<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1995
FILE NO. 2-99715
811-4386
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933 /X/
Pre-Effective Amendment No. / /
Post-Effective Amendment No. 36 /X/
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 /X/
Amendment No. 37 /X/
VAN KAMPEN MERRITT
TAX FREE FUND
(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)
Dennis J. McDonnell
President, Van Kampen Merritt
Tax Free Fund
One Parkview Plaza,
Oakbrook Terrace, Illinois 60181
(Name and Address of Agent for Service)
Copies to:
<TABLE>
<S> <C>
Wayne W. Whalen, Esq. Ronald A. Nyberg, Esq.
Thomas A. Hale, Esq. Executive Vice President,
Skadden, Arps, Slate, Meagher & Flom General Counsel and Director,
333 West Wacker Drive Van Kampen American Capital
Chicago, IL 60606 Investment Advisory Corp.
(312) 407-0700 One Parkview Plaza
Oakbrook Terrace, IL 60181
</TABLE>
IT IS PROPOSED THAT THIS FILING WILL BECOME EFFECTIVE (CHECK APPROPRIATE BOX)
___IMMEDIATELY UPON FILING PURSUANT TO PARAGRAPH (B)
___ON (DATE) PURSUANT TO PARAGRAPH (B)
_X_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
DECLARATION PURSUANT TO RULE 24F-2
REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SHARES AND HAS FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION A RULE 24F-2 NOTICE FOR ITS FISCAL YEAR
ENDING DECEMBER 31, 1994 ON FEBRUARY 28, 1995.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains one Prospectus and two Statements of
Additional Information describing two sub-trusts 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
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
Part C Information
Exhibits
-------------------------
The Prospectuses and Statements of Additional Information with respect to
Van Kampen Merritt California Tax Free Income Fund, Van Kampen Merritt Michigan
Tax Free Income Fund, Van Kampen Merritt Missouri Tax Free Income Fund and Van
Kampen Merritt Ohio Tax Free Income Fund, sub-trusts 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 Prospectuses and Statements of Additional Information with respect to
Van Kampen Merritt Tax Free High Income Fund, Van Kampen Merritt Municipal
Income Fund, Van Kampen Merritt Limited Term Municipal Income Fund, Van Kampen
Merritt Florida Insured Tax Free Income Fund, Van Kampen Merritt New Jersey Tax
Free Income Fund and Van Kampen Merritt New York Tax Free Income Fund,
sub-trusts 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
A SUB-TRUST OF
VAN KAMPEN MERRITT TAX FREE FUND
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.................... PROSPECTUS SUMMARY; 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
Item 3. Condensed Financial
Information............... 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; FINANCIAL HIGHLIGHTS; FUND PERFORMANCE;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 4. General Description of
Registrant................ PROSPECTUS SUMMARY; THE FUNDS; INVESTMENT OBJECTIVES
AND POLICIES; MUNICIPAL SECURITIES; INVESTMENT
PRACTICES; INSURANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 5. Management of the Fund...... ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--INSURED
FUND; ANNUAL FUND OPERATING EXPENSES AND EXAMPLES--
CALIFORNIA INSURED FUND; INVESTMENT ADVISORY SERVICES;
ALLOCATION OF BROKERAGE TRANSACTIONS; SHAREHOLDER
SERVICES; SHAREHOLDER REPORTS AND INQUIRIES
Item 6. Capital Stock and
Other Securities.......... DISTRIBUTIONS FROM THE FUND; REDEMPTION OF SHARES; THE
DISTRIBUTION AND SERVICE PLANS; TAX STATUS;
SHAREHOLDER SERVICES; SHAREHOLDER REPORTS AND
INQUIRIES; DESCRIPTION OF SHARES OF THE FUND
Item 7. Purchase of Securities
Being Offered............. SHAREHOLDER TRANSACTION EXPENSES; PURCHASING SHARES OF
THE FUND; THE DISTRIBUTION AND SERVICE PLANS; NET
ASSET VALUE; FUND PERFORMANCE; SHAREHOLDER SERVICES;
SHAREHOLDER REPORTS AND INQUIRIES
Item 8. Redemption or Repurchase.... REDEMPTION OF SHARES; SHAREHOLDER PROGRAMS; NET ASSET
VALUE; PURCHASING SHARES OF THE FUND
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: PURCHASING
SHARES OF THE FUND; INVESTMENT ADVISORY SERVICES; THE
DISTRIBUTION AND SERVICE PLANS; Custodian and
Independent Auditors; 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: PURCHASING
SHARES OF THE FUND; SHAREHOLDER PROGRAMS; REDEMPTION OF SHARES;
NET ASSET VALUE
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 caption:
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.
(ii)
<PAGE> 5
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION -- DATED JUNE 2, 1995
- --------------------------------------------------------------------------------
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.
The Van Kampen American Capital 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 Fund. 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.
------------------
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
- --------------------------------------------------------------------------------
The Van Kampen American Capital 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 Fund. 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 , 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 1-800-225-2222, ext. 6504,
or for Telecommunication Device for the Deaf, 1-800-772-8889.
------------------
VAN KAMPEN AMERICAN CAPITALSM
------------------
THIS PROSPECTUS IS DATED , 1995.
<PAGE> 6
(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 of the Insured Fund and the California Insured Fund
(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) 225-2222.
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 $1,000,000, "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 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 $1,000,000, 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 $1,000,000. 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 "Purchasing Shares of the Fund."
2
<PAGE> 7
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PAGE
----
<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......... 9
Annual Fund Operating Expenses and Examples -- California Insured
Fund.............................................................. 10
Financial Highlights................................................ 13
The Funds........................................................... 15
Investment Objectives and Policies.................................. 15
Municipal Securities................................................ 16
Investment Practices................................................ 19
Insurance........................................................... 22
Purchasing Shares of the Funds...................................... 22
Distributions from the Funds........................................ 33
Purchase of Additional Shares With Distributions.................. 34
Redemption of Shares................................................ 34
Net Asset Value..................................................... 37
Fund Performance.................................................... 38
Tax Status.......................................................... 40
Investment Advisory Services........................................ 43
The Distribution and Service Plans.................................. 45
Allocation of Brokerage Transactions................................ 47
Shareholder Programs................................................ 47
Shareholder Services................................................ 51
Shareholder Reports and Inquiries................................... 51
Additional Information.............................................. 52
</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> 8
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
- --------------------------------------------------------------------------------
THE FUNDS. Van Kampen American Capital Insured Tax Free Income Fund and Van
Kampen American Capital California Insured Tax Free Fund (each a "Fund" and
collectively the "Funds") each is a separate diversified series of Van Kampen
American Capital Tax Free Fund, an open-end, diversified management investment
company organized as a Delaware business trust (the "Trust"). See "The Funds."
INVESTMENT OBJECTIVES AND POLICIES. 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."
Municipal securities in which 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."
INSURANCE. Each municipal security in the portfolio of the Insured Fund and the
California Insured Fund is insured as to the timely payment of principal and
interest under one or more policies obtained by the issuer or purchased by such
Funds. No representation is made as to the ability of any insurer to perform its
obligations. See "Insurance."
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
4
<PAGE> 9
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 Examples" sets forth examples of the charges applicable to each
class of shares.
The Funds 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 $1,000,000, "Class B Shares" and "Class C Shares"). Class A Share
accounts over $1,000,000 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.
The minimum initial investment with respect to the Class A Shares, Class B
Shares and Class C Shares is $500. The minimum subsequent investment with
respect to each class of shares is $25.
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 contingent deferred sales charge.
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 contingent
deferred sales charge 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 contingent deferred sales charge 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 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.
5
<PAGE> 10
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 contingent deferred sales charge
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.
INVESTMENT ADVISER AND ADVISORY FEE. Van Kampen American Capital Investment
Advisory Corp. (the "Adviser") is the investment adviser for both of the Funds.
The annual advisory fee for the Insured Fund is 0.525% of its average daily net
assets, reduced on net assets over certain amounts. The annual advisory fee for
the California Fund is 0.50% of its average daily net assets, reduced on net
assets over certain amounts. See "Investment Advisory Services."
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."
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. Both Funds may require redemption of their shares if
the value of the account in the respective Fund is $50 or less. See "Redemption
of Shares."
The above is qualified in its entirety by reference to the more detailed
information appearing elsewhere in this Prospectus.
6
<PAGE> 11
- --------------------------------------------------------------------------------
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 original purchase
price on redemption proceeds)... None(2) Year 1--4.00% Year 1--1.00%
Year 2--3.75%
Year 3--3.50%
Year 4--2.50%
Year 5--1.50%
Year 6--1.00%
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.
(2) Investments of $1,000,000 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> 12
- --------------------------------------------------------------------------------
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).................................... 0.51% 0.51% 0.51%
12b-1 Fees(2) (as a percentage of average daily net
assets)........................................... 0.20%(3) 1.00% 1.00%
Other expenses (as a percentage of average daily net
assets)........................................... 0.22% 0.29% 0.28%
Total Expenses (as a percentage of average daily net
assets)(1)........................................ 0.93% 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 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."
(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' broker-dealers as sales compensation.
(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> 13
- --------------------------------------------------------------------------------
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 original
purchase price on redemption
proceeds)..................... None(2) Year 1--3.00% Year 1--1.00%
Year 2--2.50%
Year 3--2.00%
Year 4--1.00%
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.
(2) Investments of $1,000,000 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."
9
<PAGE> 14
- --------------------------------------------------------------------------------
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)................................. 0.18% 0.18% 0.18%
12b-1 Fees(2) (as a percentage of average daily net
assets).......................................... 0.25% 1.00% 1.00%
Other Expenses (as a percentage of average daily
net assets)...................................... 0.30% 0.34% 0.33%
Total Expenses(1) (as a percentage of average daily
net assets)...................................... 0.73% 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.
(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.
10
<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. The 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.......................... 58 92 112 180
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.......................... 18 57 97 180
Class C Shares.......................... 18 56 97 211
</TABLE>
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. The 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 83 143
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 83 143
Class C Shares.......................... 15 48 82 180
</TABLE>
The purpose of the foregoing tables is to assist an investor in understanding
the various costs and expenses that an investor in the Funds 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 Funds' 12b-1 plans and service plans, it is
anticipated that 12b-1 and service fees applicable to such Funds will increase
in accordance with such plans to a maximum amount of 0.25% of each Fund's net
assets. Additionally, as California Fund assets increase, the fees waived or
expenses reimbursed by the Adviser are expected to decrease. Accordingly, it is
unlikely
11
<PAGE> 16
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 each 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> 17
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
(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 each of the Funds 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 each 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 YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 19.587 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394 $ 16.700
-------- -------- -------- -------- -------- -------- --------
Net Investment Income.... 1.051 1.107 1.146 1.153 1.160 1.182 1.184
Net Realized and
Unrealized Gain/Loss on
Investments............ (2.280) 1.145 .561 .681 .037 .391 .682
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations............... (1.229) 2.252 1.707 1.834 1.197 1.573 1.866
-------- -------- -------- -------- -------- -------- --------
Less:
Distributions from Net
Investment Income...... 1.056 1.116 1.140 1.160 1.170 1.169 1.172
Distributions from Net
Realized Gain.......... -0- -0- .324 .021 -0- -0- -0-
-------- -------- -------- -------- -------- -------- --------
Total Distributions....... 1.056 1.116 1.464 1.181 1.170 1.169 1.172
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period................... $ 17.572 $ 19.857 $ 18.721 $ 18.478 $ 17.825 $ 17.798 $ 17.394
======== ======== ======== ======== ======== ======== ========
Total Return
(Non-annualized)......... (6.31%) 12.32% 9.51% 10.62% 7.07% 9.37% 11.48%
Net Assets at End of
Period (in millions)..... $1,110.2 $1,230.0 $ 999.9 $ 833.2 $ 701.7 $ 634.0 $ 555.3
Ratio of Expenses to
Average Net Assets
(Annualized)............. .88% .84% .83% .88% .87% .88% .85%
Ratio of Net Investment
Income to Average Net
Assets (Annualized)...... 5.70% 5.69% 6.14% 6.39% 6.63% 6.73% 6.92%
Portfolio Turnover........ 48.46% 78.73% 111.90% 113.25% 107.79% 81.28% 132.85%
<CAPTION>
CLASS B SHARES CLASS C SHARES
--------------------------- ---------------------------
AUGUST 13,
MAY 1, 1993 1993
(COMMENCEMENT (COMMENCEMENT
OF OF
YEAR YEAR YEAR YEAR DISTRIBUTION) YEAR DISTRIBUTION)
ENDED ENDED ENDED ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1987 1986 1985 1994 1993 1994 1993
------------ ------------ ------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 17.945 $ 16.189 $ 14.474 $ 19.824 $19.320 $ 19.823 $19.650
-------- -------- -------- -------- ------- -------- -------
Net Investment Income.... 1.198 1.249 1.220 .899 .619 .908 .350
Net Realized and
Unrealized Gain/Loss on
Investments............ (1.226) 1.846 1.780 (2.276) .513 (2.279) .181
-------- -------- -------- -------- ------- -------- -------
Total from Investment
Operations............... (.028) 3.095 3.000 (1.377) 1.132 (1.371) .531
-------- -------- -------- -------- ------- -------- -------
Less:
Distributions from Net
Investment Income...... 1.215 1.231 1.285 .884 .628 .884 .358
Distributions from Net
Realized Gain.......... .002 .108 -- -- -- -- --
-------- -------- -------- -------- ------- -------- -------
Total Distributions....... 1.217 1.339 1.285 .884 .628 .884 .358
-------- -------- -------- -------- ------- -------- -------
Net Asset Value, End of
Period................... $ 16.700 $ 17.945 $ 16.189 $ 17.563 $19.824 $ 17.568 $19.823
======== ======== ======== ======== ======== ======== =======
Total Return
(Non-annualized)......... .27 % 19.73% 21.08% (7.03%) 5.92% (6.98%) 2.70%
Net Assets at End of
Period (in millions)..... $ 502.5 $ 418.1 $ 188.2 $ 30.0 $ 20.8 $ 3.5 $ 5.0
Ratio of Expenses to
Average Net Assets
(Annualized)............. .71% .76% .89% 1.71% 1.68% 1.70% 1.68%
Ratio of Net Investment
Income to Average Net
Assets (Annualized)...... 7.04% 7.07% 8.00% 4.88% 4.25% 4.89% 4.21%
Portfolio Turnover........ 119.89% 31.00% 98.19% 48.46% 78.73% 48.46% 78.73%
</TABLE>
- ----------------
See Financial Statements and Notes Thereto
13
<PAGE> 18
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS--CONTINUED
(for a share outstanding throughout the period)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CALIFORNIA INSURED FUND -- CLASS A SHARES
------------------------------------------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1994 1993 1992 1991 1990 1989 1988
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227 $ 14.719
-------- -------- -------- -------- -------- -------- --------
Net Investment
Income................ .912 .967 1.004 .990 .990 .988 .981
Net Realized and
Unrealized Gain/Loss
on Investments........ (2.484) 1.441 .585 .529 .123 .381 .519
-------- -------- -------- -------- -------- -------- --------
Total from Investment
Operations.............. (1.572) 2.408 1.589 1.519 1.113 1.369 1.500
Less Distributions from
Net Investment Income... .912 .980 .990 .990 .990 .989 .992
-------- -------- -------- -------- -------- -------- --------
Net Asset Value, End of
Period.................. $ 15.802 $ 18.286 $ 16.858 $ 16.259 $ 15.730 $ 15.607 $ 15.227
======== ======== ======== ======== ======== ======== ========
Total Return(1)
(Non-annualized)........ (8.75%) 14.54% 10.08% 9.98% 7.44% 9.22% 10.51%
Net Assets at End of
Period (in millions).... $ 130.3 $ 151.1 $ 74.2 $ 60.2 $ 50.6 $ 46.6 $ 37.3
Ratio of Expenses to
Average Net Assets(1)
(Annualized)............ .78% .69% .69% .55% .69% .75% .65%
Ratio of Net Investment
Income to Average Net
Assets(1)
(Annualized)............ 5.46% 5.37% 6.07% 6.20% 6.42% 6.38% 6.53%
Portfolio Turnover....... 56.38% 36.17% 60.70% 69.85% 34.03% 32.18% 100.50%
<CAPTION>
CLASS B SHARES CLASS C SHARES
---------------------------- ----------------------------
MAY 1, 1993 AUGUST 13, 1993
DECEMBER 13, 1985 (COMMENCEMENT (COMMENCEMENT
(COMMENCEMENT OF OF
YEAR YEAR OF INVESTMENT YEAR DISTRIBUTION) YEAR DISTRIBUTION)
ENDED ENDED OPERATIONS) TO ENDED TO ENDED TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1987 1986 1985 1994 1993 1994 1993
------------ ------------ ----------------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period..... $ 16.274 $ 14.464 $14.265 $ 18.266 $ 17.570 $ 18.257 $ 18.010
-------- -------- ------- -------- -------- -------- --------
Net Investment
Income................ 1.041 1.034 .024 .785 .549 .773 .307
Net Realized and
Unrealized Gain/Loss
on Investments........ (1.566) 1.832 .175 (2.482) .705 (2.486) .258
-------- -------- ------- -------- -------- -------- --------
Total from Investment
Operations.............. (.525) 2.866 .199 (1.697) 1.254 (1.695) .565
Less Distributions from
Net Investment Income... 1.030 1.056 .000 .764 .558 .764 .318
-------- -------- ------- -------- -------- -------- --------
Net Asset Value, End of
Period.................. $ 14.719 $ 16.274 $14.464 $ 15.805 $ 18.266 $ 15.798 $ 18.257
======== ======== ======= ======== ======== ======== ========
Total Return(1)
(Non-annualized)........ (2.72%) 20.01% 1.19% (9.39%) 7.25% (9.40%) 3.17%
Net Assets at End of
Period (in millions).... $ 31.5 $ 12.9 $ 1.1 $ 17.1 $ 15.3 $ 2.8 $ 4.0
Ratio of Expenses to
Average Net Assets(1)
(Annualized)............ .14% .16% 1.01% 1.52% 1.45% 1.51% 1.45%
Ratio of Net Investment
Income to Average Net
Assets(1)
(Annualized)............ 7.02% 6.05% 3.18% 4.71% 4.06% 4.71% 3.82%
Portfolio Turnover....... 68.82% 21.45% 0% 56.38% 36.17% 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> <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% 1.11%
Ratio of net investment
income to average net
assets (Annualized)...... 5.16% 5.05% 5.68% 5.71% 6.05% 6.04% 6.08%
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of expenses to
average net assets
(Annualized)............. .97% 2.98% 1.51% 1.82% 1.77% 1.82% 1.76%
Ratio of net investment
income to average net
assets (Annualized)...... 6.19% 3.23% 2.68% 4.41% 3.74% 4.39% 3.52%
</TABLE>
See Financial Statements and Notes Thereto
14
<PAGE> 19
- --------------------------------------------------------------------------------
THE FUNDS
- --------------------------------------------------------------------------------
The Insured Fund and the California Insured Fund are each separate diversified
series of the Trust, an open-end management investment company, commonly known
as a "mutual fund," which is organized as a Delaware business trust.
The Adviser provides investment advisory and administrative services to 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.
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,
15
<PAGE> 20
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.
- --------------------------------------------------------------------------------
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 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
16
<PAGE> 21
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 the 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 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
17
<PAGE> 22
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 Statements 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.
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
18
<PAGE> 23
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
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 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.
19
<PAGE> 24
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 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 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
20
<PAGE> 25
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 of the Funds' respective
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis. To the extent the Funds engage in "when issued" and "delayed
delivery" transactions, they will do so for the purpose of acquiring securities
for the Funds' respective portfolios consistent with the Funds' respective
investment objectives and policies and not for the purposes of investment
leverage. No specific limitation exists as to the percentage of the Funds'
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
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 Advisor, 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
21
<PAGE> 26
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.
- --------------------------------------------------------------------------------
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 Insured Fund's and the California Insured Fund's
Statements of Additional Information.
- --------------------------------------------------------------------------------
PURCHASING SHARES OF THE FUNDS
- --------------------------------------------------------------------------------
The Funds currently offer three classes of shares as discussed below. Shares
of the Funds are continuously offered through the Distributor, as principal
underwriter, which is located at One Parkview Plaza, Oakbrook Terrace, Illinois
60181. Shares are also offered through members of the National Association of
Securities Dealers, Inc. ("NASD") who are acting as securities dealers
("dealers") and through NASD members or eligible non-NASD members who are acting
as brokers or agents for investors ("brokers"). 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.
22
<PAGE> 27
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
$1,000,000, "Class B Shares" and "Class C Shares"). Class A Share accounts over
$1,000,000 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.
For purposes of purchasing shares of the Fund, "any person" shall have the
meaning set forth in the section of the Prospectus captioned "Purchasing Shares
of the Fund -- Initial Sales Charge Alternative -- Quantity Discounts." 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 $1,000,000 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 $1,000,000, a purchaser of 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
23
<PAGE> 28
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 "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 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").
24
<PAGE> 29
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
securities 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. See "Net Asset Value."
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 shares of the Fund. 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 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 Fund will receive from such sale.
INITIAL SALES CHARGE ALTERNATIVE.
Investors choosing the initial sales charge alternative purchase 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
25
<PAGE> 30
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.
- --------------------------------------------------------------------------------
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>
$25 but 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>
- --------------------------------------------------------------------------------
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>
$25 but 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
$1,000,000 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 $1,000,000 or more as follows: 1.00% on sales to
$2,000,000, plus 0.80% on the next million, plus 0.20% on the next $2,000,000
and 0.08% on the excess over $5,000,000. See "Purchasing Shares Of The Fund --
Deferred Sales Charge Alternatives" for additional information with respect to
contingent deferred sales charges.
QUANTITY DISCOUNTS. Purchasers of Class A Shares may be entitled to reduced
initial sales charges through a combination of investments, rights of
accumulation or a letter of intent (even if investors are not currently making
an investment of a size that would
26
<PAGE> 31
normally qualify for a quantity discount). Investors, or their dealers or
brokers, must notify the proper 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 dealer or broker or the Distributor.
For purposes of determining whether a purchase qualifies for a reduced initial
sales charge, the term "any person" is defined as any one of the following:
(i) an individual, their spouse and children under the age of 21, trust or
custodial accounts established for any of their sole benefit(s) and any
corporation, partnership or sole proprietorship which is 100% owned,
either alone or in combination, by any of the foregoing; or
(ii) a trustee or other fiduciary purchasing for a single trust estate
(including a pension, profit-sharing or other employee benefit trust
created pursuant to a plan qualified under Section 401 of the Code);
or
(iii) a "company" as defined in Section 2(a)(8) of the Investment Company
Act of 1940 (the "Investment Company Act").
1. Combination of Investments. Purchases of shares of the Funds, or of other
Van Kampen American Capital funds distributed by the Distributor subject to an
initial sales charge ("ISC Shares"), which are made at any one time by "any
person" may be combined to receive a quantity discount.
2. Rights of Accumulation. Under the rights of accumulation, in determining
the sales charge to be paid for a current purchase of Class A Shares "any
person" may combine their current purchase with the current public offering
price of shares of Class A Shares of a Fund or ISC Shares which are owned by
such person. If the account an investor is combining for rights of accumulation
differs from the account into which the investor's current purchase is placed,
the investor must indicate to the Fund's transfer agent the account number (and,
if applicable, fund name) of such other account.
3. Letter of Intent. Purchasers of Class A Shares may qualify immediately for
a reduced sales charge by stating their intention to purchase, during a 13 month
period, an amount of Class A Shares that would qualify the investor for a
reduced sales charge. An investor may do this by signing a nonbinding Letter of
Intent, which may be signed at any time within 90 days after the first
investment to be included under the Letter of Intent. Class A Shares purchased
under the "Rights of Accumulation" described above (including investments in ISC
Shares) may be, at the time of the signing of the Letter of Intent (included as
part of the account application), applied towards completion of an investor's
Letter of Intent. In addition, if an investor's broker or dealer, and the
Distributor, agree to refund the appropriate portion of their respective
concessions to the Funds, the sales charge on an investor's previous purchases
made within 90 days may be adjusted to the reduced sales charge under the Letter
of Intent, and the refunded concession will be used to purchase shares of the
designated Fund or Funds at the offering price next determined after receipt
27
<PAGE> 32
of such monies. Each investment made after signing the Letter of Intent will be
entitled to the sales charge applicable to the total investment indicated in the
Letter of Intent. If an investor does not complete the necessary purchases under
the Letter of Intent within 13 months from the date of the first purchase
included thereunder, the sales charge will be adjusted upward, corresponding to
the amount actually purchased.
When an investor signs a Letter of Intent, Class A Shares of the Funds
purchased with a value of 5% of the amount specified in the Letter of Intent
will be restricted; that is, these shares cannot be sold or redeemed until the
Letter of Intent is satisfied or the additional sales charges have been paid. If
the total purchases made under the Letter of Intent, less redemptions, equal or
exceed the amount specified in the Letter of Intent, these shares will no longer
be restricted. If the total purchases, less redemptions, exceed the amount so
specified, and qualify an investor for a further quantity discount, the
Distributor and the investor's securities dealer or broker will, upon request,
remit their respective portions of the sales concession and with that amount,
purchase additional shares of any of the Funds for the investor's account at the
next computed offering price. If an investor does not complete the necessary
purchases under the Letter of Intent, the sales charges will be adjusted upward
and if, after written notice, the investor does not pay the increased sales
charge, sufficient restricted shares will be redeemed to pay such charge.
OTHER PURCHASE PROGRAMS. Purchasers of Class A Shares may be entitled to
reduced sales charges in connection with unit trust reinvestment programs and
purchases by registered representatives of selling firms or purchases by persons
affiliated with the Funds or the Distributor. Each Fund reserves the right to
modify or terminate these arrangements at any time.
1. Unit Trust Reinvestment Programs. The Funds will permit unitholders of unit
investment trusts to reinvest distributions from such trusts in Class A Shares
of the Funds and ISC Shares 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 Funds 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 dealer, broker or financial intermediary, if any, through which such
participation in the qualifying program was initiated 0.50% of the offering
price as a dealer concession or agency commission. Persons desiring more
information with respect to this program, including the applicable terms and
conditions thereof, should contact their securities broker, 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
Funds during each distribution period by all investors who choose to invest in
the Funds through the program and (2) provide the Funds' transfer agent with
appropriate backup data for each participating investor in a computerized format
fully compatible with the transfer agent's processing system.
28
<PAGE> 33
As further requirements for obtaining these special benefits, the Funds also
require that all dividends and other distributions by the Funds be reinvested in
additional shares without any systematic withdrawal program. There will be no
minimum for reinvestments from unit investment trusts. The Funds will send
account activity statements to such participants on a quarterly basis only, even
if their investment period is monthly or more frequently. The Funds reserves the
right to modify or terminate this program at any time.
2. NAV Purchase Options
The classes of investors entitled to purchase shares of the Funds at net asset
value are as follows:
(a) Current or retired Trustees/Directors of funds advised by Van Kampen
American Capital Investment Advisory Corp., Van Kampen American Capital
Asset Management, Inc. or John Govett & Co. Limited and such persons'
families and their beneficial accounts. The term "families" includes a
person's spouse, children and grandchildren, parents, and a person's
spouse's parents.
(b) 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 such fund or an affiliate of such
subadviser; and such persons' families and their beneficial accounts.
(c) Directors, officers, employees and registered representatives of financial
institutions that have a selling 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.
(d) 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 either Fund alone, or in any combination
of Class A Shares of the Funds and ISC Shares of other funds distributed by
the Distributor as described herein under "Purchasing Shares Of The Funds
-- Initial Sales Charge Alternative -- Quantity Discounts," during the 13
month period commencing with the first investment pursuant hereto equals at
least $1,000,000. The Distributor may pay such entities through which
purchases are made an amount up to 0.50% of the amount invested, over a
twelve month period following such transaction.
(e) Trustees and other fiduciaries purchasing shares for retirement plans of
organizations with retirement plan assets of $10,000,000 or more. The
Distributor may pay commissions of up to 1.00% for such purchases.
(f) Accounts as to which a selling firm charges an account management fee
("wrap accounts"), provided the selling firm has executed a supplemental
agreement to their existing selling agreement with the Distributor.
29
<PAGE> 34
(g) Investors purchasing shares of the Funds 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.
DEFERRED SALES CHARGE ALTERNATIVES.
Investors choosing the deferred sales charge alternative may purchase Class A
Shares in an amount of $1,000,000 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 Funds, at a percentage rate of the dollar value of the CDSC Shares
purchased from the Funds by such brokers, dealers and financial intermediaries,
which percentage rate will be equal to (i) 1.00% with respect to Class A Shares
in an amount of $1,000,000 or more; (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 Funds will receive from such sale. Sales compensation with
respect to Class A Shares subject to a CDSC is set forth under "Purchasing
Shares Of The Fund -- Initial Sales Charge Alternative".
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
Funds 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 services fees facilitates the ability of the Funds to sell such
CDSC Shares without a sales charge being deducted at the time of purchase.
30
<PAGE> 35
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).
The contingent deferred sales charge is waived (i) on a redemption of shares
following the death of a shareholder, or (ii) to the extent that the redemption
represents a minimum required distribution from an IRA or other retirement plan
to a shareholder who has attained the age of 70 1/2.
CLASS A SHARE PURCHASES OF $1,000,000 OR MORE. No sales charge is payable at
the time of purchase on investments in Class A Shares of $1,000,000 or more,
although for such investments the Funds 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 $1,000,000 or more as follows: 1.00% on sales to $2,000,000, plus
0.80% on the next million, plus 0.20% on the next $2,000,000 and 0.08% on the
excess over $5,000,000.
31
<PAGE> 36
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 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>
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>
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 Program. See
"Shareholder Programs -- Systematic Withdrawal Program."
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.
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
32
<PAGE> 37
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 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 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 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.
- --------------------------------------------------------------------------------
DISTRIBUTIONS FROM THE FUNDS
- --------------------------------------------------------------------------------
Each Fund's policy is to declare daily and pay monthly distributions of all or
substantially all net investment income of the 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
33
<PAGE> 38
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 Funds' transfer agent receives payments for such shares.
However, shares become entitled to dividends on the day the Funds' 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 (the "Transfer Agent"). After the
Transfer Agent 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
elects otherwise on the account application. This election may be made by
telephone by calling 1-800-341-2911 or in writing to the Transfer Agent. For
inquiries through Telecommunications Device for the Deaf (TDD), dial
1-800-772-8889, during the hours of 7:30 a.m. to 4:00 p.m. Central Standard
Time. If a shareholder elects to change the method of distribution, such change
will be effective only with regard to distributions for which the record date is
seven or more business days after the Transfer Agent has received the request.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
- --------------------------------------------------------------------------------
WRITTEN REDEMPTION REQUEST. Shareholders may sell shares without charge
(other than, with respect to the CDSC Shares, any applicable contingent deferred
sales charge) at any time by mailing a written redemption request in proper form
to the Transfer Agent. This request should be sent to Van Kampen American
Capital Funds, c/o ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256. The
request should indicate the number of shares to be redeemed by a particular
Fund, identify the account number and be signed exactly as the shares are
registered. If the amount being redeemed is in excess of $50,000 or if the
redemption proceeds will be sent to an address other than the address of record,
the signature(s) must be guaranteed by a member firm of a principal stock
exchange, a commercial bank or trust company which is a member of the Federal
Deposit Insurance Corporation, a credit union or a savings association. The
guarantee must state the words "Signature Guaranteed" along with the name of the
granting institution. Shareholders
34
<PAGE> 39
should verify with the institution that it is an eligible guarantor prior to
signing. A guarantee from a notary public is not acceptable. If certificates are
held for the shares being redeemed, such certificates must be sent and endorsed
for transfer or accompanied by an endorsed stock power. Share certificates
should be sent by registered mail to Van Kampen American Capital Funds, c/o
ACCESS, P.O. Box 418256, Kansas City, MO 64141-9256. Shareholders will receive
the net asset value per share next computed after the Transfer Agent receives
the redemption request and certificates (if any) in proper form. Any applicable
contingent deferred sales charge with respect to CDSC Shares redeemed will be
deducted from the redemption proceeds prior to transmittal of such proceeds to
the shareholder.
TELEPHONE REDEMPTIONS. Shareholders may sell shares by calling the Funds at
1-800-341-2911 before 3:00 p.m. Central Standard Time to request a redemption
for a particular Fund. For inquiries through Telecommunications Device for the
Deaf (TDD), dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m.
Central Standard Time. There is a $500 minimum and a $1,000,000 maximum per
request if the redemption proceeds are to be mailed to the shareholder. If the
redemption proceeds are to be wired to a bank there is a minimum of $5,000 and a
$1,000,000 maximum per request. Prior to redeeming shares by telephone the
appropriate section of the account application or an Expedited Telephone
Redemption and Exchange Request Form (the "Authorization") must be completed and
on file with the Transfer Agent. The signature(s) on the Authorization must be
guaranteed by a member firm of a principal stock exchange, a commercial bank or
trust company which is a member of the Federal Deposit Insurance Corporation, a
credit union or a savings association unless the Authorization is completed at
the time an account is originally established. The guarantee must state the
words "Signature Guaranteed" along with the name of the granting institution.
Shareholders should verify with the institution that it is an eligible guarantor
prior to signing. A guarantee from a notary public is not acceptable. A
redemption requested by telephone will be processed at the net asset value next
determined after receipt of the request. Any applicable contingent deferred
sales charge with respect to CDSC Shares redeemed will be deducted from the
redemption proceeds prior to transmittal of such proceeds to the shareholder.
The proceeds would then be made payable to the registered shareowner(s) and
mailed to the address registered on the account or wired to a bank, as requested
on the Authorizations. Shareholders cannot redeem shares by telephone if stock
certificates are held for those shares. This service is not available with
respect to shares held in an Individual Retirement Account (IRA) for which
American Capital Trust Company, an affiliate of Van Kampen American Capital,
acts as custodian. In addition, this service is not available with respect to
shares purchased by check until 15 days after purchase.
By establishing the telephone redemption service, a shareholder authorizes a
Fund or its agent to act upon the instructions of any person by telephone to
redeem shares for any account for which such service has been authorized. The
Fund, the Distributor and the Transfer Agent employ procedures reasonably
believed to confirm that instructions communicated by telephone are genuine.
Such procedures include requiring a person attempting to redeem shares by
telephone to provide, on a recorded line, the name on the account, a social
security number or tax identification number and such additional
35
<PAGE> 40
information as may be included in the Authorization. A shareholder also agrees
that none of the Funds, the Distributor or the Transfer Agent will be liable for
any loss, liability, cost or expense arising out of any request, including any
fraudulent or unauthorized request. This service may be amended or terminated at
any time by the Transfer Agent or the Funds. If a shareholder is unable to reach
a Fund by telephone, he or she may redeem shares pursuant to the procedures set
forth above under the caption "Written Redemption Requests." During periods of
extreme economic or market changes, it may be difficult for investors to reach
the Funds by telephone and to effect telephone redemptions.
REDEMPTION THROUGH DEALERS. Shareholders may sell shares (whether in
certificate or book-entry form) through their securities dealer, who will
telephone the request to the Distributor. Shareholders will receive the net
asset value next determined after such shareholder places the sell order. Any
applicable contingent deferred sales charge with respect to CDSC Shares redeemed
will be deducted from the redemption proceeds prior to transmittal of such
proceeds to the shareholder. It is the responsibility of the shareholder's
broker, dealer or financial intermediary to transmit the redemption order to the
Distributor. Because the Funds generally determine net asset value once each
business day as of the close of business, sell orders placed through a
shareholder'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 shareholder's order to be fulfilled on the basis of the
net asset value to be determined that day. Any change in the redemption price
due to the failure of the Distributor to receive a sell order prior to such time
must be settled between the investor and the broker, dealer, or financial
intermediary submitting the order. The Funds do not charge for this transaction
(other than any applicable contingent deferred sales charge). Shareholders must
submit a written redemption request in proper form to their securities dealer
within five business days after calling the dealer with the sell order. The
request should indicate the number of shares to be redeemed, identify the
account number and the order or confirmation number assigned to the trade, and
be signed by the shareholder exactly as the shares are registered. If the amount
of the redemption exceeds $50,000 or if the redemption proceeds will be sent to
an address other than the address of record, signature(s) must be guaranteed by
a member firm of a principal stock exchange, a commercial bank or trust company
which is a member of the Federal Deposit Insurance Corporation, a credit union
or a savings association. The guarantee must state the words "Signature
Guaranteed" along with the name of the granting institution. Shareholders should
verify with the institution that it is an eligible guarantor prior to signing. A
guarantee from a notary public is not acceptable. If certificates are held for
the shares being redeemed, such certificates must be sent endorsed for transfer
or accompanied by an endorsed stock power. Certificates should be sent by
registered mail to Van Kampen American Capital Funds, c/o ACCESS, P.O. Box
418256, Kansas City, MO 64141-9256.
REDEMPTION UPON DISABILITY. The Fund will waive the CDSC on Class B Share or
Class C Share redemptions following the disability of a Class B or Class C
shareholder. An individual will be considered disabled for this purpose if he or
she meets the definition thereof in 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
36
<PAGE> 41
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 Fund will require satisfactory proof of disability before it determines to
waive the CDSC.
In cases of disability, the CDSC on Class B Shares or 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 CDSC applies
to a total or partial redemption, but only to redemptions of shares held at the
time of the initial determination of disability.
GENERAL. Whether shares are redeemed by a Fund or sold through a securities
dealer, a check for the proceeds (net of any required tax withholding and, with
respect to CDSC Shares, any applicable contingent deferred sales charge)
ordinarily will be mailed to shareholders or their dealer as the case may be
within seven calendar days after a redemption request or repurchase order and
share certificates (if any) are received in proper form as set forth above. Wire
transfers from a Fund of redemption proceeds, in the manner described above,
ordinarily will be transmitted to the shareholder within one business day. If
any shares are redeemed or repurchased shortly after purchase, the respective
Fund will not mail the proceeds until checks received for the purchase of shares
have cleared, which may take 10 days or more. The proceeds, of course, may be
more or less than the cost of the shares.
The right of redemption or resale to the Funds may be suspended or the date of
payment postponed during any period when the New York Stock Exchange is closed
(other than customary weekend and holiday closings), when an emergency exists as
defined by rules and regulations of the SEC, or during any period when the SEC
has by order permitted such suspension or postponement.
The Funds reserve the right to redeem any investment if the value of an
account falls below $50. Before any Fund makes such redemption it will provide
the shareholder with written notice and 30 days in which to make an additional
investment sufficient to increase the value of the account to at least $50.
- --------------------------------------------------------------------------------
NET ASSET VALUE
- --------------------------------------------------------------------------------
The net asset value per share of each of the Funds is determined by
calculating the total value of a 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 a Fund's portfolio securities such that the
Fund's net asset value per share might be materially affected. The Funds reserve
the right
37
<PAGE> 42
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 sub-trust. 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.
- --------------------------------------------------------------------------------
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 the Funds' 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 Funds' yield quotations are determined for each class of the Funds' 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 the 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) the 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 the Fund's yield. A Fund's tax-equivalent
yield quotation for a 30 day period as described above is computed for each
class of the Funds' shares by dividing that portion of the yield of the Fund (as
computed above) which is tax-exempt by
38
<PAGE> 43
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 Funds calculate average compounded total return for each class of the
Funds' shares 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 the respective 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 a given 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 the Funds' shares.
From time to time, the Funds may compare its performance to certain securities
and unmanaged indices which may have different risk/reward characteristics than
the Funds. 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 Funds may utilize sales literature that
includes hypotheticals.
Please consult the Statements of Additional Information for more information
regarding the Funds' performance.
39
<PAGE> 44
- --------------------------------------------------------------------------------
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. As
series of a Delaware business trust, the Funds will not be subject to any excise
or income taxes in Delaware as long as each qualifies as a regulated investment
company for federal income tax purposes. 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.
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
40
<PAGE> 45
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 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
41
<PAGE> 46
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 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.
42
<PAGE> 47
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 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.
- --------------------------------------------------------------------------------
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 nearly $50
billion under management or supervision. Van Kampen American Capital's more than
40 open-end and 38 closed-end funds and more than 2,700 unit investment trusts
are professionally distributed by leading financial advisers nationwide.
Van Kampen American Capital 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.,
43
<PAGE> 48
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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon the
exercise of options, approximately an additional 10% 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
- ------------------------------------- -------------------------------------
AVERAGE DAILY NET ASSETS % PER ANNUM AVERAGE DAILY NET ASSETS % PER ANNUM
- ------------------------ ----------- ------------------------ -----------
<S> <C> <C> <C>
First $500 million...... 0.525% First $100 million...... 0.500%
Next $500 million....... 0.500% Next $150 million....... 0.450%
Next $2 billion......... 0.475% Next $250 million....... 0.425%
Over $3 billion......... 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 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.
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 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.
44
<PAGE> 49
- --------------------------------------------------------------------------------
THE DISTRIBUTION AND SERVICE PLANS
- --------------------------------------------------------------------------------
Each Fund has adopted a distribution plan (the "Distribution Plan") with
respect to each class of its shares pursuant to Rule 12b-1 under the Investment
Company Act. Each Fund 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,
distributor of each class of the Funds' shares, sub-agreements between the
Distributor and members of the NASD who are acting as securities dealers, NASD
members or eligible non-members who are acting as brokers or agents and similar
agreements between the Funds and financial intermediaries who are acting as
brokers (collectively, "Selling Agreements") that may provide for their
customers or clients certain services or assistance. Brokers, dealers and
financial intermediaries that have entered into Selling Agreements with the
Distributor and sell shares of the Funds are referred to herein as "financial
intermediaries."
CLASS A SHARES. Each 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
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 financial intermediaries and in connection with the
maintenance of such shareholders' accounts. Each Fund pays the Distributor the
lesser of the balance of the 0.25% not paid to such financial intermediaries or
the amount of the Distributor's actual distribution related expense.
CLASS B SHARES. Each Fund 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 Fund 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 and by
financial intermediaries and in connection with the maintenance of such
shareholders' accounts.
CLASS C SHARES. Each Fund 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 Fund, or the Distributor as agent
for the respective Fund, pays 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 financial intermediary's customers. Each Fund pays the
Distributor the lesser of the balance of 0.75% not paid to such financial
intermediaries or the amount of the Distributor's actual distribution related
expense. In addition, each Fund may spend up to 0.25% per year of the
45
<PAGE> 50
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 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 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 Funds' total net assets. As of December 31, 1994, there
were $38,971 and $2,788 of unreimbursed distribution expenses with respect to
Class B Shares and Class C Shares, respectively of the Insured Fund,
representing 0.00% and 0.00% 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 0.00% 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 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 Funds' shares. In
46
<PAGE> 51
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.
- --------------------------------------------------------------------------------
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,
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.
- --------------------------------------------------------------------------------
SHAREHOLDER PROGRAMS
- --------------------------------------------------------------------------------
SHARE CERTIFICATES. As a rule, 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 the respective 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 the
Transfer Agent. On the date the letter is received the Transfer Agent will
calculate no more than 2.00% of the net asset value of the issued shares, and
bill the party to whom the certificate was mailed.
SYSTEMATIC WITHDRAWAL PROGRAM. If a shareholder's account is valued at
$10,000 or more, and such shareholder's dividends are being reinvested, a
requested dollar amount may be paid from such account to any person monthly,
quarterly, semiannually or annually. The minimum amount that may be withdrawn
each period is $50; withdrawals will be made on the seventh business day of the
month in which they are scheduled to occur. Depending upon the size of the
payments requested and the fluctuations in the net asset value of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the amounts in such account. If an investor acquires additional shares
of a Fund after joining the Systematic Withdrawal Program, the investor must
inform the respective Fund if he or she wants the new shares to be subject to
the Systematic Withdrawal Program by telephoning the respective Fund at
1-800-341-2911.
With respect to redemptions of Class B Shares and Class C Shares made pursuant
to the Systematic Withdrawal Program, an investor may annually redeem up to 12%
of the net asset value of the investor's initial investment in Class B Shares
and Class C Shares of a Fund or, if the investor does not join the program on
the date of his or her initial investment, the net asset value of the investor's
Class B Shares on the date the investor
47
<PAGE> 52
elects to participate in the Systematic Withdrawal Program. Each Fund will waive
the contingent deferred sales charge applicable to Class B Shares redeemed
pursuant to the respective Fund's Systematic Withdrawal Program.
It will ordinarily be disadvantageous to purchase shares (except through
reinvestment of distributions) while participating in a systematic withdrawal
program because a shareholder will be paying a sales charge to purchase shares
at the same time that shares are being redeemed upon which a sales charge may
already have been paid. Therefore, neither Fund will knowingly permit a
shareholder to make additional investments of less than $5,000 if at the same
time such shareholder is making systematic withdrawals at a rate greater than
the distribution being paid on such shareholder's shares. The Funds reserve the
right to amend or terminate the systematic withdrawal program on thirty days
notice, and a shareholder may withdraw from the program at any time.
EXCHANGE PRIVILEGE. Any Class A Shares of a Fund which have been registered
in a shareholder's name for at least 15 days may be exchanged for shares of any
other Van Kampen American Capital fund distributed by the Distributor that
offers an exchange privilege. Under the exchange privilege, each Fund offers to
exchange its Class A Shares for Class A Shares of other such funds on the basis
of relative net asset value per share. Any ISC Shares exchanged into either Fund
that have been charged a sales load lower than the sales load applicable to
Class A Shares of the respective Fund will be charged the applicable sales load
differential upon exchange. ISC Shares of the Van Kampen American Capital Money
Market Fund and Van Kampen American Capital Tax Free Money Fund which have not
previously been charged a sales load (except for shares purchased via the
reinvestment option) will be charged the applicable sales load upon exchange
into either Fund.
Class B Shareholders of the Funds may exchange their Class B Shares
("Outstanding Class B Shares") for Class B Shares of other Van Kampen American
Capital funds sponsored by the Distributor that offer an exchange privilege
("New Class B Shares") on the basis of relative net asset value per Class B
Share, without the payment of any contingent deferred sales charge that might
otherwise be due on redemption of the Outstanding Class B Shares. Class B Shares
of a fund acquired through use of the exchange privilege will be 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.
Class C Shares of the Funds are exchangeable for Class C Shares of other Van
Kampen American Capital funds distributed by the Distributor on the same terms
set forth in the preceding paragraph with respect to Class B Shares, except that
Class C Shares do not convert to Class A Shares. The exchange privilege with
respect to any Van Kampen American Capital money market fund sponsored by the
Distributor is not available for Class C Shareholders.
In order to qualify for the exchange privilege, it is required the shares
being exchanged have a net asset value of at least $1,000 (unless prior approval
has been obtained from the respective Fund). Shareholders also may effect an
exchange by telephone by calling the
48
<PAGE> 53
Fund at 1-800-341-2911 prior to 3:00 p.m. Central Standard Time and requesting
the exchange. For inquiries through Telecommunications Device for the Deaf
(TDD), dial 1-800-772-8889, during the hours of 7:30 a.m. to 3:00 p.m. Central
Standard Time. The exchange will be processed at the net asset value next
determined after receipt of such request. By utilizing the telephone exchange
service, a shareholder authorizes the respective Fund or its agent to act upon
the instructions of any person by telephone to exchange shares from any account
for which such service has been authorized to any identically registered
account(s) with any Van Kampen American Capital fund distributed by the
Distributor that offers an exchange privilege. A shareholder also agrees that
none of the Funds, the Distributor nor the Transfer Agent will be liable for any
loss, liability, cost or expense arising out of any request, including any
fraudulent request. The staff of the SEC currently is reviewing its position
with respect to such agreements. These procedures may be amended or terminated
at any time by the Funds, Distributor or Transfer Agent. If a shareholder has
certificates for any shares being exchanged, such certificates must be
surrendered prior to the exchange in the same manner as in redemption of such
shares (see "Redemption of Shares"). Any shares exchanged between one of the
Funds and any of the other funds will begin earning dividends on the next
business day after the exchange is effected. Before effecting an exchange,
shareholders in either of the Funds 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.
An exchange between Van Kampen American Capital funds pursuant to the exchange
privilege is treated as a sale for federal income tax purposes, and depending
upon the circumstances, a short- or long-term capital gain or loss may be
realized.
The exchange privilege may be modified or terminated at any time, subject to
the requirement that the Funds give prominent notice thereof at least 60 days
prior to the modification or termination in certain circumstances. Each Fund
reserves the right to limit the number of times a shareholder may exercise the
exchange privilege.
AUTOMATED MULTIPLE ACCOUNT SHAREHOLDER SERVICES (AMASSSM).
1. 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
the Transfer Agent 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 the Transfer
Agent.
49
<PAGE> 54
2. Automated Dividend Programs. The Funds will, upon the election of a
shareholder, automatically deposit distributions from a shareholder's account
directly into a shareholder's bank account.
3. Dividend Diversification. In addition to the foregoing, dividend
distributions and any net long-term capital gain distributions to a
shareholder's account may be invested in the same class of shares of any other
Van Kampen American Capital mutual fund distributed by the Distributor at the
then current net asset value, WITHOUT A SALES CHARGE, upon election by a
shareholder. This election may be made on the account application, by written
notice to the Transfer Agent or by calling a Fund directly at 1-800-341-2911,
during the hours of 7:00 a.m. to 7:00 p.m. Central Standard Time. For inquiries
through Telecommunications Device for the Deaf (TDD), dial 1-800-772-8889. In
order to qualify for this privilege, a shareholder must have established an
account in the other fund prior to electing this privilege. This privilege may
be modified or terminated by the Funds at any time.
4. Easy Account Savings Enhancement Plan (EASESM). Once a shareholder has
opened an account with the minimum $1,000 investment, the automatic investment
option may be utilized to make regular electronic monthly investments of $100 or
more into such shareholder's account with the respective Fund. In order to
utilize this option, a shareholder must fill out and sign the appropriate
section of the application attached to this Prospectus or the EASESM application
which is available from the Transfer Agent, the Funds, such shareholder's broker
or dealer, or the Distributor. Once the Transfer Agent has received this
application, such shareholder's checking account at his or her designated local
bank will be debited each month in the amount authorized by such shareholder to
purchase shares of the respective Fund. Once enrolled in the EASESM program, a
shareholder may change the monthly amount or terminate participation at any time
by writing or calling the Transfer Agent. Shareholders in the EASESM program
will receive a confirmation of these transactions from the respective Fund at
least quarterly, and their regular bank account statements will show the debit
transaction each month.
By electing to utilize any of the foregoing services, a shareholder authorizes
the Transfer Agent or its agent to act upon the instructions indicated in the
appropriate section of the account application in performing such services by
either withdrawing funds for deposit in the Funds pursuant to the EASESM Plan,
or depositing distributions and redemptions in the bank account indicated by the
voided check or deposit slip accompanying the shareholder's election or by
depositing the shareholder's distributions in the Van Kampen American Capital
fund account indicated. A shareholder also agrees that none of the Funds, the
Distributor nor the Transfer Agent will be liable for any loss, liability, cost
or expense arising out of any request, including any fraudulent request. These
services may be amended or terminated at any time by the Funds, Distributor or
Transfer Agent.
REINSTATEMENT PRIVILEGE. A shareholder who has redeemed Class A Shares or
Class B Shares of either Fund may, within 120 days, repurchase Class A Shares of
the respective Fund, or shares of other Van Kampen American Capital mutual funds
distributed by the Distributor, in an amount of at least $500 and not exceeding
the redemption proceeds received, at a purchase price equal to the net asset
value next determined after the
50
<PAGE> 55
reinstatement request is received by the Transfer Agent or the Distributor. A
Class C Shareholder who has redeemed shares of either Fund may repurchase Class
C Shares of the respective Fund, or shares of other Van Kampen American Capital
mutual funds distributed by the Distributor with credit given for any contingent
deferred sales charge paid upon such redemption.
Exercising the reinstatement privilege will not affect the character of any
gain or loss realized on the redemption for federal income tax purposes, except
that if the redemption resulted in a loss, the reinstatement may result in the
loss being disallowed under the "wash sale" rules.
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICES
- --------------------------------------------------------------------------------
ACCESS Investor Services, Inc., P.O. Box 418256, Kansas City, MO 64141-9256,
transfer agent for the Funds, performs bookkeeping, data processing and
administrative services related to the maintenance of shareholder accounts. When
an initial investment is made in the Funds, an account will be opened for each
shareholder on the respective Fund's books and shareholders will receive a
confirmation of the opening of the account. Shareholders will receive monthly
statements giving details of all activity in their account(s) and will also
receive a statement whenever an investment or withdrawal is made in or from
their account. Information for federal income tax purposes will be provided at
the end of the year. Such statements will present separately information with
respect to each class of a Fund's shares. It is expected that the transfer
agency costs attributable to the Class B Shares and Class C Shares will be
higher than the transfer agency costs attributable to the Class A Shares.
- --------------------------------------------------------------------------------
SHAREHOLDER REPORTS AND INQUIRIES
- --------------------------------------------------------------------------------
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 Van Kampen American Capital Tax Free Fund, a
Delaware business trust (the "Trust"). 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 Investment Company Act. More detailed information
concerning the Trust is set forth in the Statement of Additional Information.
Each Fund's fiscal year ends on December 31. The Funds send to their
shareholders, at least semi-annually, reports showing the Funds' portfolios and
other information. An annual report, containing financial statements audited by
independent public accountants,
51
<PAGE> 56
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. Its telephone number is 1-800-341-2911.
For inquiries through Telecommunications Device for the Deaf (TDD) Dial
1-800-772-8889.
For Automated Telephone Service which provides 24 hour direct dial access to
Fund facts and Shareholder account information dial 1-800-542-4344.
- --------------------------------------------------------------------------------
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.
52
<PAGE> 57
EXISTING SHAREHOLDERS--
FOR INFORMATION ON YOUR
EXISTING ACCOUNT PLEASE CALL
THE FUND'S TOLL-FREE
NUMBER--1-800-341-2911.
PROSPECTIVE INVESTORS--CALL
YOUR BROKER OR 1-800-341-2911.
DEALERS--FOR DEALER
INFORMATION, SELLING
AGREEMENTS, WIRE ORDERS,
OR REDEMPTIONS CALL THE
DISTRIBUTOR'S TOLL-FREE
NUMBER--1-800-225-2222.
FOR SHAREHOLDER AND
DEALER INQUIRIES THROUGH
TELECOMMUNICATIONS
DEVICE FOR THE DEAF (TDD)
DIAL 1-800-772-8889
FOR AUTOMATED TELEPHONE
SERVICES DIAL 1-800-542-4344
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> 58
VAN KAMPEN AMERICAN CAPITAL
INSURED TAX FREE INCOME FUND
- --------------------------------------------------------------------------------
VAN KAMPEN AMERICAN CAPITAL
CALIFORNIA INSURED TAX FREE FUND
PROSPECTUS
, 1995
------ A WEALTH OF KNOWLEDGE - A KNOWLEDGE OF WEALTH ------
VAN KAMPEN AMERICAN CAPITAL
------------------------------------------------------------------------
<PAGE> 59
Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These securities
may not be sold nor may offers to buy be accepted prior to the time such
amendment to the registration statement becomes effective. This statement
of additional information shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION -- DATED JUNE 2, 1995
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL INSURED TAX FREE INCOME FUND
The Van Kampen American Capital Insured Tax Free Income Fund (the "Fund") is a
separate diversified series of Van Kampen American Capital Tax Free Fund, 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 , 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 1-800-341-2911.
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-25
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-29
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 , 1995.
<PAGE> 60
THE FUND AND THE TRUST
The Fund is a separate diversified series of Van Kampen American Capital Tax
Free Fund (the "Trust"), an open-end diversified management investment company.
The Trust is an unincorporated business trust established under the laws of the
State of Delaware by an Agreement and Declaration of Trust dated
(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 as of [August 1, 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 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> 61
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%.
B-3
<PAGE> 62
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
B-4
<PAGE> 63
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, 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
B-5
<PAGE> 64
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
B-6
<PAGE> 65
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
B-7
<PAGE> 66
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
B-8
<PAGE> 67
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
B-9
<PAGE> 68
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 Investment Company Act of 1940 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
B-10
<PAGE> 69
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 Internal Revenue 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
B-11
<PAGE> 70
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 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
B-12
<PAGE> 71
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
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
B-13
<PAGE> 72
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 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 approxi-
B-14
<PAGE> 73
mately $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 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.
B-15
<PAGE> 74
<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.
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.
</TABLE>
B-16
<PAGE> 75
<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>
B-17
<PAGE> 76
SP-3 Speculative capacity to pay principal and interest.
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,
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.
</TABLE>
B-18
<PAGE> 77
<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> 78
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 officers and trustees of the Trust (of which the Fund is a separate
series), 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., Van Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei,
Inc., MCM Asia Pacific Company, Limited, Van Kampen American Capital
Distributors, Inc., Van Kampen American Capital, Inc. or VK/AC Holding, Inc.,
are as follows:
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 62 equipment. A director or trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
B-20
<PAGE> 79
<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. A
director or trustee of each of the Van Kampen American
Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A director or trustee of
Lyme, CT 06371 each of the Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A trustee
of each of the Van Kampen American Capital Funds.
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 and Van Kampen American Capital. Director of McCarthy,
Crisanti & Maffei, Inc. and Chairman and a Director of
MCM Asia Pacific Company, Ltd. President, Chief Executive
Officer and a trustee of each of the Van Kampen American
Capital Funds. He also is President, Chief Executive
Officer and a trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies 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. Chairman of the Board and a trustee of each
of the Van Kampen American Capital Funds.
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). A trustee of each of the Van
Kampen American Capital Funds.
</TABLE>
B-21
<PAGE> 80
<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 and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of Van
Age: 55 Kampen American Capital Distributors, Inc., 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 Corpo-
ration, ACCESS Investor Services, Inc., Van Kampen
American Capital Services, Inc. and Van Kampen American
Capital Trust Company; Director of McCarthy, Crisanti &
Maffei, Inc.; Director, Trustee or Managing General
Partner of each of the AC Funds and other open-end
investment companies and closed-end investment companies
advised by the AC Adviser. He is also Chairman of the
Board and a trustee 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. A director or trustee of each of the Van
Kampen American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 AC Funds. Director, FPA Capital Fund, Inc.; FPA New
Los Angeles, CA 90067 Income Fund, Inc.; FPA Perennial Fund, Inc.; Source
Age: 62 Capital, Inc.; and TCW Convertible Security Fund, Inc. A
director or 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. Chairman of the Board and a director or trustee
Age: 70 of each of the Van Kampen American Capital Funds.
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to the VK Funds. A trustee of each
Chicago, IL 60606 of the Van Kampen American Capital Funds. He also is a
Age: 55 trustee of the Van Kampen Merritt Series Trust and
closed-end investment companies advised by the VK
Adviser.
</TABLE>
B-22
<PAGE> 81
<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. A director or 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>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 38 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.
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 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. 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 Adviser and McCarthy, Crisanti & Maffei,
Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the 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.
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. 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
Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end Funds.
</TABLE>
B-23
<PAGE> 82
<TABLE>
<CAPTION>
POSITIONS AND OTHER PRINCIPAL OCCUPATIONS
NAME AND AGE OFFICES WITH FUND IN PAST 5 YEARS
- --------------------- -------------------------- ---------------------------------------------
<S> <C> <C>
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 38 Capital, the Adviser and the Distributor and
an Assistant Secretary of McCarthy, Crisanti
& Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end Funds.
John L. Sullivan..... Controller First Vice President of the Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end Funds.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end Funds.
</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 principal cost
associated with the combination of the two boards would be the added expense of
compensating the additional trustees. Seven of the eight additional trustees are
not affiliated persons of the VK Adviser, the Distributor or Van Kampen American
Capital and such persons are eligible for compensation from the Fund. In order
to alleviate such additional expense, the trustees approved a reduction in the
compensation per trustee and agreed to an aggregate annual compensation cap from
the combined fund complex of $84,000 per trustee 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 34 closed-end
funds advised by the VK Adviser would receive an additional $119,000 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. It is anticipated that reductions in the number of trustees on the
combined board will reduce the aggregate compensation paid by the Fund to the
combined board to approximately the current amount.
B-24
<PAGE> 83
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. Merritt and McDonnell, Trustees of the Registrant during fiscal year
1994, are affiliated persons of the Adviser and are not eligible for
compensation or retirement benefits from the Registrant.
(2) The Registrant is Van Kampen American Capital Tax Free Fund (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' 1994 fiscal year. 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 ending 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 Adviser that have the same members on each funds' Board of
Trustees. 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 Adviser also serves as
investment adviser for other investment companies; however, with the
exception of Messrs. Merritt, 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 Adviser, Mr.
Whalen received Total Compensation of $161,850.
As of May 19, 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 May 19, 1995 no person owned of record or
beneficially 5% or more of the Fund's Class A Shares or Class B Shares.
As of May 19, 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, 13%; Stanley Jacob Holuba, Robert Joseph Holuba COTR,
U/A 11/9/87 ART 9th, Stanley Joseph Holuba Trust, 2 Hackensack Ave., Kearny, NJ
07032-4611, 13%; 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, 16%.]
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "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.).
B-25
<PAGE> 84
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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 10% 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 also entered into an accounting
services agreement pursuant to which the 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 funds 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.
B-26
<PAGE> 85
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 Adviser's cost of providing accounting services.
LEGAL SERVICES AGREEMENT. The Fund has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. 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 Fund. 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. The Fund,
and the other Van Kampen American Capital funds distributed by the Distributor,
share one-half (50%) of such costs equally. The remaining one-half (50%) of such
costs are allocated to specific funds based on specific time allocations, or in
the event services are attributable only to types of funds (i.e. closed-end or
open-end), the relative amount of time spent on each type of fund and then
further allocated between funds of that type based upon their respective net
asset values. The Fund has not yet incurred any expenses in connection with this
Agreement.
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, Inc.'s cost of providing legal
services.
[SUPPORT SERVICES AGREEMENT. Under a support services agreement with the
Distributor the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee paid to the Transfer Agent.
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. The
Fund, and the other Van Kampen American Capital funds distributed by the
Distributor, share 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 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
B-27
<PAGE> 86
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
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 6% of the common stock of VK/AC Holding, Inc. and have
the right to acquire, upon the exercise of options, approximately an additional
10% 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.
B-28
<PAGE> 87
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 Investment
Company Act of 1940. 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 banks 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 banks 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 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.
B-29
<PAGE> 88
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%).
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%.
B-30
<PAGE> 89
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> 90
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> 91
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> 92
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> 93
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> 94
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> 95
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> 96
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> 97
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> 98
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> 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>
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> 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>
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> 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>
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> 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>
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> 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>
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> 104
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> 105
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> 106
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> 107
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> 108
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> 109
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> 110
Information contained herein is subject to completion or amendment. An
amendment to the registration statement relating to these securities has
been filed with the Securities and Exchange Commission. These securities
may
not be sold nor may offers to buy be accepted prior to the time such
amendment to the registration statement becomes effective. This statement
of additional information shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION -- DATED JUNE 2, 1995
STATEMENT OF ADDITIONAL INFORMATION
VAN KAMPEN AMERICAN CAPITAL CALIFORNIA INSURED TAX FREE FUND
Van Kampen American Capital California Insured Tax Free Fund (the "Fund") is a
separate diversified series of Van Kampen American Capital Tax Free Fund, 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 , 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 1-800-341-2911.
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-33
Custodian and Independent Auditors...................................................... B-34
Portfolio Transactions and Brokerage Allocation......................................... B-35
Tax Status of the Fund.................................................................. B-35
The Distributor......................................................................... B-36
Legal Counsel........................................................................... B-37
Performance Information................................................................. B-37
Independent Auditors' Report............................................................ B-39
Financial Statements.................................................................... B-40
Notes to Financial Statements........................................................... B-48
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION IS DATED , 1995.
<PAGE> 111
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 , 1995.
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.
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 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 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
B-2
<PAGE> 112
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 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
B-3
<PAGE> 113
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.
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
B-4
<PAGE> 114
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, 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
"Taxation."
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
B-5
<PAGE> 115
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 "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 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
B-6
<PAGE> 116
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.
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
B-7
<PAGE> 117
equal in 1992-1993. By June 30, 1992, the State's Fund had a deficit, on a
budget basis, of approximately $2.8 billion.
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 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
B-8
<PAGE> 118
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 represents 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, is 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 a 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 include: (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 current 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 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. 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 solid recovery is now underway. The
State's unemployment rate fell sharply last year, from
B-9
<PAGE> 119
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 upcoming 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. 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).
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.
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
B-10
<PAGE> 120
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 has
issued in July and August, 1994, $4.0 billion of revenue anticipation notes
maturing on April 25, 1996 and $3.0 billion of revenue anticipation notes
maturing on June 28, 1995.
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.
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 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.
B-11
<PAGE> 121
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.
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
B-12
<PAGE> 122
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 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
B-13
<PAGE> 123
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
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
B-14
<PAGE> 124
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 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.
B-15
<PAGE> 125
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 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
B-16
<PAGE> 126
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 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
B-17
<PAGE> 127
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 Investment Company Act of 1940 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 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
B-18
<PAGE> 128
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 Internal Revenue 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 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
B-19
<PAGE> 129
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
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.
B-20
<PAGE> 130
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.
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
B-21
<PAGE> 131
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 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.
B-22
<PAGE> 132
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.
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-23
<PAGE> 133
<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
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-24
<PAGE> 134
<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.
</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>
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
B-25
<PAGE> 135
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.
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.
</TABLE>
B-26
<PAGE> 136
<TABLE>
<S> <C>
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.
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.
B-27
<PAGE> 137
OFFICERS AND TRUSTEES
The officers and trustees of the Trust (of which the Fund is a separate
series), 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., Van Kampen American Capital Management, Inc., McCarthy, Crisanti & Maffei,
Inc., MCM Asia Pacific Company, Limited, Van Kampen American Capital
Distributors, Inc., Van Kampen American Capital, Inc. or VK/AC Holding, Inc.,
are as follows:
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
J. Miles Branagan.................. Co-founder, Chairman, Chief Executive Officer and
2300 205th Street President of MDT Corporation, a company which develops
Torrance, CA 90501 manufactures, markets and services medical and scientific
Age: 62 equipment. A director or 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. A
director or trustee of each of the Van Kampen American
Capital Funds.
Philip P. Gaughan.................. Prior to February, 1989, Managing Director and Manager of
9615 Torresdale Avenue Municipal Bond Department, W. H. Newbold's Sons & Co. A
Philadelphia, PA 19114 trustee of each of the Van Kampen American Capital Funds.
Age: 66
Roger Hilsman...................... Professor of Government and International Affairs
251-1 Hamburg Cove Emeritus, Columbia University. A director or trustee of
Lyme, CT 06371 each of the Van Kampen American Capital Funds.
Age: 75
R. Craig Kennedy................... President and Director, German Marshall Fund of the
1341 E. 50th Street United States. Formerly, advisor to the Dennis Trading
Chicago, IL 60615 Group Inc. Prior to 1992, President and Chief Executive
Age: 43 Officer, Director and member of the Investment Committee
of the Joyce Foundation, a private foundation. A trustee
of each of the Van Kampen American Capital Funds.
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 and Van Kampen American Capital. Director of McCarthy,
Crisanti & Maffei, Inc. and Chairman and a Director of
MCM Asia Pacific Company, Ltd. President, Chief Executive
Officer and a trustee of each of the Van Kampen American
Capital Funds. He also is President, Chief Executive
Officer and a trustee of the Van Kampen Merritt Series
Trust and closed-end investment companies advised by the
VK Adviser. Prior to December, 1991, Senior Vice
President of Van Kampen Merritt Inc.
</TABLE>
B-28
<PAGE> 138
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
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. Chairman of the Board and a trustee of each
of the Van Kampen American Capital Funds.
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). A trustee of each of the Van
Kampen American Capital Funds.
Don G. Powell*..................... President, Chief Executive Officer and a Director of
2800 Post Oak Blvd. VK/AC Holding, Inc. and Van Kampen American Capital and
Houston, TX 77056 Chairman, Chief Executive Officer and a Director of Van
Age: 55 Kampen American Capital Distributors, Inc., 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 Corpo-
ration, ACCESS Investor Services, Inc., Van Kampen
American Capital Services, Inc. and Van Kampen American
Capital Trust Company; Director of McCarthy, Crisanti &
Maffei, Inc.; Director, Trustee or Managing General
Partner of each of the AC Funds and other open-end
investment companies and closed-end investment companies
advised by the AC Adviser. He is also Chairman of the
Board and a trustee 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. A director or trustee of each of the Van
Kampen American Capital Funds.
Jerome L. Robinson................. President of Robinson Technical Products Corporation, a
115 River Road manufacturer and processor of welding alloys, supplies
Edgewater, NJ 07020 and equipment. Director of Pacesetter Software, a
Age: 72 software programming company specializing in white collar
productivity. Director of Panasia Bank. A trustee of each
of the Van Kampen American Capital Funds.
Lawrence J. Sheehan*............... Of Counsel to and formerly Partner (from 1969 to 1994) of
1999 Avenue of the Stars the law firm of O'Melveny & Myers, legal counsel to the
Suite 700 AC Funds. Director, FPA Capital Fund, Inc.; FPA New
Los Angeles, CA 90067 Income Fund, Inc.; FPA Perennial Fund, Inc.; Source
Age: 62 Capital, Inc.; and TCW Convertible Security Fund, Inc. A
director or 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. Chairman of the Board and a director or trustee
Age: 70 of each of the Van Kampen American Capital Funds.
</TABLE>
B-29
<PAGE> 139
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS OR
NAME, ADDRESS AND AGE EMPLOYMENT IN PAST 5 YEARS
- ----------------------------------- ---------------------------------------------------------
<S> <C>
Wayne W. Whalen*................... Partner in the law firm of Skadden, Arps, Slate, Meagher
333 West Wacker Drive & Flom, legal counsel to the VK Funds. A trustee of each
Chicago, IL 60606 of the Van Kampen American Capital Funds. He also is a
Age: 55 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. A director or 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>
Peter W. Hegel....... Vice President Executive Vice President and Portfolio
Age: 38 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.
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 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. 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 Adviser and McCarthy, Crisanti & Maffei,
Inc.
Edward C. Wood III... Vice President, Treasurer Senior Vice President of the 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.
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. Prior to May
1992, attorney for Cantwell & Cantwell, a
Chicago law firm.
</TABLE>
B-30
<PAGE> 140
<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
Adviser and the Distributor. Assistant
Secretary of each of the Van Kampen American
Capital Funds and closed-end Funds.
Weston B. Assistant Secretary Vice President, Associate General Counsel and
Wetherell.......... Assistant Secretary of Van Kampen American
Age: 38 Capital, the Adviser and the Distributor and
an Assistant Secretary of McCarthy, Crisanti
& Maffei, Inc. Assistant Secretary of each of
the Van Kampen American Capital Funds and
closed-end Funds.
John L. Sullivan..... Controller First Vice President of the Adviser.
Age: 39 Controller of each of the Van Kampen American
Capital Funds and closed-end Funds.
Steven M. Hill....... Assistant Treasurer Assistant Vice President of the Adviser.
Age: 30 Assistant Treasurer of each of the Van Kampen
American Capital Funds and closed-end Funds.
</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 principal cost
associated with the combination of the two boards would be the added expense of
compensating the additional trustees. Seven of the eight additional trustees are
not affiliated persons of the VK Adviser, the Distributor or Van Kampen American
Capital and such persons are eligible for compensation from the Fund. In order
to alleviate such additional expense, the trustees approved a reduction in the
compensation per trustee and agreed to an aggregate annual compensation cap from
the combined fund complex of $84,000 per trustee 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 34 closed-end
funds advised by the VK Adviser would receive an additional $119,000 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. It is anticipated that reductions in the number of trustees on the
combined board will reduce the aggregate compensation paid by the Fund to the
combined board to approximately the current amount.
B-31
<PAGE> 141
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 McDonnell, Trustees of the Registrant during fiscal
year 1994, were affiliated persons of the Adviser and were not eligible
for compensation or retirement benefits from the Registrant.
(2) The Registrant is Van Kampen American Capital Tax Free Fund (the
"Trust") which currently is comprised of 8 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' 1994 fiscal
year. Beginning in October 1994, each Trustee, except Messrs. Gaughan and
Whalen, began deferring his entire aggregate compensation paid by the
Fund. 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 ending 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 Adviser that have the same members on each funds' Board of
Trustees. 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 Adviser also
serves as investment adviser for other investment companies; however, with
the exception of Messrs. Merritt, 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 Adviser, Mr.
Whalen received Total Compensation of $161,850.
As of May 19, 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.
The authorized stock of the Fund currently consists of an unlimited number of
full and fractional shares of beneficial interest, without par value.
To the knowledge of the Fund, as of May 19, 1995, no person owned of record or
beneficially 5% or more of the Fund's Class A or Class B Shares.
As of May 19, 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.
Ostrander 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 U S AL ATHEL, Lolowa
AL ATHEL, 23511 Paseo de Valencia, Laguna Hills, CA 92653, 10%; Richard M.
Sasahara, 16222 S. St. Andrews Place, Gardena, CA, 90247-4624, 6%; Oluyemisi S.
Afuape,
B-32
<PAGE> 142
P.O. Box 50226, Pasadena, CA 91115-0226, 5%; 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 Rd, Oakley, CA 94561, 10%; Carol Ruth Henry TR, U/A 12/10/93, Carol
Ruth Henry Rev Liv Trust, 1105 Ironwood Rd, Alameda, CA 94502-6620, 9%; Timothy
J. Conlon and Mary Beth Conlon, TTEE Timothy J. Conlon and Mary Beth Conlon
Revoc Trust S U/A DTD 12/10/93, 272 Donald Drive, Moraga, CA 94556-2310, 7%;
Kenneth A. Scott, Vera Scott JT Wros, 38045 Wesley Ct, Palm Dale, CA 93552-3238,
7%; and Robert L. Hayes TR, U/W Gloria Henry, 3599 Wells Road, Oakley, CA
94561-5011, 10%.]
INVESTMENT ADVISORY AND OTHER SERVICES
Van Kampen American Capital Investment Advisory Corp. (the "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 6% of the
common stock of VK/AC Holding, Inc. and have the right to acquire, upon exercise
of options, approximately an additional 10% 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 sub-trust, to whom the
Adviser renders periodic reports of the Fund's investment activities.
The investment advisory agreement was approved by the shareholders of the Fund
at the first shareholders meeting. Accordingly, the 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 sub-trust, (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
B-33
<PAGE> 143
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.
OTHER AGREEMENTS.
FUND ACCOUNTING AGREEMENT. The Fund has also entered into an accounting
services agreement pursuant to which the 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
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 the Fund receives support services for shareholders, including the
handling of all written and telephonic communications, except initial order
entry and other distribution related communications. Upon entering into such
agreement, the Fund realized a reduction in the fee paid to the Transfer Agent.
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. The
Fund, and the other Van Kampen American Capital mutual funds distributed by the
Distributor, share 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 has entered into a Legal Services Agreement
pursuant to which Van Kampen American Capital, Inc. 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 fund. 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. The Fund,
and the other Van Kampen American Capital mutual funds distributed by the
Distributor, share one half (50%) of such costs equally. The remaining one half
(50%) of such costs are allocated to specific funds based on specific time
allocations, or in the event services are attributable only to types of funds
(i.e. closed-end or open-end), the relative amount of time spent on each type of
fund and then further allocated between funds of that type based upon their
respective net asset values.
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.
B-34
<PAGE> 144
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 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 sub-trust.
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 sub-trusts, 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.
B-35
<PAGE> 145
THE DISTRIBUTOR
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 6% of the common stock of VK/AC Holding, Inc. and have the right to
acquire, upon the exercise of options, approximately an additional 10% 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 Investment
Company Act of 1940. 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 banks 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 banks 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-36
<PAGE> 146
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%).
B-37
<PAGE> 147
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%).
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-38
<PAGE> 148
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-39
<PAGE> 149
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-40
<PAGE> 150
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-41
<PAGE> 151
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-42
<PAGE> 152
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-43
<PAGE> 153
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-44
<PAGE> 154
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-45
<PAGE> 155
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-46
<PAGE> 156
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-47
<PAGE> 157
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-48
<PAGE> 158
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-49
<PAGE> 159
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-50
<PAGE> 160
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 and
Van Kampen American Capital California Insured Tax Free 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 Merritt Tax Free High Income Fund, Van Kampen
Merritt Municipal Income Fund, Van Kampen Merritt Limited Term Municipal Income
Fund, Van Kampen Merritt Florida Insured Tax Free Income Fund, Van Kampen
Merritt New Jersey Tax Free Income Fund and Van Kampen Merritt 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 Merritt California Tax Free Income Fund, Van Kampen
Merritt Michigan Tax Free Income Fund, Van Kampen Merritt Missouri Tax Free
Income Fund and Van Kampen Merritt Ohio Tax Free Income Fund are not included
herein because each is a new registrant.
(B) EXHIBITS:
<TABLE>
<S> <C>
(1)(a) Declaration of Trust(1)
(b) Form of Designation of Sub-Trust of
(i) Van Kampen Merritt Insured Tax Free Income Fund, as amended and
restated(21)
(ii) Van Kampen Merritt Tax Free High Income Fund, as amended and restated(21)
(iii) Van Kampen Merritt California Insured Tax Free Fund, as amended and
restated(21)
(iv) Van Kampen Merritt Municipal Income Fund, as amended and restated(21)
(v) Van Kampen Merritt Limited Term Municipal Income Fund, as amended and
restated(21)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)
(ix) Van Kampen Merritt California Tax Free Income Fund(25)
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)
(2) By-Laws(1)
(4) Specimen Certificate of share of beneficial interest in
(i) Van Kampen Merritt Insured Tax Free Income Fund
1. Class A Shares(17)
2. Class B Shares(17)
3. Class C Shares(20)
(ii) Van Kampen Merritt Tax Free High Income Fund
1. Class A Shares(17)
2. Class B Shares(17)
3. Class C Shares(20)
(iii) Van Kampen Merritt California Insured Tax Free Fund
1. Class A Shares(17)
2. Class B Shares(17)
3. Class C Shares(21)
</TABLE>
C-1
<PAGE> 161
<TABLE>
<S> <C>
(iv) Van Kampen Merritt Municipal Income Fund
1. Class A Shares(17)
2. Class B Shares(17)
3. Class C Shares(20)
(v) Van Kampen Merritt Limited Term
Municipal Income Fund
1. Class A Shares(15)
2. Class B Shares(15)
3. Class C Shares(21)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund
1. Class A Shares(23)
2. Class B Shares(23)
3. Class C Shares(23)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund
1. Class A Shares(23)
2. Class B Shares(23)
3. Class C Shares(23)
(viii) Van Kampen Merritt New York Tax Free Income Fund
1. Class A Shares(23)
2. Class B Shares(23)
3. Class C Shares(23)
(ix) Van Kampen Merritt California Tax Free Income Fund
1. Class A Shares(25)
2. Class B Shares(25)
3. Class C Shares(25)
(x) Van Kampen Merritt Michigan Tax Free Income Fund
1. Class A Shares(25)
2. Class B Shares(25)
3. Class C Shares(25)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund
1. Class A Shares(25)
2. Class B Shares(25)
3. Class C Shares(25)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund
1. Class A Shares(25)
2. Class B Shares(25)
3. Class C Shares(25)
(5) Investment Advisory Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(16)
(ii) Van Kampen Merritt Tax Free High Income Fund(16)
(iii) Van Kampen Merritt California Insured Tax Free Fund(16)
(iv) Van Kampen Merritt Municipal Income Fund(16)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)
(ix) Van Kampen Merritt California Tax Free Income Fund(25)
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)
(6) (a) Form of Distribution and Service Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(17)
(ii) Van Kampen Merritt Tax Free High Income Fund(17)
</TABLE>
C-2
<PAGE> 162
<TABLE>
<S> <C>
(iii) Van Kampen Merritt California Insured Tax Free Fund(17)
(iv) Van Kampen Merritt Municipal Income Fund(17)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(18)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)
(ix) Van Kampen Merritt California Tax Free Income Fund(25)
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)
(b) Form of Dealer Agreement, as amended(21)
(c) Form of Broker Agreement, as amended(21)
(d) Form of Bank Agreement, as amended(21)
(8)(a) Form of Custodian Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(5)
(ii) Van Kampen Merritt Tax Free High Income Fund(5)
(iii) Van Kampen Merritt California Insured Tax Free Fund(3)
(iv) Van Kampen Merritt Municipal Income Fund(8) and (5)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15) and (5)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23) and (5)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23) and (5)
(viii) Van Kampen Merritt New York Tax Free Income Fund(23) and (5)
(ix) Van Kampen Merritt California Tax Free Income Fund(25) and (5)
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25) and (5)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25) and (5)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25) and (5)
(b) Form of Transfer Agency Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(5)
(ii) Van Kampen Merritt Tax Free High Income Fund(5)
(iii) Van Kampen Merritt California Insured Tax Free Fund(3)
(iv) Van Kampen Merritt Municipal Income Fund(8) and (5)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15) and (5)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23) and (5)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23) and (5)
(viii) Van Kampen Merritt New York Tax Free Income Fund(23) and (5)
(ix) Van Kampen Merritt California Tax Free Income Fund(25) and (5)
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25) and (5)
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25) and (5)
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25) and (5)
(9)(a) Form of Amended Support Service Agreement(11)
(b) Form of Fund Pricing Agreement(6)
(c) Form of Amended Accounting Service Agreement(11)
(d) Form of Legal Services Agreement(13)
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom
(i) Van Kampen Merritt Insured Tax Free Income Fund(20)
(ii) Van Kampen Merritt Tax Free High Income Fund(20)
(iii) Van Kampen Merritt California Insured Tax Free Fund(17)
(iv) Van Kampen Merritt Municipal Income Fund(20)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(19)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(24)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(24)
(viii) Van Kampen Merritt New York Tax Free Income Fund(24)
(ix) Van Kampen Merritt California Tax Free Income Fund++
</TABLE>
C-3
<PAGE> 163
<TABLE>
<S> <C>
(x) Van Kampen Merritt Michigan Tax Free Income Fund++
(xi) Van Kampen Merritt Missouri Tax Free Income Fund++
(xii) Van Kampen Merritt Ohio Tax Free Income Fund++
(11)(a) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom as to tax matters(4)
(b) Consents of KPMG Peat Marwick LLP+
(13) Letter of Understanding relating to initial capital(1)
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1, as amended(21)
(b) Form of Shareholder Assistance Agreement(17)
(c) Form of Administrative Services Agreement(17)
(d) Form of Service Plan(21)
(16)(a) List of Affiliated Companies of Registrant(2)
(b) Computation of Performance Quotations for
(i) Van Kampen Merritt Insured Tax Free Income Fund(26)
(ii) Van Kampen Merritt Tax Free High Income Fund(26)
(iii) Van Kampen Merritt California Insured Tax Free Fund(26)
(iv) Van Kampen Merritt Municipal Income Fund(26)
(v) Van Kampen Merritt Limited Term Municipal Income Fund(26)
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(26)
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(26)
(viii) Van Kampen Merritt New York Tax Free Income Fund(26)
(17) List of certain investment companies in response to Item 29(a)(26)
(18) List of officers and directors of Van Kampen American Capital Distributors, Inc. in
response to Item 29(b)(26)
(27) Financial Data Schedules+
Power of Attorney(20)
</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 Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed October 17, 1985.
(3) 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.
(4) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration on Form N-1A, File Number 2-99715, filed
February 4, 1987.
(5) 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.
(6) Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed November 15, 1988.
(7) Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A. File Number 2-99715,
filed February 23, 1990.
(8) 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.
(9) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed June 13, 1990.
(10) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed July 24, 1990.
(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 20, 1991.
(12) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 27, 1992.
(13) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed June 19, 1992.
C-4
<PAGE> 164
(14) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
August 24, 1992.
(15) 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.
(16) 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.
(17) 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.
(18) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 21, 1993.
(19) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed August 20, 1993.
(20) 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.
(21) 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.
(22) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on March 2, 1994.
(23) 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.
(24) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed on June 3, 1994.
(25) 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.
(26) 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.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
Not applicable.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of April 13, 1995:
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
Shares of Beneficial Interest, without par value:
<S> <C>
(i) Van Kampen Merritt Insured Tax Free Income Fund*
Class A Shares.................................................... 48,799
Class B Shares.................................................... 837
Class C Shares.................................................... 188
(ii) Van Kampen Merritt Tax Free High Income Fund*
Class A Shares.................................................... 22,396
Class B Shares.................................................... 3,403
Class C Shares.................................................... 158
(iii) Van Kampen Merritt California Insured Tax Free Fund*
Class A Shares.................................................... 3,690
Class B Shares.................................................... 563
Class C Shares.................................................... 27
(iv) Van Kampen Merritt Municipal Income Fund*
Class A Shares.................................................... 17,500
Class B Shares.................................................... 5,405
Class C Shares.................................................... 65
</TABLE>
C-5
<PAGE> 165
<TABLE>
<CAPTION>
(2)
NUMBER
OF
(1) RECORD
TITLE OF CLASS HOLDERS
------------------------------------------------------------------ ------
<S> <C> <C>
(v) Van Kampen Merritt Limited Term Municipal Income Fund*
Class A Shares.................................................... 603
Class B Shares.................................................... 550
Class C Shares.................................................... 52
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund
Class A Shares.................................................... 287
Class B Shares.................................................... 306
Class C Shares.................................................... 10
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund
Class A Shares.................................................... 147
Class B Shares.................................................... 240
Class C Shares.................................................... 13
(viii) Van Kampen Merritt New York Tax Free Income Fund
Class A Shares.................................................... 184
Class B Shares.................................................... 309
Class C Shares.................................................... 12
(ix) Van Kampen Merritt California Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(x) Van Kampen Merritt Michigan Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(xi) Van Kampen Merritt Missouri Tax Free Income Fund
Class A Shares.................................................... 0
Class B Shares.................................................... 0
Class C Shares.................................................... 0
(xii) Van Kampen Merritt 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.
Please see Section 5.3 of the Registrant's Declaration of Trust (Exhibit
1(a)). Registrant's directors and officers are covered by an Errors and
Omissions Policy, Section 5 of the proposed Investment Advisory Agreement
between the Registrant and Van Kampen American Capital Investment Advisory Corp.
(the "Adviser") provides that, in the absence of willful misfeasance, bad faith,
gross negligence or reckless disregard of the obligations or duties under the
Investment Advisory Agreement on the part of the Adviser, the Adviser shall not
be liable to the Registrant or to any shareholder for any act or omission in the
course of or connected in any way with rendering services or for any losses that
may be sustained in the purchase, holding or sale of any security. The
Distribution Agreement provides that the Registrant shall indemnify the
Distributor and certain persons related thereto for any loss or liability
arising from any alleged misstatement of a material fact (or alleged omission to
state a material fact) contained in, among other things, the Registration
Statement or Prospectus except to the extent the misstated fact or omission was
made in reliance upon information provided by or on behalf of such Distributor.
(See Section 7 of the Distribution Agreement.)
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant and the investment adviser and distributor 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
C-6
<PAGE> 166
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the Registrant and the principal underwriter in
connection with the successful defense of any action, suit or proceeding) is
asserted against the Registrant by such director, officer or controlling person
or the Distributor 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 "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 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 18. 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.
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, or at State Street Bank and
Trust Company, 1776 Heritage Drive, North Quincy, MA. 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 Merritt California Tax Free Income Fund, Van Kampen
Merritt Michigan Tax Free Income, Van Kampen Merritt Missouri Tax Free Income
Fund and Van Kampen Merritt 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 sub-trusts and hereby
undertakes to furnish to each person to whom a prospectus is delivered for a
particular sub-trust with a copy of the latest annual report to shareholders of
such sub-trust.
C-7
<PAGE> 167
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE
INVESTMENT COMPANY ACT OF 1940, THE REGISTRANT, VAN KAMPEN MERRITT TAX FREE
FUND, 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 1ST DAY OF JUNE, 1995.
VAN KAMPEN MERRITT TAX FREE FUND
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 JUNE 1, 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
/s/ DENNIS J. McDONNELL* President and Trustee (Chief Executive Officer)
- ---------------------------------------------
Dennis J. McDonnell
/s/ EDWARD C. WOOD, III * Vice President and Treasurer
- --------------------------------------------- (Chief Financial and Accounting Officer)
Edward C. Wood, III
/s/ PHILIP P. GAUGHAN * Trustee
- ---------------------------------------------
Philip P. Gaughan
/s/ R. CRAIG KENNEDY * Trustee
- ---------------------------------------------
R. Craig Kennedy
/s/ JACK E. NELSON * Trustee
- ---------------------------------------------
Jack E. Nelson
/s/ JEROME L. ROBINSON * Trustee
- ---------------------------------------------
Jerome L. Robinson
/s/ WAYNE W. WHALEN * Trustee
- ---------------------------------------------
Wayne W. Whalen
- ---------------
*Signed by Ronald A. Nyberg pursuant to a power of attorney, a copy of which previously was
filed.
/s/ RONALD A. NYBERG June 1, 1995
- ---------------------------------------------
Ronald A. Nyberg
Attorney-in-Fact
</TABLE>
C-8
<PAGE> 168
SCHEDULE OF EXHIBITS TO
POST-EFFECTIVE AMENDMENT 36 TO FORM N-1A
SUBMITTED TO THE SECURITIES AND EXCHANGE
COMMISSION ON JUNE 2, 1995
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ---
<S> <C>
(1)(a) Declaration of Trust(1)........................................................
(b) Form of Designation of Sub-Trust of...........................................
(i) Van Kampen Merritt Insured Tax Free Income Fund, as amended and
restated(21)..........................................................
(ii) Van Kampen Merritt Tax Free High Income Fund, as amended and
restated(21)..........................................................
(iii) Van Kampen Merritt California Insured Tax Free Fund, as amended and
restated(21)..........................................................
(iv) Van Kampen Merritt Municipal Income Fund, as amended and
restated(21)..........................................................
(v) Van Kampen Merritt Limited Term Municipal Income Fund, as amended and
restated(21)..........................................................
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)...........
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)................
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)..................
(ix) Van Kampen Merritt California Tax Free Income Fund(25)................
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)..................
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)..................
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)......................
(2) By-Laws(1)........................................................................
(4) Specimen Certificate of share of beneficial interest in
(i) Van Kampen Merritt Insured Tax Free Income Fund
1. Class A Shares(17).................................................
2. Class B Shares(17).................................................
3. Class C Shares(20).................................................
(ii) Van Kampen Merritt Tax Free High Income Fund
1. Class A Shares(17).................................................
2. Class B Shares(17).................................................
3. Class C Shares(20).................................................
(iii) Van Kampen Merritt California Insured Tax Free Fund
1. Class A Shares(17).................................................
2. Class B Shares(17).................................................
3. Class C Shares(21).................................................
(iv) Van Kampen Merritt Municipal Income Fund
1. Class A Shares(17).................................................
2. Class B Shares(17).................................................
3. Class C Shares(20).................................................
(v) Van Kampen Merritt Limited Term Municipal Income Fund
1. Class A Shares(15).................................................
2. Class B Shares(15).................................................
3. Class C Shares(21).................................................
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund
1. Class A Shares(23).................................................
2. Class B Shares(23).................................................
3. Class C Shares(23).................................................
</TABLE>
C-9
<PAGE> 169
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ---
<S> <C>
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund
1. Class A Shares(23).................................................
2. Class B Shares(23).................................................
3. Class C Shares(23).................................................
(viii) Van Kampen Merritt New York Tax Free Income Fund
1. Class A Shares(23).................................................
2. Class B Shares(23).................................................
3. Class C Shares(23).................................................
(ix) Van Kampen Merritt California Tax Free Income Fund
1. Class A Shares(25).................................................
2. Class B Shares(25).................................................
3. Class C Shares(25).................................................
(x) Van Kampen Merritt Michigan Tax Free Income Fund
1. Class A Shares(25).................................................
2. Class B Shares(25).................................................
3. Class C Shares(25).................................................
(xi) Van Kampen Merritt Missouri Tax Free Income Fund
1. Class A Shares(25).................................................
2. Class B Shares(25).................................................
3. Class C Shares(25).................................................
(xii) Van Kampen Merritt Ohio Tax Free Income Fund
1. Class A Shares(25).................................................
2. Class B Shares(25).................................................
3. Class C Shares(25).................................................
(5) Investment Advisory Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(16)...................
(ii) Van Kampen Merritt Tax Free High Income Fund(16)......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(16)...............
(iv) Van Kampen Merritt Municipal Income Fund(16)..........................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15).............
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)...........
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)................
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)..................
(ix) Van Kampen Merritt California Tax Free Income Fund(25)................
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)..................
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)..................
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)......................
(6) (a) Form of Distribution and Service Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(17)...................
(ii) Van Kampen Merritt Tax Free High Income Fund(17)......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(17)...............
(iv) Van Kampen Merritt Municipal Income Fund(17)..........................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(18).............
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23)...........
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23)................
(viii) Van Kampen Merritt New York Tax Free Income Fund(23)..................
(ix) Van Kampen Merritt California Tax Free Income Fund(25)................
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25)..................
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25)..................
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25)......................
</TABLE>
C-10
<PAGE> 170
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ------
<S> <C>
(b) Form of Dealer Agreement, as amended(21)......................................
(c) Form of Broker Agreement, as amended(21)......................................
(d) Form of Bank Agreement, as amended(21)........................................
(8)(a) Form of Custodian Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(5)....................
(ii) Van Kampen Merritt Tax Free High Income Fund(5).......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(3)................
(iv) Van Kampen Merritt Municipal Income Fund(8) and (5)...................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15) and (5).....
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23) and (5)...
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23) and (5)........
(viii) Van Kampen Merritt New York Tax Free Income Fund(23) and (5)..........
(ix) Van Kampen Merritt California Tax Free Income Fund(25) and (5)........
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25) and (5)..........
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25) and (5)..........
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25) and (5)..............
(b) Form of Transfer Agency Agreement for
(i) Van Kampen Merritt Insured Tax Free Income Fund(5)....................
(ii) Van Kampen Merritt Tax Free High Income Fund(5).......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(3)................
(iv) Van Kampen Merritt Municipal Income Fund(8) and (5)...................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(15) and (5).....
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(23) and (5)...
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(23) and (5)........
(viii) Van Kampen Merritt New York Tax Free Income Fund(23) and (5)..........
(ix) Van Kampen Merritt California Tax Free Income Fund(25) and (5)........
(x) Van Kampen Merritt Michigan Tax Free Income Fund(25) and (5)..........
(xi) Van Kampen Merritt Missouri Tax Free Income Fund(25) and (5)..........
(xii) Van Kampen Merritt Ohio Tax Free Income Fund(25) and (5)..............
(9)(a) Form of Amended Support Service Agreement(11).................................
(b) Form of Fund Pricing Agreement(6).............................................
(c) Form of Amended Accounting Service Agreement(11)..............................
(d) Form of Legal Services Agreement(13)..........................................
(10) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom for...............
(i) Van Kampen Merritt Insured Tax Free Income Fund(20)...................
(ii) Van Kampen Merritt Tax Free High Income Fund(20)......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(17)...............
(iv) Van Kampen Merritt Municipal Income Fund(20)..........................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(19).............
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(24)...........
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(24)................
(viii) Van Kampen Merritt New York Tax Free Income Fund(24)..................
(ix) Van Kampen Merritt California Tax Free Income Fund++..................
(x) Van Kampen Merritt Michigan Tax Free Income Fund++....................
(xi) Van Kampen Merritt Missouri Tax Free Income Fund++....................
(xii) Van Kampen Merritt Ohio Tax Free Income Fund++........................
(11)(a) Opinion and Consent of Skadden, Arps, Slate, Meagher & Flom as to tax
matters(4)....................................................................
(b) Consents of KPMG Peat Marwick LLP+............................................
(13) Letter of Understanding relating to initial capital(1)........................
</TABLE>
C-11
<PAGE> 171
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
----- ------- ------
<S> <C>
(15)(a) Form of Distribution Plan Pursuant to Rule 12b-1, as amended(21)..............
(b) Form of Shareholder Assistance Agreement(17)..................................
(c) Form of Administrative Services Agreement(17).................................
(d) Form of Service Plan(21)......................................................
(16)(a) List of Affiliated Companies of Registrant(2).................................
(b) Computation of Performance Quotations for.....................................
(i) Van Kampen Merritt Insured Tax Free Income Fund(26)...................
(ii) Van Kampen Merritt Tax Free High Income Fund(26)......................
(iii) Van Kampen Merritt California Insured Tax Free Fund(26)...............
(iv) Van Kampen Merritt Municipal Income Fund(26)..........................
(v) Van Kampen Merritt Limited Term Municipal Income Fund(26).............
(vi) Van Kampen Merritt Florida Insured Tax Free Income Fund(26)...........
(vii) Van Kampen Merritt New Jersey Tax Free Income Fund(26)................
(viii) Van Kampen Merritt New York Tax Free Income Fund(26)..................
(17) List of certain investment companies in response to Item 29(a)(26)................
(18) List of officers and directors of Van Kampen American Capital Distributors, Inc. in
response to Item 29(b)(26)........................................................
(27) Financial Data Schedules+.........................................................
Power of Attorney(20).............................................................
</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 Pre-Effective Amendment No. 1 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed October 17, 1985.
(3) 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.
(4) Incorporated herein by reference to Post-Effective Amendment No. 3 to
Registrant's Registration on Form N-1A, File Number 2-99715, filed February
4, 1987.
(5) 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.
(6) Incorporated herein by reference to Post-Effective Amendment No. 7 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed November 15, 1988.
(7) Incorporated herein by reference to Post-Effective Amendment No. 8 to
Registrant's Registration Statement on Form N-1A. File Number 2-99715,
filed February 23, 1990.
(8) 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.
(9) Incorporated herein by reference to Post-Effective Amendment No. 11 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed June 13, 1990.
(10) Incorporated herein by reference to Post-Effective Amendment No. 12 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed July 24, 1990.
(11) Incorporated herein by reference to Post-Effective Amendment No. 14 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 20, 1991.
(12) Incorporated herein by reference to Post-Effective Amendment No. 15 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 27, 1992.
(13) Incorporated herein by reference to Post-Effective Amendment No. 17 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed June 19, 1992.
(14) Incorporated herein by reference to Post-Effective Amendment No. 18 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715 filed
August 24, 1992.
(15) 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.
C-12
<PAGE> 172
(16) 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.
(17) Incorporated herein by reference to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-1A, File Number 299715 filed
April 30, 1993.
(18) Incorporated herein by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed May 21, 1993.
(19) Incorporated herein by reference to Post-Effective Amendment No. 25 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed August 20, 1993.
(20) 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.
(21) Incorporated herein by reference to Post-Effective Amendment No. 27 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed February 25, 1994.
(22) Incorporated herein by reference to Post-Effective Amendment No. 28 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed March 2, 1994.
(23) Incorporated herein by reference to Post-Effective Amendment No. 29 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed April 5, 1994.
(24) Incorporated herein by reference to Post-Effective Amendment No. 30 to
Registrant's Registration Statement on Form N-1A, File Number 2-99715,
filed June 3, 1994.
(25) 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.
(26) 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.
C-13
<PAGE> 1
EXHIBIT 11(b)
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt 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
May 30, 1995
<PAGE> 2
EXHIBIT 11(b)
[KPMG PEAT MARWICK LLP LETTERHEAD]
CONSENT OF INDEPENDENT AUDITORS
The Board of Trustees and Shareholders
Van Kampen Merritt 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
May 30, 1995
<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>
