registration Statement (the
"Registration Statement") on the SEC Form applicable to the
respective Fund. The date on which the Registration Statement
is declared effective by the SEC is referred to herein as the
"Effective Date". Prior to the Effective Date of the
Registration Statement with respect to a particular Fund, you
expressly acknowledge and understand that with respect to such
Fund:
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<PAGE> 3
(a) Shares of such Fund may not be sold,
nor may offers to buy be accepted, (i) in any state prior to the
Effective Date of the Registration Statement with respect thereto
or (ii) in any state in which such offer or sale would be unlawful
prior to registration or qualification under the securities laws of such
state.
(b) The Fund's Preliminary Prospectus,
together with any sales material distributed for use in connection with the
offering of shares of such Fund, does not constitute an offer to
sell or the solicitation of an offer to buy shares of such Fund
and is subject to completion and modification by the Prospectus.
You agree that you will distribute to the public only (a) the
Preliminary Prospectus, the Prospectus and any amendment or
supplement thereto and (b) sales literature or other documents
expressly authorized for such distribution by VKAC.
(c) In the event that you transmit indications
of interest to VKAC for accumulation prior to the Effective Date, you will
be responsible for confirming such indications of interest with
your customers following the Effective Date. Indications of
interest with respect to shares of a class of a Fund's shares
transmitted to VKAC prior to the Effective Date will be
conditioned upon the occurrence of the Effective Date and the
registration or qualification of the respective class of shares
in the respective state.
(d) Indications of interest with respect to shares of a
class of a Fund's shares which are not canceled by you prior to
the latter of the Effective Date and the registration or
qualification of the respective class of the Fund's shares in
the respective state, and accepted by VKAC will be deemed by
VKAC to be orders for shares of such class of shares of the Fund.
(e) All indications of interest and orders
transmitted to VKAC are subject to the terms and conditions of the Prospectus
and this Agreement.
4. After the Effective Date, you will not offer shares of a
class of the Fund's shares for sale in any state where they are
not qualified for sale under the "blue sky" laws and regulations
of such state or where you are not qualified to act as a dealer,
except for states in which they are exempt from qualification.
5. In the event that you offer shares of the Fund for sale
outside the United States, you agree to comply with the
applicable laws, rules and regulations of the foreign government
having jurisdiction over such sales, including any regulations
of the United States military authorities applicable to
solicitations to military personnel.
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6. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been
qualified for sale under the respective securities or "blue sky"
laws of such jurisdictions. VKAC understands and agrees that
qualification of any shares of a Fund for sale in such
jurisdictions shall be solely VKAC's responsibility and that you
assume no responsibility or obligation with respect to such
eligibility. You understand and agree that your compliance with
the requirements of the securities or "blue sky" laws in each
jurisdiction with respect to your right to sell the shares in
such jurisdiction shall be solely your responsibility.
7. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained
in the Fund's current Preliminary Prospectus or Prospectus, as
the case may be. In purchasing shares from us you shall rely
solely on the representations contained in such Prospectus.
VKAC will furnish additional copies of a Fund's current
Prospectus and sales literature issued by VKAC in reasonable
quantities upon request.
8. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified
in the then-current Fund Prospectus. The minimum dollar
purchase of any shares of each Fund by any person shall be the
applicable minimum dollar amount described in the then-current
Fund Prospectus for that class of shares, and no order for less
than such amount will be accepted hereunder. The procedures
relating to the handling of orders shall be subject to
instructions that VKAC shall communicate from time to time to
you. All orders are subject to acceptance or rejection by VKAC
in its sole discretion.
9. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office
of VKAC's clearing agent, by check payable to the order of the
Fund which reserves VKAC's right to delay issuance or transfer
of shares until such check has cleared. If such payment is not
received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the sale or, at its option, to sell
the shares ordered back to the Fund, and in either case, VKAC
may hold you responsible for any loss suffered by the Fund. You
agree that in transmitting investors' funds, you will comply
with Rule 15c2-4 under the Securities Exchange Act of 1934, as
amended.
10. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such
withholding; e.g., by a change in the net asset value from that
used in determining the public offering price to your customers.
11. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
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12. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8
under the Securities Exchange Act of 1934, as amended, as it
relates to the distribution of Preliminary Prospectuses (and not
Statements of Additional Information) and Prospectuses (and not
Statements of Additional Information) for each Fund and agree
that you will comply therewith. You agree that if an investor
or potential investor places a request with you to receive a
Statement of Additional Information, you will (i) provide such
person with a Statement of Additional Information without charge
and notify the Fund that you have done so, (ii) notify the Fund
of the request so that the Fund can fulfill the request or (iii)
tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on
the cover of the current Prospectus or Preliminary Prospectus.
You also agree to keep an accurate record of your distribution
(including dates, number of copies and persons to whom sent) of
copies of any Preliminary Prospectus (and any Statement of
Additional Information) and/or Prospectus (and any Statement of
Additional Information) for each Fund (or any amendment or
supplement to either) and, promptly upon request by VKAC, to
bring all subsequent changes to such Preliminary Prospectus or
Prospectus to the attention of anyone to whom such material
shall have been distributed. You further agree to furnish to
persons who receive a confirmation of sale of shares of any Fund
a copy of the Prospectus (and not the Statement of Additional
Information) for such Fund filed pursuant to Rule 497 under the
Securities Act of 1933, as amended.
13. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares of Funds sold to you shall be issued
only if specifically requested.
14. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this
Agreement.
15. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund
Department. Any notice to you shall be duly given if sent to
you at the address specified by you below or such other address
as you may designate to VKAC in writing.
16. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture
or partnership between VKAC and you.
17. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the
choice-of-law principles thereof.
18. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend
or withdraw the offering of any shares of a Fund entirely. VKAC
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<PAGE> 6
reserves the right, without notice, to amend, modify or cancel
the Agreement. The Agreement may not be assigned by either
party without prior written consent of the other party.
19. This Agreement may be terminated at any time by either
party.
TERMS AND CONDITIONS APPLICABLE ONLY TO OPEN-END FUNDS
20. Each of the Open-End Fund's is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as
described in such Fund's then-current Prospectus pursuant to
which the Open-End Fund may sell multiple classes of its shares
with varying combinations of front-end service charges (each a
"FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion
rights, voting rights, expenses allocations and investment
requirements. As used herein, classes of shares of a Fund
subject to a FESC will be referred to as FESC Shares, and
classes of shares of a Fund subject to a CDSC will be referred
to as CDSC Shares.
21.(a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares
shall be the net asset value per share plus a FESC, expressed as
a percentage of the applicable public offering price, as
determined and effective as of the time specified in the
then-current Prospectus of such Open-End Fund. The dealer
discount applicable to any sale of shares of a class of FESC
Shares of an Open-End Fund shall be a percentage of the
applicable public offering price for such shares as provided for
in the then-current Prospectus of such Open-End Fund or, if not
so provided, as provided to you from time to time in writing by
VKAC.
(b) With respect to any shares of a class
of CDSC Shares of an Open-End Fund, the public offering price for such shares
shall be the net asset value per share as determined and
effective as of the time specified in the then-current
Prospectus of such Open-End Fund. The dealer sales compensation
payable by VKAC applicable to any sale of shares of a class of
CDSC Shares of an Open-End Fund shall be the percentage of the
applicable public offering price for such shares as provided for
in the then-current Prospectus of such Open-End Fund or, if not
so provided, as provided to you from time to time in writing by
VKAC.
22. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund
pursuant to Rule 12b-1 ("Rule 12b-1 Plan") under the Investment
Company Act of 1940, as amended, or the Service Plan with
respect to a class of shares, it is understood that you must be
approved by the Board of Directors of such Open-End Fund and
execute a Distribution Assistance Agreement.
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<PAGE> 7
23. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt
policies and procedures in the form of the policies and
procedures attached hereto as Exhibit A with respect to when you
may appropriately sell the various classes of shares of the
Open-End Funds to investors and that you will sell such shares
only in accordance therewith.
24.(a) You agree to purchase shares of an Open-End Fund only
from VKAC or from your customers. If you purchase shares of an
Open-End Fund from VKAC, you agree that all such purchases shall
be made only: (i) to cover orders already received by you from
your customers or (ii) for your own bona fide investment. If
you purchase shares of an Open-End Fund from your customers, you
agree to pay such customers not less than the applicable
repurchase price for such shares as established by the
then-current Prospectus for such Open-End Fund. VKAC in turn
agrees that it will not purchase any shares from an Open-End
Fund except for the purpose of covering purchase orders that it
has already received.
(b) With respect to shares of a class of CDSC Shares
of an Open-End Fund purchased from your customers, you additionally
agree to resell such shares only to VKAC as agent for the Fund
at the repurchase price for such shares as established by the
then-current Prospectus of such Open-End Fund. You acknowledge
and understand that shares of a class of CDSC Shares of an
Open-End Fund may be subject to a CDSC payable to VKAC as set
forth in the Prospectus for such Open-End Fund in effect at the
time of the original purchase of such shares from the Open-End
Fund and that the repurchase price for such shares that will be
paid by VKAC will reflect the imposition of any applicable CDSC.
25.(a) You shall sell shares of a class of shares of an
Open-End Fund only: (i) to customers at the applicable public
offering price or (ii) to VKAC as agent for the Open-End Fund at
the repurchase price in the then-current Prospectus of such
Open-End Fund. In such a sale to VKAC, you may act either as
principal for your own account or as agent for your customer.
If you act as principal for your own account in purchasing
shares of a class of shares of an Open-End Fund for resale to
VKAC, you agree to pay your customer not less than the price
that you receive from VKAC. If you act as agent for your
customer in selling shares of a class of shares of an Open-End
Fund to VKAC, you agree not to charge your customer more than a
fair commission for handling the transaction. You acknowledge
and understand that CDSC Shares of an Open-End Fund may be
subject to a CDSC payable to VKAC as set forth in the Prospectus
of such Open-End Fund in effect at the time of the original
purchase of such CDSC Shares and that the repurchase price that
will be paid by VKAC for such CDSC Shares will reflect the
imposition of any such CDSC.
26. If any shares of a class of FESC Shares of an Open-End
Fund sold to or by you under the terms of this Agreement are
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<PAGE> 8
repurchased by the Fund or by VKAC as agent for the Fund or are
tendered for redemption within seven business days after the
date of VKAC's confirmation of the original purchase, it is
agreed that you shall forfeit your right to any dealer discount
received by you on such FESC Shares. VKAC will notify you of
any such repurchase or redemption within ten business days from
the date on which the repurchase or redemption order in proper
form is delivered to VKAC or to the Fund, and you shall
forthwith refund to VKAC the full dealer discount allowed to you
on such sale. VKAC agrees, in the event of any such repurchase
or redemption, to refund to the Fund its share of any discount
allowed to VKAC and, upon receipt from you of the refund of the
discount allowed to you, to pay such refund forthwith to the
Fund.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
27. No Closed-End Fund will issue fractional shares.
28. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers and dealers participating in the
Initial Offering Period or among brokers, dealers and banks in
the Continuous Offering Period, as the case may be, on other
than a pro rata basis, which may result in certain brokers,
dealers and banks not being allocated the full amount of shares
of such fund sold by them while certain other brokers, dealers
and banks may receive their full allocation.
29. You agree that with respect to orders for shares of a
Closed-End Fund, you will transmit such orders received during
the Initial Offering Period to VKAC within the time period as
specified in such Closed-End Fund's Prospectus (or in the time
period as extended by VKAC in writing). You also agree to
transmit any customer order received during the Continuous
Offering Period to VKAC prior to the time that the public
offering price for such Closed-End Fund is next determined after
your receipt of such order as set forth in the Closed-End Fund's
Prospectus. There is no assurance that each Closed-End Fund
will engage in a continuous offering of shares.
30. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of
VKAC's own assets as set forth in the then-current Prospectus of
such Closed-End Fund (exclusive of additional compensation that
may be payable pursuant to sales programs, if any, that may be
established from time to time as described in the Prospectus for
such Closed-End Fund, which will be payable only as and to the
extent the requirements of such programs are satisfied). In no
event will any Closed-End Fund reimburse VKAC for any such sales
concessions or other additional compensation or pay any such
concession or other additional compensation or allowance
directly to you. VKAC will specify for each Closed-End Fund a
period after the date that the shares of such Closed-End Fund
are listed on the New York Stock Exchange, the American Stock
Exchange or another national securities market system (which
period will end no later that the first dividend payment date
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<PAGE> 9
with respect to such Closed-End Fund) during which sales
concessions and other additional compensation are subject to
forfeiture as provided in the following sentence (the
"Forfeiture Period"). During the Forfeiture Period for any
Closed-End Fund, physical delivery of certificates representing
shares will be required to transfer ownership of such shares.
In the event that any shares of a Closed-End Fund sold through
an order received from you in the Initial Offering Period or the
Continuous Offering Period are resold in the open market or
otherwise during the Forfeiture Period, VKAC reserves the right
to require you to forfeit any sales concessions and other
additional compensation with respect to such shares. In the
event of a forfeiture, VKAC may withhold any forfeited sales
concessions and other additional compensation that has not yet
been paid or from other amounts yet to be paid to you (whether
or not payable with respect to such shares) and you agree to
repay to VKAC, promptly upon demand, any forfeited sales
concessions and other compensation that has been paid.
Determinations of the amounts to be paid to you or by you to
VKAC shall be made by VKAC and shall be conclusive.
31. During the Initial Offering Period and any Continuous
Offering Period for any Closed-End Fund, you agree to supply
VKAC, not less frequently than once a week by Friday, 5:00 p.m.
Eastern Time, during such Closed-End Fund's Initial Offering
Period, a list setting forth by state and in the aggregate all
indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during
such week (or lesser period of time), and a list setting forth
by name and location each registered representative making said
sales and indicating the amount of all sales per Closed-End Fund
to date.
32. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
33. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the
Closed-End Funds (other than through tender offers from time to
time, if any) or by VKAC and that no secondary market for such
shares is expected to develop until the shares have begun
trading on a national exchange or national market system. You
hereby covenant that, until notified by VKAC that the
distribution of such shares has been completed or that the
Forfeiture Period has ended, you (a) will not make a secondary
market in any shares of such a Closed-End Fund, (b) will not
purchase or hold shares of such Closed-End Fund in inventory for
the purpose of resale in the open market or to your customers
and (c) without VKAC's consent, will not repurchase shares of
such Closed-End Fund in the open market or from your customers
for any account in which you have a beneficial interest.
34. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen Merritt Prime
Rate Income Trust (the "Prime Rate Fund") may continue
indefinitely. The offer to sell shares of the Prime Rate Fund
is subject to further terms and conditions in addition to those
set forth above as follows:
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(a) You expressly acknowledge and understand that
shares of the Prime Rate Fund will not be repurchased by either the Prime
Rate Fund (other than through tender offers from time to time,
if any) or VKAC, and that no secondary market for the shares of
the Prime Rate Fund exists currently, or is expected to develop.
You also expressly acknowledge and agree that, in the event
your customer cancels their order for shares after confirmation,
such shares may not be repurchased, remarketed or otherwise
disposed of by or through VKAC.
(b) You acknowledge and understand that, while the
Board of Trustees of the Prime Rate Fund intends to consider tendering
for all or a portion of the Prime Rate Fund's shares on a
quarterly basis, there is no assurance the Prime Rate Fund will
tender for shares at any time or, following such a tender offer,
that shares so tendered will be repurchased by the Prime Rate
Fund. You acknowledge and understand that an early withdrawal
charge payable to VKAC will be imposed on most shares accepted
for tender by the Prime Rate Fund which have been held for less
than five years, as set forth in the Prime Rate Fund's
Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY THE
PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME
RATE FUND'S CURRENT PROSPECTUS IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Dealer Agreement,
keeping a copy for your files and returning the original to us.
Accepted and Agreed to:
(PRINT OR TYPE)
Dated: By: Keith K. Furlong
Its: Senior Vice President
Broker-Dealer Name
Broker-Dealer Taxpayer ID Number
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Address
City, State, Zip
By:
Signature
Name
Title
Phone
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<PAGE> 12
EXHIBIT A
Policies and Procedures
with Respect to Sales under the
Alternative Distribution Plan
As certain Van Kampen American Capital open-end
investment companies (the "Funds") offer multiple classes of
shares subject to either front-end sales charges ("FESC Shares")
or contingent deferred sales charges ("CDSC Shares"), it is
important for an investor not only to choose the Fund that best
suits his or her investment objectives, but also to choose the
alternative distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the
selling firm) are instituting the following policy:
1. Any purchase order for $1 million or more must be
for Class A Shares.
2. Any purchase order for $100,000 but
less than $1 million is subject to approval by [appropriate selling firm
supervisor], who must approve the purchase order ticket for the appropriate
class of shares in light of the relevant facts and
circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold his
shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of
Intent or a Quantity Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would
qualify for a significant purchase price discount from the
maximum sales charge on shares of a class of FESC Shares that
has such purchase price discounts may determine that payment of
such a reduced front-end sales charge is superior to electing to
purchase shares of a class of CDSC Shares with no front-end
service charge but subject to a higher aggregate distribution
and service fee. On the other hand, an investor whose order
would not qualify for such purchase price discounts and intends
to remain invested until after the expiration of the applicable
CDSC may wish to defer the sales charge and have all his funds
<PAGE> 13
invested in Class B Shares initially. In addition, if such an
investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B
Shares the investor may, depending on the amount of his
purchase, wish to acquire Class C Shares. However, investors
who intend to hold their shares for a significantly long time
may not wish to continue to bear the ongoing distribution and
service expenses of shares of Class C Shares, irrespective of
the fact that a contingent deferred sales charge would
eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of
shares from funds subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan advise the
investor of the available alternative distribution methods
offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling
firm supervisor] to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen
American Capital Distributors, Inc.'s alternative distribution
plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
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5/95
VAN KAMPEN AMERICAN CAPITAL
DISTRIBUTORS, INC.
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EXHIBIT 6(c)
BROKER FULLY DISCLOSED CLEARING AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
Ladies and Gentlemen:
As dealer for our own account, we offer to make available to
you shares of any of the
Van Kampen American Capital open-end investment companies (the
"Open-End Funds" or, individually, an "Open-End Fund") and Van Kampen
American Capital closed-end investment companies (the "Closed-End Funds"
or, individually, a "Closed-End Fund") distributed by Van Kampen
American Capital Distributors, Inc. ("VKAC") pursuant to the
terms and conditions contained herein. Collectively, the
Open-End Funds and Closed-End Funds sometimes are referred to
herein as the "Funds" or, individually, as a "Fund". You are a
broker-dealer that desires to make available shares of such
Funds to your customers on a fully disclosed basis wherein VKAC
would confirm transactions of your customers in a Fund directly
to them.
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for
each Fund with respect to its offering of one or more classes of
shares as described in each Fund's Prospectus. Pursuant to this
Agreement, VKAC offers to make available to you shares of each
Open-End Fund and each Closed-End Fund, prior to the Effective
Date (as defined herein) of each Fund's Registration Statement
(the "Initial Offering Period") and after the Effective Date of
each Fund's Registration Statement (as defined herein) (the
"Continuous Offering Period") (if any) as described in each
respective Fund's Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of
Additional Information included in the registration statement
for the fund on the effective date and as from time to time
thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any
preliminary prospectus and any preliminary Statement of
Additional Information included at any time as a part of the
registration statement for any Fund prior to the effective date
and that is authorized by VKAC for use in connection with the
offering of shares.
<PAGE> 2
In consideration of the mutual obligations contained herein,
the sufficiency of which is hereby acknowledged by you, the
terms of the Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a securities broker-dealer
registered with the Securities and Exchange Commission (the
"SEC") and a member in good standing of the National Association
of Securities Dealers, Inc. (the "NASD"). You agree to abide by
the laws, rules and regulations of the SEC and NASD, including
without limitation rules pertaining to the opening, approval,
supervision and monitoring of customer accounts, the NASD's
Interpretation with Respect to Free-Riding and Withholding and
Sections 8, 24 and 36 of Article III of the NASD's Rules of Fair
Practice. You and we agree to abide by all other Rules and
Regulations of the NASD, including Section 26 of its Rules of
Fair Practice. Your acceptance also constitutes a
representation that you have been duly authorized by proper
corporate or partnership action to enter into this Agreement and
to perform your obligations hereunder. You will not accept any
orders from any broker, dealer or financial institution who is
purchasing from you with a view toward distribution unless you
have obtained such person's or entity's written consent to be
bound by the terms of this Agreement.
2. For the purposes of the Securities and Exchange
Commission's Financial Responsibility Rules and the Securities
Investor's Protection Act, your customers will be considered
customers of VKAC and not of your firm. VKAC has been granted
an exemption from the NASD rules of Fair Practice, Article III
Section 45 requirements to send customer statements and thus
will not due so. Customer statements showing account activity
and balances will be mailed to the customer by the Funds each
time a financial transaction occurs in their account and on a
monthly basis. Nothing herein shall cause your firm's customers
to be interpreted as customers of VKAC for any other purpose, or
to negate the intent of any other section of this agreement,
including, but not limited to, the delineation of
responsibilities as set forth elsewhere in this agreement.
3. In transactions where you make available shares of the
Funds to the public, you shall have no authority to act as agent
for the Fund or for VKAC.
4. Each Fund has filed with the SEC and the securities
commissions of one or more states a Registration Statement (the
"Registration Statement") on the SEC form applicable to the
respective Fund. The date on which the Registration Statement
is declared effective by the SEC is referred to herein as the
"Effective Date". Prior to the Effective Date of the
Registration Statement with respect to a particular Fund, you
expressly acknowledge and understand that with respect to such
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<PAGE> 3
Fund:
(a) Shares of such Fund may not be sold, nor may
offers to buy be accepted, (i) prior to the Effective Date of the
Registration Statement or (ii) in any state in which such offer
or sale would be unlawful prior to registration or qualification
under the securities laws of such state.
(b) The Fund's Preliminary Prospectus, together
with any sales material distributed for use in connection with the
offering of shares of such Fund, does not constitute an offer to
sell or the solicitation of an offer to buy shares of such Fund
and is subject to completion and modification by the Prospectus.
(c) In the event that you transmit indications of
interest to VKAC for accumulation prior to the Effective Date, upon your
instruction VKAC will send confirmation of such indications of
interest directly to your customers in writing, together with
copies of the Preliminary Prospectus for the Fund, and send
copies of the confirmations to you. Indications of interest
with respect to shares of a class of a Fund's shares transmitted
to VKAC prior to the Effective Date are subject to acceptance or
rejection by VKAC in its sole discretion and are conditioned
upon the occurrence of (i) the Effective Date and (ii) the
registration or qualification of the respective class of shares
in the respective state.
(d) Indications of interest with respect to shares of a
class of a Fund's shares not cancelled by you prior to or on the
later of (i) the Effective Date and (ii) the registration or
qualification of the respective class of shares in the
respective state, and accepted by VKAC will be deemed by VKAC to
be orders for Shares.
(e) Upon your instruction, VKAC will send
confirmations of orders accepted by VKAC (including indications of interest
deemed orders) directly to your customers in writing, together
with copies of the Prospectus for the Fund, and send copies of
the confirmations to you.
(f) Upon receipt of duplicate confirmations you will
examine the same and promptly notify VKAC of any errors or discrepancies
that you discover and will promptly bring to VKAC's attention
any errors in such confirmations claimed by your customers. All
confirmations to your customers will indicate that orders were
placed on a fully disclosed basis.
(g) All indications of interest and orders
transmitted to VKAC are subject to the terms and conditions of the Fund's
Prospectus and this Agreement and are subject to acceptance or
rejection by VKAC in its sole discretion.
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5. After the Effective Date, you will not make shares of a
class of the Fund's shares available in any state where they are
not qualified for sale under the "blue sky" laws and regulations
of such state, except for states in which they are exempt from
qualification.
6. In the event that you make shares of the Fund available
outside the United States, you agree to comply with the
applicable laws, rules and regulations of the foreign government
having jurisdiction over such sales, including any regulations
of the United States military authorities applicable to
solicitations to military personnel.
7. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been
qualified for sale under the respective securities or "blue sky"
laws of such jurisdictions. VKAC understands and agrees that
qualification of any shares of a Fund for sale in such
jurisdictions shall be solely VKAC's responsibility and that you
assume no responsibility or obligation with respect to such
eligibility. You understand and agree that your compliance with
the requirements of the securities or "blue sky" laws in each
jurisdiction with respect to your right to make the shares
available in such jurisdiction shall be solely your
responsibility.
8. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained
in the Fund's current Preliminary Prospectus or Prospectus, as
the case may be. In purchasing shares from us you shall rely
solely on the representations contained in such Prospectus.
VKAC will furnish additional copies of a Fund's current
Prospectus and sales literature issued by VKAC in reasonable
quantities upon request.
9. You agree that you will distribute to the public only (a)
the Preliminary Prospectus, the Prospectus and any amendment or
supplement thereto and (b) sales literature or other documents
expressly authorized for such distribution by VKAC.
10. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified
in the then-current Fund Prospectus. The minimum dollar
purchase of any shares of each Fund by any person shall be the
applicable minimum dollar amount described in the then-current
Fund Prospectus for that class of shares, and no order for less
than such amount will be accepted hereunder. The procedures
relating to the handling of orders shall be subject to
instructions that VKAC shall communicate from time to time to
you. All orders are subject to acceptance or rejection by VKAC
in its sole discretion. Upon acceptance of an order, we shall
confirm directly to the customer in writing upon your
instruction and send a copy of the confirmation to you. In
addition, we will send a Fund Prospectus with the confirmation.
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You agree that upon receipt of duplicate confirmations you will
examine the same and promptly notify VKAC of any errors or
discrepancies that you discover and shall promptly bring to
VKAC's attention any errors in such confirmations claimed by
your customers. All confirmations to your customers will
indicate that orders were placed on a fully disclosed basis.
11. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office
of VKAC's clearing agent, by check payable to the order of the
Fund which reserves VKAC's right to delay issuance of transfer
of shares until such check has cleared. If such payment is not
received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the trade at our option or as
required by the provisions of Regulation T, and in either case,
VKAC may hold you responsible for any loss suffered by the Fund.
You agree that in transmitting investors' funds, you will
comply with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended.
12. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such
withholding; e.g., by a change in the net asset value from that
used in determining the public offering price to your customers.
13. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
14. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8
under the Securities Exchange Act of 1934, as amended, as it
relates to the distribution of Preliminary Prospectuses (and not
Statements of Additional Information) and Prospectuses (and not
Statements of Additional Information) for each Fund and agree
that you will comply therewith. You agree that if an investor
or potential investor places a request with you to receive a
Statement of Additional Information, you will (i) provide such
person with a Statement of Additional Information without charge
and notify the Fund that you have done so, (ii) notify the Fund
of the request so that the Fund can fulfill the request or (iii)
tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on
the cover of the current Prospectus or Preliminary Prospectus.
You also agree to keep an accurate record of your distribution
(including dates, number of copies and persons to whom sent) of
copies of any Preliminary Prospectus (and any Statement of
Additional Information) and/or Prospectus (and any Statement of
Additional Information) for each Fund (or any amendment or
supplement to either) and, promptly upon request by VKAC, to
bring all subsequent changes to such Preliminary Prospectus or
Prospectus to the attention of anyone to whom such material
shall have been distributed. You further agree to furnish to
persons who receive a confirmation of sale of shares of any Fund
a copy of the Prospectus for such Fund filed pursuant to Rule
497 under the Securities Act of 1933, as amended. Upon your
request, VKAC will furnish to such persons a copy of the
Prospectus for such Fund filed pursuant to Rule 497 Under the
Securities Act of 1993, as amended.
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15. The names of your customers shall remain your sole
property and shall not be used by VKAC for any purpose except
for servicing and informational mailings in the normal course of
business to Fund shareholders.
16. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares sold will be issued to your customers
only if specifically requested.
17. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this
Agreement.
18. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund
Department. Any notice to you shall be duly given if sent to
you at the address specified by you below or such other address
as you may designate to VKAC in writing.
19. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture
or partnership between VKAC and you.
20. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the
choice-of-law principles thereof.
21. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend
or withdraw the offering of any shares of a Fund entirely. VKAC
reserves the right, without notice, to amend, modify or cancel
the Agreement. The Agreement may not be assigned by either
party without prior written consent of the other party.
22. This Agreement may be terminated at any time by either
party.
TERMS AND CONDITIONS APPLICABLE TO OPEN-END FUNDS
23. Each of the Open-End Funds is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as
described in such Fund's then-current Prospectus pursuant to
which the Open-End Fund may sell multiple classes of its shares
with varying combinations of front-end service charges (each a
"FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion
rights, voting rights, expenses allocations and investment
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requirements. As used herein, classes of shares of a Fund
subject to a FESC will be referred to as FESC Shares, and
classes of shares of a Fund subject to a CDSC will be referred
to as CDSC Shares.
24.(a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares
shall be the net asset value per share plus a FESC, expressed as
a percentage of the applicable public offering price, as
determined and effective as of the time specified in the
then-current Prospectus of such Open-End Fund. On each order
for shares of a class of FESC Shares of an Open-End Fund
accepted by us, you will be entitled to receive the applicable
agency commission for such shares as provided for in the
then-current Prospectus of such Open-End Fund or, if not so
provided, as provided to you from time to time in writing by
VKAC.
(b) With respect to any shares of a class of CDSC
Shares of an Open-End Fund, the public offering price for such shares
shall be the net asset value per share as determined and
effective as of the time specified in the then-current
Prospectus of such Open-End Fund. You will remit payment of the
aggregate public offering price to VKAC for the CDSC Shares
sold, and on each order accepted by us, you will be entitled to
receive the applicable selling compensation for such shares as
provided for in the then-current Prospectus of such Open-End
Fund or, if not so provided, as provided to you from time to
time in writing by VKAC.
25. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund
pursuant to Rule 12b-1 ("Rule 12b-1 Plan") under the Investment
Company Act of 1940, as amended, or the Service Plan with
respect to a class of shares, it is understood that you must be
approved by the Board of Directors of such Open-End Fund and
execute a Distribution Assistance Agreement.
26. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt
policies and procedures in the form of the policies and
procedures attached hereto as Exhibit A with respect to when you
may appropriately make available the various classes of shares
of the Open-End Funds to investors and that you will make
available such shares only in accordance therewith.
27. You agree to make shares of an Open-End Fund available to
your customers only: (i) at the applicable public offering
price, (ii) from VKAC and (iii) to cover orders already received
by you from your customers. VKAC in turn agrees that it will
not purchase any shares from an Open-End Fund except for the
purpose of covering purchase orders that it has already received.
28.(a) If any shares of a class of FESC Shares of an Open-End
Fund sold to your customers under the terms of this Agreement
are repurchased by the Fund or by VKAC as agent for the Fund or
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are tendered for redemption within seven business days after the
date of VKAC's confirmation of the original purchase, it is
agreed that you shall forfeit your right to any agency
commission received by you on such FESC Shares. VKAC will
notify you of any such repurchase or redemption within ten
business days from the date on which the repurchase or
redemption order in proper form is delivered to VKAC or to the
Fund, and you shall forthwith refund to VKAC the full agency
commission allowed to you on such sale. VKAC agrees, in the
event of any such repurchase or redemption, to refund to the
Fund its share of any discount allowed to VKAC and, upon receipt
from you of the refund of the agency commission allowed to you,
to pay such refund forthwith to the Fund.
(b) If any shares of a class of CDSC Shares sold to
your customers under the terms of this Agreement are repurchased by
the Fund or by VKAC as agent for the Fund or are tendered for
redemption within seven business days after the date of VKAC's
confirmation of the original purchase, it is agreed that you
shall forfeit your right to any sales compensation received by
you on such CDSC Shares. We will notify you of any such
repurchase or redemption within ten business days from the date
on which the repurchase or redemption order in proper form is
delivered to VKAC or to the Fund, and you shall forthwith refund
to VKAC the full sales compensation paid to you.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
29. No Closed-End Fund will issue fractional shares.
30. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers, dealers and, if permitted by
applicable laws, banks participating in the Initial Offering
Period or among brokers, dealers and banks in the Continuous
Offering Period, as the case may be, on other than a pro rata
basis, which may result in certain brokers, dealers and banks
not being allocated the full amount of shares of such Fund sold
by them while certain other brokers, dealers and banks may
receive their full allocation.
31. You agree that with respect to orders for shares of a
Closed-End Fund, you will transmit such orders received during
the Initial Offering Period to VKAC within the time period as
specified in such Closed-End Fund's Prospectus (or in the time
period as extended by VKAC in writing). You also agree to
transmit any customer order received during the Continuous
Offering Period to VKAC prior to the time that the public
offering price for such Closed-End Fund is next determined after
your receipt of such order, as set forth in the Closed-End
Fund's Prospectus. There is no assurance that each Closed-End
Fund will engage in a continuous offering of shares.
32. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of
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VKAC's own assets as set forth in the then-current Prospectus of
such Closed-End Fund (exclusive of additional compensation that
may be payable pursuant to sales programs, if any, that may be
established from time to time as described in the Prospectus for
such Closed-End Fund, which will be payable only as and to the
extent the requirements of such programs are satisfied). In no
event will any Closed-End Fund reimburse VKAC for any such sales
concessions or other additional compensation or pay any such
concession or other additional compensation or allowance
directly to you. VKAC will specify for each Closed-End Fund a
period after the date that the shares of such Closed-End Fund
are listed on the New York Stock Exchange, the American Stock
Exchange or another national securities market system (which
period will end no later than the first dividend payment date
with respect to such Closed-End Fund) during which sales
concessions and other additional compensation are subject to
forfeiture as provided in the following sentence (the
"Forfeiture Period"). During the Forfeiture Period for any
Closed-End Fund, physical delivery of certificates representing
shares will be required to transfer ownership of such shares.
In the event that any shares of a Closed-End Fund sold through
an order received from you in the Initial Offering Period or the
Continuous Offering Period are resold in the open market or
otherwise during the Forfeiture Period, VKAC reserves the right
to require you to forfeit any sales concessions and other
additional compensation with respect to such shares. In the
event of a forfeiture, VKAC may withhold any forfeited sales
concessions and other additional compensation that has not yet
been paid or from other amounts yet to be paid to you (whether
or not payable with respect to such shares), and you agree to
repay to VKAC, promptly upon demand, any forfeited sales
concessions and other compensation that has been paid.
Determinations of the amounts to be paid to you or by you to
VKAC shall be made by VKAC and shall be conclusive.
33. During the Initial Offering Period and any Continuous
Offering Period for any Closed-End Fund, you agree to supply
VKAC, not less frequently than once a week by Friday, 5:00 p.m.
Eastern Time, during such Closed-End Fund's Initial Offering
Period, a list setting forth by state and in the aggregate all
indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during
such week (or lesser period of time) and a list setting forth by
name and location each registered representative making said
sales and indicating the amount of all sales per Closed-End Fund
to date.
34. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
35. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the
Closed-End Funds (other than through tender offers from time to
time, if any) or by VKAC and that no secondary market for such
shares is expected to develop until the shares have begun
trading on a national exchange or national market system. You
hereby covenant that, until notified by VKAC that the
distribution of such shares has been completed or that the
Forfeiture Period has ended, you (a) will not make a secondary
market in any shares of such a Closed-End Fund, (b) will not
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<PAGE> 10
purchase or hold shares of such Closed-End Fund in inventory for
the purpose of resale in the open market or to your customers
and, (c) without VKAC's consent, will not repurchase shares of
such Closed-End Fund in the open market or from your customers
for any account in which you have a beneficial interest.
36. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen Merritt Prime
Rate Income Trust (the "Prime Rate Fund") may continue
indefinitely. The offer to make available to you shares of the
Prime Rate Fund is subject to further terms and conditions in
addition to those set out above, as follows:
(a) You expressly acknowledge and understand that shares of
the Prime Rate Fund will not be repurchased by either the Prime
Rate Fund (other than through tender offers from time to time,
if any) or VKAC and that no secondary market for the shares of
the Prime Rate Fund exists currently or is expected to develop.
You also expressly acknowledge and agree that, in the event your
customer cancels their order for shares after confirmation, such
shares may not be repurchased, remarketed or otherwise disposed
of by or through VKAC.
(b) You acknowledge and understand that, while the Board of
Trustees of the Prime Rate Fund intends to consider tendering
for all or a portion of the Prime Rate Fund's shares on a
quarterly basis, there is no assurance the Prime Rate Fund will
tender for shares at any time or, following such a tender offer,
that shares so tendered will be repurchased by the Prime Rate
Fund. You acknowledge and understand that an early withdrawal
charge payable to VKAC will be imposed on most shares accepted
for tender by the Prime Rate Fund that have been held for less
than five years, as set forth in the Prime Rate Fund's
Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY THE
PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME
RATE FUND'S CURRENT PROSPECTUS, IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Broker Fully
Disclosed Clearing Agreement, keeping a copy for your files and
returning the original to us.
Accepted and Agreed to: (PRINT OR TYPE)
Dated: By: Keith K. Furlong
Its: Senior Vice President
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Broker-Dealer Name
Broker-Dealer Taxpayer ID Number
Address
City, State, Zip
By:
Signature
Name
Title
Phone
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<PAGE> 12
EXHIBIT A
Policies and Procedures
with Respect to Sales under the
Alternative Distribution Plan
As certain Van Kampen American Capital open-end investment
companies (the "Funds") offer multiple classes of shares subject to either
front-end sales charges ("FESC Shares") or contingent deferred
sales charges ("CDSC Shares"), it is important for an investor
not only to choose the Fund that best suits his or her
investment objectives, but also to choose the alternative
distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the
selling firm) are instituting the following policy:
1. Any purchase order for $1 million or more must be for Class
A Shares.
2. Any purchase order for $100,000 but less than $1 million
is subject to approval by [appropriate selling firm supervisor],
who must approve the purchase order ticket for the appropriate
class of shares in light of the relevant facts and
circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold his
shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of
Intent or a Quantity Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would
qualify for a significant purchase price discount from the
maximum sales charge on shares of a class of FESC Shares that
has such purchase price discounts may determine that payment of
such a reduced front-end sales charge is superior to electing to
purchase shares of a class of CDSC Shares with no front-end
service charge but subject to a higher aggregate distribution
and service fee. On the other hand, an investor whose order
would not qualify for such purchase price discounts and intends
to remain invested until after the expiration of the applicable
CDSC may wish to defer the sales charge and have all his funds
invested in Class B Shares initially. In addition, if such an
investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B
Shares the investor may, depending on the amount of his
<PAGE> 13
purchase, wish to acquire Class C Shares. However, investors
who intend to hold their shares for a significantly long time
may not wish to continue to bear the ongoing distribution and
service expenses of shares of Class C Shares, irrespective of
the fact that a contingent deferred sales charge would
eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of
shares from funds subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan advise the
investor of the available alternative distribution methods
offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling
firm supervisor] to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen
American Capital Distributors, Inc.'s alternative distribution
plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
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5
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5/94
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
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EXHIBIT 6(d)
BANK FULLY DISCLOSED CLEARING AGREEMENT
WITH VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
REGARDING VAN KAMPEN AMERICAN CAPITAL
OPEN-END AND CLOSED-END INVESTMENT COMPANIES
Ladies and Gentlemen:
As dealer for our own account, we offer to make available to
you shares of any of the
Van Kampen American Capital open-end investment companies (the "Open-End
Funds" or, individually, an "Open-End Fund") and Van Kampen
American Capital closed-end investment companies (the "Closed-End Funds"
or, individually, a "Closed-End Fund") distributed by Van Kampen
American Capital Distributors, Inc. ("VKAC") pursuant to the
terms and conditions contained herein. Collectively, the
Open-End Funds and Closed-End Funds sometimes are referred to
herein as the "Funds" or, individually, as a "Fund". You are a
bank that desires to make available shares of such Funds to your
customers on a fully disclosed basis wherein VKAC would confirm
transactions of your customers in a Fund directly to them. You
agree not to make available shares of such Funds during any
fixed price offering of such shares.
VKAC acts as the principal underwriter (as such term is
defined in the Investment Company Act of 1940, as amended) for
each Fund with respect to its offering of one or more classes of
shares as described in each Fund's Prospectus. Pursuant to this
Agreement, VKAC offers to make available to you shares of each
Open-End Fund and each Closed-End Fund prior to the Effective
Date (as defined herein) of each Fund's Registration Statement
(as defined herein) (the "Initial Offering Period"), to the
extent permitted by applicable law, and after the Effective Date
of each Fund's Registration Statement (the "Continuous Offering
Period") (if any) as described in such Closed-End Fund's
Prospectus.
As used herein unless otherwise indicated, the term
"Prospectus" means the final prospectus and Statement of
Additional Information included in the Registration Statement
for the Fund on the Effective Date and as from time to time
thereafter amended or supplemented. As used herein unless
otherwise indicated, the term "Preliminary Prospectus" means any
preliminary prospectus and any Statement of Additional
Information included at any time as a part of the Registration
Statement for any Fund prior to the Effective Date and that is
authorized by VKAC for use in connection with the offering of
shares.
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In consideration of the mutual obligations contained herein,
the sufficiency of which is hereby acknowledged by you, the
terms of the Agreement are as follows:
GENERAL TERMS AND CONDITIONS
1. Your acceptance of this Agreement constitutes a
representation that you are a bank as defined in Section 3(a)(6)
of the Securities Exchange Act of 1934, as amended, and have
been duly authorized to enter into this Agreement and perform
your obligations hereunder. This Agreement as well as your
authority to make shares available to your customers will
automatically terminate if you shall cease to be a bank as
defined above. You agree not to offer or sell shares of any
Fund except through VKAC. You will not accept any orders from
any broker, dealer or financial institution who is purchasing
from you with a view toward distribution unless you have
obtained such person's or entity's written consent to be bound
by the terms of this Agreement.
2. For the purposes of the Securities and Exchange
Commission's Financial Responsibility Rules and the Securities
Investor's Protection Act, your customers will be considered
customers of VKAC and not of your firm. VKAC has been granted
an exemption from the NASD rules of Fair Practice, Article III
Section 45 requirements to send customer statements and thus
will not due so. Customer statements showing account activity
and balances will be mailed to the customer by the Funds each
time a financial transaction occurs in their account and on a
monthly basis. Nothing herein shall cause your firm's customers
to be interpreted as customers of VKAC for any other purpose, or
to negate the intent of any other section of this agreement,
including, but not limited to, the delineation of
responsibilities as set forth elsewhere in this agreement.
3. In transactions where you make available shares of the
Funds to the public, you shall have no authority to act as agent
for the Fund or for VKAC. The customers in question are for all
purposes your customers and not customers of VKAC. We will
clear transactions for each of your customers only upon your
authorization, it being understood in all cases that (a) you are
acting as the agent for the customer; (b) the transactions are
without recourse against you by the customer except to the
extent that your failure to transmit orders in a timely fashion
results in a loss to your customer; (c) as between you and the
customer, the customer will have full beneficial ownership of
the Fund shares; (d) each transaction is initiated solely upon
the order of the customer; and (e) each transaction is for the
account of the customer and not for your account.
4. Each Fund has filed with the Securities and Exchange
Commission (the "SEC") and the securities commissions of one or
more states a Registration Statement (the "Registration
Statement") on the SEC form applicable to the respective Fund.
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<PAGE> 3
The date on which the Registration Statement is declared
effective by the SEC is hereinafter referred to as the
"Effective Date". Prior to the Effective Date of the
Registration Statement with respect to a particular Fund, you
expressly acknowledge and understand that with respect to such
Fund:
(a) Shares of such Fund may not be sold, nor may offers to
buy be accepted, (i) prior to the Effective Date of the
Registration Statement or (ii) in any state in which such offer
or sale would be unlawful prior to registration or qualification
under the securities laws of such state.
(b) Except to the extent permitted by law, you will not
solicit or transmit to VKAC any indications of interest to
purchase shares during any fixed-price offering.
(c) The Fund's Preliminary Prospectus, together with any
sales material distributed for use in connection with the
offering of shares of such Fund, does not constitute an offer to
sell or the solicitation of an offer to buy shares of such Fund
and is subject to completion and modification by the Prospectus.
(d) In the event and to the extent permitted by applicable
law you transmit indications of interest to VKAC for
accumulation prior to the Effective Date, upon your instruction
VKAC will send confirmation of such indications of interest
directly to your customers in writing, together with copies of
the Preliminary Prospectus for the Fund, and send copies of the
confirmations to you. Indications of interest with respect to
shares of a class of a Fund's shares transmitted to VKAC prior
to the Effective Date are subject to acceptance or rejection by
VKAC in its sole discretion and are conditioned upon the
occurrence of (i) the Effective Date and (ii) the registration
or qualification of the respective class of shares in the
respective state.
(e) Indications of interest with respect to shares of a
class of a Fund's shares not canceled by you prior to or on the
later of (i) the Effective Date and (ii) the registration or
qualification of the respective class of shares in the
respective state, and accepted by VKAC will be deemed by VKAC to
be orders for Shares solely to the extent permitted by
applicable law.
(f) Upon your instruction, VKAC will send confirmations of
orders accepted by VKAC (including indications of interest
deemed orders) directly to your customers in writing, together
with copies of the Prospectus for the Fund, and send copies of
the confirmations to you.
(g) Upon receipt of duplicate confirmations you will examine
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the same and promptly notify VKAC of any errors or discrepancies
that you discover and will promptly bring to VKAC's attention
any errors in such confirmations claimed by your customers. All
confirmations to your customers will indicate that orders were
placed on a fully disclosed basis.
(h) All indications of interest and orders transmitted to
VKAC are subject to the terms and conditions of the Fund's
Prospectus and this Agreement and are subject to acceptance or
rejection by VKAC in its sole discretion.
5. After the Effective Date, you will not make shares of a
class of the Fund's shares available in any state where they are
not qualified for sale under the "blue sky" laws and regulations
of such state, except for states in which they are exempt from
qualification.
6. In the event that you make shares of the Fund available
outside the United States, you agree to comply with the
applicable laws, rules and regulations of the foreign government
having jurisdiction over such sales, including any regulations
of the United States military authorities applicable to
solicitations to military personnel.
7. Upon application to VKAC, VKAC will inform you as to the
jurisdictions in which VKAC believes shares of a Fund have been
qualified for sale under the respective securities or "blue sky"
laws of such jurisdictions. VKAC understands and agrees that
qualification of any shares of a Fund for sale in such
jurisdictions shall be solely VKAC's responsibility and that you
assume no responsibility or obligation with respect to such
eligibility. You understand and agree that your compliance with
the requirements of the securities or "blue sky" laws in each
jurisdiction with respect to your right to make the shares
available in such jurisdiction shall be solely your
responsibility.
8. No person is authorized to make any representations
concerning any class of shares of a Fund except those contained
in the Fund's current Preliminary Prospectus or Prospectus, as
the case may be. In purchasing shares from us you shall rely
solely on the representations contained in such Prospectus.
VKAC will furnish additional copies of a Fund's current
Prospectus and sales literature issued by VKAC in reasonable
quantities upon request.
9. You agree that you will distribute to the public only (i)
the Prospectus and any amendment or supplement thereto and (ii)
sales literature or other documents expressly authorized for
such distribution by VKAC.
10. Orders received from you will be accepted by VKAC only at
the public offering price applicable to each order as specified
in the then-current Fund Prospectus. The minimum dollar
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purchase of any shares of each Fund by any person shall be the
applicable minimum dollar amount described in the then-current
Fund Prospectus for that class of shares, and no order for less
than such amount will be accepted hereunder. The procedures
relating to the handling of orders shall be subject to
instructions that VKAC shall communicate from time to time to
you. All orders are subject to acceptance or rejection by VKAC
in its sole discretion. Upon acceptance of an order, we shall
confirm directly to the customer in writing upon your
instruction and send a copy of the confirmation to you. In
addition, we will send a Fund Prospectus with the confirmation.
You agree that upon receipt of duplicate confirmations you will
examine the same and promptly notify VKAC of any errors or
discrepancies that you discover and shall promptly bring to
VKAC's attention any errors in such confirmations claimed by
your customers. All confirmations to your customers will
indicate that orders were placed on a fully disclosed basis.
11. Payment for Fund shares shall be made on or before the
settlement date specified in the VKAC confirmation at the office
of VKAC's clearing agent, by check payable to the order of the
Fund which reserves VKAC's right to delay issuance or transfer
of shares until such check has cleared. If such payment is not
received by VKAC, VKAC reserves the right, without notice,
forthwith either to cancel the trade at our option or as
required by the provisions of Regulation T, and in either case,
VKAC may hold you responsible for any loss suffered by the Fund.
You agree that in transmitting investors' funds, you will
comply with Rule 15c2-4 under the Securities Exchange Act of
1934, as amended.
12. You shall not withhold placing orders with VKAC from your
customers so as to profit yourself as a result of such
withholding; e.g., by a change in the net asset value from that
used in determining the public offering price to your customers.
13. VKAC will not accept from you any conditioned orders for
shares, except at a definite, specified price.
14. You represent that you are familiar with Release No. 4968
under the Securities Act of 1933, as amended, and Rule 15c2-8
under the Securities Exchange Act of 1934, as amended, as it
relates to the distribution of Preliminary Prospectuses (and not
Statements of Additional Information) and Prospectuses (and not
Statements of Additional Information) for each Fund and agree
that you will comply therewith. You agree that if an investor
or potential investor places a request with you to receive a
Statement of Additional Information, you will (i) provide such
person with a Statement of Additional Information without charge
and notify the Fund that you have done so, (ii) notify the Fund
of the request so that the Fund can fulfill the request or (iii)
tell such person to request a Statement of Additional
Information by telephoning the Fund at the number set forth on
the cover of the current Prospectus or Preliminary Prospectus.
You also agree to keep an accurate record of your distribution
(including dates, number of copies and persons to whom sent) of
copies of any Preliminary Prospectus (and any Statement of
Additional Information) and/or Prospectus (and any Statement of
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<PAGE> 6
Additional Information) for each Fund (or any amendment or
supplement to either) and, promptly upon request by VKAC, to
bring all subsequent changes to such Preliminary Prospectus or
Prospectus to the attention of anyone to whom such material
shall have been distributed. You further agree to furnish to
persons who receive a confirmation of sale of shares of any Fund
a copy of the Prospectus for such Fund filed pursuant to Rule
497 under the Securities Act of 1933, as amended. Upon your
request, VKAC will furnish to such persons a copy of the
Prospectus for such Fund filed pursuant to Rule 497 Under the
Securities Act of 1993, as amended.
15. The names of your customers shall remain your sole
property and shall not be used by VKAC for any purpose except
for servicing and informational mailings in the normal course of
business to Fund shareholders.
16. Unless otherwise indicated in a Fund's Prospectus, stock
certificates for shares sold will be issued to your customers
only if specifically requested.
17. VKAC will have no liability to you, except for lack of
good faith and for obligations expressly assumed by VKAC in this
Agreement.
18. All communications to VKAC shall be sent to One Parkview
Plaza, Oakbrook Terrace, Illinois 60181, Attention: Mutual Fund
Department. Any notice to you shall be duly given if sent to
you at the address specified by you below or such other address
as you may designate to VKAC in writing.
19. Neither this Agreement nor the performance of the
services hereunder shall be considered to create a joint venture
or partnership between VKAC and you.
20. This Agreement shall be construed in accordance with the
laws of the State of Illinois without reference to the
choice-of-law principles thereof.
21. The Fund reserves the right in its discretion and VKAC
reserves the right in its discretion, without notice, to suspend
or withdraw the offering of any shares of a Fund entirely. VKAC
reserves the right, without notice, to amend, modify or cancel
the Agreement. The Agreement may not be assigned by either
party without prior written consent of the other party.
22. This Agreement may be terminated at any time by either
party.
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<PAGE> 7
TERMS AND CONDITIONS APPLICABLE TO OPEN-END FUNDS
23. Each of the Open-End Funds is subject to an alternative
distribution plan (the "Alternative Distribution Plan") as
described in such Fund's then-current Prospectus pursuant to
which the Open-End Fund may sell multiple classes of its shares
with varying combinations of front-end service charges (each a
"FESC"), distributions fees, service fees, contingent deferred
sales charges (each a "CDSC"), exchange features, conversion
rights, voting rights, expenses allocations and investment
requirements. As used herein, classes of shares of a Fund
subject to a FESC will be referred to as FESC Shares, and
classes of shares of a Fund subject to a CDSC will be referred
to as CDSC Shares.
24. (a) With respect to any shares of a class of FESC Shares
of an Open-End Fund, the public offering price for such shares
shall be the net asset value per share plus a FESC, expressed as
a percentage of the applicable public offering price, as
determined and effective as of the time specified in the
then-current Prospectus of such Open-End Fund. On each order
for shares of a class of FESC Shares of an Open-End Fund
accepted by us, you will be entitled to receive the applicable
agency commission for such shares as provided for in the
then-current Prospectus of such Open-End Fund or, if not so
provided, as provided to you from time to time in writing by
VKAC.
(b) With respect to any shares of a class of CDSC Shares of
an Open-End Fund, the public offering price for such shares
shall be the net asset value per share as determined and
effective as of the time specified in the then-current
Prospectus of such Open-End Fund. You will remit payment of the
aggregate public offering price to VKAC for the CDSC Shares
sold, and on each order accepted by us, you will be entitled to
receive the applicable selling compensation for such shares as
provided for in the then-current Prospectus of such Open-End
Fund or, if not so provided, as provided to you from time to
time in writing by VKAC.
25. Should you wish to participate in the Distribution Plan
with respect to a class of shares adopted by an Open-End Fund
pursuant to Rule 12b-1 ("Rule 12b-1 Plan") under the Investment
Company Act of 1940, as amended, or the Service Plan with
respect to a class of shares, it is understood that you must be
approved by the Board of Directors of such Open-End Fund and
execute an Administrative Service Agreement.
26. With respect to the Open-End Funds, your acceptance of
this Agreement constitutes a representation that you will adopt
policies and procedures in the form of the policies and
procedures attached hereto as Exhibit A with respect to when you
may appropriately make available the various classes of shares
of the Open-End Funds to investors and that you will make
available such shares only in accordance therewith.
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<PAGE> 8
27. You agree to make shares of an Open-End Fund available to
your customers only: (i) at the applicable public offering
price, (ii) from VKAC and (iii) to cover orders already received
by you from your customers. VKAC in turn agrees that it will
not purchase any shares from an Open-End Fund except for the
purpose of covering purchase orders that it has already received.
28. (a) If any shares of a class of FESC Shares of an
Open-End Fund sold to your customers under the terms of this
Agreement are repurchased by the Fund or by VKAC as agent for
the Fund or are tendered for redemption within seven business
days after the date of VKAC's confirmation of the original
purchase, it is agreed that you shall forfeit your right to any
agency commission received by you on such FESC Shares. VKAC
will notify you of any such repurchase or redemption within ten
business days from the date on which the repurchase or
redemption order in proper form is delivered to VKAC or to the
Fund, and you shall forthwith refund to VKAC the full agency
commission allowed to you on such sale. VKAC agrees, in the
event of any such repurchase or redemption, to refund to the
Fund its share of any discount allowed to VKAC and, upon receipt
from you of the refund of the agency commission allowed to you,
to pay such refund forthwith to the Fund.
(b) If any shares of a class of CDSC Shares sold to your
customers under the terms of this Agreement are repurchased by
the Fund or by VKAC as agent for the Fund or are tendered for
redemption within seven business days after the date of VKAC's
confirmation of the original purchase, it is agreed that you
shall forfeit your right to any sales compensation received by
you on such CDSC Shares. We will notify you of any such
repurchase or redemption within ten business days from the date
on which the repurchase or redemption order in proper form is
delivered to VKAC or to the Fund, and you shall forthwith refund
to VKAC the full sales compensation paid to you.
TERMS AND CONDITIONS APPLICABLE TO CLOSED END-FUNDS
29. No Closed-End Fund will issue fractional shares.
30. VKAC may, in its sole discretion, allocate shares of a
Closed-End Fund among brokers, dealers and, to the extent
permitted by applicable law, banks participating in the Initial
Offering Period or among brokers, dealers and banks
participating in the Continuous Offering Period, as the case may
be, on other than a pro rata basis, which may result in certain
brokers, dealers and banks not being allocated the full amount
of shares of such Fund sold by them while certain other brokers,
dealers and banks may receive their full allocation.
31. You agree that with respect to orders for shares of a
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<PAGE> 9
Closed-End Fund, you will transmit such orders received, to the
extent permitted by applicable law, during the Initial Offering
Period to VKAC within the time period as specified in such
Closed-End Fund's Prospectus (or in the time period as extended
by VKAC in writing). You also agree to transmit any customer
order received during the Continuous Offering Period to VKAC
prior to the time that the public offering price for such
Closed-End Fund is next determined after your receipt of such
order, as set forth in the Closed-End Fund's Prospectus. There
is no assurance that each Closed-End Fund will engage in a
continuous offering of shares.
32. On each order accepted by VKAC for shares of a Closed-End
Fund, you will be entitled to receive a concession paid out of
VKAC's own assets as set forth in the then-current Prospectus of
such Closed-End Fund (exclusive of additional compensation that
may be payable pursuant to sales programs, if any, that may be
established from time to time as described in the Prospectus for
such Closed-End Fund, which will be payable only as and to the
extent the requirements of such programs are satisfied). In no
event will any Closed-End Fund reimburse VKAC for any such sales
concessions or other additional compensation or pay any such
concession or other additional compensation or allowance
directly to you. VKAC will specify for each Closed-End Fund a
period after the date that the shares of such Closed-End Fund
are listed on the New York Stock Exchange, the American Stock
Exchange or another national securities market system (which
period will end no later than the first dividend payment date
with respect to such Closed-End Fund) during which sales
concessions and other additional compensation are subject to
forfeiture as provided in the following sentence (the
"Forfeiture Period"). During the Forfeiture Period for any
Closed-End Fund, physical delivery of certificates representing
shares will be required to transfer ownership of such shares.
In the event that any shares of a Closed-End Fund sold through
an order received from you, to the extent permitted by
applicable law, in the Initial Offering Period or the Continuous
Offering Period are resold in the open market or otherwise
during the Forfeiture Period, VKAC reserves the right to require
you to forfeit any sales concessions and other additional
compensation with respect to such shares. In the event of a
forfeiture, VKAC may withhold any forfeited sales concessions
and other additional compensation that has not yet been paid or
from other amounts yet to be paid to you (whether or not payable
with respect to such shares), and you agree to repay to VKAC,
promptly upon demand, any forfeited sales concessions and other
compensation that has been paid. Determinations of the amounts
to be paid to you or by you to VKAC shall be made by VKAC and
shall be conclusive.
33. During the Initial Offering Period or any Continuous
Offering Period for any Closed-End Fund, you agree to supply
VKAC, not less frequently than once a week by Friday, 5:00 p.m.
Eastern Time, during such Closed-End Fund's Initial Offering
Period, a list setting forth by state and in the aggregate all
indications of interest and, during any Continuous Offering
Period, all shares sold by you of such Closed-End Fund during
such week (or lesser period of time) and a list setting forth by
name and location each registered representative making said
sales and indicating the amount of all sales per Closed-End Fund
to date.
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<PAGE> 10
34. You expressly acknowledge and understand that there is no
Rule 12b-1 Plan for the Closed-End Funds.
35. You expressly acknowledge and understand that shares of
the Closed-End Funds will not be repurchased by either the
Closed-End Funds (other than through tender offers from time to
time, if any) or by VKAC and that no secondary market for such
shares is expected to develop until the shares have begun
trading on a national exchange or national market system. You
hereby covenant that, until notified by VKAC that the
distribution of such shares has been completed or that the
Forfeiture Period has ended, you (a) will not make a secondary
market in any shares of such a Closed-End Fund, (b) will not
purchase or hold shares of such Closed-End Fund in inventory for
the purpose of resale in the open market or to your customers
and, (c) without VKAC's consent, will not repurchase shares of
such Closed-End Fund in the open market or from your customers
for any account in which you have a beneficial interest.
36. Unlike the other Closed-End Funds, the Continuous
Offering period with respect to the Van Kampen Merritt Prime
Rate Income Trust (the "Prime Rate Fund") may continue
indefinitely. The offer to make available to you shares of the
Prime Rate Fund is subject to further terms and conditions in
addition to those set out above, as follows:
(a) You expressly acknowledge and understand that shares of
the Prime Rate Fund will not be repurchased by either the Prime
Rate Fund (other than through tender offers from time to time,
if any) or VKAC and that no secondary market for the shares of
the Prime Rate Fund exists currently or is expected to develop.
You also expressly acknowledge and agree that, in the event your
customer cancels their order for shares after confirmation, such
shares may not be repurchased, remarketed or otherwise disposed
of by or through VKAC.
(b) You acknowledge and understand that, while the
Board of Trustees of the Prime Rate Fund intends to consider tendering
for all or a portion of the Prime Rate Fund's shares on a
quarterly basis, there is no assurance the Prime Rate Fund will
tender for shares at any time or, following such a tender offer,
that shares so tendered will be repurchased by the Prime Rate
Fund. You acknowledge and understand that an early withdrawal
charge payable to VKAC will be imposed on most shares accepted
for tender by the Prime Rate Fund that have been held for less
than five years, as set forth in the Prime Rate Fund's
Prospectus. ANY REPRESENTATION AS TO A TENDER OFFER BY THE
PRIME RATE FUND, OTHER THAN THAT WHICH IS SET FORTH IN THE PRIME
RATE FUND'S CURRENT PROSPECTUS, IS EXPRESSLY PROHIBITED.
Please accept the foregoing by signing this Bank Fully
Disclosed Clearing Agreement, keeping a copy for your files and
returning the original to us.
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<PAGE> 11
Accepted and Agreed to: (PRINT OR TYPE)
Dated: By: Keith K. Furlong
Its: Senior Vice President
Bank Name
Bank Taxpayer ID Number
Address
<PAGE> 12
EXHIBIT A
Policies and Procedures
with Respect to Sales under the
Alternative Distribution Plan
As certain Van Kampen American Capital open-end
investment companies (the "Funds") offer multiple classes of
shares subject to either front-end sales charges ("FESC Shares")
or contingent deferred sales charges ("CDSC Shares"), it is
important for an investor not only to choose the Fund that best
suits his or her investment objectives, but also to choose the
alternative distribution method that best suits his or her particular
situation. To assist investors in these decisions, we (the
selling firm) are instituting the following policy:
1. Any purchase order for $1 million or more must be for class
A Shares
2. Any purchase order for $100,000 but less than $1 million
is subject to approval by [appropriate selling firm supervisor],
who must approve the purchase order ticket for the appropriate
class of shares in light of the relevant facts and
circumstances, including:
(a) the specific purchase order dollar amount;
(b) the length of time the investor expects to hold his
shares; and
(c) any other relevant circumstances, such as the
availability of purchase price discounts under a Letter of
Intent or a Quantity Discount.
There are instances when one financing method may be more
appropriate than the other. For example, investors who would
qualify for a significant purchase price discount from the
maximum sales charge on shares of a class of FESC Shares that
has such purchase price discounts may determine that payment of
such a reduced front-end sales charge is superior to electing to
purchase shares of a class of CDSC Shares with no front-end
service charge but subject to a higher aggregate distribution
and service fee. On the other hand, an investor whose order
would not qualify for such purchase price discounts and intends
to remain invested until after the expiration of the applicable
CDSC may wish to defer the sales charge and have all his funds
invested in Class B Shares initially. In addition, if such an
investor anticipates that he or she will redeem such shares
prior to the expiration of the CDSC period applicable to Class B
Shares the investor may, depending on the amount of his
<PAGE> 13
purchase, wish to acquire Class C Shares. However, investors
who intend to hold their shares for a significantly long time
may not wish to continue to bear the ongoing distribution and
service expenses of shares of Class C Shares, irrespective of
the fact that a contingent deferred sales charge would
eventually not apply to a redemption of such shares.
[The appropriate selling firm supervisor] must ensure that all
employees receiving investor inquiries about the purchase of
shares from funds subject to Van Kampen American Capital
Distributors, Inc.'s alternative distribution plan advise the
investor of the available alternative distribution methods
offered by such funds and the impact of choosing one method over
another. It may be appropriate for [the appropriate selling
firm supervisor] to discuss the purchase with the investor.
This policy is effective immediately with respect to any order
for the purchase of shares from a fund subject to Van Kampen
American Capital Distributors, Inc.'s alternative distribution
plan.
Questions relating to this policy should be directed to
[appropriate selling firm supervisor].
Van Kampen American Capital
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
2
3
4
5
6
7
5/95
City, State, Zip
Phone
Signature
<PAGE> 14
Name
Title
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
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<PAGE> 1
EXHIBIT 8(b)
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of the ___ day of _______, 1995 by and between each
of the VAN KAMPEN AMERICAN CAPITAL OPEN END FUNDS set forth on Schedule "A"
hereto, which are organized under the laws of the state and as the entities set
forth in Schedule "A" hereto, having their principal office and place of
business at Houston, Texas (collectively, the "Funds"), and ACCESS INVESTOR
SERVICES, INC., a Delaware corporation, having its principal office at Houston,
Texas, and its principal place of business at Kansas City, Missouri ("ACCESS").
R E C I T A L:
WHEREAS, each of the Funds desires to appoint ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent and ACCESS
desires to accept such appointments;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1. TERMS OF APPOINTMENT; DUTIES OF ACCESS.
1.01 Subject to the terms and conditions set forth in this
Agreement, each of the Funds hereby employs and appoints ACCESS as its transfer
agent, dividend disbursing agent and shareholder service agent.
1.02 ACCESS hereby accepts such employment and appointments and
agrees that on and after the effective date of this Agreement it will act as
the transfer agent, dividend disbursing agent and shareholder service agent for
each of the Funds on the terms and conditions set forth herein.
1.03 ACCESS agrees that its duties and obligations hereunder will
be performed in a competent, efficient and workmanlike manner with due
diligence in accordance with reasonable industry practice, and that the
necessary facilities, equipment and personnel for such performance will be
provided.
1.04 In order to assure compliance with section 1.03 and to
implement a cooperative effort to improve the quality of transfer agency and
shareholder services received by each of the Funds and its shareholders,
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<PAGE> 2
ACCESS agrees to provide and maintain quantitative performance objectives,
including maximum target turn-around times and maximum target error rates, for
the various services provided hereunder. ACCESS also agrees to provide a
reporting system designed to provide the Board of Trustees or Board of
Directors of each of the Funds (the "Board") on a quarterly basis with
quantitative data comparing actual performance for the period with the
performance objectives. The foregoing procedures are designed to provide a
basis for continuing monitoring by the Board of the quality of services
rendered hereunder.
ARTICLE 2. FEES AND EXPENSES.
2.01 For the services to be performed by ACCESS pursuant to this
Agreement, each of the Funds agrees to pay ACCESS the fees provided in the fee
schedules agreed upon from time to time by each of the Funds and ACCESS.
2.02 In addition to the amounts paid under section 2.01 above, each
of the Funds agrees to reimburse ACCESS promptly for such Fund's reasonable
out-of-pocket expenses or advances paid on its behalf by ACCESS in connection
with its performance under this Agreement for postage, freight, envelopes,
checks, drafts, continuous forms, reports and statements, telephone, telegraph,
costs of outside mailing firms, necessary outside record storage costs, media
for storage of records (e.g., microfilm, microfiche and computer tapes) and
printing costs incurred due to special requirements of such Fund. In addition,
any other special out-of-pocket expenses paid by ACCESS at the specific request
of any of the Funds will be promptly reimbursed by the requesting Fund.
Postage for mailings of dividends, proxies, Fund reports and other mailings to
all shareholder accounts shall be advanced to ACCESS by the concerned Fund
three business days prior to the mailing date of such materials.
ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF ACCESS.
ACCESS represents and warrants to each of the Funds that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of the State of Delaware.
3.02 It is duly qualified to carry on its business in the states of
Texas and Missouri.
3.03 It is empowered under applicable laws and by its charter and
bylaws to enter into and perform this Agreement.
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<PAGE> 3
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have during the term of this
Agreement access to the necessary facilities, equipment and personnel to
perform its duties and obligations hereunder.
3.06 It will maintain a system regarding "as of" transactions as
follows:
(a) Each "as of" transaction effected at a price other
than that in effect on the day of processing for which an estimate has
not been given to any of the affected Funds and which is necessitated
by ACCESS' error, or delay for which ACCESS is responsible or which
could have been avoided through the exercise of reasonable care, will
be identified, and the net effect of such transactions determined, on
a daily basis for each such Fund.
(b) The cumulative net effect of the transactions
included in paragraph (a) above will be determined each day throughout
each month. If, on any day during the month, the cumulative net
effect upon any Fund is negative and exceeds an amount equivalent to
1/2 of 1 cent per share of such Fund, ACCESS shall promptly make a
payment to such Fund (in cash or through use of a credit as described
in paragraph (c) below) in such amount as necessary to reduce the
negative cumulative net effect to less than 1/2 of 1 cent per share of
such Fund. If on the last business day of the month the cumulative
net effect (adjusted by the amount of any payments pursuant to the
preceding sentence) upon any Fund is negative, such Fund shall be
entitled to a reduction in the monthly transfer agency fee next
payable by an equivalent amount, except as provided in paragraph (c)
below. If on the last business day of the month the cumulative net
effect (similarly adjusted) upon any Fund is positive, ACCESS shall be
entitled to recover certain past payments and reductions in fees, and
to a credit against all future payments and fee reductions made under
this paragraph to such Fund, as described in paragraph (c) below.
(c) At the end of each month, any positive cumulative net
effect upon any Fund shall be deemed to be a credit to ACCESS which
shall first be applied to recover any payments and fee reductions made
by ACCESS to such Fund under paragraph (b) above during the calendar
year by increasing the amount of the monthly transfer agency fee next
payable in an amount equal to prior payments and fee
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<PAGE> 4
reductions made during such year, but not exceeding the sum of that
month's credit and credits arising in prior months during such year to
the extent such prior credits have not previously been utilized as
contemplated by this paragraph (c). Any portion of a credit to ACCESS
not so used shall remain as a credit to be used as payment against the
amount of any future negative cumulative net effects that would
otherwise require a payment or fee reduction to such Fund pursuant to
paragraph (b) above.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF THE FUNDS.
Each of the Funds hereby represents and warrants on behalf of
itself only and not any other Funds that are a party to this Agreement that:
4.01 It is duly organized and existing and in good standing under
the laws of the commonwealth or state set forth in Schedule "A" hereto.
4.02 It is empowered under applicable laws and regulations and by
its Declaration of Trust or Articles of Incorporation and by-laws to enter into
and perform this Agreement.
4.03 All requisite proceedings have been taken by its Board to
authorize it to enter into and perform this Agreement.
4.04 It is an open-end, diversified, management investment company
registered under the Investment Company Act of 1940, as amended.
4.05 A registration statement under the Securities Act of 1933, as
amended, is currently effective and will remain effective, and appropriate
state securities laws filings have been made and will continue to be made, with
respect to all of its shares being offered for sale.
ARTICLE 5. INDEMNIFICATION.
5.01 ACCESS shall not be responsible for and each of the Funds
shall indemnify and hold ACCESS harmless from and against any and all losses,
damages, costs, charges, reasonable counsel fees, payments, expenses and
liabilities arising out of or attributable to:
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<PAGE> 5
(a) All actions of ACCESS required to be taken by ACCESS
for the benefit of such Fund pursuant to this Agreement, provided
ACCESS has acted in good faith with due diligence and without
negligence or willful misconduct.
(b) The reasonable reliance by ACCESS on, or reasonable
use by ACCESS of, information, records and documents which have been
prepared or maintained by or on behalf of such Fund or have been
furnished to ACCESS by or on behalf of such Fund.
(c) The reasonable reliance by ACCESS on, or the carrying
out by ACCESS of, any instructions or requests of such Fund.
(d) The offer or sale of such Fund's shares in violation
of any requirement under the federal securities laws or regulations or
the securities laws or regulations of any state or in violation of any
stop order or other determination or ruling by any federal agency or
any state with respect to the offer or sale of such shares in such
state unless such violation results from any failure by ACCESS to
comply with written instructions of such Fund that no offers or sales
of such Fund's shares be made in general or to the residents of a
particular state.
(e) Such Fund's refusal or failure to comply with the
terms of this Agreement, or such Fund's lack of good faith, negligence
or willful misconduct or the breach of any representation or warranty
of such Fund hereunder.
5.02 ACCESS shall indemnify and hold each of the Funds harmless
from and against any and all losses, damages, costs, charges, reasonable
counsel fees, payments, expenses and liability arising out of or attributable
to ACCESS' refusal or failure to comply with the terms of this Agreement, or
ACCESS' lack of good faith, negligence or willful misconduct, or the breach of
any representation or warranty of ACCESS hereunder.
5.03 At any time ACCESS may apply to any authorized officer of any
of the Funds for instructions, and may consult with any of the Funds' legal
counsel, at the expense of such concerned Fund, with respect to any matter
arising in connection with the services to be performed by ACCESS under this
Agreement, and ACCESS shall not be liable and shall be indemnified by such
concerned Fund for any action taken or omitted by it in good faith in
reasonable reliance upon such instructions or upon the opinion of such counsel.
ACCESS shall be protected and
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<PAGE> 6
indemnified in acting upon any paper or document reasonably believed by ACCESS
to be genuine and to have been signed by the proper person or persons and shall
not be held to have notice of any change of authority of any person, until
receipt of written notice thereof from the concerned Fund. ACCESS shall also
be protected and indemnified in recognizing stock certificates which ACCESS
reasonably believes to bear the proper manual or facsimile signatures of the
officers of the concerned Fund, and the proper countersignature of any former
transfer agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event any party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage, or other causes reasonably beyond its control,
such party shall not be liable for damages to the other for any damages
resulting from such failure to perform or otherwise from such causes.
5.05 In no event and under no circumstances shall any party to this
Agreement be liable to another party for consequential damages under any
provision of this Agreement or for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which one party may be
required to indemnify another, the party seeking indemnification shall promptly
notify the other party of such assertion, and shall keep the other party
advised with respect to all developments concerning such claim. The party who
may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in
any case in which the other party may be required to indemnify it except with
the other party's prior written consent.
ARTICLE 6. COVENANTS OF EACH OF THE FUNDS AND ACCESS.
6.01 Each of the Funds shall promptly furnish to ACCESS the
following:
(a) Certified copies of the resolution of its Board
authorizing the appointment of ACCESS and the execution and delivery
of this Agreement.
(b) Certified copies of its Declaration of Trust or
Articles of Incorporation and by-laws and all amendments thereto.
6
<PAGE> 7
6.02 ACCESS hereby agrees to maintain facilities and procedures
reasonably acceptable to each of the Funds for safekeeping of share
certificates, check forms and facsimile signature imprinting devices, if any;
and for the preparation or use, and for keeping account of, such certificates,
forms and devices.
6.03 ACCESS shall keep records relating to the services to be
performed hereunder, in the form and manner as it may deem advisable; provided,
however, that all accounts, books and other records of each of the Funds
(hereinafter referred to as "Fund Records") prepared or maintained by ACCESS
hereunder shall be maintained and kept current in compliance with Section 31 of
the Investment Company Act of 1940 and the Rules thereunder (such Section and
Rules being hereinafter referred to as the "1940 Act Requirements"). To the
extent required by the 1940 Act Requirements, ACCESS agrees that all Fund
Records prepared or maintained by ACCESS hereunder are the property of the
concerned Fund and shall be preserved and made available in accordance with the
1940 Act Requirements, and shall be surrendered promptly to the concerned Fund
on its request. ACCESS agrees at such reasonable times as may be requested by
the Board and at least quarterly to provide (i) written confirmation to the
Board that all Fund Records are maintained and kept current in accordance with
the 1940 Act Requirements, and (ii) such other reports regarding its
performance hereunder as may be reasonably requested by the Board.
6.04 ACCESS and each of the Funds agree that all books, records,
information and data pertaining to the business of the other party which are
exchanged or received pursuant to the negotiation or the carrying out of this
Agreement shall remain confidential, and shall not be voluntarily disclosed to
any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of any
of the Fund Records, ACCESS will endeavor to notify each of the concerned Funds
and to secure instructions from an authorized officer of each of the concerned
Funds as to such inspection. ACCESS reserves the right, however, to exhibit
such Fund Records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit such Fund Records to such person.
ARTICLE 7. TERM AND TERMINATION OF AGREEMENT.
7.01 This Agreement shall remain in effect from the date hereof
through June 30, 1995; provided, however, that this Agreement may be terminated
by any party with respect to that party for good and reasonable
7
<PAGE> 8
cause at any time by giving written notice to the other party at least 120 days
prior to the date on which such termination is to be effective. Any unpaid
fees or reimbursable expenses payable to ACCESS shall be due on any such
termination date. ACCESS agrees to use its best efforts to cooperate with each
of the Funds and the successor transfer agent or agents in accomplishing an
orderly transition.
7.02 Subject to the prior approval of the Board, this Agreement
shall be renewed and extended for periods of not more than one year each,
unless and until this Agreement is terminated in accordance with section 7.01
above.
ARTICLE 8. MISCELLANEOUS.
8.01 Except as provided in section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by any party
without the written consent of ACCESS or the concerned Fund, as the case may
be; provided, however, that no consent shall be required for any merger of any
of the Funds with, or any sale of all or substantially all the assets of any of
the Funds to, another investment company.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 ACCESS may, without further consent on the part of any of the
Funds, subcontract with DST, Inc., a Missouri corporation, or any other
qualified servicer, for the performance of data processing activities;
provided, however, that ACCESS shall be as fully responsible to each of the
Funds for the acts and omissions of DST, Inc., or other qualified servicer as
it is for its own acts and omissions.
8.04 ACCESS may, without further consent on the part of any of the
Funds, provide services to its affiliated companies. Such services may be
provided at cost.
8.05 This Agreement constitutes the entire agreement between the
parties hereto with respect to the subject matter hereof, and supersedes any
prior agreement with respect thereto, whether oral or written, and this
Agreement may not be modified except by written instrument executed by the
affected parties.
8.06 The execution of this Agreement has been authorized by the
Funds' Trustees. This Plan is executed on
behalf of the Funds or the Trustees of the Funds as Trustees and not
individually and that the obligations of this Agreement are not binding upon
any of
8
<PAGE> 9
the Trustees, officers or shareholders of the Funds individually but are
binding only upon the assets and property of the Funds. A Certificate of Trust
in respect of each of the Funds is on file with the Secretary of the State of
Delaware.
8.07 For each of those Funds that have one or more portfolios as
set forth in Schedule "A" hereto, all obligations of those Funds under this
Agreement shall apply only on a portfolio-by-portfolio basis and the assets of
one portfolio shall not be liable for the obligations of any other.
8.08 In the event of a change in the business or regulatory
environment affecting all or any portion of this Agreement, the parties hereto
agree to renegotiate such affected portions in good faith.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed in their names and on their behalf and through their duly
authorized officers, as of the date first above written.
EACH OF THE VAN KAMPEN AMERICAN
CAPITAL OPEN END FUNDS LISTED ON
SCHEDULE "A" HERETO
BY:____________________________________
Vice President
ATTEST:
____________________________
Secretary
ACCESS INVESTOR SERVICES, INC.
BY:____________________________________
President
ATTEST:
____________________________
Secretary
10
<PAGE> 11
SCHEDULE "A"
VAN KAMPEN AMERICAN CAPITAL OPEN END FUNDS
<TABLE>
<CAPTION>
Type
[Corporation "C"/
Fund Name State of Business Trust "T"/
(including Portfolios) Organization Partnership "P"]
===============================================================================================================
<S> <C> <C>
[TO BE PROVIDED]
</TABLE>
11
<PAGE> 12
PRICING SCHEDULE
PRICE PER ACCOUNT PLUS OUT-OF-POCKET
______________, 1995
[TO BE PROVIDED]
12
<PAGE> 1
EXHIBIT 9(a)
FORM OF
FUND ACCOUNTING AGREEMENT
THIS AGREEMENT, dated _________, 199__, by and between the parties
set forth in Schedule A hereto (designated collectively
hereafter as the "Funds") and VAN KAMPEN AMERICAN CAPITAL
INVESTMENT ADVISORY CORP., a Delaware corporation ("Advisory
Corp.").
W I T N E S S E T H:
WHEREAS, each of the Funds is registered as a management
investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, Advisory Corp. has the capability of providing certain
accounting services to the Funds; and
WHEREAS, each desires to utilized Advisory Corp. in the
provision of such accounting services; and
WHEREAS, Advisory Corp. intends to maintain its staff in order
to accommodate the provision of all such services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties
hereto as follows:
1. Appointment of Advisory Corp.. As agent, Advisory Corp. shall
provide each of the Funds the accounting services ("Accounting
Services") as set forth in Paragraph 2 of this Agreement.
Advisory Corp. accepts such appointment and agrees to furnish
the Accounting Services in return for the compensation provided
in Paragraph 3 of this Agreement.
1
<PAGE> 2
2. Accounting Services to be Provided. Advisory Corp. will
provide to the Funds the following accounting related services,
including without limitation, accurate maintenance of the
specific Fund's books and records such as are within the scope
of control of Advisory Corp. and are required by the applicable
securities statutes and regulations, preparation of each Fund's
financial reports and other accounting and tax related notice
information to shareholders, the assimilation and interpretation
of accounting data for meaningful management review. Advisory
Corp. shall hire persons (collectively the "Accounting Service
Group") as needed to provide such Accounting Services and in
such numbers as the parties to this Agreement may agree from
time to time.
3. Expenses and Reimbursements. The Accounting Service expenses
(the "Accounting Service Expenses") for which Advisory Corp. may
be reimbursed are salary and salary related benefits, including
but not limited to bonuses, group insurances and other regular
wages ("Salaries") paid to the personnel of the Accounting
Service Group as discussed from time to time with the Board of
Trustees of each of the Funds.
2
<PAGE> 3
The Accounting Services Expenses
will be paid by Advisory Corp. and reimbursed by the Funds.
Advisory Corp. will tender to each Fund a monthly invoice as of
the last business day of each month which shall certify the total
support service expenses expended. Except as provided herein,
Advisory Corp. will receive no other compensation in connection
with Accounting Services rendered in accordance with this
Agreement, and Advisory Corp. will be responsible for all other
expenses relating to the providing of Accounting Services.
4. Payment for Accounting Service Expenses Among the Funds. As
to one quarter (25%) of the Accounting Service Expenses incurred
under the Agreement, the expense shall be allocated between all
Funds based on the number of classes of shares of beneficial
interest that each respective Fund has issued.
5. Maintenance of Records. All records maintained by Advisory
Corp. in connection with the performance of its duties under
this agreement will remain the property of each respective Fund
and will be preserved by Advisory Corp. for the periods
prescribed in Section 31 of the 1940 Act and the rules
thereunder or such other applicable rules that may be adopted
from time to time under the act. In the event of termination of
the Agreement, such records will be promptly delivered to the
respective Funds. Such records may be inspected by the
respective Funds at reasonable times.
6. Liability of Advisory Corp. Advisory Corp. shall not be
liable to any Fund for any action taken or thing done by it or
its agents or contractors on behalf of the fund in carrying out
the terms and provisions of the Agreement if done in good faith
and without negligence or misconduct on the part of Advisory
Corp., its agents or contractors.
7. Indemnification By Funds. Each Fund will indemnify and hold
Advisory Corp. harmless from all lost, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by
Advisory Corp. resulting from: (a) any claim, demand, action or
suit in connection with Advisory Corp.'s acceptance of this
Agreement; (b) any action or omission by advisory Corp. in the
performance of its duties hereunder; (c) Advisory Corp.'s acting
upon instructions believed by it to have been executed by a duly
authorized officer of the Fund; or (d) Advisory Corp.'s acting
upon information provided by the Fund in form and under policies
agreed to by Advisory Corp. and the Fund. Advisory Corp. shall
not be entitled to such indemnification in respect of actions or
omissions constituting negligence or willful misconduct of
Advisory Corp. or its agents or contractors. Prior to
confessing any claim against it which may be subject to this
indemnification, Advisory Corp. shall give the Fund reasonable
opportunity to defend against said claim in its own name or in
the name of Advisory Corp.
8. Indemnification By Advisory Corp. Advisory Corp. will
indemnify and hold harmless each Fund from all loss, cost,
damage and expense, including reasonable expenses for legal
3
<PAGE> 4
counsel, incurred by the Fund resulting from any claim, demand,
action or suit arising out of Advisory Corp.'s failure to comply
with the terms of this Agreement or which arises out of the
negligence or willful misconduct of Advisory Corp. or its agents
or contractors; provided that such negligence or misconduct is
not attributable to the Funds, their agents or contractors.
Prior to confessing any claim against it which may be subject to
this indemnification, the Fund shall give Advisory Corp.
reasonable opportunity to defend against said claim in its own
name or in the name of such Fund.
9. Further Assurances. Each party agrees to perform such further
acts and execute such further documents as are necessary to
effectuate the purposes hereof.
10. Dual Interests. It is understood that some person or persons
may be directors, trustees, officers or shareholders of both the
Funds and Advisory Corp. (including Advisory Corp.'s
affiliates), and that the existence of any such dual interest
shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision
of applicable law.
4
<PAGE> 5
11. Execution, Amendment and Termination. The term of this
Agreement shall begin as of the date first above written, and
unless sooner terminated as herein provided, this Agreement
shall remain in effect through _______, 199___, and thereafter
from year to year, if such continuation is specifically approved
at least annually by the Board of Trustees of each Fund,
including a majority of the independent Trustees of each Fund.
This Agreement may be modified or amended from time to time by
mutual agreement between the parties hereto and may be
terminated after _______, 199___, by at least sixty (60) days'
written notice given by one party to the others. Upon
termination hereof, each Fund shall pay to Advisory Corp. such
compensation as may be due as of the date of such termination
and shall likewise reimburse Advisory Corp. for its costs,
expenses and disbursements payable under this Agreement to such
date. This Agreement may be amended in the future to include as
additional parties to the Agreement other investment companies
for with Advisory Corp., any subsidiary or affiliate serves as
investment advisor or distributor if such amendment is approved
by the President of each Fund.
12. Assignment. Any interest of Advisory Corp. under this
Agreement shall not be assigned or transferred, either
voluntarily or involuntarily, by operation of law or otherwise,
without the prior written consent of the Funds. This agreement
shall automatically and immediately terminate in the event of
its assignment without the prior written consent of the Funds.
13. Notice. Any notice under this Agreement shall be in writing,
addressed and delivered or sent by registered or certified mail,
postage prepaid, to the other party at such address as such
other party may designate for the receipt of such notices.
Until further notice to the other parties, it is agreed that for
this purpose the address of each Fund is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, Attention: President and that
of Advisory Corp. for this purpose is One Parkview Plaza,
Oakbrook Terrace, Illinois 60181, Attention: President.
14. Personal Liability. As provided for in Article 8, Section 8.1
of the Agreement and Declaration of Trust of the various Funds, under
which the Funds are organized as unincorporated trusts, the shareholders,
trustees, officers, employees and other agents of the Fund shall
not personally be found by or liable for the matters set forth
hereto, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.
15. Interpretive Provisions. In connection with the operation
of this Agreement, Advisory Corp. and the Funds may agree from
time to time on such provisions interpretative of or in addition
to the provisions of this Agreement as may in their joint
opinion be consistent with the general tenor of this Agreement.
16. State Law. This Agreement shall be construed and enforced in
accordance with and governed by the laws of the State of
Illinois.
5
<PAGE> 6
17. Captions. The captions in this Agreement are included for
convenience of reference only and in no way define or limit any
of the provisions hereof or otherwise affect their construction
or effect.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the day and year first above written.
ALL OF THE PARTIES SET FORTH IN SCHEDULE A
By:__________________________________________________
Dennis J. McDonnell, President
VAN KAMPEN AMERICAN CAPITAL INVESTMENT ADVISORY CORP.
By:__________________________________________________
Dennis J. McDonnell, President
7
<PAGE> 1
EXHIBIT 9(b)
LEGAL SERVICES AGREEMENT
THIS AGREEMENT, dated as of January 1, 1995, by
and between the parties hereto (designated collectively
hereafter as the "Funds") and VAN KAMPEN AMERICAN CAPITAL,
INC., (formerly Van Kampen Merritt Holdings Corp., a
Delaware corporation ("Van Kampen").
W I T N E S S E T H:
WHEREAS, each of the Funds is registered as a management
investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, Van Kampen has the capability of providing certain
legal services to the Funds; and
WHEREAS, each Fund desires to utilize Van Kampen in the
provision of such legal services; and
WHEREAS, Van Kampen intends to increase its staff in order to
accommodate the provision of all such services.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants spelled out herein, it is agreed between the parties
hereto as follows:
1. Appointment of Van Kampen. As agent, Van Kampen shall provide
each of the Funds the legal services (the "Legal Services") as
set forth in Paragraph 2 of this Agreement. Van Kampen accepts
such appointments and agrees to furnish the Legal Services in
return for the compensation provided in Paragraph 3 of this
Agreement.
2. Legal Services to be Provided. Van Kampen will provide to the
Funds the following legal services, including without
limitation: accurate maintenance of the Funds' Corporate Minute
books and records, preparation and oversight of each Fund's
regulatory reports and other information provided to
shareholders as well as responding to day-to-day legal issues on
behalf of the Funds. Van Kampen shall hire persons
(collectively the "Legal Services Group") as needed to provide
such Legal Services and in such numbers as may be agreed from
time to time.
1
<PAGE> 2
3. Expenses and Reimbursement. The Legal Services expenses (the
"Legal Services Expenses") for which Van Kampen may be
reimbursed are salary and salary related benefits, including but
not limited to bonuses, group insurance and other regular wages
paid to the personnel of the Legal Services Group, as well as
overhead and expenses related to office space and necessary
equipment. The Legal Services Expenses will be paid by Van
Kampen and reimbursed by the Funds. Van Kampen will tender to
each Fund a monthly invoice as of the last business day of each
month which shall certify the total Legal Service Expenses
expended. Except as provided herein, Van Kampen will receive no
other compensation in connection with Legal Services rendered in
accordance with this Agreement, and Van Kampen will be
responsible for all other expenses relating to the providing of
Legal Services.
4. Payment for Legal Services Expense Among the Funds. One half
(50%) of the Legal Services Expenses incurred under the
Agreement shall be attributable equally to each respective Fund
and all other funds to whom Van Kampen provides Legal Services,
including all other Funds for which Van Kampen serves as
investment adviser and distributor and the Govett Funds (the
Non-Participating Funds"). Van Kampen shall assume the costs of
Legal Services for the Non-Participating Funds for which
reimbursement is not received. The remaining one half (50%) of
the Legal Services Expenses shall be in allocated (a) in the
event services are attributable to specific funds (including the
Non-Participating Funds) based on such specific time
allocations; and (b) in the event services are attributable only
to types of funds (i.e. closed-end and open-end funds), the
relative amount of time spent on each type of fund and then
further allocated between funds of that type on the basis of
relative net assets at the end of the period.
5. Maintenance of Records. All records maintained by Van Kampen
in connection with the performance of its duties under this
Agreement will remain the property of each respective Fund and
will be preserved by Van Kampen for the periods prescribed in
Section 31 of the 1940 Act and the rules thereunder or such
other applicable rules that may be adopted from time to time
under the Act. In the event of termination of the Agreement,
such records will be promptly delivered to the respective Funds.
Such records may be inspected by the respective Funds at
reasonable times.
6. Liability of Van Kampen. Van Kampen shall not be liable to
any Fund for any action taken or thing done by it or its agents
or contractors on behalf of the Fund in carrying out the terms
and provisions of the Agreement if done in good faith and
without negligence or misconduct on the part of Van Kampen, its
agents or contractors.
7. Indemnification By Funds. Each Fund will indemnify and hold
Van Kampen harmless from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by Van
2
<PAGE> 3
Kampen resulting from (a) any claim, demand, action or suit in
connection with Van Kampen's acceptance of this Agreement; (b)
an action or omission by Van Kampen in the performance of its
duties hereunder; (c) Van Kampen's acting upon instructions
believed by it to have been executed by a duly authorized office
of the Fund; or (d) Van Kampen's acting upon information
provided by the Fund in form and under policies agreed to by Van
Kampen and the Fund. Van Kampen shall not be entitled to such
indemnification in respect of action or omissions constituting
negligence or willful misconduct of Van Kampen or its agents or
contractors. Prior to confessing any claim against it which may
be subject to this indemnification, Van Kampen shall give the
Fund reasonable opportunity to defend against said claim on its
own name or in the name of Van Kampen.
8. Indemnification By Van Kampen. Van Kampen will indemnify and
hold harmless each Fund from all loss, cost, damage and expense,
including reasonable expenses for legal counsel, incurred by the
Fund resulting from any claim, demand, action or suit arising
out of Van Kampen's failure to comply with the terms of this
Agreement or which arises out of the negligence or willful
misconduct of Van Kampen or its agents or contractors; provided,
that such negligence or misconduct is not attributable to the
Funds, their agents or contractors. Prior to confessing any
claim against it which may be subject to this indemnification,
the Fund shall give Van Kampen reasonable opportunity to defend
against said claim in its own name or in the name of such Fund.
9. Further Assurances. Each party agrees to perform such
further acts and execute such further documents as necessary to
effectuate the purposes hereof.
10. Dual Interests. It is understood that some person or
persons may be directors, trustees, officers, or shareholders of
both the Funds and Van Kampen (including Van Kampen's
affiliates), and that the existence of any such dual interest
shall not affect the validity hereof or of any transactions
hereunder except as otherwise provided by a specific provision
of applicable law.
11. Execution, Amendment and Termination. The term of this
Agreement shall begin as of the date first above written, and
unless sooner terminated as herein provided, this Agreement
shall remain in effect through May 31, 1996, and thereafter from
year to year if such continuation is specifically approved at
least annually by the Board of Trustees of each Fund, including
a majority of the independent Trustees of each Fund. The
Agreement may be modified or amended from time to time by mutual
agreement between the and shall likewise reimburse Van Kampen
for its costs, expenses and disbursements payable under this
Agreement to such date. This Agreement may be amended in the
future to include as additional parties to the Agreement other
investment companies for which Van Kampen, any subsidiary or
affiliate serves as investment advisor or distributor.
12. Assignment. Any interest of Van Kampen under this Agreement
3
<PAGE> 4
shall not be assigned or transferred, either voluntarily or
involuntarily, by operation of law or otherwise, without the
prior written consent of the Fund. This Agreement shall
automatically and immediately terminate in the event of its
assignment without the prior written consent of the Fund.
13. Notice. Any notice under this agreement shall be in
writing, addressed and delivered or sent by registered or
certified mail, postage prepaid, to the other party at such
address as such other party may designate for the receipt of
such notices. Until further notice to the other parties, it is
agreed that for this purpose the address of each Fund is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention:
President and the address of Van Kampen. for this purpose is One
Parkview Plaza, Oakbrook Terrace, Illinois 60181, Attention:
General Counsel.
14. Personal Liability. As provided for in the Declaration of
Trust of the various Funds, under which the Funds are organized
as unincorporated trust under the laws of the State of Delaware
and Pennsylvania, as the case may be, the shareholders,
trustees, officers, employees and other agents of the Fund shall
not personally be found by or liable for the matters set forth
hereunder, nor shall resort be had to their private property for
the satisfaction of any obligation or claim hereunder.
15. Interpretative Provisions. In connection with the operation
of this agreement, Van Kampen and the Funds may agree from time
to time on such provisions interpretative of or in addition to
the provisions of this Agreement as may in their opinion be
consistent with the general tenor of this Agreement.
16. State Law. This Agreement shall be construed and enforced
in accordance with and governed by the laws of the State of
Illinois.
17. Captions. The captions in the Agreement are included for
convenience of reference only and in no way define or limit any
of the provisions hereof or otherwise affect their construction
effect.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be executed as of the day and year first above written.
4
<PAGE> 1
EXHIBIT 10(i)
July 31, 1995
Van Kampen American Capital
Tax Free Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Van Kampen American Capital
Tax Free Trust --
Registration Statement on Form N-1A
(File Nos. 2-99715 and 811-4386)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital Insured Tax
Free Income Fund (the "Fund"), a series of Van Kampen American
Capital Tax Free Trust (the "Trust"), a voluntary association with transferable
shares formed and existing under and by virtue of the laws of the State of
Delaware, in connection with the preparation of Post-Effective Amendment No. 37
to the Trust's Registration Statement on Form N-1A (as so amended, the
"Registration Statement") to be filed under the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended
(the "1940 Act") with the Securities and Exchange Commission (the "Commission")
on August 1, 1995. The Registration Statement relates to the registration under
the 1933 Act and 1940 Act of an indefinite number of each of Class A Shares of
beneficial interest, $.01 par value per share, Class B Shares of beneficial
interest, $.01 par value per share, and Class C Shares of beneficial interest,
$.01 par value per share, of the Fund (collectively, the "Shares"). The Trust
has stated in Post-Effective Amendment No. 37 to the Registration Statement
that it is thereby adopting the Registration Statement of Van Kampen Merritt Tax
Free Fund, a Massachusetts business trust (the "Old Trust"), reorganized into
the Trust as of July 31, 1995.
<PAGE> 2
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 2
The Shares will be sold pursuant to a distribution and service
agreement to be entered into among the Trust, on behalf of the Fund, and Van
Kampen American Capital Distributors, Inc. (the "Distribution Agreement").
The Old Trust is a party to an "Order Pursuant to Section 6(c) of the
Investment Company Act for an Exemption from the Provisions of Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of such Act and Rule
22c-1 thereunder" (the "Exemptive Order"), issued by the Commission on July 28,
1993, allowing registered investment companies party thereto to issue an
unlimited number of classes of securities (including the Class A Shares,
Class B Shares and Class C Shares) with varying combinations of sales charges,
distribution fees and service fees, the application for which Exemptive Order
requested that such order apply to entities organized for the purpose of
changing the state of domicile of the original parties to such order.
This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, (ii) the Agreement and Declaration of Trust and By-Laws of the
Trust, each as amended to date (the "Declaration of Trust" and "By-Laws",
respectively), (iii) the designations of series with respect to the Fund,
(iv) copies of the resolutions adopted by the Board of Trustees of the Trust
relating to the authorization, issuance and sale of the Shares, the filing of
the Registration Statement and any amendments or supplements thereto and
related matters, (v) the form of Distribution Agreement, which is included as
an exhibit to the Registration Statement, (vi) the Exemptive Order and (vii)
such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth herein. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
authenticity of all documents submited to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
<PAGE> 3
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 3
photostatic copies and the authenticity of the originals of such copies. We
have also assumed that the Distribution Agreement, when executed and delivered
by the parties thereto, will be in the form reviewed by us in connection with
this opinion and that the Fund will be entitled to rely on the Exemptive Order
as if it were a party thereto. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Trust and others.
Members of our firm are admitted to the practice of law in the State of
Delaware, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement (and such other Post-Effective Amendments,
if any, to the Registration Statement relating to the public offering of the
Shares) shall have become effective under the 1933 Act and shall be deemed to
be the Registration Statement of the Trust pursuant to the rules and
regulations of the Commission under the 1933 Act, (ii) the Distribution
Agreement is duly executed and delivered by the Trust and the other respective
parties thereto and (iii) certificates representing the Shares are duly
executed, countersigned, registered and duly delivered and paid for in
accordance with the Distribution Agreement, the Shares will be validly issued,
fully paid and nonassessable.
<PAGE> 4
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 4
We hereby consent to the filing of this opinion with the Commission as
Exhibit 10(i) to the Registration Statement. We also consent to the
reference to our firm under the heading "Legal Counsel" in the Registration
Statement. In giving this consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom
<PAGE> 1
EXHIBIT 10(iii)
July 31,1995
Van Kampen American Capital
Tax Free Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Van Kampen American Capital
Tax Free Trust --
Registration Statement on Form N-1A
(File Nos. 2-99715 and 811-4386)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital California
Insured Tax Free Fund (the "Fund"), a series of Van Kampen American Capital Tax
Free Trust (the "Trust"), a voluntary association with transferable shares
formed and existing under and by virtue of the laws of the State of
Delaware, in connection with the preparation of Post-Effective Amendment No. 37
to the Trust's Registration Statement on Form N-1A (as so amended, the
"Registration Statement") to be filed under the Securities Act of 1933, as
amended (the "1933 Act"), and the Investment Company Act of 1940, as amended
(the "1940 Act") with the Securities and Exchange Commission (the "Commission")
on August 1, 1995. The Registration Statement relates to the registration under
the 1933 Act and 1940 Act of an indefinite number of each of Class A Shares of
beneficial interest, $.01 par value per share, Class B Shares of beneficial
interest, $.01 par value per share, and Class C Shares of beneficial interest,
$.01 par value per share, of the Fund (collectively, the "Shares"). The Trust
has stated in Post-Effective Amendment No. 37 to the Registration Statement
that it is thereby adopting the Registration Statement of Van Kampen Merritt Tax
Free Fund, a Massachusetts business trust (the "Old Trust"), reorganized into
the Trust as of July 31, 1995.
<PAGE> 2
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 2
The Shares will be sold pursuant to a distribution and service
agreement to be entered into among the Trust, on behalf of the Fund, and Van
Kampen American Capital Distributors, Inc. (the "Distribution Agreement").
The Old Trust is a party to an "Order Pursuant to Section 6(c) of the
Investment Company Act for an Exemption from the Provisions of Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of such Act and Rule
22c-1 thereunder" (the "Exemptive Order"), issued by the Commission on July 28,
1993, allowing registered investment companies party thereto to issue an
unlimited number of classes of securities (including the Class A Shares,
Class B Shares and Class C Shares) with varying combinations of sales charges,
distribution fees and service fees, the application for which Exemptive Order
requested that such order apply to entities organized for the purpose of
changing the state of domicile of the original parties to such order.
This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, (ii) the Agreement and Declaration of Trust and By-Laws of the
Trust, each as amended to date (the "Declaration of Trust" and "By-Laws",
respectively), (iii) the designations of series with respect to the Fund,
(iv) copies of the resolutions adopted by the Board of Trustees of the Trust
relating to the authorization, issuance and sale of the Shares, the filing of
the Registration Statement and any amendments or supplements thereto and
related matters, (v) the form of Distribution Agreement, which is included as
an exhibit to the Registration Statement, (vi) the Exemptive Order and (vii)
such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth herein. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
authenticity of all documents submited to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
<PAGE> 3
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 3
photostatic copies and the authenticity of the originals of such copies. We
have also assumed that the Distribution Agreement, when executed and delivered
by the parties thereto, will be in the form reviewed by us in connection with
this opinion and that the Fund will be entitled to rely on the Exemptive Order
as if it were a party thereto. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Trust and others.
Members of our firm are admitted to the practice of law in the State of
Delaware, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement (and such other Post-Effective Amendments,
if any, to the Registration Statement relating to the public offering of the
Shares) shall have become effective under the 1933 Act and shall be deemed to
be the Registration Statement of the Trust pursuant to the rules and regulations
of the Commission under the 1933 Act, (ii) the Distribution Agreement is duly
executed and delivered by the Trust and the other respective parties thereto
and (iii) certificates representing the Shares are duly executed,
countersigned, registered and duly delivered and paid for in accordance with
the Distribution Agreement, the Shares will be validly issued, fully paid
and nonassessable.
<PAGE> 4
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 4
We hereby consent to the filing of this opinion with the Commission as
Exhibit 10(iii) to the Registration Statement. We also consent to the
reference to our firm under the heading "Legal Counsel" in the Registration
Statement. In giving this consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom
<PAGE> 1
EXHIBIT 10(iv)
July 31, 1995
Van Kampen American Capital
Tax Free Trust
One Parkview Plaza
Oakbrook Terrace, Illinois 60181
Re: Van Kampen American Capital
Tax Free Trust --
Registration Statement on Form N-1A
(File Nos. 2-99715 and 811-4386)
Ladies and Gentlemen:
We have acted as counsel to Van Kampen American Capital Municipal
Income Fund (the "Fund"), a series of Van Kampen American Capital Tax Free
Trust (the "Trust"), a voluntary association with transferable shares formed
and existing under and by virtue of the laws of the State of Delaware, in
connection with the preparation of Post-Effective Amendment No. 37 to the
Trust's Registration Statement on Form N-1A (as so amended, the "Registration
Statement") to be filed under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the "1940 Act") with
the Securities and Exchange Commission (the "Commission") on August 1, 1995. The
Registration Statement relates to the registration under the 1933 Act and 1940
Act of an indefinite number of each of Class A Shares of beneficial interest,
$.01 par value per share, Class B Shares of beneficial interest, $.01 par value
per share, and Class C Shares of beneficial interest, $.01 par value per share,
of the Fund (collectively, the "Shares"). The Trust has stated in
Post-Effective Amendment No. 37 to the Registration Statement that it is
thereby adopting the Registration Statement of Van Kampen Merritt Tax Free
Fund, a Massachusetts business trust (the "Old Trust"), reorganized into the
Trust as of July 31, 1995.
<PAGE> 2
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 2
The Shares will be sold pursuant to a distribution and service
agreement to be entered into among the Trust, on behalf of the Fund, and Van
Kampen American Capital Distributors, Inc. (the "Distribution Agreement").
The Old Trust is a party to an "Order Pursuant to Section 6(c) of the
Investment Company Act for an Exemption from the Provisions of Sections
2(a)(32), 2(a)(35), 18(f), 18(g), 18(i), 22(c) and 22(d) of such Act and Rule
22c-1 thereunder" (the "Exemptive Order"), issued by the Commission on July 28,
1993, allowing registered investment companies party thereto to issue an
unlimited number of classes of securities (including the Class A Shares,
Class B Shares and Class C Shares) with varying combinations of sales charges,
distribution fees and service fees, the application for which Exemptive Order
requested that such order apply to entities organized for the purpose of
changing the state of domicile of the original parties to such order.
This opinion is delivered in accordance with the requirements of Item
24(b)(10) of Form N-1A under the 1933 Act and the 1940 Act.
In connection with this opinion, we have examined originals or copies,
certified or otherwise identified to our satisfaction, of (i) the Registration
Statement, (ii) the Agreement and Declaration of Trust and By-Laws of the
Trust, each as amended to date (the "Declaration of Trust" and "By-Laws",
respectively), (iii) the designations of series with respect to the Fund,
(iv) copies of the resolutions adopted by the Board of Trustees of the Trust
relating to the authorization, issuance and sale of the Shares, the filing of
the Registration Statement and any amendments or supplements thereto and
related matters, (v) the form of Distribution Agreement, which is included as
an exhibit to the Registration Statement, (vi) the Exemptive Order and (vii)
such other documents as we have deemed necessary or appropriate as a basis for
the opinions set forth herein. In such examination, we have assumed the
genuineness of all signatures, the legal capacity of all natural persons, the
authenticity of all documents submited to us as originals, the conformity to
original documents of all documents submitted to us as certified, conformed or
<PAGE> 3
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 3
photostatic copies and the authenticity of the originals of such copies. We
have also assumed that the Distribution Agreement, when executed and delivered
by the parties thereto, will be in the form reviewed by us in connection with
this opinion and that the Fund will be entitled to rely on the Exemptive Order
as if it were a party thereto. As to any facts material to the opinions
expressed herein which we have not independently established or verified, we
have relied upon statements and representations of officers and other
representatives of the Trust and others.
Members of our firm are admitted to the practice of law in the State of
Delaware, and we express no opinion as to the laws of any other jurisdiction.
Based upon and subject to the foregoing, we are of the opinion that
when (i) the Registration Statement (and such other Post-Effective Amendments,
if any, to the Registration Statement relating to the public offering of the
Shares) shall have become effective under the 1933 Act and shall be deemed to
be the Registration Statement of the Trust pursuant to the rules and
regulations of the Commission under the 1933 Act, (ii) the Distribution
Agreement is duly executed and delivered by the Trust and the other respective
parties thereto and (iii) certificates representing the Shares are duly
executed, countersigned, registered and duly delivered and paid for in
accordance with the Distribution Agreement, the Shares will be validly issued,
fully paid and nonassessable.
<PAGE> 4
Van Kampen American Capital
Tax Free Trust
July 31, 1995
Page 4
We hereby consent to the filing of this opinion with the Commission as
Exhibit 10(iv) to the Registration Statement. We also consent to the
reference to our firm under the heading "Legal Counsel" in the Registration
Statement. In giving this consent, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the 1933
Act or the rules and regulations of the Commission.
Very truly yours,
/s/ Skadden, Arps, Slate, Meagher & Flom
<PAGE> 1
EXHIBIT 11(i)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Insured Tax Free Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
July 26, 1995
<PAGE> 1
EXHIBIT 11(iii)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital California Insured Tax Free Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
July 26, 1995
<PAGE> 1
EXHIBIT 11(iv)
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen American Capital Municipal Income Fund:
We consent to the use of our report included in the Statement of Additional
Information which is incorporated by reference into the Prospectus and to the
reference to our Firm under the headings "Financial Highlights" in the
Prospectus and "Custodian and Independent Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
Chicago, Illinois
July 26, 1995
<PAGE> 1
EXHIBIT 15(a)
FORM OF
PLAN OF DISTRIBUTION PURSUANT TO RULE 12B-1
VAN KAMPEN AMERICAN CAPITAL FUND
The plan set forth below (the "Distribution Plan") is the
written plan contemplated by Rule 12b-1 (the "Rule") under the
Investment Company Act of 1940, as amended (the "1940 Act"), for
the VAN KAMPEN AMERICAN CAPITAL FUND (the "Fund"), a
Series of the Van Kampen AMERICAN CAPITAL Trust (the
"Trust"). This Distribution Plan describes the material terms
and conditions under which assets of the Fund may be used in
connection with financing distribution related activities with
respect to each of its classes of shares of beneficial interest
(the "Shares"), each of which is offered and sold subject to a
different combination of front-end sales charges, distribution
fees, service fees and contingent deferred sales charges.1
Classes of shares, if any, subject to a front-end sales charge
and a distribution and/or service fee are referred to herein as
"Front-End Classes" and the Shares of such classes are referred
to herein as "Front-End Shares." Classes of shares, if any,
subject to a contingent-deferred sales charge and a distribution
and/or a service fee are referred to herein as "CDSC Classes"
and Shares of such classes are referred to herein as "CDSC
Shares." Classes of shares, if any, subject to a front-end
sales charge, a contingent-deferred sales charge and a
distribution and/or service fee are referred to herein as
"Combination Classes" and Shares of such class are referred to
herein as "Combination Shares."
The Fund has adopted a service plan (the "Service Plan")
pursuant to which the Fund is authorized to expend on an annual
basis a portion of its average net assets attributable to any or
each class of Shares in connection with the provision by the
principal underwriter (within the meaning of the 1940 Act) of
the Shares and by brokers, dealers and other financial
intermediaries (collectively, "Financial Intermediaries") of
personal services to holders of Shares and/or the maintenance of
shareholder accounts. The Fund also has entered into a
distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital Distributors,
Inc. (the "Distributor"), pursuant to which the Distributor acts as
the principal underwriter with respect to each class of Shares and
provides services to the Fund and acts as agent on behalf of the
Fund in connection with the implementation of the Service Plan.
<PAGE> 2
The Distributor may enter into selling agreements (the "Selling
Agreements") with Financial Intermediaries in order to implement
the Distribution and Services Agreement, the Service Plan and
this Distribution Plan.
The Fund hereby is authorized to pay the Distributor a
distribution fee with respect to each class of its Shares to
compensate the Distributor for activities which are primarily
intended to result in the sale of such Shares ("distribution
related activities") performed by the Distributor with respect
to the respective class of Shares of the Fund. Such
distribution related activities include without limitation: (a)
printing and distributing copies of any prospectuses and annual
and interim reports of the Fund (after the Fund has prepared and
set in type such materials) that are used by such Distributor in
connection with the offering of Shares; (b) preparing, printing
or otherwise manufacturing and distributing any other literature
or materials of any nature used by such Distributor in
connection with promoting, distributing or offering the Shares;
(c) advertising, promoting and selling Shares to broker-dealers,
banks and the public; (d) distribution related overhead and the
provision of information programs and shareholder services
intended to enhance the attractiveness of investing in the Fund;
(e) incurring initial outlay expenses in connection with
compensating Financial Intermediaries for (i) selling CDSC
Shares and Combination Shares and (ii) providing personal
services to shareholders and the maintenance of shareholder
accounts of all classes of Shares, including paying interest on
and incurring other carrying costs on funds borrowed to pay such
initial outlays; and (f) acting as agent for the Fund in
connection with implementing this Distribution Plan pursuant to
the Selling Agreements.
The amount of the distribution fee hereby authorized with
respect to each class of Shares of the Fund shall be as follows:
With respect to Class A Shares, the distribution fee authorized
hereby and the service fee authorized pursuant to the Service
Plan, in the aggregate, shall not exceed on an annual basis
0.25% of the Fund's average daily net assets attributable to
Class A Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to Class A
Shares. The Fund may pay a distribution fee as determined from
time to time by its Board of Trustees in an annual amount not to
exceed the lesser of (i) (A) 0.25% of the Fund's average daily
net asset value during such year attributable to Class A Shares
sold on or after the date on which this Distribution Plan was
first implemented with respect to Class A Shares minus (B) the
amount of the service fee with respect to the Class A Shares
actually expended during such year by the Fund pursuant to the
Service Plan and (ii) the actual amount of distribution related
expenses incurred by the Distributor with respect to Class A
Shares.
With respect to Class B Shares, the distribution fee authorized
hereby and the service fee authorized pursuant to the Service
Plan, in the aggregate, shall not exceed on an annual basis
1.00% of the Fund's average daily net assets attributable to
2
<PAGE> 3
Class B Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class
B Shares. The Fund may pay a distribution fee with respect to
the Class B Shares as determined from time to time by its Board
of Trustees in an annual amount not to exceed the lesser of (A)
0.75% of the Fund's average daily net asset value during such
year attributable to Class B Shares sold on or after the date on
which this Distribution Plan is first implemented with respect
to the Class B Shares and (B) the actual amount of distribution
related expenses incurred by the Distributor during such year
plus prior unreimbursed distribution related expenses less the
amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class B Shares
sold on or after the date on which this Distribution Plan is
first implemented with respect to the Class B Shares.
With respect to Class C Shares, the distribution fee authorized
hereby and the service fee authorized pursuant to the Service
Plan, in the aggregate, shall not exceed on an annual basis
1.00% of the Fund's average daily net assets attributable to
Class C Shares sold on or after the date on which this
Distribution Plan is first implemented with respect to the Class
C Shares. The Fund may pay a distribution fee with respect to
the Class C Shares as determined from time to time by its Board
of Trustees in an annual amount not to exceed the lesser of (A)
0.75% of the Fund's average daily net asset value during such
year attributable to Class C Shares sold on or after the date on
which this Distribution Plan is first implemented with respect
to the Class C Shares and (B) the actual amount of distribution
related expenses incurred by the Distributor during such year
plus prior unreimbursed distribution related expenses less the
amount of any contingent deferred sales charge paid to the
Distributor, in each case with respect to the Class C Shares
sold on or after the date on which this Distribution Plan is
first implemented with respect to the Class C Shares.
Payments pursuant to this Distribution Plan shall not be made
more often than monthly upon receipt by the Fund of a separate
written expense report with respect to each class of Shares
setting forth the expenses qualifying for such reimbursement
allocated to each class of Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to
shares of a Front-End Class do not fully reimburse the
Distributor for its actual distribution related expenses with
respect to the Shares of such class, there is no carryforward of
reimbursement obligations to succeeding years. In the event the
amounts payable hereunder with respect to a shares of a CDSC
Class or a Combination Class do not fully reimburse the
Distributor for its actual distribution related expenses with
respect to the Shares of the respective class, such unreimbursed
distribution expenses will be carried forward and paid by the
Fund hereunder in future years so long as this Distribution Plan
remains in effect, subject to applicable laws and regulations.
Reimbursements for distribution related expenses payable
hereunder with respect to a particular class of Shares may not
be used to subsidize the sale of Shares of any other class of
Shares.
3
<PAGE> 4
The Fund shall not compensate the Distributor, and neither the
Fund nor the Distributor shall compensate any Financial
Intermediary, for any distribution related expenses incurred
with respect to a class of Shares prior to the later of (a) the
implementation of this Distribution Plan with respect to such
class of Shares or (b) the date that such Financial Intermediary
enters into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into
Selling Agreements with certain Financial Intermediaries to
provide compensation to such Financial Intermediaries for
activities and services of the type referred to in Paragraph 1
hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of
Trustees of the Trust and a majority of the Disinterested
Trustees (within the meaning of the 1940 Act) by a vote cast in
person at a meeting called for the purpose of voting on such
Selling Agreements. The Distributor may reallocate all or a
portion of its distribution fee to such Financial Intermediaries
as compensation for the above-mentioned activities and services.
Such reallocation shall be in an amount as set forth from time
to time in the Fund's prospectus. Such Selling Agreements shall
provide that the Financial Intermediaries shall provide the
Distributor with such information as is reasonably necessary to
permit the Distributor to comply with the reporting requirements
set forth in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Distribution Agreement, the
Fund is hereby authorized to pay a distribution fee to any
person that is not an "affiliated person" or "interested person"
of the Fund or its "investment adviser" or "principal
underwriter" (as such terms are defined in the 1940 Act) who
provides any of the foregoing services for the Fund. Such fee
shall be paid only pursuant to written agreements between the
Fund and such other person the terms of which permit payments to
such person only in accordance with the provisions of this
Distribution Agreement and which have the approval of a majority
of the Disinterested Trustees by vote cast separately with
respect to each class of Shares and cast in person at a meeting
called for the purpose of voting on such written agreement.
The Fund and the Distributor shall prepare separate written
reports for each class of Shares and shall submit such reports
to the Fund's Board of Trustees on a quarterly basis summarizing
all payments made by them with respect to each class of Shares
pursuant to this Distribution Plan, the Service Plan and the
agreements contemplated hereby, the purposes for which such
payments were made and such other information as the Board of
Trustees or the Disinterested Trustees may reasonably request
from time to time, and the Board of Trustees shall review such
reports and other information.
This Distribution Plan shall become effective upon its approval
by (a) a majority of the Board of Trustees and a majority of the
Disinterested Trustees by vote cast separately with respect to
each class of Shares cast in person at a meeting called for the
purpose of voting on this Distribution Plan, and (b) with
4
<PAGE> 5
respect to each class of Shares, a "majority of the outstanding
voting securities" (as such phrase is defined in the 1940 Act)
of such class of Shares voting separately as a class.
This Distribution Plan and any agreement contemplated hereby
shall continue in effect beyond the first anniversary of its
adoption by the Board of Trustees of the Fund only so long as
(a) its continuation is approved at least annually in the manner
set forth in clause (a) of paragraph 9 above and (b) the
selection and nomination of those trustees of the Fund who are
not "interested persons" of the Fund are committed to the
discretion of such trustees.
This Distribution Plan may be terminated with respect to a
class of Shares without penalty at any time by a majority of the
Disinterested Trustees or by a "majority of the outstanding
voting securities" of the respective class of Shares of the
Fund.
This Distribution Plan may not be amended to increase
materially the maximum amounts permitted to be expended
hereunder except with the approval of a "majority of the
outstanding voting securities" of the respective class of Shares
of the Fund and may not be amended in any other material respect
except with the approval of a majority of the Disinterested
Trustees. Amendments required to conform this Distribution Plan
to changes in the Rule or to other changes in the 1940 Act or
the rules and regulations thereunder shall not be deemed to be
material amendments.
To the extent any service fees paid by the Fund pursuant to the
Service Plan are deemed to be payments for the financing of any
activity primarily intended to result in the sale of Shares
issued by the Fund within the meaning of the Rule, the terms and
provisions of such plan and any payments made pursuant to such
plan hereby are authorized pursuant to this Distribution Plan in
the amounts and for the purposes authorized in the Service Plan
without any further action by the Board of Trustees or the
shareholders of the Fund. To the extent the terms and
provisions of the Service Plan conflict with the terms and
provisions of this Distribution Plan, the terms and provisions
of the Service Plan shall prevail with respect to amounts
payable pursuant thereto. This paragraph 13 is adopted solely
due to the uncertainty that may exist with respect to whether
payments to be made by the Fund pursuant to the Service Plan
constitute payments primarily intended to result in the sale of
Shares issued by the Fund within the meaning of the Rule.
The Trustees of the Trust have adopted this Distribution Plan
as trustees under the Declaration of Trust of the Trust and the
policies of the Trust adopted hereby are not binding upon any of
the Trustees or shareholders of the Trust individually, but bind
only the trust estate.
1 The Fund is authorized to offer multiple classes of shares
pursuant to an order of the Securities and Exchange Commission
5
<PAGE> 6
exempting the Fund from certain provisions of the 1940 Act.
6
<PAGE> 1
EXHIBIT 15(b)
FORM OF
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
SHAREHOLDER ASSISTANCE AGREEMENT
This Agreement is entered into as of the _____day of _____,
1995, by and between Van Kampen American Capital Distributors,
Inc. (formerly Van Kampen Merritt, Inc.) (the "Company") and the
undersigned (the "Broker-Dealer").
WHEREAS, the Company is the principal underwriter of the
open-end investment companies listed on Schedule 1 to this
Agreement (hereinafter individually the "Fund" or collectively
the "Funds"); and
WHEREAS, the Broker-Dealer is registered as a broker-dealer
with the National Association of Securities Dealers, Inc.; and
WHEREAS, each respective Fund has adopted a Distribution Plan
(the "Distribution Plan") and a service plan (the "Service
Plan") pursuant to Rule 12b-1 (the "Rule") under the Investment
Company Act of 1940, as amended (the "1940 Act"), relating to
such Fund, the Distribution Plans being described in the Fund's
Prospectus and Statement of Additional Information; and
WHEREAS, each respective Fund's Distribution Plans authorize
the Company to enter into distribution assistance agreements
such as this Agreement with broker-dealers selected by the
Company, and the Broker-Dealer has been so selected; and
WHEREAS, each respective Fund's Distribution Plans authorize
the Company to make payments at a rate specified in an agreement
such as this Agreement varying directly with the aggregate
average daily net asset value of shares of each respective Fund
sold by such broker-dealer on or after the effective date of
this Agreement, as determined pursuant to Section 4 hereof, and
held at the close of each day in accounts of clients or
customers of a particular broker-dealer, such amount being
referred to herein as the "Holding Level"; for purposes of
calculating the Holding Level, shares of such Fund which are
redeemed or otherwise disposed of from any account existing
prior to such effective date shall be deemed to have been shares
sold prior to such effective date to the extent of the number of
shares held in such account immediately after the close of
business on the day prior to such effective date; and
1
<PAGE> 2
WHEREAS, this Agreement is a "related agreement" to the
Distribution Plan as that term is used in the Rule and is
subject to all of the provisions of the Rule as to such
agreements;
NOW, THEREFORE, the Company and the Broker-Dealer agree as
follows:
1. Subject to continuing compliance with its obligations
pursuant to Section 2 hereof, the Broker-Dealer shall be
entitled distribution fee and service fee to payments, if any,
to be paid by the Company at the annual percentage rate of the
Holding Level set forth from time to time in the then current
Prospectus of the Fund on a quarterly basis (prorated for any
portion of such period during which this Agreement is in effect
for less than the full amount of such period); it is understood
and agreed that the Company may make final and binding
determinations as to whether such continuing compliance and as
to whether or not any Fund shares are to be considered in
determining the Holding Level of any particular broker-dealer
and what Fund shares, if any, are to be attributed to such
purpose to a particular broker-dealer, to a different
broker-dealer or to no broker-dealer. Payments shall be made to
the Broker-Dealer named above and portions of the payments may
be, in the discretion of the Broker-Dealer, paid over to
individual registered representatives of said Broker-Dealer to
whom there have been assigned accounts of clients or customers
of the Broker-Dealer with respect to which the respective
Holding Level was determined.
2. The distribution fee payments with respect to a class of
the Fund's shares to be made in accordance with Section 1
hereof, if any, shall be paid to the Broker-Dealer as
compensation for selling shares of the respective class.
3. In consideration for the service fee payments to be made in
accordance with Section 1 hereof, the Broker-Dealer shall
provide to its clients or customers who hold shares of each
respective Fund with respect to which payments to the
Broker-dealer may be made under such Fund's Distribution Plan
such services and other assistance as may from time to time be
reasonably requested by the Company, including but not limited
to answering inquiries regarding the Fund, providing information
programs regarding the fund, assisting in selected dividend payment
options, account designations and addresses and maintaining the
investment of such customer or client in the Fund.
4. The Company shall have the right at any time and from time
to time without notice to the Broker-Dealer to amend its
Prospectus with respect to the amount of the service free and
the amount of the distribution fee to be paid pursuant hereto.
2
<PAGE> 3
Such amendments shall be effective as of the date of the amended
Prospectus.
5. This Agreement shall go into effect on the later of the date set
forth above or the date on which it is approved by a vote of each Fund's Board
of Trustees, and of those Trustees (the "Qualified Trustees") who are not
interested persons (as defined in the 1940 Act), of the Fund and have no direct
or indirect financial interest in the operations of the Distribution Plan or
any agreement related to the Distribution Plan cast in person at a meeting
called for the purpose of voting on this Agreement and shall continue in effect
(unless terminated) until the June 30th next succeeding such effective date and
will continue thereafter only if such continuance is specifically approved at
least annually in the manner heretofore specified for initial approval. This
agreement will terminate automatically in the event of its assignment (as that
term is used in the Rule) or if the Distribution Plan is terminated. This
Agreement may also be terminated at any time, without the payment of any
penalty, on sixty (60) days written notice to the Broker-dealer, by vote of a
majority of the Qualified Trustees or by vote of a majority (as that term is
used in the Rule) of the outstanding voting securities of the Fund.
IN WITNESS WHEREOF, this Agreement is executed as of the date
first above written.
VAN KAMPEN AMERICAN CAPITAL
Broker-dealer Firm Name
By:______________________________
Firm Address Senior Vice President
By:
Title:
3
<PAGE> 1
EXHIBIT 15(c)
FORM OF
VAN KAMPEN AMERICAN CAPITAL DISTRIBUTORS, INC.
ADMINISTRATIVE SERVICES AGREEMENT
This Agreement is entered into as of the ____ day of ____,
19__, by and between Van Kampen American Capital Distributors,
Inc. (formerly Van Kampen Merritt, Inc.) (the "Company") and the
undersigned (the "Intermediary").
WHEREAS, the Company is the principal underwriter of the
open-end investment companies listed on Schedule 1 to this
Agreement (hereinafter individually the "Fund" or collectively
the "Funds"); and
WHEREAS, each respective Fund has adopted a Distribution Plan
(the "Distribution Plan") pursuant to Rule 12b-1 (the "Rule")
under the Investment Company Act of 1940, as amended (the "1940
Act"), and a Service Plan (the "Service Plan") relating to such
Fund, the Distribution Plans being described in the Fund's
Prospectus and Statement of Additional Information; and
WHEREAS, each respective Fund's Distribution Plans authorize
the Company to enter into distribution services agreements such
as this Agreement with certain financial intermediaries selected
by the Company, and the Intermediary has been so selected; and
WHEREAS, each respective Fund's Distribution Plans authorize
the Company to make payments at a rate specified in an agreement
such as this Agreement varying directly with the aggregate
average daily net asset value of shares of each respective Fund
sold by such financial intermediary on or after the effective
date of this Agreement, as determined pursuant to Section 4
hereof, and held at the close of each day in accounts of clients
or customers of particular intermediary, such amount being
referred to herein as the "Holding Level"; for purposes of
calculating the Holding Level, shares of such Fund which are
redeemed or otherwise disposed of from any account existing
prior to such effective date shall be deemed to have been shares
sold prior to such effective date to the extent of the number of
shares held in such account immediately after the close of
business on the day prior to such effective date; and
WHEREAS, this Agreement is a "related agreement" to the
Distribution Plan as that term is used in the Rule and is
subject to all of the provisions of the Rule as to such
agreements;
1
<PAGE> 2
NOW, THEREFORE, the Company and the Intermediary agree as
follows:
1. Subject to continuing compliance with its obligations
pursuant to Section 2 hereof, the Intermediary shall be entitled
to distribution fee and service fee payments, if any, to be paid
by the Company with respect to each class of the Fund's shares
at the annual percentage rate of the Holding Level set forth
from time to time in the then current Prospect of the Fund on a
quarterly basis (prorated for any portion of such period during
which this Agreement is in effect for less than the full amount
of such period); it is understood and agreed that the Company
may make final and binding determinations as to whether such
continuing compliance and as to whether or not any Fund shares
are to be considered in determining the Holding Level of any
particular financial intermediary and what Fund shares, if any,
are to be attributed to such purpose to a particular financial
intermediary, to a different financial intermediary or to no
financial intermediary.
2. The distribution fee payments with respect to a class of
the Fund's shares to be made in accordance with Section 1
hereof, if any, shall be paid to the Broker-Dealer as
compensation for selling shares of the respective class.
2
<PAGE> 3
3. In consideration for the service fee payments to be made in
accordance with Section 1 hereof, the Intermediary shall provide
to its clients or customers who hold shares of each respective
Fund with respect to which payments to the Intermediary may be
made under such Fund's Distribution Plan such services and other
assistance as may from time to time be reasonably requested by
the Company, including but not limited to answering inquiries
regarding the Fund, providing information programs regarding the
Fund, assisting in selected dividend payment options, account
designations and addresses and maintaining the investment of
such customer or client in the Fund.
4. The Company shall have the right at any time and from time
to time without notice to the Broker-Dealer to amend its
Prospectus with respect to the amount of the service free and
the amount of the distribution fee to be paid pursuant hereto.
Such amendments shall be effective as of the date of the amended
Prospectus.
5. This Agreement shall go into effect on the later of the
date set forth above or the date on which it is approved by a
vote of each Fund's Board of Trustees and of those Trustees (the
"Qualified Trustees") who are not interested persons (as defined
in the 1940 Act) of the Fund and have no direct or indirect
financial interest in the operations of the Distribution Plan or
any agreement related to the Distribution Plan cast in person at
a meeting called for the purpose of voting on this Agreement and
shall continue in effect (unless terminated) until the June 30th
next succeeding such effective date and will continue thereafter
only if such continuance is specifically approved at least
annually in the manner heretofore specified for initial
approval. This agreement will terminate automatically in the
event of its assignment (as that term is used in the Rule) or if
the Distribution Plan is terminated. This Agreement may also be
terminated at any time, without the payment of any penalty, on
sixty (60) days written notice to the Intermediary, by vote of a
majority of the Qualified Trustees or by vote of a majority
(as that term is used in the Rule) of the outstanding
voting securities of the Fund.
IN WITNESS WHEREOF, this Agreement is executed as of the date
first above written.
VAN KAMPEN AMERICAN CAPITAL
By:
Intermediary Senior Vice President
3
<PAGE> 4
Address
By:
Title
4
<PAGE> 1
EXHIBIT 15(d)
FORM OF
VAN KAMPEN AMERICAN CAPITAL [FUND NAME]
SERVICE PLAN
The plan set forth below (the "Service Plan") for the VAN
KAMPEN AMERICAN CAPITAL [FUND NAME] (the "Fund"), a series of the Van
Kampen American Capital [Trust Name] (the "Trust") describes the material
terms and conditions under which assets of the Fund may be used
to compensate the Fund's principal underwriter, within the
meaning of the Investment Company Act of 1940, as amended (the
"1940 Act"), brokers, dealers and other financial intermediaries
(collectively "Financial Intermediaries") for providing personal
services to shareholders and/or the maintenance of shareholder
accounts with respect to each of its Class A Shares of
beneficial interest (the "Class A Shares"), its Class B Shares
of beneficial interest (the "Class B Shares"), and its Class C
Shares of beneficial interest (the "Class C Shares") The Class
A Shares, Class B Shares and Class C Shares sometimes are
referred to herein collectively as the "Shares." Each class of
Shares is offered and sold subject to a different combination of
front-end sales charges, distribution fees, service fees and
contingent deferred sales charges.1 Classes of shares, if any,
subject to a front-end sales charge and a distribution and/or
service fee are referred to herein as "Front-End Classes" and
the Shares of such classes are referred to herein as "Front-End
Shares." Classes of shares, if any, subject to a
contingent-deferred sales charge and a distribution and or a
service fee are referred to herein as "CDSC Classes" and Shares
of such classes are referred to herein as "CDSC Shares."
Classes of shares, if any, subject to a front-end sales charge,
a contingent-deferred sales charge and a distribution and/or
service fee are referred to herein as "Combination Classes" and
Shares of such class are referred to herein as "Combination
Shares."
The Fund has adopted a distribution plan (the "Distribution
Plan") pursuant to which the Fund is authorized to expend on an
annual basis a portion of its average net assets attributable to
each class of Shares in connection with financing distribution
related activities. The Fund also has entered into a
distribution and services agreement (the "Distribution and
Services Agreement") with Van Kampen American Capital
Distributors, Inc. (formerly Van Kampen Merritt, Inc.) (the
"Distributor"), pursuant to which the Distributor acts as agent
on behalf of the Fund in connection with the implementation of
the Service Plan and acts as the principal underwriter with
respect to each class of Shares. The Distributor may enter into
selling agreements (the "Selling Agreements") with brokers,
<PAGE> 2
dealers and other financial intermediaries ("Financial
Intermediaries") in order to implement the Distribution
Agreement, the Distribution Plan and this Service Plan.
The Fund hereby is authorized to pay a service fee with respect
to its Class A Shares, Class B Shares and Class C Shares to any
person who sells such Shares and provides personal services to
shareholders and/or maintains shareholder accounts in an annual
amount not to exceed 0.25% of the average annual net asset value
of the Shares maintained in the Fund by such person that were
sold on or after the date on which this Service Plan was first
implemented. The aggregate annual amount of all such payments
with respect to each such class of Shares may not exceed 0.25%
of the Fund's average annual net assets attributable to the
respective class of Shares sold on or after the date on which
this Service Plan was first implemented and maintained in the
Fund more than one year.
Payments pursuant to this Service Plan may be paid or prepaid
on behalf of the Fund by the Distributor acting as the Fund's
agent.
Payments by the Fund to the Distributor pursuant to this
Service Plan shall not be made more often than monthly upon
receipt by the Fund of a separate written expense report with
respect to each class of Shares setting forth the expenses
qualifying for such reimbursement allocated to each class of
Shares and the purposes thereof.
In the event that amounts payable hereunder with respect to a
class of Shares do not fully reimburse the Distributor for
pre-paid service fees, such unreimbursed service fee expenses
will be carried forward and paid by the Fund hereunder in future
years so long as this Service Plan remains in effect, subject to
applicable laws and regulations. Reimbursements for service fee
related expenses payable hereunder with respect to a particular
class of Shares may not be used to subsidize services provided
with respect to any other class of Shares.
The Fund shall not compensate the Distributor, and neither the
Fund nor the Distributor shall compensate any Financial
Intermediary, for any service related expenses incurred with
respect to a class of Shares prior to the later of (a) the
implementation of this Service Plan with respect to such class
of Shares or (b) the date that such Financial Intermediary
enters into a Selling Agreement with the Distributor.
The Fund hereby authorizes the Distributor to enter into
Selling Agreements with certain Financial Intermediaries to
provide compensation to such Financial Intermediaries for
activities and services of the type referred to in Paragraph 1
hereof. Prior to the implementation of a Selling Agreement,
such agreement shall be approved by a majority of the Board of
Trustees of the Trust and a majority of the Disinterested
2
<PAGE> 3
Trustees (within the meaning of the 1940 Act) by a vote cast in
person at a meeting called for the purpose of voting on such
Selling Agreements. Such Selling Agreements shall provide that
the Financial Intermediaries shall provide the Distributor with
such information as is reasonably necessary to permit the
Distributor to comply with the reporting requirements set forth
in Paragraphs 3 and 8 hereof.
Subject to the provisions of this Service Agreement, the Fund
is hereby authorized to pay a service fee to any person that is
not an "affiliated person" or "interested person" of the Fund or
its "investment adviser" or "principal underwriter" (as such
terms are defined in the 1940 Act) who provides any of the
foregoing services for the Fund. Such fee shall be paid only
pursuant to written agreements between the Fund and such other
person the terms of which permit payments to such person only in
accordance with the provisions of this Service Agreement and
which have the approval of a majority of the Disinterested
Trustees by vote cast separately with respect to each class of
Shares and cast in person at a meeting called for the purpose of
voting on such written agreement.
The Fund and the Distributor shall prepare separate written
reports for each class of Shares and shall submit such reports
to the Fund's Board of Trustees on a quarterly basis summarizing
all payments made by them with respect to each class of Shares
pursuant to this Service Plan and the agreements contemplated
hereby, the purposes for which such payments were made and such
other information as the Board of Trustees or the Disinterested
Trustees may reasonably request from time to time, and the Board
of Trustees shall review such reports and other information.
This Service Plan may be terminated with respect to a class of
Shares without penalty at any time by a majority of the
Disinterested Trustees or by a "majority of the outstanding
voting securities" of the respective class of Shares of the
Fund.
This Service Plan shall become effective upon its approval by
(a) a majority of the Board of Trustees and a majority of the
Disinterested Trustees by vote cast separately with respect to
each class of Shares cast in person at a meeting called for the
purpose of voting on this Distribution Plan, and (b) with
respect to each class of Shares, a "majority of the outstanding
voting securities" (as such phrase is defined in the 1940 Act)
of such class of Shares voting separately as a class.
This Service Plan and any agreement contemplated hereby shall
continue in effect beyond the first anniversary of its adoption
by the Board of Trustees of the Fund only so long as (a) its
continuation is approved at least annually in the manner set
forth in clause (a) of paragraph 10 above and (b) the selection
and nomination of those trustees of the Fund who are not
"interested persons" of the Fund are committed to the discretion
of such trustees.
3
<PAGE> 4
This Service Plan may not be amended to increase materially the
maximum amounts permitted to be expended hereunder except with
the approval of a "majority of the outstanding voting
securities" of the respective class of Shares of the Fund. This
Service Plan may not be amended in any material respect except
with the approval of a majority of the Disinterested Trustees.
Amendments required to conform this Service Plan to changes in
Rule 12b-1 under the Investment Company Act of 1940, as amended
(the "1940 Act"), the 1940 Act, the rules and regulations
thereunder or the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. shall not be deemed to
be material amendments.
The Trustees of the Trust have adopted this Service Plan as
trustees under the Declaration of Trust of the Trust and the
policies of the Trust adopted hereby are not binding upon any of
the Trustees or shareholders of the Trust individually, but bind
only the trust estate.
1 The Fund is authorized to offer multiple classes of shares
pursuant to an order of the Securities and Exchange Commission
exempting the Fund from certain provisions of the 1940 Act.
4
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
The undersigned, being officers and trustees of Van Kampen American
Capital Tax Free Trust, a Delaware business trust (the "Trust"), do hereby, in
the capacities shown below, individually appoint Dennis J. McDonnell and Ronald
A. Nyberg, each of Oakbrook Terrace, Illinois, and each of them, as the agents
and attorneys-in-fact with full power of substitution and resubstitution, for
each of the undersigned, to execute and deliver, for and on behalf of the
undersigned, any and all amendments to the Registration Statement on Form N-1A
filed by the Trust with the Securities and Exchange Commission pursuant to the
provisions of the Securities Act of 1933 and the Investment Company Act of
1940.
This Power of Attorney may be executed in multiple counterparts, each
of which shall be deemed an original, but which taken together shall constitute
one instrument.
Dated: July 25, 1995
Signature Title
_____________________________________ Trustee
J. Miles Branagan
<PAGE> 2
/s/ Richard E. Caruso
----------------------------- Trustee
Richard E. Caruso
/s/ Philip P. Gaughan
----------------------------- Trustee
Philip P. Gaughan
/s/ Roger Hilsman
------------------------ Trustee
Roger Hilsman
_____________________________________ Trustee
R. Craig Kennedy
/s/ Dennis J. McDonnell
----------------------- President, Chief Executive Officer and Trustee
Dennis J. McDonnell
/s/ Donald C. Miller
--------------------- Chairman and Trustee
Donald C. Miller
<PAGE> 3
/s/ Jack E. Nelson
--------------------------- Trustee
Jack E. Nelson
_____________________________________ Trustee
Don G. Powell
/s/ David Rees
--------------------- Trustee
David Rees
/s/ Jerome L. Robinson
----------------------- Trustee
Jerome L. Robinson
/s/ Lawrence J. Sheehan
------------------------- Trustee
Lawrence J. Sheehan
_____________________________________ Trustee
Fernando Sisto
<PAGE> 4
/s/ Wayne W. Whalen
-------------------- Trustee
Wayne W. Whalen
_____________________________________ Trustee
William S. Woodside
/s/ Edward C. Wood III
----------------------- Chief Financial and Accounting Officer
Edward C. Wood III
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 011
<NAME> INSURED TAX FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1,137,588,569<F1>
<INVESTMENTS-AT-VALUE> 1,147,667,200<F1>
<RECEIVABLES> 21,780,226<F1>
<ASSETS-OTHER> 32,230<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,169,479,656<F1>
<PAYABLE-FOR-SECURITIES> 16,998,148<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 8,731,701<F1>
<TOTAL-LIABILITIES> 25,729,849<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,116,662,803
<SHARES-COMMON-STOCK> 63,181,868
<SHARES-COMMON-PRIOR> 61,941,348
<ACCUMULATED-NII-CURRENT> 37,808<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,960,321)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (3,089,839)<F1>
<NET-ASSETS> 1,110,223,546
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 79,444,087<F1>
<OTHER-INCOME> (588,068)<F1>
<EXPENSES-NET> 10,843,161<F1>
<NET-INVESTMENT-INCOME> 68,012,858<F1>
<REALIZED-GAINS-CURRENT> 6,340,550<F1>
<APPREC-INCREASE-CURRENT> (154,941,139)<F1>
<NET-CHANGE-FROM-OPS> (80,587,731)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (66,735,561)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,865,303
<NUMBER-OF-SHARES-REDEEMED> (8,130,723)
<SHARES-REINVESTED> 2,505,940
<NET-CHANGE-IN-ASSETS> (119,733,295)
<ACCUMULATED-NII-PRIOR> 273,882<F1>
<ACCUMULATED-GAINS-PRIOR> (13,300,871)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,028,401<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,843,161<F1>
<AVERAGE-NET-ASSETS> 1,166,800,743
<PER-SHARE-NAV-BEGIN> 19.857
<PER-SHARE-NII> 1.051
<PER-SHARE-GAIN-APPREC> (2.280)
<PER-SHARE-DIVIDEND> (1.056)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.572
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 012
<NAME> INSURED TAX FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1,137,588,569<F1>
<INVESTMENTS-AT-VALUE> 1,147,667,200<F1>
<RECEIVABLES> 21,780,226<F1>
<ASSETS-OTHER> 32,230<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,169,479,656<F1>
<PAYABLE-FOR-SECURITIES> 16,998,148<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 8,731,701<F1>
<TOTAL-LIABILITIES> 25,729,849<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 33,016,541
<SHARES-COMMON-STOCK> 1,709,564
<SHARES-COMMON-PRIOR> 1,047,858
<ACCUMULATED-NII-CURRENT> 37,808<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,960,321)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (3,089,839)<F1>
<NET-ASSETS> 30,025,336
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 79,444,087<F1>
<OTHER-INCOME> (588,068)<F1>
<EXPENSES-NET> 10,843,161<F1>
<NET-INVESTMENT-INCOME> 68,012,858<F1>
<REALIZED-GAINS-CURRENT> 6,340,550<F1>
<APPREC-INCREASE-CURRENT> (154,941,139)<F1>
<NET-CHANGE-FROM-OPS> (80,587,731)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (1,291,269)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 806,590
<NUMBER-OF-SHARES-REDEEMED> (185,936)
<SHARES-REINVESTED> 41,052
<NET-CHANGE-IN-ASSETS> 9,252,002
<ACCUMULATED-NII-PRIOR> 273,882<F1>
<ACCUMULATED-GAINS-PRIOR> (13,300,871)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,028,401<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,843,161<F1>
<AVERAGE-NET-ASSETS> 26,873,828
<PER-SHARE-NAV-BEGIN> 19.824
<PER-SHARE-NII> .899
<PER-SHARE-GAIN-APPREC> (2.276)
<PER-SHARE-DIVIDEND> (.884)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.563
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 013
<NAME> INSURED TAX FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1,137,588,569<F1>
<INVESTMENTS-AT-VALUE> 1,147,667,200<F1>
<RECEIVABLES> 21,780,226<F1>
<ASSETS-OTHER> 32,230<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,169,479,656<F1>
<PAYABLE-FOR-SECURITIES> 16,998,148<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 8,731,701<F1>
<TOTAL-LIABILITIES> 25,729,849<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,080,719
<SHARES-COMMON-STOCK> 199,168
<SHARES-COMMON-PRIOR> 250,987
<ACCUMULATED-NII-CURRENT> 37,808<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,960,321)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (3,089,839)<F1>
<NET-ASSETS> 3,498,975
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 79,444,087<F1>
<OTHER-INCOME> (588,068)<F1>
<EXPENSES-NET> 10,843,161<F1>
<NET-INVESTMENT-INCOME> 68,012,858<F1>
<REALIZED-GAINS-CURRENT> 6,340,550<F1>
<APPREC-INCREASE-CURRENT> (154,941,139)<F1>
<NET-CHANGE-FROM-OPS> (80,587,731)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (222,010)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 151,670
<NUMBER-OF-SHARES-REDEEMED> (213,783)
<SHARES-REINVESTED> 10,294
<NET-CHANGE-IN-ASSETS> (1,476,361)
<ACCUMULATED-NII-PRIOR> 273,882<F1>
<ACCUMULATED-GAINS-PRIOR> (13,300,871)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,028,401<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,843,161<F1>
<AVERAGE-NET-ASSETS> 4,647,772
<PER-SHARE-NAV-BEGIN> 19.823
<PER-SHARE-NII> .908
<PER-SHARE-GAIN-APPREC> (2.279)
<PER-SHARE-DIVIDEND> (.884)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.568
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 014
<NAME> INSURED TAX FREE INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 1,137,588,569<F1>
<INVESTMENTS-AT-VALUE> 1,147,667,200<F1>
<RECEIVABLES> 21,780,226<F1>
<ASSETS-OTHER> 32,230<F1>
<OTHER-ITEMS-ASSETS> 0<F1>
<TOTAL-ASSETS> 1,169,479,656<F1>
<PAYABLE-FOR-SECURITIES> 16,998,148<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 8,731,701<F1>
<TOTAL-LIABILITIES> 25,729,849<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 2,096<F1>
<SHARES-COMMON-STOCK> 111
<SHARES-COMMON-PRIOR> 100
<ACCUMULATED-NII-CURRENT> 37,808<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (6,960,321)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (3,089,839)<F1>
<NET-ASSETS> 1,950
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 79,444,087<F1>
<OTHER-INCOME> (588,068)<F1>
<EXPENSES-NET> 10,843,161<F1>
<NET-INVESTMENT-INCOME> 68,012,858<F1>
<REALIZED-GAINS-CURRENT> 6,340,550<F1>
<APPREC-INCREASE-CURRENT> (154,941,139)<F1>
<NET-CHANGE-FROM-OPS> (80,587,731)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (92)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 111
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 1,950
<ACCUMULATED-NII-PRIOR> 273,882<F1>
<ACCUMULATED-GAINS-PRIOR> (13,300,871)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 5,028,401<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 10,843,161<F1>
<AVERAGE-NET-ASSETS> 2,009
<PER-SHARE-NAV-BEGIN> 18.890
<PER-SHARE-NII> .811
<PER-SHARE-GAIN-APPREC> (1.313)
<PER-SHARE-DIVIDEND> (.820)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 17.568
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 031
<NAME> VKM CALIFORNIA INSURED TAX FREE
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994<F1>
<PERIOD-START> JAN-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 154,915,479<F1>
<INVESTMENTS-AT-VALUE> 150,750,580<F1>
<RECEIVABLES> 3,037,740<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 1,664,398<F1>
<TOTAL-ASSETS> 155,452,718<F1>
<PAYABLE-FOR-SECURITIES> 4,062,463<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,255,458<F1>
<TOTAL-LIABILITIES> 5,317,921<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 138,705,152
<SHARES-COMMON-STOCK> 8,245,311
<SHARES-COMMON-PRIOR> 8,262,630
<ACCUMULATED-NII-CURRENT> 18,913<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,466,853)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,102,506)<F1>
<NET-ASSETS> 130,294,489
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,362,696<F1>
<OTHER-INCOME> (81,395)<F1>
<EXPENSES-NET> 1,448,314<F1>
<NET-INVESTMENT-INCOME> 8,832,987<F1>
<REALIZED-GAINS-CURRENT> (5,830,138)<F1>
<APPREC-INCREASE-CURRENT> (18,824,986)
<NET-CHANGE-FROM-OPS> (15,822,137)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (7,808,441)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,342,809
<NUMBER-OF-SHARES-REDEEMED> (132,758)
<SHARES-REINVESTED> 281,094
<NET-CHANGE-IN-ASSETS> (20,792,359)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (1,636,715)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 793,610<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,944,313<F1>
<AVERAGE-NET-ASSETS> 143,016,841
<PER-SHARE-NAV-BEGIN> 18.286
<PER-SHARE-NII> .912
<PER-SHARE-GAIN-APPREC> (2.484)
<PER-SHARE-DIVIDEND> (.912)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 15.802
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 032
<NAME> VKM CALIFORNIA INSURED TAX FREE
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994<F1>
<PERIOD-START> JAN-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 154,915,479<F1>
<INVESTMENTS-AT-VALUE> 150,750,580<F1>
<RECEIVABLES> 3,037,740<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 1,664,398<F1>
<TOTAL-ASSETS> 155,452,718<F1>
<PAYABLE-FOR-SECURITIES> 4,062,463<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,255,458<F1>
<TOTAL-LIABILITIES> 5,317,921<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 19,509,963
<SHARES-COMMON-STOCK> 1,079,043
<SHARES-COMMON-PRIOR> 839,789
<ACCUMULATED-NII-CURRENT> 18,913<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,466,853)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,102,506)<F1>
<NET-ASSETS> 17,054,794
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,362,696<F1>
<OTHER-INCOME> (81,395)<F1>
<EXPENSES-NET> 1,448,314<F1>
<NET-INVESTMENT-INCOME> 8,832,987<F1>
<REALIZED-GAINS-CURRENT> (5,830,138)<F1>
<APPREC-INCREASE-CURRENT> (18,824,986)
<NET-CHANGE-FROM-OPS> (15,822,137)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (811,323)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 414,834
<NUMBER-OF-SHARES-REDEEMED> (206,014)
<SHARES-REINVESTED> 30,434
<NET-CHANGE-IN-ASSETS> 1,715,048
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (1,636,715)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 793,610<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,944,313<F1>
<AVERAGE-NET-ASSETS> 17,666,425
<PER-SHARE-NAV-BEGIN> 18.266
<PER-SHARE-NII> .785
<PER-SHARE-GAIN-APPREC> (2.482)
<PER-SHARE-DIVIDEND> (.764)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 15.805
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 033
<NAME> VKM CALIFORNIA INSURED TAX FREE
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994<F1>
<PERIOD-START> JAN-01-1994<F1>
<PERIOD-END> DEC-31-1994<F1>
<INVESTMENTS-AT-COST> 154,915,479<F1>
<INVESTMENTS-AT-VALUE> 150,750,580<F1>
<RECEIVABLES> 3,037,740<F1>
<ASSETS-OTHER> 0<F1>
<OTHER-ITEMS-ASSETS> 1,664,398<F1>
<TOTAL-ASSETS> 155,452,718<F1>
<PAYABLE-FOR-SECURITIES> 4,062,463<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 1,255,458<F1>
<TOTAL-LIABILITIES> 5,317,921<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 3,470,128
<SHARES-COMMON-STOCK> 176,321
<SHARES-COMMON-PRIOR> 218,158
<ACCUMULATED-NII-CURRENT> 18,913<F1>
<OVERDISTRIBUTION-NII> 0<F1>
<ACCUMULATED-NET-GAINS> (7,466,853)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (4,102,506)<F1>
<NET-ASSETS> 2,785,514
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 10,362,696<F1>
<OTHER-INCOME> (81,395)<F1>
<EXPENSES-NET> 1,448,314<F1>
<NET-INVESTMENT-INCOME> 8,832,987<F1>
<REALIZED-GAINS-CURRENT> (5,830,138)<F1>
<APPREC-INCREASE-CURRENT> (18,824,986)
<NET-CHANGE-FROM-OPS> (15,822,137)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (194,310)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 82,157
<NUMBER-OF-SHARES-REDEEMED> (132,758)
<SHARES-REINVESTED> 8,764
<NET-CHANGE-IN-ASSETS> (1,197,495)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (1,636,715)<F1>
<OVERDISTRIB-NII-PRIOR> 0<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 793,610<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 1,944,313<F1>
<AVERAGE-NET-ASSETS> 4,169,589
<PER-SHARE-NAV-BEGIN> 18.257
<PER-SHARE-NII> .773
<PER-SHARE-GAIN-APPREC> (2.468)
<PER-SHARE-DIVIDEND> (.764)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0<F1>
<PER-SHARE-NAV-END> 15.798
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0<F1>
<AVG-DEBT-PER-SHARE> 0<F1>
<FN>
<F1>This item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 041
<NAME> VKM MUNICIPAL INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 518,901,563
<SHARES-COMMON-STOCK> 34,768,092
<SHARES-COMMON-PRIOR> 36,973,304
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 495,814,695
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (32,205,506)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 2,891,335
<NUMBER-OF-SHARES-REDEEMED> (6,182,355)
<SHARES-REINVESTED> 1,085,808
<NET-CHANGE-IN-ASSETS> (1,821,198)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 545,671,916
<PER-SHARE-NAV-BEGIN> 16.164
<PER-SHARE-NII> .886
<PER-SHARE-GAIN-APPREC> (1.907)
<PER-SHARE-DIVIDEND> (.882)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.261
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>* This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 042
<NAME> VKM MUNICIPAL INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 174,384,111
<SHARES-COMMON-STOCK> 11,128,652
<SHARES-COMMON-PRIOR> 10,422,152
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 158,705,886
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (8,547,628)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 1,909,204
<NUMBER-OF-SHARES-REDEEMED> (1,527,736)
<SHARES-REINVESTED> 325,032
<NET-CHANGE-IN-ASSETS> 9,492,807
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 165,994,307
<PER-SHARE-NAV-BEGIN> 16.139
<PER-SHARE-NII> .78
<PER-SHARE-GAIN-APPREC> (1.89)
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.261
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>* This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 043
<NAME> VKM MUNICIPAL INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 4,365,588
<SHARES-COMMON-STOCK> 270,017
<SHARES-COMMON-PRIOR> 253,923
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 3,850,918
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (212,571)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 141,638
<NUMBER-OF-SHARES-REDEEMED> (134,564)
<SHARES-REINVESTED> 9,020
<NET-CHANGE-IN-ASSETS> (3,115,984)
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 4,168,299
<PER-SHARE-NAV-BEGIN> 16.141
<PER-SHARE-NII> .783
<PER-SHARE-GAIN-APPREC> (1.894)
<PER-SHARE-DIVIDEND> (.768)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.262
<EXPENSE-RATIO> 2
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 044
<NAME> VKM MUNICIPAL INCOME FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> MAR-14-1994
<PERIOD-END> DEC-31-1994
<INVESTMENTS-AT-COST> 667,323,342<F1>
<INVESTMENTS-AT-VALUE> 652,138,108<F1>
<RECEIVABLES> 13,639,763<F1>
<ASSETS-OTHER> 17,688<F1>
<OTHER-ITEMS-ASSETS> 2,841<F1>
<TOTAL-ASSETS> 665,798,400<F1>
<PAYABLE-FOR-SECURITIES> 0<F1>
<SENIOR-LONG-TERM-DEBT> 0<F1>
<OTHER-ITEMS-LIABILITIES> 6,444,286<F1>
<TOTAL-LIABILITIES> 6,444,286<F1>
<SENIOR-EQUITY> 0<F1>
<PAID-IN-CAPITAL-COMMON> 1,088,397
<SHARES-COMMON-STOCK> 68,899
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0<F1>
<OVERDISTRIBUTION-NII> 228,298<F1>
<ACCUMULATED-NET-GAINS> (26,022,029)<F1>
<OVERDISTRIBUTION-GAINS> 0<F1>
<ACCUM-APPREC-OR-DEPREC> (13,135,218)<F1>
<NET-ASSETS> 982,615
<DIVIDEND-INCOME> 0<F1>
<INTEREST-INCOME> 49,936,822<F1>
<OTHER-INCOME> (354,986)<F1>
<EXPENSES-NET> 8,293,265<F1>
<NET-INVESTMENT-INCOME> 41,288,571<F1>
<REALIZED-GAINS-CURRENT> (15,519,375)<F1>
<APPREC-INCREASE-CURRENT> (76,400,277)<F1>
<NET-CHANGE-FROM-OPS> (50,631,081)<F1>
<EQUALIZATION> 0<F1>
<DISTRIBUTIONS-OF-INCOME> (55,216)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0<F1>
<NUMBER-OF-SHARES-SOLD> 133,104
<NUMBER-OF-SHARES-REDEEMED> (65,876)
<SHARES-REINVESTED> 1,671
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0<F1>
<ACCUMULATED-GAINS-PRIOR> (10,502,654)<F1>
<OVERDISTRIB-NII-PRIOR> 495,948<F1>
<OVERDIST-NET-GAINS-PRIOR> 0<F1>
<GROSS-ADVISORY-FEES> 3,475,616<F1>
<INTEREST-EXPENSE> 0<F1>
<GROSS-EXPENSE> 8,293,265<F1>
<AVERAGE-NET-ASSETS> 1,174,079
<PER-SHARE-NAV-BEGIN> 15.29
<PER-SHARE-NII> .701
<PER-SHARE-GAIN-APPREC> (1.031)
<PER-SHARE-DIVIDEND> (.698)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.262
<EXPENSE-RATIO> 1
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>This Item relates to the Fund on a composite basis and not on a class basis.
</FN>
</TABLE>
